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POWER ELECTRONICS

Power Semiconductors and Power Supplies


The Building Blocks of the Digital Power Revolution

Todd Cooper
Vice President
Power Electronics Analyst
(501) 377-2503
tcooper@stephens.com

Holman Harvey
Associate
(501) 377-8232
hharvey@stephens.com

September 2000

2000 Stephens Inc.


This report has been prepared solely for informative purposes and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete
description of the securities, markets or developments referred to in the material. All expressions of opinion are subject to change without notice. The information is
obtained from internal and external sources which we consider reliable but we have not independently verified such information and we do not guarantee that it is accurate
or complete. We do not undertake to advise you to any change in figures or our views. We, our employees, and/or our officers and directors, may from time to time have a
long or short position in the securities mentioned and may sell or buy such securities. Additional information available upon request.
Stephens Inc., 111 Center Street, Little Rock, Arkansas 72201, (501) 374-4361, FAX (501) 377-8003, Member NYSE, NASD, SIPC
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TABLE OF CONTENTS

EXECUTIVE SUMMARY AND INTRODUCTION ..........................................................................................6


Electric Power Revolution Drivers.....................................................................................................................7
The Digital Age is Very Energy-Intensive.........................................................................................................8
Reliable Power ...................................................................................................................................................9
Expensive Power ..............................................................................................................................................10
In This Industry Report ....................................................................................................................................10
POWER SEMICONDUCTORS FUNDAMENTALS ........................................................................................11
SEMICONDUCTOR BASICS............................................................................................................................12
Silicon (Si) - The Primary Material..................................................................................................................12
How Semiconductors Work .............................................................................................................................14
The Fabrication Process ...................................................................................................................................15
DIGITAL VS. ANALOG ....................................................................................................................................18
Broad Base of Demand ....................................................................................................................................18
Low Unit Volumes, Broad Product Portfolio...................................................................................................18
Long Product Life Cycles ................................................................................................................................19
Manufacturing Differences...............................................................................................................................19
Steady Pricing ..................................................................................................................................................19
POWER SEMICONDUCTOR INDUSTRY OVERVIEW ................................................................................20
History..............................................................................................................................................................20
Competitors ......................................................................................................................................................20
Overall Industry Growth ..................................................................................................................................21
A Cyclical Industry ..........................................................................................................................................22
Challenges Facing the Power Semiconductor Industry....................................................................................22
FORECASTS BY END-MARKET.....................................................................................................................24
Automotive.......................................................................................................................................................24
Computers and Peripherals...............................................................................................................................25
Communications...............................................................................................................................................26
Consumer Electronics ......................................................................................................................................27
Industrial...........................................................................................................................................................28
ANALYSIS BY PRODUCT CATEGORY.........................................................................................................30
Power Transistors.............................................................................................................................................30
Market Trends ..............................................................................................................................................33
Market Drivers .............................................................................................................................................34
Market Restraints .........................................................................................................................................34
Thyristors .........................................................................................................................................................35
Market Trends ..............................................................................................................................................35
Market Drivers .............................................................................................................................................36
Market Restraints .........................................................................................................................................37
Rectifiers ..........................................................................................................................................................37
Market Trends ..............................................................................................................................................38
Market Drivers .............................................................................................................................................39
Market Restraints .........................................................................................................................................40
Motion Control Power ICs ...............................................................................................................................40
Market Trends ..............................................................................................................................................42
Market Drivers .............................................................................................................................................42
Market Restraints .........................................................................................................................................43
Power Conversion/Management ICs................................................................................................................43
Market Trends ..............................................................................................................................................44
Market Drivers .............................................................................................................................................46
Market Restraints .........................................................................................................................................46
Smart Power ICs (Low Voltage) ......................................................................................................................46
Market Trends ..............................................................................................................................................48

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Market Drivers .............................................................................................................................................48
Market Restraints .........................................................................................................................................49
High-Voltage Smart Power ICs........................................................................................................................49
POWER SEMICONDUCTORS CONCLUSION..........................................................................................49
Power Semiconductors Company Profiles .......................................................................................................51
Advanced Power Technology, Inc. ..................................................................................................................53
Cree, Inc. ..........................................................................................................................................................57
International Rectifier Corp..............................................................................................................................61
Power Integrations Inc. ....................................................................................................................................65
Semtech Corp. ..................................................................................................................................................69
TelCom Semiconductor....................................................................................................................................73
POWER SUPPLY FUNDAMENTALS..............................................................................................................77
PRODUCT PROFILE .........................................................................................................................................78
Electricity Review ............................................................................................................................................79
Why Do We Need Power Supplies?.................................................................................................................79
Types of Power Architecture............................................................................................................................80
AC/DC POWER SUPPLIES ...............................................................................................................................82
Switching vs. Linear Power Suppliers .............................................................................................................84
Efficiency .....................................................................................................................................................85
Size ...............................................................................................................................................................85
EMI and RFI.................................................................................................................................................85
Custom, Standard and Modified Standard Products.........................................................................................86
Output Segmentation........................................................................................................................................86
DC/DC CONVERTERS......................................................................................................................................87
TELECOM POWER PLANTS ...........................................................................................................................89
POWER SUPPLY INDUSTRY OVERVIEW....................................................................................................90
Intense Industry Fragmentation........................................................................................................................91
Barriers to Entry ...............................................................................................................................................93
Foreign Competition ........................................................................................................................................93
Continued Industry Growth..............................................................................................................................94
Market Segments..............................................................................................................................................96
Growth Opportunities by Power Supply Category...........................................................................................97
Increased Outsourcing......................................................................................................................................98
Consolidating Industry .....................................................................................................................................99
Other Market Dynamics .................................................................................................................................101
POWER SUPPLY SECTION CONCLUSION.................................................................................................102
Power Supply Company Profiles.......................................................................................................................103
Artesyn Technologies Inc...............................................................................................................................105
C&D Technologies.........................................................................................................................................109
Power-One, Inc...............................................................................................................................................113
Vicor Corp......................................................................................................................................................117

CHARTS and TABLES

Chart 1 Stephens Inc. Power Solutions Focus .......................................................................................................6


Chart 2 Digital Economy Electricity Consumption ...............................................................................................9
Chart 3 Electrical Conductivity of Selected Materials.........................................................................................13
Chart 4 Summary of the Process Employed to Produce Ultrapure Silicon..........................................................13
Chart 5 Silicon Molecular Structure ....................................................................................................................14
Chart 6 The Fabrication Process ..........................................................................................................................17
Chart 7 North American Power Semiconductor Market......................................................................................21
Table 1 North American Automotive Power Semiconductor Market .................................................................24

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Chart 8 Power Semiconductor Automotive Applications....................................................................................25
Table 2 North American Computer and Peripherals Power Semiconductor Market...........................................26
Table 3 North American Telecommunications Power Semiconductor Market ...................................................27
Table 4 North American Consumer Electronics Power Semiconductor Market .................................................28
Table 5 North American Industrial Power Semiconductor Market .....................................................................29
Chart 9 Power Semiconductor Market Segmentation..........................................................................................30
Chart 10 North American Power Semiconductor Market Percentage of Revenue by Product............................31
Chart 11 North American Power Transistor Market............................................................................................32
Table 6 North American Power Transistor Market ............................................................................................33
Chart 12 North American Thyristor Market ........................................................................................................35
Table 7 North American Thyristor Market..........................................................................................................36
Chart 13 North American Diode Market .............................................................................................................38
Table 8 North American Diode Market ...............................................................................................................39
Chart 14 North American Motion Control Power IC Market..............................................................................41
Table 9 Motion Control Power IC Market...........................................................................................................42
Chart 15 North American Power Conversion/Management IC Market...............................................................44
Table 10 North American Power Conversion/Management IC Market ..............................................................45
Chart 16 North American Smart Power IC Market .............................................................................................47
Table 11 North American Smart Power IC Market .............................................................................................48
Chart 17 Power Supply Devices ..........................................................................................................................78
Table 12 - AC Line Voltages Selected Countries................................................................................................80
Chart 18 Centralized Vs. Distributed Architecture..............................................................................................81
Chart 19 North American Consumption of Distributed Power Architecture......................................................82
Chart 20 Simple AC/DC Power Supply...............................................................................................................83
Table 13 Pricing Trends In AC/DC Power Suppliers..........................................................................................84
Table 14 Linear Vs. Switching Power Supplies ..................................................................................................84
Table 15 Output Segmentation ............................................................................................................................87
Table 16 DC/DC Converter Pricing Trends.........................................................................................................89
Table 17 Power Supply Industry..........................................................................................................................91
Table 18 Ten Largest North American Power Supply Companies* - 1999 Sales ...............................................92
Table 19 Largest Worldwide Power Supply Companies* - 1999 Sales ..............................................................92
Chart 21 Global Power Electronics Market .........................................................................................................94
Chart 22 Global Power Supplies Consumption ...................................................................................................95
Chart 23 Global Telecom Power Plant Consumption..........................................................................................96
Chart 24 North American Power Supplies Consumption by Market Segment....................................................97
Chart 25 North American Merchant Power Supplies Consumption....................................................................98
Chart 26 North American Power Supplies Consumption ....................................................................................99
Chart 27 Fragmented Merchant Power Supply Industry ...................................................................................100
Table 20 Recent Consolidation in The Power Electronics Industry ..................................................................101
Chart 28 North American Market Share Held by Top 10 Merchant Power Supply Manufacturers..................101
Appendix A Power Electronics Valuation Analysis..........................................................................................121
Appendix B Power SemiconductorS Comparative Analysis..........................................................................122
Appendix C Power Supply Manufacturers Comparative Analysis.................................................................123
Appendix D Glossary.........................................................................................................................................124
Appendix E North American Power Semiconductor Manufacturers.................................................................126
Appendix F North American Power Supply Manufacturers..............................................................................128

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EXECUTIVE SUMMARY AND INTRODUCTION

We believe that, over the next decade, one of the most robust investment sectors
in the economy will be the electric power industry. But we dont advise that you
run out and invest in your local power company. The electric utilities will have
Electric utilities are their role, but we suggest you focus on those companies that provide the power
not providing the type for the dot-coms. Were talking about companies that make products like power
of power that the semiconductors and superconductors, batteries and flywheels, ac/dc power
digital economy supplies and dc/dc bricks. These are the products that provide the ultra-clean,
requires ultra-reliable electricity consumed in the digital economy. We think well-run
companies that manufacture and sell these products successfully will offer the
astute investor the potential for exceptional returns, not unlike those that have
been experienced in the communications revolution.

In 1997 Stephens Inc. made the power electronics industry a focus of its equity
Our power electronics
research (see Chart 1). We define power electronics as the application of
research focuses
exclusively on power electronic devices and associated components to control, convert and condition
semiconductors and electric power. In other words, we have been following power supply
power supplies manufacturers and semiconductor manufacturers that focus on power
management applications.

Recently, Stephens Inc. placed even more emphasis on the power solutions area
by having analyst Steve Sanders and his team moved to cover a sector that we are
calling Emerging Power Technologies. The Emerging Power Technology sector
includes information management technologies, distributed generation, power
procurement, infrastructure enhancements and system integration. We at
Stephens Inc. are committed to helping our clients benefit from the exceptional
investment opportunities that we believe will materialize over the next few years
in the electrical power industry.

Chart 1
Stephens Inc. Power Solutions Focus

Power Solutions

Power Quality
and Reliability

Distributed
Power Generation
Supplies
Emerging Information
Power
Power Management
Electronics Technologies
Technology
Power
Semiconductors
Systems
Integrators

Infrastructure
Enhancement

Source: Stephens Inc.

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Stephens Inc. Power Solutions Research Group

Power Electronics Emerging Power Technology

Todd Cooper, Analyst Stephen Sanders, Analyst


tcooper@stephens.com ssanders@stephens.com
(501) 377-2503 (501) 377-2065

Holman Harvey, Associate Joe Chumbler, CFA, Associate


hharvey@stephens.com jchumbler@stephens.com
(501) 377-8232 (501) 377-3760

Michael Peng Zhang, Associate

We believe that the experience weve gained over the last three years following
the power electronics industry gives Stephens Inc. a unique perspective on this
space. We are not semiconductor analysts who have strayed into the power
semiconductor space, nor are we contract manufacturing analysts who have
recently discovered power supplies. We have come to the job focused on power
and the unique industry dynamics that it entails. There is no single strategy a
company can follow to become successful in this industry. However, there are
trends and market dynamics that should not be ignored by companies and
investors alike. By thoroughly understanding the market and its participants, we
plan to identify those companies that are best positioned to prosper in the power
electronics marketplace.

Electric Power Revolution Drivers

Due to the laws of physics, energy underpins any economy. In other words, you
cannot get something for nothing. The Internet has not changed the laws of
physics. Even cyberspace has an energy cost. Energy will continue to underpin
our economy in the 21st century, just as it did in the 20th. The last century
belonged to oil; this one belongs to electricity. The transformation is already
evident. Our economy today spends four times as much purchasing electricity as
oil.

The beginning of the last century saw an explosion of economic activity in the
creation of the automobile. One consequence of the rise of the automobile was
the creation of an enormous and complex oil-related industrial infrastructure to
fuel the engines in all kinds of vehicles. The creation of the automobile and the
infrastructure needed to support it are analogous to whats taking place in todays
digital age.

The engine of the digital age is the microprocessor. Its fuel is electricity. The
The engine of the proliferation of microprocessors and computers and the seemingly unending
digital age is the appetite for communications bandwidth is increasing the demand for reliable
microprocessor; the electricity. It takes a lot of clean, reliable electricity to process and move bits
fuel is electricity of information around. The sheer amount of electricity demanded by the
information economy is, in itself, a primary driver behind the changes occurring
in the electric power industry. But far more important than the steep increase in
the demand for electricity is the type of electricity the information economy

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requiresultra-clean, stable, and totally reliable. This type of electricity cannot
be delivered by the same old technologies on the same old power grid. A new
type of infrastructure is developing to support the digital economy. We will
examine both drivers, the increase in demand and the reliability issue, in more
detail.

The Digital Age Is Very Energy-Intensive

The expansion of the digital economy is creating two kinds of electrical


problems. The most straightforward is that it drives up the absolute demand for
electricity. It takes about a pound of coal to create, package, store and move two
megabytes of data. When you include the portion of the infrastructure that
supports Web-enabled devices, such as the Palm Pilot PDA, each device uses
as much electricity as a refrigerator. Your typical PC and its peripherals require
about 1,000 watts of power, which for the average home PC equates to about
1,000 kilowatt hours (kWh) of electricity a year.

The last non-extrapolated study that was conducted to ascertain exactly how
much electricity was being consumed by computers was done in 1995. Lawrence
Berkeley Labs reported that approximately 50 billion kWh in 1993 were
consumed in the commercial sector by PCs, computers and directly related
equipment such as monitors and printers. Since then:

The number of PCs and related equipment in offices has increased


exponentially.
The number of PCs in homes and schools has also increased dramatically.
The Internet has rapidly made its way onto the scene, with all its back-office
Web and telecommunications hardware.
An entirely new class of businesses has been createdthe dot-coms.
The usage level for all computing and IT equipment is up globally.

It is estimated that the It is now estimated that 8% of the nations electric supply, or 290 billion kWh, is
Internet consumes 8% absorbed by the hardware of the Internet. When you consider a broader scope of
of the countrys all computers and related equipment, U.S. electricity consumption by the digital
electricity economy reaches 13%. There is simply no denying it, computers, and more
recently, the Internet, are driving up the demand for more electricity.

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Chart 2
Digital Economy Electricity Consumption

14%

12%

10%

8%

6%

4%

2%

0%
1978 1982 1986 1990 1994 1998

All computers Internet only

Source: Information Technology Industry Council; Greening Earth Society

Reliable Power

Our U.S. trillion dollar electric utility grid is a remarkable engineering


achievement. It delivers electricity that is up and clean, or event free, 99.9% of
the time. Said another way, the 99.9% reliability figure equates to about eight
hours of outage a year for a typical residential consumer. Until the digital
revolution, the grid has handled the three previous electricity-demanding waves
of technology well. First came electric lights, then electric motors and finally air
conditioning. For each of these technologies 99.9% reliability was, and is,
acceptable.

Eight hours worth of power outages over the course of a year is an inconvenience
for you and me, but a financial nightmare for businesses in the digital economy.
Several industries A few industries have always required electricity that was more reliable than
have always required what comes off the grid. Hospitals, airports, military bases and phone companies
highly reliable power have always deployed generators and banks of batteries to provide standby
power. In the new digital economy, add to the list of companies already
requiring extremely reliable power the Amazons and AOLs of the world. And as
digital semiconductors (i.e., microprocessors and memory chips) and the Internet
penetrate deeper and deeper into our society, even old economy companies are
requiring more reliable power. Next will be our homes. The number of
commercial and residential devices and users that rely on digital semiconductors
and the Internet is growing exponentially.

For these applications, demand reliability only starts at 99.9999% (six nines). At
six nines the length of power outage is equivalent to only 30 seconds a year. At
seven nines, its only out for a few seconds, but thats still long enough to crash a
network. Only at the ninth and tenth nines is the power reliable enough for the
digital semiconductors that are at the heart of the digital economy.

The problem is that its hard to imagine the traditional electric utility grid ever
providing electricity that is much more reliable than 99.9%. The grid is simply

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The traditional electric too exposed to catastrophic events (i.e., bad weather, animals shorting out
grid is too exposed to transformers, and car - utility pole interactions). Its far too impractical and
catastrophic events to expensive to rebuild the grid to support the digital economy. To do that requires
provide highly reliable an array of systems and components that will reside on the customers side of the
power electric meter.

These systems and components include capacitors and inductors to fix problems
of milliseconds in duration; batteries, flywheels, and super-conducting coils to fix
outages ranging from seconds to a few minutes; and generators and turbines to
supply power for hours or days. The switch that links these systems together
seamlessly is the power semiconductor.

Expensive Power

Building reliability into the power grid is expensive, but how much will people
pay? What does it cost AOL if it is off-line for an hour? With some of the larger
communications companies billing customers in total at a rate of over $4 million
per minute, what will they pay to stay up and running? The questions are
rhetorical ones. The answer is: a lot.

Electricity at the wholesale level is relatively cheap, approximately 2 per kWh


(kilowatt hour). The electric utility grid, with its 99.9% reliability, delivers
electricity to you at roughly 8 to 10 per kWh. The cost goes up exponentially
as you add nines. The cost of six nines reliability is approximately $1,000 per
kWh, and customers that need this level happily pay it. We estimate that the cost
of providing ten nines reliability is over $100,000 per kWh.

We predict that, very According to the Gilder Groups inaugural Power Report, the total market for
soon, the aggregate electricity that is more reliable than 99.9% is approximately 20% of the total
profits of companies electricity market. As digital semiconductors and the Internet penetrate deeper
that provide reliable and deeper into the economy, demand for reliable power will continue to grow as
power will exceed the a percent of the total electricity market. We predict that, at some point in the not
aggregate profits of too distant future, the aggregate profits of the companies providing reliable
the nations electric power will exceed the aggregate profits of those companies/utilities providing
utilities
99.9% reliable electricity. And thats precisely why we think that, over the next
decade, one of the most robust investment sectors in the economy will be the
electric power industry.

In This Industry Report

This industry report is divided into two sections. First, we address the power
semiconductor industry. Well explore the various types of power
semiconductors, the market dynamics and growth rates, and the players. Second,
we address the power supply industry. Here too well explore the different types
of power supplies, the market dynamics and growth rates, and the players. After
years of evolutionary technological change, a few manufacturers of power
semiconductors and power supplies are making the revolutionary technological
changes necessary to take advantage of the vast market that is craving affordable
reliable electricity. At Stephens Inc., we want our clients to be prepared to profit
from the electric power revolution that is underway. This industry report has
been written for that purpose.

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POWER SEMICONDUCTORS FUNDAMENTALS

The fundamental building block of power electronic devices is the power


semiconductor. Power semiconductors are essential components of most
electronic devices and systems. A power semiconductor performs one or more of
the following functions:

Conditions electric current and voltage


Protects electric circuits from power surges
Amplifies and switches electric signals
Regulates voltage levels in circuits

The first semiconductor was a power semiconductor. Originally, semiconductors


The first power meant power. For the past 25 years, the computer revolution has been driven by
semiconductors were the increasing functionality and the decreasing cost of semiconductors that
invented over 50 provide the brains within electronic systems. The semiconductor business has
years ago now come full circle. Power, which was the original semiconductor technology,
is once again critically important to the perpetuation of the worlds electronic
revolution.

Todays power semiconductors perform many diverse functions. However, at the


heart of most power semiconductors is the simple switch. There are a variety of
silicon switch architectures with acronyms like MOSFETs (metal oxide
The silicon switch is at semiconductor field effect transistor), IGBTs (insulated gate bi-polar transistor),
the heart of most power SCRs (silicon controlled rectifiers), FREDs (fast recovery epitaxial diodes), and
semiconductors
GTOs (gate turn-off thyristors). These silicon switches are used to perform a
number of different functions. For example, silicon switches clean up power by
switching it very quickly and efficiently, mediating between electricity coming
off a primary power source (i.e., the electric utility grid) and electricity that is
temporarily stored in capacitors and inductors alongside the chip itself.

The switches are also used in the rectification process (turning alternating current
(ac) into direct current (dc) by chopping up an ac sine wave into small segments
that can then be reconfigured into a dc sine wave). A third application for
advanced high frequency switches is to generate plasma and lasers. Plasma and
lasers are produced by switching the polarity of a magnetic field at an extremely
high speed. This in turn excites atoms that can then be manipulated to produce
the desired laser or plasma process.

Todays power semiconductors can handle an exceptionally large amount of


power. Several companies already manufacture semiconductors that are capable
of handling 5,000+ volts and 3,000 amps. By comparison, it takes only 100
amps to power an electric car going 65 mph.

We estimate that approximately 12% of the worlds electricity is switched by


Inefficient motors power semiconductors. Virtually no solid state devices are found on the electric
waste approximately utility grid, and few are found in appliances and equipment below the
$72 billion of sophistication level of a personal computer. This is in the process of changing.
electricity a year Approximately 50% of the electricity consumed worldwide is used to run motors.
An example of one of these motors is a refrigerator compressor. To keep the
refrigerator cold, the compressor is typically either 100% on or 100% off.
Running a motor in this fashion is very inefficient and comparable to driving
your car with the accelerator either all the way down or all the way up. The

Stephens Inc. 11
result of all of these inefficient motors is that approximately $72 billion of
electricity is wasted every year.

Power We believe that the power semiconductor has come of age. These devices
semiconductors are interface with the various technologies required to deliver reliable power, and
poised to change the they are capable of dramatically reducing the worlds energy consumption. The
electric economy power semiconductor is indeed poised to change forever the $500 billion-a-year
kilowatt-hour economy.

The Power Semiconductor section of this Industry Report is divided into four
segments. First, we take a very elementary look at semiconductor fundamentals.
We address how power semiconductors work, how they are made and what they
are made of. We have included this section to hopefully take some of the
mystique out of semiconductors. Second, we focus on the analog segment of the
semiconductor market as opposed to the digital semiconductor market. Power
semiconductors are a subset of analog or linear semiconductors. Third, we zero
in on the power semiconductor market, providing growth rates and market trends
for the overall North American power semiconductor industry as well as seven
individual product categories. We conclude by providing the investment
highlights of each of the power semiconductor companies that we currently
cover.

SEMICONDUCTOR BASICS

Silicon (Si) - The Primary Material

In the strict scientific sense, semiconductors are a class of materials whose


Silicon is the most electrical properties lie between conductors (such as copper and aluminum) and
commonly used
insulators (such as rubber and glass). In common usage, however, the term
semiconductor
semiconductor is used to refer to electronic devices made from a
material
semiconductor material. Silicon is by far the most widely used semiconductor
material. More recently, several other compound semiconductor materials are
being used in niche power semiconductor applications. These materials include
gallium arsenide, indium phosphide, silicon germanium and silicon carbide.
However, silicon continues to dominate the present commercial market.

Although a number of elements and compound elements possess semiconducting


properties, silicon is an ideal material for commercial semiconductors for several
reasons. First, its electrical conductivity properties are excellent. Chart 3
illustrates the relative electrical conductivity of select materials.

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Chart 3
Electrical Conductivity of Selected Materials

1010

Metals
Copper
Iron
Mercury
106

102 Germanium

Electrical Conductivity
Semiconductor

Semiconductors
conductivity lies Selenium
somewhere between Silicon
that of conductors 10-2 Boron
and that of insulators

10-6 Gallium Arsenide

Quartz
10-10 Porcelain
Mica

Insulators
10-14
Paraffin

10-18 Diamond

Source: Georgia Institute of Technology

A second reason for using silicon is that it is inexpensive and easily obtained
from melting sand. Although silicon is the second most abundant element in the
earths crust and a component in numerous compounds, it never occurs in its pure
state. Single-crystal silicon used in device production is a man-made material.
The process of producing device-quality silicon first involves separating it from
compounds and then purifying the separated material. Chart 4 illustrates this
process.

Chart 4
Summary of the Process Employed to Produce Ultrapure Silicon

Very Ultrapure
SiCi4 Ultrapure
Silica Impure Polycrystalline
(Liquid) SiCi4
Silicon Si

Reduced in Reduced in
Presence of Chlorinated Distilled, etc. Hydrogen
Carbon Atmosphere

Source: Semiconductor Device Fundamentals, 1996

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The third reason for the commercial use of silicon in semiconductors is the
exceptional purity of the processed material. Modern semiconductors are some
of the purest solid materials in existence. In silicon, for example, the
unintentional content of dopant atoms (impurities) is typically less than one atom
per 109 silicon atoms. To better understand this extraordinary level of purity,
imagine a forest of maple trees planted from coast to coast, border to border, at
50-foot centers across the United States (including Alaska and Hawaii). An
impurity level of one part per 109 would correspond to finding about 25
crabapple trees in the maple tree forest covering the entire United States!

How Semiconductors Work

The basic function of a power semiconductor is to impede, induce, or regulate the


Electrons and holes flow of electricity through the semiconductor material. Carriers are the entities
carry the electrical that transport an electrical charge from place to place inside a conductive
charge within
material. In metallic wires, electrons act as the carrier. Electrons are also
semiconductors
involved in carrying the charge within semiconductors. However, a second
equally important type of carrier existsthe hole.

Pure silicon has 1023 atoms per cubic centimeter. Each atom has four electrons
that bond with its four nearest neighbors. In nature, the crystalline molecular
structure of silicon is obviously three-dimensional. As a visual aid, a two-
dimensional silicon lattice is shown in Chart 5.

Chart 5
Silicon Molecular Structure

Lines represent a shared


electron.

Circles represent the core


of the silicon atom.

Source: Georgia Institute of Technology

The above model represents a silicon structure at rest or in equilibrium. Each


atom has four electrons attached to its four closest neighboring atoms which in
The electron bond turn have four electrons attached to their four closest neighboring atoms.
between silicon atoms However, the electron bond between silicon atoms is relatively weak and easily
is easily manipulated
manipulated. When the silicon-silicon bond is broken and the associated electron
is free to wander about the lattice, the released electron is a carrier. In addition to
releasing an electron, the breaking of a silicon-silicon bond creates a missing

Stephens Inc. 14
bond or hole. The hole is positively charged and, thus, attracts negatively
charged electrons. By creating an environment within the semiconductor
material in which electrons are released and holes are created, one can
manipulate the flow of electrical current through the material.

The manipulation of carrier numbers is done by doping. In semiconductor


terminology, doping is the addition of controlled amounts of specific impure
Doping is done to atoms with the express purpose of increasing either the electron or the hole
increase the concentration. The addition of dopants in controlled amounts to semiconductor
concentration of material occurs routinely in the fabrication of almost all semiconductor devices.
electrons or holes
For example, when an atom of phosphorus is substituted for an atom of silicon in
the lattice, four of the electrons from the phosphorus atom fit snugly into the
bonding structure. But phosphorus has five electrons, so the fifth electron is
readily freed to wander about the lattice and, thus, becomes a carrier.

The above is a vastly oversimplified description of how electronic charges are


transported and controlled within a semiconductor. However, we believe that a
basic understanding of how semiconductors work helps to take some of the
mystique out of these devices. Next, we will briefly look at how semiconductors
are manufactured.

The Fabrication Process

While a chip may possess as many as 25 layers of complicated circuit patterns


and/or protective materials, the following narrative describes the steps involved
in fabricating a simple power semiconductor, a pn junction diode. Chart 6
graphically summarizes the major processing steps.

The fabrication The basic component in the manufacture of power semiconductor devices is a
process starts with a thin, circular crystalline silicon wafer, typically six to eight inches in diameter.
silicon wafer that is First, a thermal oxide is grown that prevents carriers within the silicon from
typically six to eight diffusing to other parts of the device. The oxidation process (1) is accomplished
inches in diameter
by reacting silicon with either oxygen gas or water vapor at high temperatures.

The next step is the lithography process (2), which is performed to open
diffusion holes in the oxidation layer. Lithography basically involves
removing a portion of the oxidation layer and exposing the silicon, thus, focusing
the carrier action to the portion of the device where the silicon is exposed.

Following the lithography process is the introduction of a doping material


(phosphorus) (3) to the surface regions not protected by the oxidation layer. The
doped region further accentuates the carrier action in the doped area of the
device. The final step (4) involves connecting the device to the outside world by
adding a metal contact. A thin metal film is placed (sputtered) over the entire
surface of the wafer. A second lithography process (5) is then performed to
remove the excess metal.

The chip making process is complete when the finished wafer is cut into
individual devices, or dies. A die bonder then takes each good die and
encapsulates it in a plastic or metal package. The package is then moved to a
wire bonder. To create the electrical connection necessary for the device to
function, very fine gold or aluminum wire is bonded between the die and
corresponding leads on the package.

Stephens Inc. 15
The wafer is cleaned throughout the manufacturing process. To ensure that
microscopic particles dont contaminate the wafers undergoing fabrication,
semiconductors are manufactured in clean roomssmall windowless spaces
fitted with superfine air filters. Human presence is minimized in the clean room
where production workers wear a bunny suit that covers their entire body.

Stephens Inc. 16
Chart 6
The Fabrication Process

Step Process Visualization

Start
Silicon

SiO 2
(1) Oxidation
Silicon
SiO 2

SiO 2 SiO 2
(2) Lithography #1
Silicon

Phosphorus

SiO 2 SiO 2 SiO 2 SiO 2


+
(3) Phosphorus n
Diffusion
Silicon Silicon

Al
SiO 2 SiO 2
(4) Metalization
+
n

Silicon

SiO 2 SiO 2
(5) Lithography #2 +
n

Silicon

Source: Semiconductor Device Fundamentals, 1996

Stephens Inc. 17
DIGITAL VS. ANALOG

Semiconductors are typically classified into two major categories: digital and
Power analog (also know as linear). Digital semiconductors process information in
semiconductors are binary numbers, the basic substructure of computer language. Therefore, digital
typically considered
to be analog
semiconductors are normally associated with computer applications. There are
semiconductors three different types of digital semiconductors: 1) microprocessors, which are
used for control and computing tasks; 2) memory chips, used to store
programming instructions and data; and 3) logic chips, which are employed to
manage the interchange and manipulation of digital signals within a system.

Analog semiconductors process signals from real world phenomenon such as


light, heat, and pressure. The vast majority of power semiconductor devices are
analog devices. Therefore, our report will focus more on this type.

The analog semiconductor sector shares many growth drivers with the broader
semiconductor market. However, the analog market has some distinct
characteristics that we believe make the sector a particularly attractive investment
opportunity: steady growth, broad-based demand, barriers to entry, long product
life cycles, low capital intensity, steady pricing, and high profitability.

Broad Base of Demand

Analog chips are found in all electronic equipment. Even a PC, the ultimate
example of digital technology, requires analog chips to power the various
components of the PC, to generate sound, graphics, and video, and to move
Analog
semiconductors are information back and forth among the microprocessor, memory, hard disk,
especially prevalent display, and printer. In addition to computer applications, analog semiconductors
in consumer are prevalent in consumer electronics, telecommunications equipment, and
electronics and industrial and automotive applications. Digital semiconductors are much more
telecommunications dependent on the computer industry. While we expect the PC sector to grow
equipment nicely through the end of the decade, driving substantial chip growth, the non-
analog semiconductor segments are heavily exposed to any potential PC
downturn. The analog segment is far more diversified.

Low Unit Volumes, Broad Product Portfolio

Most analog standard products are sold in relatively small volumes. This is
because analog semiconductors have many different critical specifications, and
any particular application is likely to require its own combination of those
specifications. For example, one application may require a higher speed while
another requires better consistency of performance over a range of temperatures.
It is usually impossible to design an analog chip that will optimize all of the
parameters simultaneously. Therefore, the manufacturer must design different
semiconductors for each application. Most semiconductor companies offer a
wide range of these products. The differences within some product families may
be minimal, but they are important to the designers that use them in their
products.

Stephens Inc. 18
Long Product Life Cycles

Analog chips are commonly sold in reasonable volumes for eight to ten years.
Replacing an existing This pattern is very different from almost any type of digital chip. A
analog part is often
microprocessor that sells in volume for more than a year or two is a rarity. Again,
an expensive
proposition for an the wide range of critical performance parameters is the key reason for analog
OEM product longevity. Once an analog chip has been designed for an electronic
product and it performs as desired, the end-product designer is strongly
disinclined to replace it.

With typical analog chip volumes being comparatively smaller and it being
difficult to enter existing markets, analog companies are generally better off
designing new parts of their own rather than trying to imitate a competitors
product. Most analog companies make a point of citing the percentage of their
business that comes from proprietary parts.

Manufacturing Differences

Analog chip manufacturing is relatively inexpensive in an industry known for its


capital intensity. Most analog semiconductors do not require leading-edge
manufacturing equipment. As a result, analog companies typically spend 10% -
15% of sales on capital expenditures, about 8 - 10 percentage points lower than
the semiconductor industry as a whole.

Analog and digital chip manufacturing are driven by different parameters. The
digital world requires high integration, small feature sizes and high volumes. The
Analog
manufacturing is analog markets requires low integration, larger feature sizes and low volumes of
about flexibility, not many different parts. Because analog parts are more reliable with larger feature
about leading-edge sizes, small feature size can actually be a disadvantage for analog
technology semiconductors. Additionally, an analog plant does not have the luxury of
locking down on a single manufacturing process and then running it in high
volumes. The wide range of analog parts typically requires multiple
manufacturing processes.

Steady Pricing

Given the above factors, it is not difficult to understand why pricing tends to be
relatively stable in the analog sector.

Fragmented industry: The analog market is highly fragmented, with no one


company dominating the market.

Little competition for specific parts: Analog companies spend their R&D
efforts on new products, not on imitating competitors products.

Incumbent has the advantage: Analog companies would rather move on to


their next design than spend time qualifying a new analog part for an existing
product.

Little capacity utilization pressure: The low capital intensity of the analog
business keeps fixed costs relatively low. Consequently, analog companies
are far less tempted to cut prices during periods of weaker demand simply to
keep capacity utilization high up.

Stephens Inc. 19
Low-cost impact on final systems: The average selling price for an analog
integrated circuit is only around $2.00. Consequently, the cost of the analog
content of the final product is low compared with many other components.
OEMs can generally save themselves more money by concentrating their
negotiating skills on non-analog areas.

POWER SEMICONDUCTOR INDUSTRY OVERVIEW

Power semiconductor devices are a subsection of the overall analog


semiconductor market. The power semiconductor industry is composed of
manufacturers producing power discrete devices and/or power integrated circuit
(IC) devices. The definitions of these two product groups are as follows:

Power discrete: A semiconductor device that performs only one function


and can control at least one watt of power at one amp of current.

Power IC: A single semiconductor device that performs multiple functions


and controls and delivers a total of at least one watt of power.

These two general groups can be further broken down into product categories.
Later in this report we will look at the projected growth rates and analyze the key
market trends impacting each of the individual product categories. We will
begin, however, by focusing on the industry as a whole.

History

The power semiconductor industry has grown at an accelerating rate since its
The first power inception in the 1950s. The first power semiconductor devices were simple
semiconductors were diodes and thyristors. During the 1950s and 1960s, research teams at major
simple diodes electronics companies like Motorola and Bell Laboratories, now part of Lucent,
developed additional power discrete products as they investigated different
applications for the new semiconductor devices. By the end of the 1960s,
discrete power semiconductors were commonplace in consumer electronics and
lighting applications.

The first ICs appeared in the late 1960s as engineers began to integrate bipolar
power transistors and small signal devices onto a single chip. Advances in IC
design continued throughout the 1970s. In the early 1980s, IGBTs and
MOSFETs were developed for higher power applications. Today, firms continue
to experiment with new design and fabrication techniques to increase the power-
handling capabilities of power semiconductors and to raise the level of
integration possible in power ICs.

Competitors

Appendix A shows the major power semiconductor manufacturers serving the


There are
North American market. Approximately 80 companies are active in the domestic
approximately 80
companies that
market. Because the power semiconductor industry is relatively mature, the
manufacture power number of competitors is expected to remain stable. However, market share does
semiconductors shift frequently as companies extend their product lines into high-growth
segments.

Stephens Inc. 20
Overall Industry Growth

The overall North American power semiconductor market is expected to grow at


a CAGR of 9.4% through 2006. As reflected in Chart 7, the North American
market in 1996 was $3.35 billion and is expected to grow to $7.97 billion in
2006. Units are forecasted to increase at a slightly slower rate, from 7.81 billion
units in 1996 to 16.08 billion units in 2006.

Chart 7
North American Power Semiconductor Market

Revenues (Billions) Units (Billions)

$9 18
$8 16
$7 14
$6 12
$5 10
$4 8
$3 6
$2 4
$1 2
$0 0
2000E

2001E

2002E

2003E

2004E

2005E

2006E
1996

1997

1998

1999

Source: Frost & Sullivan

According to Frost and Sullivan, the devices that are expected to experience the
highest growth are discrete insulated gate bipolar transistors (IGBTs), discrete
metal-oxide semiconductor field effect transistors (MOSFETs), smart power ICs
and power conversion/management ICs. The growth for these and other power
semiconductor devices will be driven by several events, including:

The introduction of new electronic products and the increase in the electronic
Strong end-market
content of existing products, devices and systems.
growth is expected to Strong demand for voice and data communication products.
drive the growth of Strong demand for portable computing devices.
power Strong demand for digital consumer electronic devices.
semiconductors Stability in the prices of power discrete devices and the likely increase in the
prices of power ICs.
Steady increase in the electronic content of automobiles.

Stephens Inc. 21
A Cyclical Industry

The power semiconductor market, like the overall semiconductor market, is


cyclical in nature. The basic cycle is as follows:

1) Suppliers add capacity to meet demand


2) Product lead times shorten
3) Customers begin to place fewer new orders
4) Customers reduce inventories
5) Suppliers cut prices to move products
6) Distributor orders increase
7) Suppliers ship from inventory
8) Inventory runs out lead times increase
9) Customers experience shortages
10) Prices firm panic-buying ensues

The overall U.S. semiconductor industry has undergone phenomenal growth


The overall during the 1990s and, according to the Semiconductor Industry Association
semiconductor (SIA), has added more value to the U.S. economy than any other manufacturing
market picked up industry. However, the cyclical nature of the industry and the short-term effects
significantly in 1999 those cycles have are impacting long-term growth. Worldwide semiconductor
and should remain
above the historical
sales increased 18.9% in 1999, according to the SIA, versus a decrease in sales of
growth rate through approximately 8.4% in 1998. Semiconductor sales in 1999 compare favorably to
2001 the historical average of around 17%. Total semiconductor sales are expected to
increase almost 30% in 2000, 25% in 2001, 14% in 2002, and around 12% in
2003.

In the past month, many semiconductor company stocks have taken a hit due to
concerns that the semiconductor industry has hit its high and other company-
specific reasons. We disagree. We think that there is ample room for growth in
both the overall semiconductor industry and, more specifically, the analog and
power semiconductor markets. According to the Semiconductor Industry
Association, analog sales are expected to grow almost 35% in 2000, faster than
the overall semiconductor market. Starting in 2001, analog sales should grow at
a comparable rate to that of the rest of the industry. We believe that now is an
excellent time for investors to build positions in anticipation of strong results in
through 2001 and beyond.

Challenges Facing the Power Semiconductor Industry

Anticipating changing demand patterns - The power semiconductor end-user


markets are growing at different rates. This variation forces companies to
anticipate market variations and respond accordingly to optimize the use of their
productive resources. A power semiconductor companys failure to meet
demand as it varies will inevitably lead to an erosion in revenues and
profitability.

Markets are easily cannibalized - The continued development of better


technology represents the greatest threat to individual products. Specifically,
within the discrete market, the IGBTs and MOSFETs are restraining the bipolar
transistor markets growth in applications such as power supplies and motor
drives. The result has effectively redirected the bipolar transistor into smaller
consumer electronics niches.

Stephens Inc. 22
Establishing a competitive pricing strategy - In both power discrete markets
and IC markets, end-users are always looking for the best price. Customer
interviews indicate a very low loyalty level. During the semiconductor industry
downturn from 1996 to 1998, manufacturers were forced to vary prices,
sometimes by up to 25%. In 1999, the demand picture was much stronger, and
the near-term pricing outlook is pretty stable. However, OEMs are continually
looking for cheaper prices, and suppliers must have strong pricing strategies
across their entire product classes.

Customers are demanding more functionality from power ICs - Power IC


customers are demanding that the power devices they purchase integrate as much
functionality as possible in the smallest package. The need for highly functional,
highly integrated power circuits is driven by the continued shrinking size and
increasing sophistication of end-user products such as laptop computers, cellular
phones, and automotive applications.

Capacity shortages - Because of the cyclical nature of the industry, during


periods of high demand, the industry is prone to experience manufacturing
capacity shortages. This last occurred in 1995, when lead times grew from five
weeks to longer than twelve weeks. It has happened again in 1999 and should
continue through 2002 in the power semiconductor market. We do not see
significant capacity expansion coming on line until 2001.

Price declines in mature discrete power semiconductors - Mature discrete


power semiconductor companies are plagued by factors such as low growth, little
product differentiation, and severe competition. As a result, pricing is the
primary competitive factor. Companies that produce these products have to
concentrate on reducing costs, sometimes at the expense of developing new
technologies or products.

Demand for analog engineers - For the last twenty years, the majority of
engineering students and college engineering curriculums have gravitated
towards the high-tech digital fields. Consequently, a severe shortage of quality
analog engineers has developed within the industry. A power semiconductor
manufacturers most valued resource is its engineers.

Stephens Inc. 23
FORECASTS BY END-MARKET

Automotive

The automotive industry is one of the fastest growing market segments for power
semiconductors. Revenues from the North American automotive industry totaled
$1.1 billion in 1999. This figure is expected to grow to approximately $2.0
billion in 2006, representing a CAGR of 9.2%.

Table 1
North American Automotive Power Semiconductor Market
Revenue
Revenue Growth Rate
($ Million) (%)

1996 $818.2 NA
1997 888.6 8.6
Power semiconductor 1998 956.0 7.6
sales to the
1999 1,052.0 10.0
automotive market
are projected to have
2000E 1,163.5 10.6
a CAGR of 9.2% 2001E 1,292.3 11.1
through 2006 2002E 1,409.7 9.1
2003E 1,531.4 8.6
2004E 1,652.5 7.9
2005E 1,807.2 9.4
2006E 1,952.6 8.1

Compound Annual Growth Rate (1999A-2006E): 9.2%


Source: Frost & Sullivan

Driving the growth is the simple fact that more and more power semiconductor
devices are being integrated into automotive electrical systems. Additional
trends in this segment include 1) the use of higher battery voltages to optimize
the efficiency of the electrical system, 2) the demand for device loads driven with
both ac and dc voltages, and 3) the desire to individually match voltages with
loads to optimize efficiency and performance. Power semiconductors will be
used in body electronics (power windows, doors, mirrors, etc.), power train
systems, electronic steering systems, and motor drives for electric vehicles.

Power transistors Power transistors stand to benefit the most from the automotive industry growth.
should benefit the We see strong growth coming in 2004 to 2006 as electric vehicles, which use
most from the growth IGBTs and MOSFETs, become increasingly attractive. Problems that have been
of the automotive associated with electric vehicles include low maximum speed, limited driving
industry range, and lengthy charging downtime. However, the industry is making steady
progress at solving these problems.

Stephens Inc. 24
Chart 8
Power Semiconductor Automotive Applications

Climate Control
Multiplex Wiring Electric Power Steering
Voltage Regulator
Active Suspension
Ignition Control
Power Windows
Cruise Control
Dashboard Electric Vehicle
The automotive
applications segment Keyless Entry Air Bags
is one of the fastest Power Seats
growing segments Traction Control
within the power Headlamp Control
semiconductor
Power Door Locks
industry
Windshield Wipers

Power Antenna
Anti-Lock Braking
High Intensity Lighting
Transmission Control Electronic Fuel Injection

Source: International Rectifier Corporation

Computers and Peripherals

The North American computer and peripherals industry consumed $649.1 million
in power semiconductors in 1999. This amount is forecast to increase to just
over $1.1 billion in 2006, representing a CAGR of 7.9% (see Table 2). The
growth in this market will be driven by strong demand for portable devices and
digital consumer electronic devices. According to eTForecasts, overall PC
revenue will increase from approximately $226 billion in 1999 to $356.9 billion
in 2005. Although the growth rate should decline in the U.S. and Western
Europe, the rest of the world has less product penetration, and thus ample room
for strong growth remains.

Stephens Inc. 25
Table 2
North American Computer and
Peripherals Power Semiconductor Market

Revenue
Revenue Growth Rate
Year ($ Million) (%)

1996 $533.1 NA
1997 583.8 9.5
1998 582.7 (0.2)
1999 649.1 11.4
2000E 732.6 12.9
2001E 821.9 12.2
2002E 903.6 9.9
2003E 979.3 8.4
2004E 1,031.0 5.3
2005E 1,076.8 4.4
2006E 1,107.8 2.9

Compound Annual Growth Rate (1999A-2006E): 7.9%

Source: Frost & Sullivan

Communications

In 1999, the North American communications industry bought $912.0 million of


The growth of the power semiconductors. This market is forecasted to grow at a 14.6% CAGR to
Internet is fueling the $2,359.0 million in 2006 (see Table 3). The primary driver of market growth in
demand for power this segment should be consumption of power discretes such as MOSFETs and
semiconductors in the diodes in the wireless telecommunications markets, which include portable
communications
personal communications devices. MOSFETs should experience some of the
industry
strongest growth due to extraordinary demand for Internet-related enabling
equipment (network hubs, routers, switching equipment).

Stephens Inc. 26
Table 3
North American Telecommunications
Power Semiconductor Market
Revenue
Revenue Growth Rate
Year ($ Million) (%)

1996 $590.2 NA
1997 694.0 17.6
1998 757.9 9.2
1999 912.0 20.3
2000E 1,120.4 22.9
2001E 1,362.6 21.6
2002E 1,626.5 19.4
2003E 1,840.3 13.2
2004E 2,033.8 10.5
2005E 2,198.7 8.1
2006E 2,359.0 7.3

Compound Annual Growth Rate (1999A-2006E): 14.6%

Source: Frost & Sullivan

Consumer Electronics
Sales of digital
cameras, game Revenues from the consumer electronics industry were $733.8 million in 1999.
stations, and DVDs The segment is forecasted to grow at a CAGR of 6.6% through 2006 (see Table
are driving the 4) to approximately $1,147.6 million in 2006. The year 1999 was a good one for
growth in the
the consumer electronics market, driven by increasing demand for digital
consumer electronics
industry cameras and game stations. Other areas of strength included DVDs and
digital/audio video devices.

Stephens Inc. 27
Table 4
North American Consumer
Electronics Power Semiconductor Market
Revenue
Revenue Growth Rate
Year ($ Million) (%)

1996 $637.1 NA
1997 679.3 6.6
1998 678.0 (.2)
1999 733.8 8.2
2000E 804.4 9.6
2001E 881.4 9.6
2002E 951.8 8.0
2003E 1,012.2 6.4
2004E 1,066.3 5.3
2005E 1,106.9 3.8
2006E 1,147.6 3.7

Compound Annual Growth Rate (1999A-2006E): 6.6%

Source: Frost & Sullivan

Industrial

The industrial market segment is a catch-all segment that includes applications


like power supplies, batteries, welding, induction heating, medical equipment and
motor drives. This market has historically been a large consumer of power
Power supplies are discretes and is increasingly moving toward total solutions packages offered by
included in the power integrated circuits (ICs). In 1999, the industrial end-user market
catch-all industrial consumed $895.0 million in power semiconductors, a figure that is expected to
market segment grow to $1.4 billion in 2006. This represents a CAGR of 6.6%. In the next
several years, we believe that the industrial segment growth will remain steady
due to increasing demand from the Asian markets during their recovery.
However, from 2003 to 2006, the growth rate could slow due to the saturation of
the power supply market and weakening domestic demand for overall power
semiconductors.

Stephens Inc. 28
Table 5
North American Industrial
Power Semiconductor Market
Revenue
Revenue Growth Rate
Year ($ Million) (%)

1996 $774.6 NA
1997 826.2 6.7
1998 834.1 1.0
1999 895.0 7.3
2000E 967.2 8.1
2001E 1,049.0 8.5
2002E 1,132.6 8.0
2003E 1,209.3 6.8
2004E 1,278.2 5.7
2005E 1,340.3 4.9
2006E 1,402.7 4.7

Compound Annual Growth Rate (1999A-2006E): 6.6%

Source: Frost & Sullivan

Stephens Inc. 29
ANALYSIS BY PRODUCT CATEGORY

There are a number of ways to segment the power semiconductor market. Chart
9 illustrates how we have chosen to segment the market for the purpose of this
report.

Chart 9
Power Semiconductor Market Segmentation

Power Discrete Power Integrated


Devices Circuits (IC)

Motion Control
Power Transistors Rectifiers Thyristors
Power Power ICs
semiconductors are
broken into two main
Metal-Oxide Field
segments, discretes Effect Transistors Rectifer Diode
Silicon Controlled Power Management
and integrated Rectifiers SCRs ICs
MOSFETs
circuits

Smart Power
Bipolar Transistors Schottky Rectifier Triacs
ICs

Insulated Gate
Gate Turn-Off
Bipolar Transistors
Thyristors GTOs
IGBTs

Thyristor/Diode
Module
Source: Stephens Inc.

Below is an analysis by product category. The product categories were originally


identified by Frost & Sullivan in a report entitled North American Power
Semiconductor Markets - July 2000. We have included Frost & Sullivans
definitions and anticipated growth rates. Additionally, we provide a discussion
of the market trends, drivers and restraints that are impacting the various product
categories. The following chart depicts the 1999 total power semiconductor
market broken down by product category. Total power semiconductor revenue
for 1999 was approximately $4.2 billion.

Stephens Inc. 30
Chart 10
North American Power Semiconductor
Market Percentage of Revenue by Product 1999 Estimates

Total - $4.2 billion

Transistors
32%

Integrated
Circuits
51%

Rectifiers
12%
Thyristors
5%

Source: Frost & Sullivan

Power Transistors

Power transistors are used as switches in power electronic circuits. Transistors


typically have very fast switching times, which give them an advantage in
medium power range applications of less than 2 kV.

The power transistor market is basically comprised of three product sub-


Power transistors act
categories that address different voltage segments of the market yet overlap on
as switches in
medium power range the fringes: IGBTs, MOSFETs, and bipolar transistors. Together, these three
applications product sub-categories accounted for approximately $1.4 billion in revenues in
1999, or approximately 32% of the total North American power semiconductor
market. Power transistor revenues are expected to grow at a CAGR of 7.5% to
approximately $2.2 billion in 2006.

Stephens Inc. 31
Chart 11
North American Power Transistor Market

Revenues (M illions) Units (M illions)

$2,500.0 7,000

6,000
$2,000.0
5,000

$1,500.0
4,000

3,000
$1,000.0

2,000
$500.0
1,000

$0.0 0

2000E

2001E

2002E

2003E

2004E

2005E

2006E
1996

1997

1998

1999
Source: Frost & Sullivan

The main drivers in the growth of the power transistor market for the coming
The wireless market years should be the strong growth in the mobile/wireless industry, the continued
has contributed to the increase of electrical content in automobiles, and the growing need for mobile
strong growth in the
Internet connectivity which is fueling the growth for portable computing devices.
transistor market
The wireless market has been a strong growth driver for transistors, especially
MOSFETs, the past few years. Frost & Sullivan predicts an accelerating growth
rate in this market with a 2000 2002 CAGR approaching 25%. On the
automotive side, transistor growth should be driven by applications such as
power windows, doors, mirrors, seats and sunroofs. Power train systems also use
transistors for ignition and fuel injection systems.

Approximately 45 companies participate in the power transistor market in North


America. There are basically three types of competitors: conglomerates, large
multinational semiconductor companies and smaller manufacturers that focus
more on niche markets. Examples of the conglomerate players include Hitachi
Semiconductor, ABB Semiconductor, Phillips Semiconductors, Infineon, Fuji,
Toshiba, Mitsubishi and ST Microelectronics. In the second tier are the smaller
publicly traded companies like International Rectifier, ON Semiconductor,
Intersil, Fairchild and Advanced Power Technology. Niche companies include,
Dynex Power, EUPEC Inc., Powerex, Westcode, SPCO, PEMA and Sanrex
Corp.

Stephens Inc. 32
Market Trends

Table 6 shows the percent of revenues by product type of the North American
transistor market.

Table 6
North American Power Transistor Market
(Percent of Revenues by Product Type)

MOSFET Bipolar IGBT


Year (%) (%) (%)

1996 56.2 33.4 10.4


1997 56.6 33.0 10.3
MOSFETs and IGBTs
1998 56.5 32.6 10.9
are expected to take
market share from the
1999 57.6 31.7 10.7
traditional bipolar 2000E 58.6 30.9 10.5
transistors 2001E 59.9 29.9 10.3
2002E 61.1 28.8 10.1
2003E 61.7 28.1 10.2
2004E 61.9 27.6 10.5
2005E 62.3 26.7 11.0
2006E 62.8 25.6 11.6
Source: Frost & Sullivan

The MOSFET market represents the largest product segment within the total
power transistor market. In 1999, MOSFET revenues were $780 million, or
MOSFETs are the approximately 57.6% of North American transistor revenues. MOSFET sales are
largest product expected to be strong due to strong demand from the communications and
category in the power automotive markets. Additionally, MOSFETS continue to gain market share by
transistor market replacing bipolar transistors in low to medium power applications. The second
largest market is the more mature bipolar transistor market, which has thus far
faced heavy competition from the newer IGBTs and MOSFETs. However, in
1999, bipolar transistors revenue increased to $430 million because of
competitive pricing relative to MOSFETS and IGBTs.

We expect that there will still be market demand for the bipolar transistors in low
to medium frequency applications but expect the bipolar transistors to lose
market share going forward. The newest product category, the IGBT, has
enjoyed rapid growth in the last few years. In 1999, IGBT sales equaled $145
million, and Frost & Sullivan expect this figure to grow to approximately $260
million by 2006. The continued growth is attributable to an increasing
price/performance ratio that should allow for further penetration into high-power
applications.

In 1999, the average selling price for power transistors was approximately $0.40
per unit, down from $0.48 in 1996. The decline was in response to excess
manufacturing capacity in all three transistor product types. However, the price
decline in 1999 was much less than that of the two previous years due to the
strong demand for transistors during the year. We expect prices to remain stable
for the next two to three years due to robust market demand and tightening

Stephens Inc. 33
capacity, but then decline again as manufacturing capacity outpaces demand
from 2003 through 2006.

Market Drivers

The primary market driver for the power transistor market continues to be the
As transistor growth of its end-markets. As mentioned above, there are three main markets
technology continues
that should drive growth for the next five to seven years: mobile/wireless
to improve, new
markets will become
communications, automotive, and the need for mobile Internet connectivity,
available which in turn drives the growth of portable computing devices. Other markets
include the power supply industry, which is expected to grow in the low double-
digit range, and the motor drives industry, which should have continued steady
growth.

The development of faster switching technology should facilitate the entry of


power transistors into the industrial segment. Specific markets within this
segment that will be ripe for transistors include the welding and induction heating
markets. These markets have traditionally belonged to thyristors. The high-
frequency transistors will prove useful in industrial applications such as gas
tungsten arc welding (GTAW), plasma and laser generation, and ultrasonic
welding, which use power transistors in their power management systems.

Market Restraints

One of the primary restraints to power transistor growth is capacity constraint.


The strong demand in the past year has resulted in most manufacturers operating
at nearly 100% capacity, which has created supply shortages in the short term.
Manufacturers that we have polled anticipate supply shortages in the near term of
around 5%, primarily in high-growth applications such as cellular handsets,
portable computing applications, and automobiles.

Internal competition Another primary restraint to growth is internal market competition among
between product product types. IGBTs and MOSFETs compete against each other in the power
categories represents supplies and portable electronics markets. MOSFETs are further encroaching on
the greatest market bipolar transistor markets in automotive and consumer electronics applications.
restraint for power As a result, the new MOSFET and IGBT products should significantly outpace
transistors the growth of the older bipolar transistors.

Pricing is another factor that could affect revenues and profit margins going
forward. Pricing is a factor due to intense competition among vendors within the
transistor market. Over forty companies compete in this market. Those
companies that manufacture low power transistors targeting high volume
applications are especially sensitive to price. This would include most of the
larger manufacturers like International Rectifier, ST Micro Electronics, Texas
Instruments, Fairchild and ABB. Because of their pricing sensitivity, these
companies are also more susceptible to the whims of the semiconductor cycle.
During 1999, the semiconductor cycle was strong, and consequently, pricing was
relatively firm. Companies that focus on higher power niche applications, like
Advanced Power Technologies, Silicon Power and Dynex Power, typically fare
better than the commodity manufacturers during cyclical downturns.

Stephens Inc. 34
Thyristors

The thyristor is a three-terminal semiconductor device composed of four layers


of silicon. Thyristors are used as switches in electronic circuits where control of
the switch turn-on is required. Thyristors are capable of large currents and large
blocking voltages and, as such, are typically used in very high power
applications.

The four primary thyristor product segments are silicon controlled rectifiers
Thyristors act as (SCRs), triacs, gate turn-off thyristors (GTOs), and thyristor/diode modules.
switches in very high Together, these four product sub-categories accounted for $222.3 million in
power applications
revenues in 1999. The market is expected to grow a modest 3.3% per year to
$279.6 million by 2006.

Chart 12
North American Thyristor Market

Revenues (M illions) Units (M illions)

$300.0 900
800
$250.0
700
$200.0 600
Thyristors are not
expected to grow as 500
fast as the overall $150.0
400
power semiconductor
market $100.0 300
200
$50.0
100
$0.0 0
2000E

2001E

2002E

2003E

2004E

2005E

2006E
1996

1997

1998

1999

Source: Frost & Sullivan

The North American thyristor market comprises three types of manufacturers.


The first is large conglomerate companies such as ABB Semiconductor, Hitachi,
and Infineon. The second type of manufacturer is the smaller publicly traded
companies like International Rectifier, ON Semiconductor, Microsemi and
Powerex. The third type of manufacturer is the specialists in niche applications
like EUPEC Inc. and Solid State Devices.

Market Trends

Table 7 shows the percent of revenues by product type of the North American
thyristor market.

Stephens Inc. 35
Table 7
North American Thyristor Market
(Percent of Revenues by Product Type)

Silicon Gate Thyristor/


Controlled Turn-Off Diode
Year Rectifier Triac Thyristor Module
(%) (%) (%) (%)

1996 43.2 20.9 9.2 26.7


1997 43.0 20.9 8.6 27.4
1998 42.9 20.9 8.0 28.2
1999 43.0 20.9 7.1 29.0
2000E 43.1 21.0 6.2 29.8
2001E 43.2 21.0 5.4 30.4
2002E 43.2 21.0 4.8 31.0
2003E 43.1 21.1 4.3 31.5
2004E 42.7 21.0 4.1 32.2
2005E 42.3 20.9 3.9 32.9
2006E 42.0 20.9 3.8 33.4

Source: Frost & Sullivan

As illustrated in Table 7, the SCR market is the largest product segment within
the power thyristor market. The GTO market should come under the most
pressure because of the growth in the thyristor/diode modules in the industrial
market, where increased functional integration and transient voltage spike
suppression are key.

When the thyristor market was at its peak in 1995, the average selling price was
The pricing decline in
roughly $0.45 per unit. By 1999, the average selling price had dropped to $0.35
thyristors is expected
to ease in the coming
per unit. In the short term, prices are forecasted to decrease to $0.32 per unit by
year 2002. The expected decline is due to the decrease in sales of the higher-priced
GTO thyristors. After 2002, prices are expected to remain stable or inch up
slightly through 2006.

Market Drivers

High-power applications continue to drive demand for thyristors, despite the


encroachment made by other semiconductors such as MOSFETs and IGBTs.
Thyristors are still Thyristors remain the best choice for high-power applications, especially in the
very well-suited for
range of 2.5KV to 6.5KV. Thyristors are well suited for very high-power
high-power
applications applications because of their low conduction losses and high-voltage-blocking
capabilities. In the medium- to high-power range, transistors are better suited
due to low switching losses and high switching speeds, despite their high
conductive losses.

A second market driver for thyristors is the strong growth in the consumer
electronics market. Strength in the U.S. economy is fueling demand for products
such as ovens, washers, dryers, coffeepots, and other white goods, for which
thyristors are ideally suited. One trend within this market is the move towards
increased portability. This trend should support the growth of the thyristor
module market versus discrete thyristors.

Stephens Inc. 36
New thyristor variations are being designed that are getting a lot of attention
from end-users. These products include the MOS-controlled thyristor (MCT),
the fast turn-off thyristor (FTO) and the MOS turn-off thyristor (MTO). All three
devices are very high-power devices aimed at traditional GTO and high power
IGBT applications. These new devices possess improved performance
characteristics and will be cheaper to manufacture in the near future.

Another factor in favoring thyristors versus MOSFETs and IGBTs is the


Thyristors will be thyristors large installed base and the expense associated with replacing them. In
extremely difficult to order to replace the thyristors, companies must reconfigure their parent system,
replace
which involves changing software and training service personnel.

Market Restraints

While the maturity of thyristor design has ensured its long-term use, end-users
have cited a number of design-inherent problems associated with thermal cycling
and switching losses. Even the new thyristor variations such as the MCT and
MTO do not eliminate such design-inherent difficulties for end-users. Once
again, the IGBT can potentially capture a part of this market as a thyristor
substitute because of its lower switching loss and improved thermal cycling
characteristics. Because of these design strengths, IGBTs are expected to
continue to make strong in-roads into markets traditionally dominated by
thyristors. However, in the short term, the new thyristors should maintain the
products overall market share.

Price competition has been a constant in the price-sensitive thyristor market.


With the move to increased contract manufacturing by OEMs, the problem will
only be exacerbated. This move entails most U.S. OEMs looking for overseas
manufacturing, especially in the low-cost areas of South America and Asia. This
trend is especially evident in consumer electronics, the second largest market for
thyristors.

Rectifiers

Rectifiers are the largest segment in the diode family. The diode is the simplest
electronic switch. It is uncontrollable in that the on and off conditions are
determined by voltages and currents in the circuit. Current easily flows in one
direction while it is blocked in the other.

Rectifier diodes and The two primary types of rectifiers are rectifier diodes and Schottky diodes.
Schottky diodes are Together, these two product sub-categories accounted for $491.6 million in
the two main types of revenues in 1999. The market is expected to grow at 5.8% per year to $731.0
rectifiers million by 2006 (see Chart 13).

Stephens Inc. 37
Chart 13
North American Diode Market
Revenues (M illions) Units (M illions)

$800.0 300

$700.0
250
$600.0
200
$500.0

$400.0 150

$300.0
100
$200.0
50
$100.0

$0.0 0

2000E

2001E

2002E

2003E

2004E

2005E

2006E
1996

1997

1998

1999
Source: Frost & Sullivan

Approximately 40 companies participate in the North American diode market.


The three main
Again, there are three types of manufacturers: large conglomerates, smaller
players in the
rectifier market are publicly held companies, and specialist niche manufacturers. The firms with
General significant market share are those that are large and have broad product lines. For
Semiconductor, these companies, diodes are typically complementary products to other products
Microsemi, and ON like MOSFETs and IGBTs. The top three players in the rectifier market are
Semiconductor General Semiconductor, Microsemi Corp., and ON Semiconductor.

Market Trends

Table 8 depicts the percent of revenues by product type of the North American
diode market.

Stephens Inc. 38
Table 8
North American Diode Market
(Percent of Revenues by Product Type)
Rectifier Schottky
Diodes Diodes
Year (%) (%)

1996 73.8 26.2


1997 73.3 26.7
1998 72.9 27.1
1999 72.0 28.0
2000E 71.0 29.0
2001E 69.9 30.1
2002E 68.8 31.2
2003E 67.8 32.2
2004E 66.8 33.2
2005E 65.8 34.2
2006E 65.0 35.0
Source: Frost & Sullivan

During 1999, the main end-use groups for rectifiers were industrial (32.3%),
automotive (19.6%), communications (17.3%), and consumer electronics
(14.6%). End-users are demanding faster recovery functionality and physically
smaller diodes. Faster recovery functionality means greater energy efficiency
and the ability to handle higher frequencies like those demanded by the new
Pentium chips. Additionally, as portable electronics like cellular phones get
smaller and smaller, device size must decrease.

As is shown in the above table, Schottky rectifiers are estimated to grow from
Due to demand from
approximately 28% of total rectifier revenue in 1999 to around 35% by 2006.
high-growth markets
such as
This is due to the use of Schottky rectifiers in fast-growth markets like
communications, automotive, communications, and portable electronic devices. The growth for
Schottky diodes the Schottky diodes is expected to be the greatest in 2000 2002, and then slow
should increase their from 2003 through 2006. The slowing growth from 2003 2006 is due to an
market share expected slowdown in the communications market and the maturation of digital
electronic and portable computing devices.

From 1996 to 1999, rectifier average selling price declined from $0.103 to
$0.089, primarily due to excess capacity across all product segments. The
current pricing has affected margins to the extent that any further decline in
pricing would have serious repercussions on margins. From 2000 through 2006,
Frost & Sullivan expects ASPs to increase slightly due to the growth of higher-
priced Schottky diodes and ultra-fast diodes.

Market Drivers

IGBTs require fast recovery diodes in order to function properly. The high rates
of growth of IGBTs should fuel the complementary growth of the diodes
markets. The fact that IGBTs continue to gain market share from traditional
thyristors should also help fuel rectifier growth.

Stephens Inc. 39
Growth in rectifiers is tied to the growth in the general electronics market. In the
electronics market, a new product with increasing capabilities seems to replace
an older model, almost on a daily basis. Because rectifiers are the solid-state
device found in almost every power circuit, demand should continue to increase
for rectifiers.

Market Restraints

As with most standardized and mature products, price competition in the rectifier
Like other commodity market is severe. The average selling price of this product is $0.089 per unit,
products, pricing is a with very slim margins. While this pricing environment may lead to increased
primary issue in
unit sales, it does not necessarily translate into increased revenue and
purchasing decisions
profitability.

End-user industries such as the automotive and telecommunications industries


are demanding the usability of integrated circuits and power modules at the
expense of the discretes market. This trend is affecting all the discrete devices
but is particularly impacting the relatively simple diodes market. However, the
extremely price-sensitive markets should continue to prefer the cheaper rectifiers.

Motion Control Power ICs

Motion control ICs


Motion control power ICs are monolithic analog devices (integrated circuits built
are expected to grow into a single chip) used to control or power the movement of electromechanical
10% per year through products such as small motors, printer heads, scanners, and hard disk drives. The
2006 devices usually operate in the five-volt to twenty-four-volt dc motor range.

In 1999, motion control power ICs accounted for about $355.0 million of overall
power semiconductor sales. By 2006, the North American motion control power
IC market is forecasted to be $689.7 million. From 1999 through 2006, the
CAGR for this market is expected to be 10% (see Chart 14).

Stephens Inc. 40
Chart 14
North American Motion Control Power IC Market

Revenues (M illions) Units (M illions)

$800.0 300

$700.0
250
$600.0
200
$500.0

$400.0 150

$300.0
100
$200.0
50
$100.0

$0.0 0

2000E

2001E

2002E

2003E

2004E

2005E

2006E
1996

1997

1998

1999

Source: Frost & Sullivan

The North American motion control power IC market is highly competitive with
approximately 40 companies jockeying for position. There are, however, four
main companies that dominate the market: National Semiconductor, ON
Semiconductor, ST Microelectronics, and Toshiba Semiconductor. In sum, these
four control approximately 45% of the market.

Stephens Inc. 41
Market Trends

Table 9 shows a forecast of the percent of revenues by end-user category.

Table 9
Motion Control Power IC Market
(Percent of Revenues by End-User Industry)

Computers & Consumer Communi- Industrial


Automotive Peripherals Electronics cations Machinery
Year (%) (%) (%) (%) (%)

1996 27.0 31.0 15.0 5.0 22.0


1997 26.9 31.0 15.0 5.1 22.0
The automotive and 1998 27.9 29.8 14.7 5.3 22.2
communications 1999 28.0 29.8 14.7 5.6 21.9
markets are expected 2000E 28.2 29.8 14.7 5.9 21.4
to gain market share
2001E 28.2 29.8 14.7 6.2 21.1
from the computer
and peripherals in the
2002E 28.4 29.5 14.6 6.6 20.9
motion control IC 2003E 28.4 29.3 14.4 7.0 20.9
market 2004E 28.8 28.7 14.2 7.3 21.1
2005E 29.6 27.6 13.9 7.4 21.5
2006E 30.4 26.6 13.4 7.5 22.1

Source: Frost & Sullivan

The market share for the motion control power ICs by industry is expected to
remain relatively stable over the next several years. The automotive industry
should gain market share going forward due to the increasing electrical content in
automobiles. The communications sector is also expected to drive the motion
control power IC market, primarily from demand for mobile communications.

Other trends in this market include the continual reduction in package size,
circuits with improved heat dissipation, and the integration of multiple drivers
and protective circuitry. For example, the integration of sensors with motion
control power ICs is a mature technological trend. The advantage of this
technological innovation is that it conserves board space and development costs.

Prices in the motion After relative price stability in 1997 and 1998, motion control IC prices increased
control IC market to $2.65 per unit in 1999 due to strong demand. We expect further price
should continue to increases through 2002 as more functionality is added to the IC. We are looking
increase going forward for total price appreciation of around 9% from 1999 through 2006.

Market Drivers

Advances in IC fabrication techniques are leading to higher and higher levels of


integrated functionality in motion control ICs. Additionally, integrated circuits
offer greater reliability than discrete or electromechanical controlled devices. The
combination of increased functionality and greater reliability should continue to
drive revenues in this product category.

Stephens Inc. 42
Adding additional Motion control ICs sell better when they are protected from power transients.
functionality to Transient protection takes place at the board level rather than the chip level.
motion control Transient protection is not a motion control-specific driver; however, transient
devices increases protection boosts product demand by increasing the probability of a longer IC life
demand
in harsh electrical environments.

Motion control power ICs are increasingly being designed to the specific
requirements of end-user industries. This trend is driving the quality and range
of technical innovation in motion control ICs.

Market Restraints

Motion control ICs generate unwanted heat during their operating cycle, which
negatively affects the overall operating characteristics of the circuit. The effects
of too much heat include interference with other circuits, which could in the
worst case cause the failure of the circuit.

A second restraint is that there is a void in motion control ICs targeting high
voltage and high current markets. Demand for circuits that can handle 1,200
volts and over 30 amps is high, but there are no products addressing this need.
This market is still handled by discrete devices.

The application of motion control power ICs only to motion control functions
limits market opportunities. Companies are adding extra functionality to motion
control devices as a means to extend their utility beyond motor control and boost
revenues.

Power Conversion/Management ICs

Power conversion/management ICs convert, adjust, and/or control electrical


power. Specific products that are grouped in power management include low
drop-out regulators (LDOs), switching regulators, linear regulators, power
converters, and controller ICs. Specific functions performed by these ICs
include:

Power management Ac to dc conversion


ICs are used to Dc to dc conversion
convert and adjust Level translation
electrical power Voltage regulation
Interfacing high voltages with small-signal logic devices

In 1999, power conversion/management ICs sales amounted to an estimated


$910.0 million. By year-end 2006, the North American power management IC
market is forecast to be approximately $1.9 billion (see Chart 15). The CAGR for
this market is expected to be 11.1% from 1999 to 2006.

Stephens Inc. 43
Chart 15
North American Power
Conversion/Management IC Market

Revenues (M illions) Units (M illions)

$2,000.0 1,200
$1,800.0
$1,600.0 1,000
Power management
ICs are one of the $1,400.0
fastest growing 800
segments, with a $1,200.0
CAGR estimate $1,000.0 600
through 2006 of 11% $800.0
400
$600.0
$400.0 200
$200.0
$0.0 0

2000E

2001E

2002E

2003E

2004E

2005E

2006E
1996

1997

1998
1999
Source: Frost & Sullivan

The North American power conversion/management IC market is highly


Due to the wide range fragmented due primarily to the wide range of product applications. Some of the
of applications, the main players include Texas Instruments, National Semiconductor, and ON
power management
Semiconductor. Collectively, these three account for around 45% of the market.
market is highly
fragmented Other players include Linear Technology, ST Microelectronics, Toshiba,
Semtech and TelCom Semiconductor.

Market Trends

Table 10 shows Frost & Sullivans forecast of the percent of revenue by industry
category.

Stephens Inc. 44
Table 10
North American Power
Conversion/Management IC Market
(Percent of Revenues by End-User Industry)

Computers & Consumer Communi- Industrial


Year Automotive Peripherals Electronics cations Machinery
(%) (%) (%) (%) (%)

1996 23.0 20.0 14.0 24.0 19.0


1997 22.7 19.9 13.8 24.8 18.8
1998 23.2 19.3 13.2 25.3 18.9
1999 22.9 19.0 13.1 26.6 18.4
2000E 22.6 18.8 12.9 28.0 17.7
2001E 22.2 18.5 12.7 29.5 17.2
2002E 21.4 18.2 12.5 31.0 16.9
2003E 21.1 18.0 12.4 31.6 16.9
2004E 21.0 17.7 12.3 32.2 16.9
2005E 21.0 17.3 11.9 32.8 16.9
2006E 21.5 16.7 11.5 33.4 16.9

Source: Frost & Sullivan

The communications market is the largest end-market for power-management


ICs, accounting for 26.6% of sales in 1999. Demand for power management ICs
should remain strong through 2002 in every market segment. However, the
communications end-market should continue to grow fastest because of the
increased demand for mobile phones, pagers and cordless phones that require
more sophisticated battery management devices. The communications market is
expected to account for approximately 33.4% of total market sales by 2006, thus
companies serving this market should experience faster growth rates than other
market participants. Consequently, we have built our power semiconductor
research coverage list with companies that target one or more of the fastest
growing segments of the communications industry.

Power conversion/management IC vendors are pursuing efforts to reduce the size


of their chip packages. These efforts are driven by the need to save board space
(especially in small portable electronic devices such as cellular phones).
Additionally, power conversion/management ICs are developing numerous
product varieties as manufacturers seek market niches by differentiating their
products. TelCom Semiconductor and Semtech are examples of companies that
are devoting the vast majority of their R&D efforts to unique, proprietary ICs for
mobile handsets and portable electronics.

The desire to extend In 1999, the weighted average unit-selling price for power management ICs was
the battery life in $1.65 per unit, an increase from $1.50 in 1996. The increasing price was due to
portable electronics is the strong demand exhibited. Looking forward through 2002, pricing should
driving the need for continue to improve. The strong demand could cause component shortages, most
efficient power likely in communication and portable device applications. However, prices
regulation and should stabilize after 2002 as ample capacity is brought on-line. Frost & Sullivan
control forecasts power management ICs to have a sales price of around $1.93 per unit in
2006.

Stephens Inc. 45
Market Drivers

Portable electronics, including laptop computers, cellular telephones, and


personal digital assistants (PDAs), should fuel demand for power
conversion/management ICs. Portable electronics have limited power sources
Advantages of power that need more efficient power regulation and control. Power management ICs
management ICs offer advantages including higher levels of integration and smaller footprints.
include smaller
footprints and The increasing electrical content in automobiles should also help to drive demand
increased integration for power management ICs. Besides being useful in body electronics and power
train applications, power management ICs are also used in airbags, antilock
brakes, and collision prevention systems.

Market Restraints

At this time, there is a supply shortage for power management ICs due to the
strong demand from the communication and portable electronic market segments.
Although manufacturers are in the process of expanding capacity, meaningful
capacity is not expected to hit the market until the end of 2001. As a result,
supply shortages will likely occur between now and 2002, which will constrain
the growth rate of power management ICs.

Additional costs are Power management ICs produce unwanted heat during their operating cycle. This
often incurred to heat may interfere with other circuit components, negatively impacting their
dissipate excess heat performance and/or generating circuit failure.

Smart Power ICs (Low Voltage)

Smart Power ICs are defined as ICs that combine mixed-signal power drivers
with mixed signal and logic control circuitry on a monolithic wafer or chip.
Smart Power ICs have traditionally been devices that integrate low-voltage (up to
The definition of 100V) power MOSFETs with control circuitry. This definition has been changed
smart power ICs since the early 1990s because it limited the market to a few select applications,
continues to evolve such as motor drives and power supplies. Today, smart power ICs contain
complex circuitry such as motor control systems, solenoid drivers, step-up
converters, microprocessor interfaces, and voice circuits. Other possible
applications include office equipment, portable electronics, telecommunications,
white goods, and automotive applications.

In 1999, smart power ICs sales totaled an estimated $908.0 million. In 2006, the
North American smart power IC market is forecast to be $2.1 billion (see Chart
16). Frost & Sullivan expects the CAGR for this market to be 12.9% from 1999
to 2006.

Stephens Inc. 46
Chart 16
North American Smart Power IC Market

Revenues (M illions) Units (M illions)

$2,500.0 700

600
$2,000.0
Texas Instruments, 500
ON Semiconductor, $1,500.0
and ST 400
Microelectronics are
the three main $1,000.0 300
players in the smart
200
power IC market,
controlling 37% of $500.0
100
the market
$0.0 0

2000E

2001E

2002E

2003E

2004E

2005E

2006E
1996

1997

1998

1999
Source: Frost & Sullivan

The companies participating in this market range from the very large, previously
mentioned multinational companies to smaller participants. The defining
competitive criterion is the product itself. Quality products are available from
both large and small manufacturers. However, currently, 37% of the market is
controlled by Texas Instruments, ON Semiconductor, and ST Microelectronics.
Growing from a smaller base, International Rectifier is one of the fastest growing
smart power IC manufacturers today.

Stephens Inc. 47
Market Trends

Table 11 depicts the smart power IC market by end-user industry in 1999.

Table 11
North American Smart Power IC Market
(Percent of Revenues by End-User Industry)

Computers & Consumer Communi- Industrial


Year Automotive Peripherals Electronics cations Machinery
(%) (%) (%) (%) (%)

1996 28.0 20.0 15.0 32.0 5.0


1997 27.5 19.7 14.7 33.1 5.0
1998 28.2 18.9 14.2 33.7 5.0
1999 27.5 18.5 13.9 35.3 4.8
2000E 26.7 18.1 13.5 37.1 4.6
2001E 25.9 17.6 13.2 39.0 4.4
2002E 25.0 17.0 12.8 41.0 4.2
2003E 24.8 16.5 12.5 42.1 4.1
2004E 24.9 16.1 12.1 42.9 4.1
2005E 25.1 15.9 12.0 42.9 4.1
2006E 25.3 15.8 11.9 42.9 4.1

Source: Frost & Sullivan

Like other power IC markets, the growth in the smart power IC market should be
derived mainly from the communications market. Communications, which
accounted for approximately 35% of the smart power market in 1999, is
scheduled to grow to approximately 43% in 2006. During 1999, the growth in
smart ICs was also helped by the automotive market and power supplies market.
Customer demand for increased portability will drive the growth going forward,
as the move towards portability will result in IC replacement of discrete
alternatives based on improving performance of ICs and increasing economies of
scales.

The trend in smart power pricing, like other Power ICs, is upward. During 1999,
we found that prices increased between 3% and 5%. We would expect prices to
continue to trend higher over the coming years but at a slower rate than was
experienced in 1999. This market will no doubt follow the lead of other more
established power semiconductor markets. As the power IC market begins to
mature, market share should be gained through aggressive pricing, and margins
will likely be maintained by cost cutting efforts.

Market Drivers

Price is the number Price is the number one factor driving sales of smart power ICs. When a cost
one issue with smart advantage can be gained using a smart power IC over discretes, OEMs typically
power ICs choose the IC.

Standard smart power ICs offer end-users an off-the-shelf solution that shortens
the time to market for their product. Vendors providing a wide range of standard

Stephens Inc. 48
smart power ICs enable their customers to get their final product to market
quickly by reducing the need for customized solutions or board level designs.

Smart power ICs have typically targeted space-conscious applications. Smart


power ICs have been used widely for dc/dc conversion in portable electronics.
However, recent IC designs that do not integrate MOSFETs are finding markets
in PC, telecommunications, consumer electronics, automotive and industrial
applications.

Market Restraints

Integration brings together many components capable of crosstalk. Crosstalk is


defined as extraneous signals from an adjacent ac circuit interfering with system
Many design performance. Dealing with the issue of crosstalk means physically isolating ac
engineers have yet to components. This solution increases costs and die size.
get comfortable with
smart power IC
Many electrical engineers develop a preference for using discrete devices. This
technology
preference limits the smart power IC in applications not under space constraints.
Applications for which there is no pressure to reduce device size have no urgent
need to move toward an IC solution, and thus discretes typically prevail.

High-Voltage Smart Power ICs

With the patented technology developed by Power Integrations, a high-voltage


power MOSFET (350V - 700V) can now be integrated cost effectively along
with standard CMOS and BiPolar processes. This high-voltage smart power
Recent technological capability can now provide the benefits of integration to applications historically
breakthroughs enable served by discrete designs. A good example is the ac/dc conversion market
smart power ICs to where ac voltages from 85V to 265V previously required discrete MOSFETs.
cost effectively Existing linear and switch mode power supply designs can utilize a smart power
compete with discrete IC that integrates the high-voltage power MOSFET, PWM control circuitry, the
designs that convert switching oscillator and other active and passive components, thus cutting the
high voltage ac to dc
part count in half and reducing the size and weight of the system by a fourth. All
this can occur with no cost compromise, and even cost improvement in many
cases. This emerging high-voltage market has a potential of 1.5 billion units
($1.1 million) in 2000 on a worldwide basis for ac/dc converters in the 0.5 watt
to 150 watt segment. We estimate that this market is growing at approximately
15% per year. The high-voltage smart power IC market alone should provide for
considerable expansion of the overall smart power IC category going forward.

POWER SEMICONDUCTORS CONCLUSION

This report has painted a rosy outlook for power semiconductors. Over the
longer term, the trend line is definitely moving up. However, for all of its
attractive characteristics, the power semiconductor sector in general is not
immune to inventory corrections and broad semiconductor downturns. The
group of companies that comprise the power semiconductor industry are very
diverse, both in terms of product offerings and served markets. Because of this,
some companies will do better than others when the inevitable semiconductor
cycle downturn hits. On the other hand, other companies do better during the
growth phase of a cyclical upturn. We intend to use our experience in following
this unique market to help our clients take advantage of these cyclical changes.

Stephens Inc. 49
We watch manufacturing capacity levels, which in our opinion drive the overall
We believe that end semiconductor cycles, because of their strong influence on the more price-
markets influence sensitive companies on our coverage list. However, the majority of the power
power semiconductor semiconductor companies on our coverage list are more dependent on the health
companies more than of the end-markets that they serve than the state of the overall semiconductor
the overall market. We have intentionally built our coverage list with companies that realize
semiconductor cycle a significant percentage of their revenues from the fastest growing segment of
our economy, the communications market.

As we stated in the opening of this section, the power semiconductor has truly
come of age. These devices interface with the various technologies that are
required to deliver reliable power, and they are capable of dramatically reducing
the worlds energy consumption. There is a precedent to the kind of change and
opportunity that we are talking about. Generations of regulatory and
technological change created new opportunities in the telecommunications
industry and transformed a sleepy utility sector of Grandma stocks into a
vibrant investment sector. Similar dynamics are at work in the electricity sector,
and the power semiconductor is at the heart of the action.

Finally, the power semiconductor industry is not unlike other industries; those
companies that best understand their customer needs and design and deliver
products that meet those needs will be the most successful.

Stephens Inc. 50
Power Semiconductors Company Profiles

Stephens Inc. 51
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Stephens Inc. 52
Advanced Power Technology, Inc. (APTI-NASDAQ)

Price (close on 9/15/00): $34.81 ADVANCED POWER TECHNOL INC High:


Low:
49.63
15.50
APTI 8/8/00 to 9/15/00 Last: 34.81

52-Week Range: $49.63 - $15.50 USD


50

Market Capitalization: $285.4 million 40

Shares Outstanding: 8.2 million 30

Debt/Capital: 0%
3-Year Estimated CAGR: 70% 20

Daily Volume (shares): 425,460 Thousands


839

Price Target (12-month): $42 420

Rating: BUY Aug Sep

Chart Courtesy of FactSet Research Systems Inc.

Earnings Per Share % P/E Revs. EBITDA Enter./


Year 1Q 2Q 3Q 4Q DecFY Chg. Ratio $ Mil $ Mil Sales
1998A $0.00 ($0.04) ($0.02) $0.00 ($0.06) NA NA $24.9 $1.4 10.0X
1999A ($0.00) $0.04 $0.13 ($0.00) $0.16 380% 217.6X 27.5 3.1 9.1X
2000E $0.08A $0.11A $0.12 $0.14 $0.46 187% 75.7X 42.5 6.8 5.9X
2001E $0.16 $0.17 $0.18 $0.19 $0.70 52% 49.7X 57.0 10.8 4.4X

Company Description

Advanced Power Technology, Inc., headquartered in Bend, Oregon, is a leading


APTI manufactures designer, manufacturer and marketer of high performance power
high power and high semiconductors. The Company focuses primarily on the high power, high
frequency power
frequency segment of the power semiconductor market. Targeted end-markets
semiconductors
are communications and Internet infrastructure, semiconductor capital
equipment, medical, industrial, and military/aerospace.

Investment Highlights and Summary

Advanced Power Technology (APT) is experiencing strong revenue growth


and earnings momentum. Beginning in 1999, demand for APTs power
semiconductors began to accelerate dramatically. Since its inception in 1984,
APT has focused on a niche markethigh power, high frequency power
semiconductors. The demand for these products is expanding as a result of the
rapid proliferation of sophisticated electronics that require higher power that is
more precisely regulated. A large, fast-growing market is moving in APTs
direction. We are projecting APTs revenues to grow at a compound annual
rate of 44.0% and earnings at a compound annual rate of 209.2% from 1999 to
2001.

APT is an industry leader in high power, high frequency power


Advanced Powers semiconductors. APTs products are based on its proprietary interdigitated
intellectual property structure and self-aligned manufacturing process. This structure and process,
is protected by 17 which are protected by 17 U.S. patents and 8 foreign patents, allow APTs
U.S. and 8 foreign products to operate more efficiently and at higher frequencies than competing
patents
products. When an application calls for high power and extremely fast
switching speeds, APT has the solution.

Stephens Inc. 53
Through acquisitions and/or increased R&D efforts, we expect APT to
increase its exposure in fast-growing, high power radio frequency (RF)
applications. RF MOSFET (metal oxide silicon field effect transistor) refers to
a specialized type of device that operates at very high switching speeds. APTs
existing RF MOSFET product offering already addresses the semiconductor
capital equipment, medical imaging and CO2 laser markets. The Company
would like to expand into the communications RF band market. The RF market
is currently being addressed primarily by low voltage RF devices or RF tubes.
APTs high voltage RF MOSFETs allow for a lower overall system cost when
designing RF components and electronics.

A large portion of APTs business is immune to the cyclicality in the


semiconductor industry. Historically, the classic semiconductor cycle has
been driven by capacity issues, not lack of demand. When manufacturing
capacity is tight, lead times stretch out, prices go up and the semiconductor
The Company is not cycle heats up. As manufacturers add capacity, and inevitably too much
as exposed to the
capacity, lead times begin to shorten, prices drop and the semiconductor cycle
semiconductor cycle
as other heads into a downturn. This cycle has the greatest impact on those
manufacturers manufacturers that are price sensitive. Or said another way, it affects those
semiconductor companies with the most competition. APT is a single-source
supplier for approximately 35% of its revenues. There is only one other head-
to-head competitor in APTs niche space. Therefore, we look more at the health
of the end-markets it serves rather than the overall semiconductor market to
determine the outlook for the Company.

APT has a strong, tenured management team. APTs six senior officers
purchased controlling interest in the Company in 1995; in 1998, they acquired
the balance. We think management had the right idea to purchase the
Company, but its timing was bad. Following a period of strong sequential
growth, demand softened and revenue growth slowed from 1995 to 1999.
During this period, management focused on cash flows and kept the Company
afloat. Today, with the demand picture improved dramatically and APT armed
with the proceeds from the recent IPO, we believe that management is poised to
take the Company to new heights. Led by Chairman, CEO and President,
Patrick Sireta, the senior management team has an average of 14 years
experience at APT. Mr. Sireta has 31 years of experience in the semiconductor
industry. With the completion of the IPO, management owns approximately
50% of the outstanding shares.

Stephens Inc. maintains a market in the common stock of Advanced Power and may act as
principal in these transactions. Stephens Inc. has managed or co-managed an underwriting for
Advanced Power within the past three years.

Stephens Inc. 54
Advanced Power Technology
Historical Earnings Summary & Projections
$ in millions, except per share amounts

1999 2000 2001 Fiscal Year Ending December


1Q* 2Q* 3Q* 4Q* 1Q* 2Q* 3QE 4QE 1QE 2QE 3QE 4QE 1998 1999 2000E 2001E

Revenues $ 5.9 $ 6.6 $ 7.3 $ 7.8 $ 9.6 $ 10.1 $ 11.0 $ 11.9 $ 12.8 $ 13.6 $ 14.8 $ 15.8 $ 24.9 $ 27.5 $ 42.5 $ 57.0
Cost of Goods Sold 4.0 4.2 4.9 4.8 6.2 6.3 6.8 7.3 7.8 8.3 9.0 9.6 17.6 18.0 26.7 34.6
Gross Profit 1.8 2.3 2.4 2.9 3.4 3.7 4.2 4.6 5.0 5.3 5.8 6.2 7.2 9.5 15.9 22.4
Research & Development 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.4 0.5 0.6 0.7 0.9 0.9 1.0 2.1
SG&A 1.6 1.8 1.6 2.0 2.2 2.2 2.4 2.5 2.6 2.7 2.8 2.9 6.8 7.0 9.3 11.1
Operating Income 0.0 0.4 0.6 0.7 1.0 1.3 1.5 1.8 2.0 2.2 2.4 2.6 (0.5) 1.6 5.6 9.2
Net Interest Income (Expense) (0.2) (0.1) (0.1) (0.3) (0.1) (0.2) 0.0 0.4 0.4 0.4 0.4 0.4 (0.7) (0.7) 0.0 1.5
Other Income (Expense) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0
Pretax Income (0.1) 0.3 0.4 0.4 0.8 1.1 1.5 2.2 2.4 2.5 2.8 3.0 (1.1) 1.0 5.6 10.7
Taxes (0.1) 0.1 (0.2) 0.4 0.3 0.4 0.6 0.8 0.9 1.0 1.1 1.1 (0.8) 0.2 2.2 4.1
Net Income (0.0) 0.2 0.7 (0.0) 0.5 0.7 0.9 1.3 1.5 1.6 1.7 1.9 (0.3) 0.8 3.5 6.6

Average Shares (Diluted) 5.0 5.0 5.0 5.0 6.3 6.3 7.8 9.3 9.3 9.4 9.5 9.6 5.0 5.0 7.4 9.4

EPS (Diluted) $ (0.00) $ 0.04 $ 0.13 $ (0.00) $ 0.08 $ 0.11 $ 0.12 $ 0.14 $ 0.16 $ 0.17 $ 0.18 $ 0.19 $ (0.06) $ 0.16 $ 0.46 $ 0.70

Depreciation & Amortization 0.5 0.5 0.3 0.2 0.3 0.3 0.3 0.3 0.4 0.4 0.4 0.4 1.9 1.4 1.2 1.6
EBITDA 0.5 0.8 0.9 0.9 1.2 1.6 1.8 2.1 2.4 2.6 2.8 3.0 1.4 3.1 6.8 10.8

Margins
Gross Profit 31.2% 35.6% 32.6% 37.6% 35.4% 37.2% 38.0% 38.5% 39.0% 39.2% 39.3% 39.5% 29.0% 34.5% 37.4% 39.3%
Research & Development 3.4% 3.6% 2.9% 3.0% 2.5% 2.5% 2.4% 2.3% 3.0% 3.4% 3.8% 4.2% 3.7% 3.2% 2.4% 3.6%
SG&A 27.1% 26.6% 22.1% 25.9% 22.9% 21.9% 21.9% 21.0% 20.3% 19.9% 19.1% 18.6% 27.2% 25.3% 21.9% 19.4%
Operating Income 0.7% 5.4% 7.6% 8.8% 10.0% 12.8% 13.7% 15.2% 15.7% 15.9% 16.4% 16.7% NM 5.9% 13.1% 16.2%
Pretax Income NM 4.1% 6.1% 5.0% 8.6% 11.2% 13.7% 18.1% 18.6% 18.7% 19.0% 18.9% NM 3.7% 13.2% 18.8%
Net Income NM 2.9% 9.2% NM 5.2% 6.8% 8.5% 11.2% 11.5% 11.6% 11.8% 11.7% NM 2.9% 8.1% 11.7%
Tax Rate 73.9% 30.5% -50.3% 106.4% 39.2% 39.5% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 73.5% 20.6% 38.5% 38.0%
EBITDA 8.5% 12.3% 12.3% 11.3% 12.6% 16.0% 16.5% 18.0% 18.8% 18.9% 19.1% 19.2% 5.8% 11.2% 15.9% 19.0%

% Change Over Prior Year


Revenues -12.3% -0.8% 17.7% 44.6% 63.4% 53.1% 51.7% 53.1% 33.9% 34.9% 34.5% 32.8% 10.5% 54.9% 34.0%
Gross Profit -22.0% 11.7% 28.3% 216.9% 85.1% 59.6% 76.7% 56.6% 47.6% 42.4% 39.1% 36.2% 31.2% 67.9% 40.9%
Operating Income -87.0% 471.0% 171.4% 165.4% nm 265.5% 174.0% 165.3% 110.3% 67.6% 61.2% 46.0% 447.4% 242.3% 66.2%
Pretax Income -179.3% 315.9% 1548.1% 135.5% 333.1% 314.3% 239.6% 451.8% 138.8% 93.7% 60.2% 38.5% 193.6% 450.3% 91.0%
Taxes -197.0% 10.7% -262.3% 138.5% 593.8% 436.1% 356.3% 97.1% 182.0% 117.1% 85.9% 38.5% 126.2% 928.6% 88.6%
Net Income -152.3% 194.0% 702.7% -19.0% nm 260.8% 40.0% 5450.6% 197.2% 131.2% 85.9% 38.5% 380.3% 326.4% 92.5%
EPS (Diluted) -152.3% 194.0% 702.7% -19.0% nm 185.3% -10.2% nm 102.1% 56.4% 52.6% 34.1% 380.3% 186.6% 51.7%

*Pro Forma
Does not include the effects of pushdown accounting and warrants associated with a $2.5 million bank loan.
Source: Company reports and Stephens Inc. estimates

Stephens Inc. 55
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Stephens Inc. 56
Cree, Inc. (CREE-NASDAQ)

High: 202.00
CREE INC
Price (close on 9/15/00): $115.94 CREE 9/15/99 to 9/15/00
Low:
Last:
32.13
115.94
USD
200
52-Week Range: $202.00 - $32.13 150

Market Capitalization: $4.4 billion 100

Shares Outstanding: 37.6 million


Debt/Capital: 0% 50

3-Year Estimated CAGR: 45%


Millions
3.22

Daily Volume (shares): 1,028,285 1.61

Price Target (12-month): $175 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Rating: BUY
Chart Courtesy of FactSet Research Systems Inc.

Cash Earnings Per Share % P/E Revs. EBITDA Enter./


Year 1Q 2Q 3Q 4Q JunFY Chg. Ratio $ Mil $ Mil Sales
1999A $0.09 $0.11 $0.12 $0.13 $0.45 88% 257.6X $60.1 $21.5 68.2X
2000A $0.14 $0.17 $0.25 $0.30 $0.85 90% 136.4X 108.6 44.1 37.7X
2001E $0.32 $0.33 $0.35 $0.39 $1.39 63% 83.4X 175.1 77.9 23.4X
2002E $0.41 $0.44 $0.47 $0.49 $1.80 30% 64.4X 250.6 111.8 16.5X

Company Description

Cree, Inc., headquartered in Durham, North Carolina, is an industry leader in


the development, manufacture, and marketing of electronic devices made from
We believe Cree is
the undisputed world silicon carbide (SiC). The Company incorporates its proprietary technology to
leader in silicon produce compound semiconductors for use in automotive and liquid crystal
carbide technology display (LCD) backlighting; indicator lamps; full-color light-emitting diode
(LED) displays; and other lighting applications. Cree also manufactures SiC
crystals used in the production of unique gemstones and SiC wafers for research
directed toward opto-electronic, microwave and power applications. (Source:
Company Website)

Investment Highlights and Summary

World leader in silicon carbide (SiC) technology. Cree, Inc. (CREE) was
established in 1987 to commercialize silicon carbide (SiC) as a base
semiconductor material. Today, Cree is the largest producer of SiC wafers and
other silicon carbide-based semiconductor materials. While silicon carbide has
been around since 1824, it was extremely difficult to produce in large
quantities. Cree developed a way to mass-produce single crystalline SiC, and 70
patents have been issued to the Company for technological breakthroughs and
product development.

Crees main products include LEDs, SiC wafers, and gemstones/materials.


Additionally, Cree receives significant funding from the U.S. government to do
research on SiC applications, particularly in radio frequency (RF) and
microwave devices. The Companys LED products are used for backlighting
applications in mobile phones, automotive dashboards, stereos, and office
equipment. These LEDs are also used for large video displays, indicator lamps
and stop lights. Additional targeted end-markets for silicon carbide wafers

Stephens Inc. 57
include microwave products, wireless transmission products, and power devices
such as high-power rectifiers and switches.

Leadership position in light-emitting diode (LED) market. LEDs are


essentially junction semiconductors that emanate a single color light when
exposed to an electrical current. The fundamental structure of an LED is made
up of the light-emitting semiconductor material, a reflector cup, a transparent
lens that houses the semiconductor material, and electrical leads. LEDs made
with SiC offer several advantages over LEDs made from traditional materials
like sapphire. Crees LEDs are smaller, easier to manufacture, thus cheaper,
and produce less static electricity than traditional LEDs. Even though the die
size is smaller, Crees new high-brightness LEDs are able to produce enough
light to be used in outdoor applications.

Large, high-growth end-market opportunities. Crees R&D efforts are


focused on commercializing new products in the areas of RF/microwave
devices, solid state devices for high-voltage transmission applications, and blue
laser diodes. Cree is beginning to receive qualification orders for its
microwave/RF transistor products. The Companys blue laser diodes, used in
DVDs and CD-Roms, are scheduled for launch in FY02.

Silicon carbide is ideal for use in high-voltage power semiconductors


because it can tolerate extremely high temperatures. Potential applications
include automobiles, factory automation, lamp ballasts, motor control, traction
control, and electric power transmission. Cree is working with the Kansai
Electric Company in Japan, the fourth-largest electric utility in the world,
researching switching systems in power transmission networks. Revenues from
power semiconductor products arent expected to be material until CY01.

Key for Cree is executing its plan to meet demand. Demand is now visible
Cree decreased the into the next three to four quarters. Cree must continue to increase capacity and
cost of its LEDs by an improve yields. This is not a new problem for the Company, and management
average of 50% over has proven its ability to execute its strategy in the past. In FY99 and FY00,
the past two years Cree dropped the average cost of its standard LED by approximately 50%.
Going forward, Cree must continue to decrease the cost of producing its high-
brightness LEDs to maintain margins.

Near-term outlook is good with strong visibility and record backlog. Crees
4Q00 backlog of $76.6 million was the highest in its history. With product
demand now visible into the next three to four quarters, the Company is
essentially booked for the rest of FY01.

Stephens Inc. maintains a market in the common stock of Cree, Inc. and may act as principal in
these transactions.

Stephens Inc. 58
CREE, INC.
Historical Earnings Summary & Projections
(in millions, except per share amounts)

2000* 2001 2002 Fiscal Year Ending June


Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun
1Q 2Q 3Q 4Q 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1999 2000* 2001E 2002E
Sales $ 20.9 $ 24.8 $ 29.5 $ 33.4 $ 37.4 $ 40.6 $ 45.9 $ 51.3 $ 55.7 $ 60.2 $ 65.1 $ 69.7 $ 60.1 $ 108.6 $ 175.1 $ 250.6
Cost of Sales 11.4 12.1 13.7 15.2 17.1 18.5 21.0 23.4 25.3 27.3 29.7 31.9 31.9 52.4 80.1 114.2
Gross Profit 9.5 12.7 15.8 18.2 20.2 22.0 24.9 27.9 30.4 32.8 35.3 37.8 28.1 56.2 95.1 136.4
R&D 0.9 1.9 2.2 2.0 2.2 2.5 2.8 3.2 3.5 3.8 4.0 4.3 4.4 7.1 10.7 15.6
SG & A 2.1 2.8 3.0 3.3 3.7 4.1 4.6 5.1 5.4 5.5 5.8 5.9 6.1 11.1 17.5 22.7
Other Expense 0.1 (0.0) 1.2 0.0 - - - - - - - - 1.0 - - -
Operating Income 6.4 8.1 9.4 12.9 14.3 15.5 17.4 19.7 21.4 23.5 25.5 27.7 16.6 36.8 66.8 98.1
Interest (Income)/Expense (0.6) (0.6) (3.8) (4.5) (4.0) (3.6) (3.3) (3.1) (2.7) (2.4) (2.2) (1.8) (1.1) (9.4) (14.0) (9.1)
Pretax Income 6.9 8.6 13.2 17.4 18.3 19.1 20.7 22.8 24.1 25.9 27.7 29.5 17.6 46.2 80.8 107.2
Taxes 2.4 3.0 4.5 6.2 6.2 6.5 7.0 7.7 8.2 8.8 9.4 10.0 4.9 16.1 27.5 36.5
Net Income $ 4.6 $ 5.6 $ 8.7 $ 11.2 $ 12.1 $ 12.6 $ 13.7 $ 15.0 $ 15.9 $ 17.1 $ 18.3 $ 19.5 $ 12.7 $ 30.1 $ 53.4 $ 70.8
Average Shares - Diluted 33.2 33.5 34.6 37.6 37.9 38.2 38.6 38.9 38.9 39.2 39.3 39.4 28.4 34.7 38.4 39.2
EPS - Diluted $ 0.14 $ 0.17 $ 0.25 $ 0.30 $ 0.32 $ 0.33 $ 0.35 $ 0.39 $ 0.41 $ 0.44 $ 0.47 $ 0.49 $ 0.45 $ 0.85 $ 1.39 $ 1.80

Depreciation & Amortization $ 1.5 $ 1.7 $ 2.0 $ 2.1 $ 2.5 $ 2.7 $ 2.9 $ 3.0 $ 3.2 $ 3.4 $ 3.5 $ 3.6 $ 5.0 $ 7.3 $ 11.1 $ 13.7
EBITDA $ 7.9 $ 9.8 $ 11.4 $ 15.0 $ 16.8 $ 18.2 $ 20.3 $ 22.7 $ 24.6 $ 26.9 $ 29.0 $ 31.3 $ 21.5 $ 44.1 $ 77.9 $ 111.8

Margin Analysis
Gross Profit 45.4% 51.3% 53.5% 54.5% 54.2% 54.3% 54.2% 54.4% 54.5% 54.6% 54.3% 54.3% 46.8% 51.8% 54.3% 54.4%
R&D 4.5% 7.7% 7.6% 5.9% 6.0% 6.1% 6.2% 6.2% 6.3% 6.3% 6.2% 6.1% 7.4% 6.5% 6.1% 6.2%
SG&A 9.9% 11.2% 10.1% 9.9% 9.9% 10.0% 10.1% 9.9% 9.7% 9.2% 8.9% 8.5% 10.1% 10.2% 10.0% 9.0%
Operating Income 30.6% 32.5% 31.9% 38.6% 38.3% 38.2% 37.9% 38.3% 38.5% 39.1% 39.2% 39.7% 27.6% 33.9% 38.2% 39.2%
Pretax Income 33.3% 34.8% 44.6% 52.1% 49.0% 47.1% 45.1% 44.3% 43.3% 43.1% 42.6% 42.3% 29.3% 42.5% 46.2% 42.8%
Net Income 21.8% 22.8% 29.5% 33.6% 32.3% 31.1% 29.8% 29.3% 28.6% 28.4% 28.1% 27.9% 21.1% 27.7% 30.5% 28.2%
Tax Rate 34.4% 34.6% 34.0% 35.6% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 28.0% 34.8% 34.0% 34.0%

Percent Change Over Prior Year


Sales 69.9% 76.8% 84.1% 88.5% 79.1% 63.4% 55.4% 53.9% 49.1% 48.3% 41.8% 35.8% 41.2% 80.8% 61.3% 43.1%
Cost of Sales 71.9% 62.9% 65.5% 58.3% 50.3% 53.3% 53.0% 54.4% 48.1% 47.4% 41.5% 36.1% 14.1% 64.0% 52.9% 42.7%
Gross Profit 67.5% 92.4% 104.2% 124.1% 113.7% 73.0% 57.4% 53.4% 49.9% 49.2% 42.1% 35.5% 93.3% 99.8% 69.1% 43.5%
SG&A 15.5% 70.5% 48.3% 96.6% 140.8% 29.5% 26.6% 61.9% 56.5% 53.2% 41.8% 33.6% 150.4% 58.8% 52.3% 45.1%
R&D 68.8% 90.8% 89.3% 78.3% 79.9% 46.6% 56.1% 54.0% 46.1% 36.5% 25.0% 16.6% 47.3% 82.2% 57.5% 29.7%
Operating Income 89.9% 115.0% 116.7% 152.3% 123.9% 92.3% 84.7% 52.5% 49.9% 51.8% 46.7% 40.8% 103.4% 121.9% 81.9% 46.8%
Pretax Income 99.5% 129.1% 181.0% 205.9% 163.7% 121.2% 56.9% 30.8% 31.9% 35.8% 33.9% 29.5% 98.6% 161.9% 75.2% 32.6%
Taxes 114.6% 225.7% 241.1% 288.2% 160.7% 117.6% 56.9% 24.8% 31.9% 35.8% 33.9% 29.5% 90.0% 224.9% 71.2% 32.6%
Net Income 92.5% 98.1% 157.6% 173.7% 165.3% 123.1% 56.9% 34.2% 31.9% 35.8% 33.9% 29.5% 102.1% 137.3% 77.3% 32.6%
EPS - Diluted 53.8% 60.3% 118.3% 127.4% 132.2% 95.9% 40.9% 29.7% 28.5% 32.3% 31.5% 27.9% 87.5% 89.9% 62.5% 30.0%

* Restated due to acquisition of Nitres Inc.


Source: Company reports and Stephens Inc. estimates

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Stephens Inc. 60
International Rectifier Corp. (IRF-NYSE)

High: 67.44
INTL RECTIFIER CORP
Price (close on 9/15/00): $59.50 IRF 9/15/99 to 9/15/00
Low:
Last:
14.69
59.50
USD
70

52-Week Range: $67.44 - $14.69 60

50

Market Capitalization: $3.9 billion 40

Shares Outstanding: 65.7 million 30

Debt/Capital: 1% 20

3-Year Estimated CAGR: 229%


Millions
2.93

Daily Volume (shares): 1,195,896 1.46

Price Target (12-month): $90 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Rating: BUY
Chart Courtesy of FactSet Research Systems Inc.

Earnings Per Share % P/E Revs. EBITDA Enter./


Year 1Q 2Q 3Q 4Q JunFY Chg. Ratio $ Mil $ Mil Sales
1999A $0.00 $0.02 $0.04 $0.06 $0.12 (64%) 495.8X $545.3 $66.4 6.2X
2000A $0.10 $0.23 $0.38 $0.52 $1.27 982% 46.9X 753.3 161.8 4.5X
2001E $0.58 $0.64 $0.69 $0.74 $2.66 110% 22.4X 1,070.3 289.2 3.9X
2002E $0.75 $0.80 $0.85 $0.90 $3.30 24% 18.0X 1,345.2 373.0 2.5X

Company Description

International Rectifier, headquartered in El Segundo, California, was founded in


IRF is one of the 1947 to manufacture selenium rectifiers. Since its inception, IRF has been
oldest semiconductor considered the technological leader in discrete power semiconductor design.
companies in the Today, IRF is the only company in the world that produces components that
world address the entire power conversion process of refining raw electricity into
clean, usable power. IRF provides enabling technologies for products that work
smarter, run cooler, and raise the world's productivity-per-watt.

Investment Highlights and Summary

IRFs R&D efforts are focused on designing higher value-added products.


As recently as last year, IRF was characterized as a semiconductor company
that does well during the upturns in the semiconductor cycle but does poorly
We estimate that in 12 when the inevitable downturn comes. This was because the Companys legacy
months, new
products were basically commodity components. However, to some degree,
proprietary products
will account for 35%
management has been able to transform the Company. IRF has new
of IRFs sales proprietary analog power ICs, advanced circuit devices for power systems.
These products are highly differentiated products that are targeting the
automotive, broadband communications, computing, lighting and industrial
markets. During FY00 (June year-end), these products accounted for
approximately 25% of revenue, versus 18% during FY99. We predict that in
twelve months, IRFs new proprietary products will account for approximately
35% of total revenues. These proprietary products carry higher ASPs, relatively
longer product life cycles and substantially greater gross margins than the
Companys traditional component business.

IRF has developed a lucrative patent portfolio. IRF currently holds over 300
patents. The majority of the MOSFET (metal oxide semiconductor field effect
transistor) market is served by International Rectifier and companies that

Stephens Inc. 61
license IRFs technology. It has over 20 companies under licensing agreements,
IRF owns key
MOSFET-related
some of which include ABB Semiconductor, Hitachi, Mitsubishi Electronics,
patents Motorola, National Semiconductor, NEC, SGS-Thompson, Toshiba, and
Unitrode. The Companys strong patent portfolio and extensive licensing
agreements yielded $36.4 million in royalty revenue in FY00.

The Company has available capacity and lower lead times than the
IRF currently has industry average. Currently, IRFs capacity utilization is only 85%, versus the
shorter lead times industry average of around 90%. Additionally, International Rectifier is
than the industry
maintaining lead times in the 4- to 18-week range, which is much shorter than
average
the industry average of around 30 weeks. Shorter lead times aid in IRFs ability
to gain market share, allowing it to grow faster than the industry average.

The current outlook is extremely robust. IRF is clearly hitting on all


cylinders at this time, and with the current market strength, we see no reason for
a slowdown in the near future. IRF is publicly targeting revenue growth of 40%
during the current fiscal year. We are especially encouraged with the growth of
its new proprietary products. We believe that the proprietary products will help
mitigate the cyclicality of IRFs business, as well as improve margins and
increase revenue and earnings.

Stephens Inc. 62
International Rectifier Corp.
Historical Earnings Summary & Projections
$ in millions, except per share amounts

2000 2001 2002 Fiscal Year Ending June


Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun
1Q00 2Q00 3Q00*** 4Q00 1Q01E 2Q01E 3Q01E 4Q01E 1Q02E 2Q02E 3Q02E 4Q02E 1999 2000 2001E 2002E

Revenues $ 152.2 $ 171.1 $ 198.0 $ 232.0 $ 245.5 $ 260.3 $ 274.6 $ 290.0 $ 307.4 $ 325.8 $ 345.7 $ 366.4 $ 545.3 $ 753.3 $ 1,070.3 $ 1,345.2
Cost of Goods Sold 104.0 112.9 125.5 142.8 149.0 155.6 162.3 169.6 178.3 188.5 199.3 211.0 388.2 485.2 636.6 777.1
Gross Profit 48.2 58.2 72.4 89.2 96.5 104.6 112.3 120.3 129.1 137.3 146.4 155.4 157.2 268.1 433.8 568.2
Selling & Administrative 26.7 27.1 28.8 32.1 33.0 34.6 35.7 37.7 40.0 42.0 44.6 46.9 98.2 114.7 141.0 173.5
Research & Development 10.6 11.1 11.8 13.7 15.2 16.6 17.8 19.0 20.3 22.2 23.9 25.6 40.5 47.2 68.5 91.9
Operating Income 11.0 20.1 31.8 43.4 48.3 53.5 58.8 63.7 68.8 73.1 77.9 82.8 18.5 106.2 224.2 302.7
Interest Income (Expense) (3.4) (3.9) (2.1) 3.4 4.2 4.4 4.4 4.6 4.5 4.5 4.5 4.5 (11.1) (6.0) 17.6 18.0
Other Income (Expense) - 0.6 0.5 0.2 - - - - - - - - 1.4 1.3 - -
Pretax Income 7.5 16.8 30.2 47.1 52.5 57.9 63.2 68.3 73.3 77.6 82.4 87.3 8.7 101.5 241.8 320.7
Taxes 2.4 4.4 8.5 13.2 13.1 14.5 15.8 17.1 21.3 22.5 23.9 25.3 2.7 28.4 60.5 93.0
Net Income $ 5.1 $ 12.4 $ 21.7 $ 33.9 $ 39.4 $ 43.4 $ 47.4 $ 51.2 $ 52.1 $ 55.1 $ 58.5 $ 62.0 $ 6.0 $ 73.1 $ 181.4 $ 227.7

Average Shares (Diluted) 53.1 54.1 57.7 65.7 67.4 67.8 68.5 69.0 69.0 69.0 69.0 69.0 51.3 57.7 68.2 69.0
EPS (Diluted) $0.10 $0.23 $0.38 $0.52 $0.58 $0.64 $0.69 $0.74 $0.75 $0.80 $0.85 $0.90 $ 0.12 $ 1.27 $ 2.66 $ 3.30
Depreciation & Amortization $13.1 $13.4 $14.4 $14.7 $15.8 $16.0 $16.4 $16.8 $17.0 $17.4 $18.0 $18.9 $47.9 $55.6 $65.0 $70.3
EBITDA $24.1 $33.5 $46.2 $58.1 $64.1 $69.5 $75.2 $80.5 $85.8 $90.5 $95.9 $101.7 $66.4 $161.8 $289.2 $373.0

Margins
Gross profit 31.7% 34.0% 36.6% 38.5% 39.3% 40.2% 40.9% 41.5% 42.0% 42.2% 42.4% 42.4% 28.8% 35.6% 40.5% 42.2%
Selling & Administrative 17.5% 15.8% 14.6% 13.8% 13.4% 13.3% 13.0% 13.0% 13.0% 12.9% 12.9% 12.8% 18.0% 15.2% 13.2% 12.9%
Research & Development 7.0% 6.5% 6.0% 5.9% 6.2% 6.4% 6.5% 6.5% 6.6% 6.8% 6.9% 7.0% 7.4% 6.3% 6.4% 6.8%
Operating Income 7.2% 11.7% 16.1% 18.7% 19.7% 20.5% 21.4% 22.0% 22.4% 22.5% 22.6% 22.6% 3.4% 14.1% 20.9% 22.5%
Pretax Income 5.0% 9.8% 15.2% 20.3% 21.4% 22.2% 23.0% 23.5% 23.9% 23.8% 23.9% 23.8% 1.6% 13.5% 22.6% 23.8%
Net Income 3.4% 7.2% 11.0% 14.6% 16.0% 16.7% 17.3% 17.7% 16.9% 16.9% 16.9% 16.9% 1.1% 9.7% 16.9% 16.9%
Tax rate 32.0% 26.1% 28.1% 28.0% 25.0% 25.0% 25.0% 25.0% 29.0% 29.0% 29.0% 29.0% 31.0% 28.0% 25.0% 29.0%

% Change Over Prior Year


Revenues 19.4% 28.8% 43.9% 57.3% 61.3% 52.1% 38.7% 25.0% 25.2% 25.2% 25.9% 26.4% -1.2% 38.1% 42.1% 25.7%
Gross Profit 33.2% 50.8% 81.6% 110.1% 100.1% 79.8% 55.1% 34.8% 33.8% 31.3% 30.4% 29.1% -10.8% 70.6% 31.2% 22.1%
Operating Income nm nm 516.7% 477.4% 340.2% 166.6% 84.8% 46.7% 42.6% 36.8% 32.5% 30.0% -43.0% 475.6% 111.0% 35.0%
Pretax Income nm nm 1034.5% 921.8% 595.7% 245.2% 109.6% 45.0% 39.8% 34.2% 30.4% 27.9% -64.6% 1065.1% 138.2% 32.6%
Taxes nm nm 926.7% 822.9% 443.6% 230.6% 86.8% 29.5% 62.1% 55.7% 51.3% 48.3% -66.7% 952.5% 112.6% 53.9%
Net Income nm nm 1082.9% 966.2% 667.3% 250.4% 118.5% 51.0% 32.3% 27.0% 23.5% 21.1% -63.5% 1115.7% 148.1% 25.6%
EPS (Diluted) nm nm 961.2% 739.3% 504.4% 179.6% 84.2% 43.8% 29.3% 24.8% 22.6% 21.1% -63.5% 981.8% 109.6% 24.2%

*** Excludes charges associated with the early repayment of debt.


Source: Company reports and Stephens Inc. estimates .

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Stephens Inc. 64
Power Integrations Inc. (POWI-NASDAQ)

High: 68.00
POWER INTEGRATIONS INC
Price (close on 9/15/00): $14.31 POWI 9/15/99 to 9/15/00
Low:
Last:
14.00
14.31
USD
70

52-Week Range: $68.00- $14.00 60

50

Market Capitalization: $410.7 million 40

Shares Outstanding: 28.7 million 30

Debt/Capital: 0% 20

3-Year Estimated CAGR: 27%


Millions
2.08

Daily Volume (shares): 765,391 1.04

Price Target (12-month): $49 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Rating: BUY
Chart Courtesy of FactSet Research Systems Inc.

Earnings Per Share % P/E Revs. EBITDA Enter./


Year 1Q 2Q 3Q 4Q DecFY Chg. Ratio $ Mil $ Mil Sales
1998A* $0.07 $0.07 $0.12 $0.12 $0.37 134% 38.7X $70.0 $17.1 5.0X
1999A* $0.14 $0.15 $0.20 $0.18 $0.67 78% 21.4X 104.0 30.4 3.3X
2000E $0.17A $0.18A $0.24 $0.23 $0.82 23% 17.5X 128.6 35.4 2.7X
2001E $0.24 $0.25 $0.30 $0.29 $1.08 32% 13.3X 165.5 47.6 2.1X
* Fully diluted, fully taxed

Company Description

Power Integrations, Inc., headquartered in Sunnyvale, California, designs,


manufactures, and sells proprietary high-voltage analog integrated circuits (ICs)
Power that convert ac power to dc power. POWI targets high-volume power supply
Integrations has a markets, including cellular phone chargers, PC set-top boxes, and other
strong intellectual consumer electronics. The Companys TOPSwitch was the first high-voltage
property base power conversion IC to successfully gain widespread market acceptance. The
Company now has 25 U.S. patents and 33 foreign patents relating to high-
voltage analog design and wafer fabrication processing techniques, which, we
believe, underscores Power Integrations high-voltage analog technology
leadership.

Investment Highlights and Summary

Power Integrations stock has been hit because of slowing sales to its
number one customer Motorola. In 1Q00, POWI had a disappointing quarter,
with lower-than-expected sales to Motorola. The decrease was primarily a
The situation at result of Motorola selling more of its low-end mobile phones in pre-paid
Motorola is packages, especially in Europe. POWIs products are typically used in phone
trending back in chargers packaged with MOTs higher-end phones. In POWIs most recent
POWIs favor quarter, sales to Motorola were only 11% of total sales, down 40% year-over-
year. Motorola has discontinued manufacturing several lower-end phone
models and is ramping up production of several higher-end models to compete
with Nokia and Ericsson. This is good news for POWI; its proprietary
integrated circuits have a much better chance of being designed into a phone
charger for higher-end phones. It should be noted that demand from POWIs
other customers increase 100% year-over-year. The wireless market represents
approximately 33% of POWIs sales.

Stephens Inc. 65
New product development initiatives. The Company now has three main
product lines: the TOPSwitch-FX, targeted at applications from 0 to 75 watts;
the TinySwitch for use in applications from 0 to 19 watts; and the TOPSwitch,
Customer acceptance which is focused on uses in the 0 to 150-watt range. The TOPSwitch-FX line is
of POWIs new the latest Company release, introduced to the market in March 2000. This
TOPSwitch-FX has product is targeted for applications such as cellular phone chargers, PC standby
been better and power supplies, set-top boxes, DVDs, LCD monitors, and multimedia speakers.
sooner than initially Initially, we expected revenue to begin to ramp up for this product in 2Q01.
expected However, customer feedback has been very positive, and POWI began
shipments of the new product in the most recent quarter to MOT and other
customers.

Unlike many other semiconductor companies, capacity is not an issue.


During its most recent quarter, POWI signed a new five-year contract with its
primary foundry partner Matsushita Electric Corp. The areement with MEC
will allow increased exposure to the Japanese IC market, ensure wafer supplies
(both for its standard silicon wafers and for POWIs new silicon technology to
be announced in 4Q00), and lower wafer costs.

Power Integrations has built a better mouse trap. The Companys integrated
We believe that a
circuits allow designers of low-end power supplies to build components that are
second-source smaller and more efficient than older versions. To date, POWI has no direct
competitor would be competition. We believe that this will change and that competition will be good
good for POWI for POWI. In the electronic component and semiconductor industries, it doesnt
always pay to get too far ahead of the technology curve. Customers
understandably like to have a second source. While the Company has grown
exceptionally well in the past, we think its size and the lack of competition have
been hindrances. The removal of one of these (i.e., the addition of a second-
source competitor or the increase in scale of POWIs organization through
acquisitions or a merger/buyout) would help to more effectively market POWIs
superior technology.

Stephens Inc. maintains a market in the common stock of Power Integrations and may act as
principal in these transactions.

Stephens Inc. 66
POWER INTEGRATIONS, INC.
Historical Earnings Summary & Projections
$ in millions, except per share amounts

1999 2000 2001 Fiscal Year Ending December


1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE 1QE 2QE 3QE 4QE 1998 1999 2000E 2001E
Revenues
Product sales $ 20.4 $ 22.7 $ 29.8 $ 29.7 $ 27.6 $ 28.6 $ 35.3 $ 35.5 $ 36.4 $ 37.5 $ 44.4 $ 45.5 $ 68.2 $ 102.7 $ 127.0 $ 163.8
License fees & royalties 0.4 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.4 0.4 1.8 1.4 1.6 1.7
Total Revenues 20.8 23.0 30.1 30.1 28.0 29.0 35.7 35.9 36.8 38.0 44.8 45.9 70.0 104.1 128.6 165.5
Cost of Goods Sold 9.5 10.5 12.7 14.2 13.4 13.9 17.1 17.2 17.7 18.3 21.7 22.3 36.6 46.8 61.7 80.0
Gross Profit 11.4 12.5 17.5 15.9 14.6 15.1 18.6 18.7 19.1 19.7 23.1 23.6 33.4 57.3 66.9 85.5
Research & development 2.3 2.5 2.8 3.1 3.1 3.4 3.7 3.7 3.8 4.0 4.5 4.6 7.2 10.8 13.9 16.9
Sales & marketing 2.5 2.7 2.9 3.0 3.4 3.4 4.3 4.3 4.2 4.3 4.7 4.9 8.5 11.1 15.4 18.1
General & administrative 1.4 1.4 4.3 1.6 1.9 1.5 1.5 1.6 1.7 1.8 2.3 2.3 3.6 8.8 6.5 8.1
Operating Income 5.2 5.8 7.4 8.2 6.2 6.8 9.1 9.1 9.4 9.6 11.6 11.9 14.0 26.7 31.2 42.4
Other Income (Expenses) 0.6 0.4 0.5 0.6 0.8 0.7 0.8 0.9 0.9 1.0 1.0 1.0 1.2 2.1 3.2 3.9
Pretax Income 5.8 6.2 8.0 8.9 6.9 7.5 9.9 10.0 10.3 10.6 12.6 12.9 15.3 28.8 34.3 46.3
Taxes 0.9 0.9 1.2 1.3 2.1 2.2 3.0 3.0 3.1 3.2 3.8 3.9 2.6 4.3 10.3 13.9
Net Income $ 4.9 $ 5.3 $ 6.8 $ 7.5 $ 4.9 $ 5.2 $ 6.9 $ 7.0 $ 7.2 $ 7.4 $ 8.8 $ 9.0 $ 12.7 $ 24.5 $ 24.0 $ 32.4

Average Shares (Diluted) 27.5 28.2 28.6 28.9 28.9 28.7 29.5 29.8 30.0 30.0 30.0 30.0 26.5 28.3 29.2 30.0

EPS reported $ 0.18 $ 0.19 $ 0.24 $ 0.26 $ 0.17 $ 0.18 $ 0.23 $ 0.24 $ 0.24 $ 0.25 $ 0.29 $ 0.30 $ 0.48 $ 0.86 $ 0.82 $ 1.08
EPS (Diluted, taxed @ 35%) $ 0.14 $ 0.15 $ 0.18 $ 0.20 $ 0.37 $ 0.67

Depreciation & Amortization $ 1.0 $ 1.1 $ 0.8 $ 0.8 $ 0.9 $ 1.0 $ 1.1 $ 1.2 $ 1.2 $ 1.3 $ 1.3 $ 1.4 $ 3.1 $ 3.7 $ 4.2 $ 5.2
EBITDA $ 6.2 $ 6.9 $ 8.2 $ 9.0 $ 7.1 $ 7.8 $ 10.2 $ 10.3 $ 10.6 $ 10.9 $ 12.9 $ 13.3 $ 17.1 $ 30.4 $ 35.4 $ 47.6

Margins
Gross profit 54.5% 54.4% 58.0% 52.9% 52.0% 52.2% 52.0% 52.0% 51.8% 51.8% 51.5% 51.5% 47.7% 55.0% 52.0% 51.6%
Research & development 11.2% 11.0% 9.3% 10.2% 10.9% 11.8% 10.4% 10.3% 10.3% 10.5% 10.0% 10.0% 10.3% 10.3% 10.8% 10.2%
Sales & marketing 11.9% 11.9% 9.6% 9.9% 12.2% 11.9% 12.0% 11.8% 11.4% 11.3% 10.5% 10.7% 12.1% 10.7% 12.0% 10.9%
General & administrative 6.6% 6.2% 14.3% 5.4% 6.8% 5.2% 4.2% 4.5% 4.6% 4.7% 5.1% 5.0% 5.2% 8.4% 5.1% 4.9%
Operating income 24.8% 25.3% 24.7% 27.4% 22.1% 23.3% 25.4% 25.4% 25.5% 25.2% 25.8% 25.8% 20.0% 25.6% 24.2% 25.6%
Pretax income 27.7% 27.2% 26.4% 29.4% 24.8% 25.7% 27.7% 27.9% 27.9% 27.9% 28.1% 28.0% 21.8% 27.7% 26.7% 28.0%
Net income 23.5% 23.1% 22.5% 24.9% 17.4% 18.0% 19.4% 19.5% 19.5% 19.5% 19.6% 19.6% 18.1% 23.5% 18.7% 19.6%
Tax rate 15.0% 15.1% 14.9% 15.2% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 17.0% 15.0% 30.0% 30.0%

% Change Over Prior Year


Product sales 47.1% 54.7% 49.8% 50.5% 34.9% 26.4% 18.3% 19.4% 31.9% 30.9% 25.8% 28.2% 52.2% 50.5% 23.7% 29.0%
License fees & royalties -28.4% -30.5% -24.1% 0.0% 12.8% 15.7% 28.6% -0.5% -5.4% 33.3% 0.0% 0.0% 55.1% -21.6% 13.2% 6.4%
Total revenues 44.3% 52.0% 48.3% 49.5% 34.5% 26.3% 18.4% 19.2% 31.4% 31.0% 25.5% 27.9% 52.2% 48.7% 23.6% 28.7%
Gross profit 76.0% 82.2% 80.5% 53.7% 28.3% 21.2% 6.2% 17.0% 30.9% 30.0% 24.3% 26.6% 69.4% 71.6% 16.9% 27.7%
Operating income 110.8% 116.2% 73.4% 79.2% 19.6% 16.6% 22.0% 10.6% 51.5% 41.5% 27.4% 30.1% 134.8% 90.0% 16.8% 36.1%
Other income (expenses) 212.3% -25.9% 27.8% 21.6% 29.3% -7.8% 56.9% 12.5% 19.2% 43.7% 25.0% 11.1% -282.7% 72.0% 46.8% 23.8%
Pretax income 118.0% 117.1% 69.5% 74.7% 20.6% 19.7% 24.2% 13.0% 48.0% 41.7% 27.2% 28.4% 188.7% 88.6% 19.1% 34.9%
Taxes 30.3% 30.2% 237.6% 56.1% 141.0% 138.6% 150.1% 123.3% 48.1% 41.8% 27.2% 28.4% 374.8% 66.9% 137.5% 35.0%
Net income 147.4% 146.2% 55.9% 78.5% -0.7% -1.4% 2.2% -6.7% 48.0% 41.7% 27.2% 28.4% 167.2% 93.0% -1.9% 34.9%
EPS (Diluted, Fully Taxed) 108.1% 111.3% 55.7% 63.6% 23.7% 21.1% 29.7% 18.1% 42.5% 35.6% 25.1% 27.6% 134.1% 78.0% 23.1% 31.7%

Source: Company reports and Stephens Inc. estimates

Stephens Inc. 67
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Stephens Inc. 68
Semtech Corp. (SMTC-NASDAQ)

High: 120.11
SEMTECH CORP
Price (close on 9/15/00): $100.63 SMTC 9/15/99 to 9/15/00
Low:
Last:
29.75
100.63
USD
120
52-Week Range: $120.11 - $29.75 100

Market Capitalization: $3.3 billion 80

Shares Outstanding: 32.6 million 60

Debt/Capital: 68% 40

3-Year Estimated CAGR: 60%


Millions
1.84

Daily Volume (shares): 588,746 0.92

Price Target (12-month): $135 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Rating: BUY
Chart Courtesy of FactSet Research Systems Inc.

Earnings Per Share % P/E Revs. EBITDA Enter./


Year 1Q 2Q 3Q 4Q JanFY Chg. Ratio $ Mil $ Mil Sales
1999A $0.15 $0.08 $0.11 $0.10 $0.45 (13%) 223.6X $114.5 $23.9 28.5X
2000A $0.14 $0.18 $0.24 $0.29 $0.85 90% 118.4X 173.8 47.4 18.7X
2001E $0.32A $0.36A $0.41 $0.46 $1.55 84% 64.9X 262.7 80.8 12.4X
2002E $0.49 $0.53 $0.59 $0.65 $2.26 46% 44.5X 360.9 124.2 9.0X

Company Description

Semtech Corporation (SMTC) was founded in 1960 and went public in 1967.
The Company designs and manufactures a broad line of analog and mixed-
signal integrated circuits (ICs) used in the computer, communications,
industrial, automotive, and military/aerospace industries. Additionally, SMTC
provides wafer foundry services to other electronic component manufacturers.
Semtech is based in Newbury Park, California, and has manufacturing facilities
in California, Texas, Mexico and Scotland and design centers in California,
North Carolina, and Scotland.

Investment Highlights and Summary

Semtech is leveraging its design talent. The most important resource in the
analog semiconductor industry is design engineers. Just six years ago, Semtech
We expect Semtech to had only six full-time circuit designers and one design center. Remarkably,
introduce 75 new today it employs approximately 280 engineers, an impressive number for a
product families in the company its size. Semtechs aggressive investment in design talent is
current fiscal year beginning to pay dividends and is far from being fully leveraged. We expect
the Company to introduce 130 to 140 new product families in FY01 (January
year-end), up from 88 new product families in FY00.

New products are hitting their mark. An important measure in the


semiconductor industry is the proportion of revenues being generated by new
product families. In FY01, we expect those products SMTC introduced within
the last 18 months to account for approximately 30% of new orders. In FY00,
new products were 28% of new orders. By the end of FY02, the Company's
goal is to have its new products account for 33% to 35% of total new orders. In
2Q01, 22% of Semtechs design wins came from new customers, 65% of which
focus on the communications market.

Stephens Inc. 69
Semtechs strategy of diversifying its applications, products and customers
has been successful. Semtechs main strategic product lines are power
Semtechs diversified management, protection, automated test equipment (ATE), ICs and advanced
product offerings communications ICs. This diversity has evolved over nearly 40 years. Starting
and customer base
with the military/aerospace market, Semtech moved to the commercial
will help insulate the
Company from the computer market, then to the portable systems market, and then to the ATE
next cyclical market. Lately, its focus has been in the high-bandwidth communications
downturn market. With design wins in systems that span several industries, Semtechs
success is independent of the cycles of any one industry.

We believe that, within three years, revenues from new communications


products will be $100 million. The most promising product looks to be a
highly integrated system synchronization timing device. These devices are
about 90% digital and 10% analog in content and go in add/drop multiplexers,
ATM switches, routers and base stations. We estimate the size of this market to
be approximately $150 million today and growing exponentially. SMTC has
successfully sampled this product with about 40 customers. Additionally, the
Company recently introduced two transceiver products for SONET/ATM
equipment that are capable of integrating 16 T1/E1 channels into a single fiber
connection. We dont expect meaningful revenues from these products until the
first part of CY01.

An exceptional management team has guided Semtech from a sleepy, low-


tech analog manufacturer to a company known for its exceptional analog
Managements focus technology. By focusing on design talent, Chairman and CEO Jack Poe and his
on attracting and management team have built a company that is recognized for its technology-
retaining design
improving solutions for the markets it serves. For example, Semtech sells
talent is one of the
key reasons for
products that can potentially garner $33 of chip content in a portable PC, $10 in
Semtechs success a PDA (personal digital assistant), and $10 in a cell phone handset.
Additionally, the Company sees $3.00 to $4.00 in revenue when its chip set is
sold with an Intel Pentium microprocessor or an Advanced Micro Devices
microprocessor. Semtech is bringing the same superior technology to the fast-
growing high-bandwidth communications market.

Stephens Inc. maintains a market in the common stock of Semtech and may act as principal in
these transactions.

Stephens Inc. 70
SEMTECH CORPORATION
Historical Earnings Summary & Projections
(in millions, except per share amounts)

2000 2001 2002 Fiscal Year Ending January


Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE 1QE 2QE 3QE 4QE 1998 1999 2000 2001E 2002E

Sales $ 33.0 $ 38.3 $ 47.1 $ 55.4 $ 57.4 $ 60.6 $ 68.2 $ 76.4 $ 80.2 $ 84.2 $ 93.5 $ 102.9 $ 102.8 $ 114.5 $ 173.8 $ 262.7 $ 360.9
Cost of Sales 16.4 18.6 22.1 25.6 26.2 27.0 30.0 32.9 33.7 34.5 37.4 40.6 53.9 60.2 82.7 116.1 146.3
Gross Profit 16.6 19.6 25.0 29.8 31.2 33.6 38.2 43.6 46.5 49.7 56.1 62.2 48.9 54.3 91.0 146.6 214.6
SG & A 5.6 6.1 7.2 8.3 8.2 8.6 9.7 10.7 11.1 11.5 12.7 14.0 16.9 20.1 27.2 37.2 49.3
Development and Engineering 4.1 4.5 5.5 6.2 7.0 7.7 8.7 9.7 10.3 10.9 12.2 13.4 9.2 14.0 20.3 33.1 46.7
Other (Income)/Expense - - - - - - - - - - - - - - - - -
Operating Income 6.8 9.1 12.3 15.3 15.9 17.3 19.9 23.2 25.2 27.3 31.2 34.9 22.8 20.2 43.5 76.2 118.6
Interest (Income)/Expense (0.3) (0.2) (0.2) (0.4) (1.3) (2.3) (2.4) (2.4) (2.5) (2.5) (2.6) (2.6) (0.3) (0.8) (1.1) (8.4) (10.2)
Pretax Income 7.1 9.3 12.5 15.7 17.3 19.6 22.3 25.6 27.7 29.8 33.8 37.5 23.2 20.9 44.6 84.7 128.8
Taxes 2.3 3.1 4.1 5.2 5.1 5.9 6.7 7.7 8.3 8.9 10.2 11.2 7.7 7.0 14.7 25.3 38.6
Net Income $ 4.8 $ 6.2 $ 8.4 $ 10.5 $ 12.1 $ 13.7 $ 15.6 $ 17.9 $ 19.4 $ 20.9 $ 23.7 $ 26.2 $ 15.4 $ 14.0 $ 29.9 $ 59.3 $ 90.2
Average Shares - Diluted 33.1 34.6 35.5 36.9 37.4 37.9 38.3 38.8 39.2 39.6 40.0 40.4 30.1 31.3 35.0 38.1 39.8
EPS - Diluted $ 0.14 $ 0.18 $ 0.24 $ 0.29 $ 0.32 $ 0.36 $ 0.41 $ 0.46 $ 0.49 $ 0.53 $ 0.59 $ 0.65 $ 0.51 $ 0.45 $ 0.85 $ 1.55 $ 2.26

Depreciation & Amortization $ 1.1 $ 0.9 $ 1.0 $ 0.9 $ 1.0 $ 1.2 $ 1.2 $ 1.2 $ 1.3 $ 1.3 $ 1.5 $ 1.5 $ 2.78 $ 3.7 $ 3.9 $ 4.6 $ 5.6
EBITDA $ 7.9 $ 10.0 $ 13.3 $ 16.2 $ 16.9 $ 18.5 $ 21.1 $ 24.4 $ 26.5 $ 28.6 $ 32.7 $ 36.4 $ 25.6 $ 23.9 $ 47.4 $ 80.8 $ 124.2

Margin Analysis
Gross Profit 50.2% 51.4% 53.1% 53.8% 54.3% 55.5% 56.0% 57.0% 58.0% 59.0% 60.0% 60.5% 47.6% 47.4% 52.4% 55.8% 59.5%
SG&A 17.1% 15.9% 15.2% 15.0% 14.3% 14.2% 14.2% 14.0% 13.8% 13.7% 13.6% 13.6% 16.5% 17.5% 15.7% 14.2% 13.7%
Development and Engineering 12.5% 11.8% 11.8% 11.1% 12.3% 12.7% 12.7% 12.7% 12.8% 12.9% 13.0% 13.0% 8.9% 12.2% 11.7% 12.6% 12.9%
Operating Income 20.7% 23.7% 26.1% 27.7% 27.7% 28.5% 29.1% 30.3% 31.4% 32.4% 33.4% 33.9% 22.2% 17.6% 25.0% 29.0% 32.9%
Pretax Income 21.5% 24.3% 26.6% 28.4% 30.1% 32.3% 32.6% 33.4% 34.5% 35.4% 36.2% 36.4% 22.5% 18.3% 25.7% 32.2% 35.7%
Net Income 14.4% 16.3% 17.8% 19.0% 21.1% 22.6% 22.8% 23.4% 24.2% 24.8% 25.3% 25.5% 15.0% 12.2% 17.2% 22.6% 25.0%
Tax Rate 33.0% 33.0% 33.0% 33.0% 29.7% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 33.4% 33.4% 33.0% 29.9% 30.0%

Percent Change Over Prior Year


Sales 11.9% 49.8% 65.0% 79.2% 73.7% 58.5% 44.9% 37.9% 39.8% 38.9% 37.1% 34.6% 43.6% 11.4% 51.7% 51.2% 37.4%
Cost of Sales 9.2% 35.7% 49.8% 53.0% 59.4% 45.1% 35.9% 28.4% 28.5% 27.9% 24.6% 23.7% 31.7% 11.8% 37.3% 40.3% 26.0%
Gross Profit 14.7% 66.1% 81.2% 110.1% 87.9% 71.2% 52.9% 46.1% 49.2% 47.8% 46.9% 42.9% 59.5% 10.9% 67.7% 61.0% 46.4%
SG&A 21.8% 22.6% 39.4% 55.2% 45.7% 42.4% 35.1% 28.5% 34.7% 33.6% 31.3% 30.8% 33.3% 18.7% 35.4% 36.9% 32.4%
R&D 39.8% 36.4% 50.0% 51.4% 71.1% 70.6% 56.6% 57.4% 45.8% 40.8% 40.3% 37.8% 72.7% 52.5% 45.0% 62.9% 40.8%
Operating Income -0.8% 154.1% 148.0% 222.4% 132.9% 91.0% 61.7% 51.1% 58.2% 58.0% 57.3% 50.6% 80.1% -11.6% 115.7% 75.3% 55.6%
Pretax Income 0.4% 146.8% 143.9% 215.6% 143.2% 111.1% 77.7% 62.4% 60.5% 52.1% 52.0% 46.6% 82.1% -9.5% 113.1% 89.7% 52.1%
Taxes -0.8% 144.0% 141.0% 211.8% 118.6% 91.9% 61.5% 47.6% 62.4% 52.1% 52.0% 46.6% nm -9.6% 110.5% 72.0% 52.5%
Net Income 1.0% 148.3% 145.3% 217.5% 155.4% 120.6% 85.7% 69.7% 59.7% 52.1% 52.0% 46.6% 81.7% -9.5% 114.3% 98.4% 52.0%
EPS - Diluted -4.5% 122.3% 116.2% 173.8% 126.2% 101.3% 72.4% 61.2% 52.3% 45.7% 45.7% 40.9% -15.4% -12.9% 89.9% 83.9% 45.7%

Source: Company reports and Stephens Inc. estimates

Stephens Inc. 71
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Stephens Inc. 72
TelCom Semiconductor (TLCM-NASDAQ)

High: 46.88
TELCOM SEMICONDUCTOR INC
Price (close on 9/15/00): $14.63 TLCM 9/15/99 to 9/15/00
Low:
Last:
7.88
14.63
USD

52-Week Range: $46.88 - $7.88 40

Market Capitalization: $298.5 million 30

Shares Outstanding: 20.4 million 20

Debt/Capital: 0%
10

3-Year Estimated CAGR: 60%


Millions
1.95

Daily Volume (shares): 737,903 0.97

Price Target (12-month): $31 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Rating: BUY
Chart Courtesy of FactSet Research Systems Inc.

Earnings Per Share % P/E Revs. EBITDA Enter./


Year 1Q 2Q 3Q 4Q DecFY Chg. Ratio $ Mil $ Mil Sales
1998A $0.12 $0.05 $0.02 $0.02 $0.20 (49%) 73.2X $54.3 $9.5 3.5X
1999A $0.05 $0.10 $0.14 $0.16 $0.45 126% 32.5X 57.4 11.8 3.3X
2000E $0.17A $0.23A $0.21 $0.22 $0.83 86% 17.6X 76.2 18.7 2.5X
2001E $0.23 $0.26 $0.28 $0.31 $1.08 31% 13.5X 97.7 25.1 1.9X

Company Description

TelCom Semiconductor, based in Mountain View, California, was founded in


June 1993, when a group of managers bought Teledyne Components in an
TelComs product LBO from Teledyne Industries, now a subsidiary of Alleghany Teledyne.
portfolio consists of TelComs history actually goes back to 1960 as a company called Amelco
power management, Semiconductor Company. In 1970, Amelco was acquired by Teledyne and
thermal management operated as a division of it from 1970 to 1993. TLCM designs and
and linear/mixed signal manufactures a diversified portfolio of high-performance analog integrated
products circuits (ICs) used primarily in the industrial, computing, networking, wireless
communications, and medical markets. The Companys products fall into
three main families: power management products, thermal management
products, and linear/mixed signal products. Within each family, the Company
markets proprietary and selected second-source products.

Investment Highlights and Summary

TelCom is a new product development machine. Its basic strategy is to


address an increasing spectrum of customer applications by introducing
proprietary and selected second-source products that increase the range of
performance and capabilities of its products. A key to TelComs success will
be its ability to introduce new proprietary products. In 1999, it introduced a
record 72 new products, more than double the previous year. TelCom plans to
introduce an additional 65 to 70 new products this year. Additionally, the
Company is focused on developing proprietary products. Proprietary products
typically generate higher margins versus those that are second-sourced.

Stephens Inc. 73
The Company has entered into several strategic relationships. In late
January 1999, TelCom announced that it had entered into an agreement with
Motorolas Semiconductor Components Group, now ON Semiconductor.
In early 1999, TelCom Under the terms of the agreement, ON and TelCom became authorized sources
announced a strategic for many of each companys power and thermal management products. The
relationship with ON agreement with ON has quickly added products to TelComs portfolio.
Semiconductor
Currently, TelCom is marketing 10 of ONs products and ON is selling around
15 to 20 of TLCMs products. We expect that both of these amounts will
increase by three to four per quarter going forward.

At the end of 2Q00, TLCM had around $8 million in backlog with ON, with $7
million scheduled for shipment in 2H00, versus basically zero in 1H00. The
only question for TLCM is how fast it can get the product out the door.
Additionally, the relationship should allow both companies to more rapidly
identify and respond to target markets. TelCom is also aggressively pursuing
strategic acquisitions that would round out its product offerings and/or broaden
its customer base.

TelComs stock price has been under pressure in the last few months, due
to the current weakness being experienced in its wireless handset business,
The transition of specifically at Motorola. Motorola is TLCMs largest customer, representing
Motorolas handset 31% of revenues during 2Q00. Due to MOTs de-emphasis of its lower-end
business is negatively cell phones, and the timing difference in its ramp up of high-end phones,
impacting TelCom TLCMs revenues will be adversely affected. We expect that TLCMs
revenues from MOT will be in the $2.0 million to $2.5 million range for the
next two quarters. However, the revenue from the ON Semiconductor
relationship will help to offset the adverse affects from Motorolas changed
strategy.

Stephens Inc. maintains a market in the common stock of TelCom and may act as principal in
these transactions. Stephens Inc. has managed or co-managed an underwriting for TelCom
within the past three years.

Stephens Inc. 74
TELCOM SEMICONDUCTOR, INC.
Historical Earnings Summary & Projections
(in millions, except per share amounts)

1999 2000E 2001E Fiscal Year Ending December


1Q*** 2Q 3Q 4Q 1Q 2Q 3QE 4QE 1QE 2QE 3QE 4QE 1997* 1998** 1999 2000E 2001E

Sales $ 12.8 $ 13.9 $ 14.9 $ 15.8 $ 17.2 $ 20.0 $ 19.0 $ 20.0 $ 21.2 $ 23.5 $ 25.5 $ 27.5 $ 55.4 $ 54.3 $ 57.4 $ 76.2 $ 97.7
Cost of Sales 7.8 7.4 8.1 8.4 8.7 9.7 9.2 9.7 10.3 11.4 12.4 13.3 31.2 34.9 31.6 37.4 47.4
Gross Profit 5.0 6.5 6.8 7.4 8.5 10.3 9.8 10.3 10.9 12.1 13.1 14.2 24.3 19.4 25.7 38.8 50.3
SG&A 2.3 2.6 2.6 2.6 2.6 3.3 3.2 3.3 3.4 3.6 3.8 3.9 9.5 9.5 10.0 12.4 14.7
R&D 1.8 1.9 1.5 1.6 2.4 2.6 2.8 2.9 3.1 3.2 3.4 3.6 5.5 5.6 6.8 10.7 13.3
Operating Income 1.0 2.0 2.6 3.2 3.5 4.4 3.8 4.1 4.4 5.3 5.9 6.7 9.3 4.3 8.8 15.7 22.3
Interest (Income)/Expense (0.1) 0.0 (0.2) (0.2) (0.3) (1.6) (1.7) (1.8) (1.8) (1.9) (1.9) (1.9) 0.3 (0.4) (0.4) (5.4) (7.5)
Pretax Income 1.1 2.0 2.7 3.3 3.8 6.0 5.5 5.8 6.2 7.2 7.8 8.6 9.0 4.7 9.2 21.1 29.8
Taxes 0.3 0.6 0.5 0.6 0.9 1.4 1.3 1.3 1.4 1.6 1.8 2.0 2.4 1.3 2.0 4.9 6.8
Net Income $ 0.8 $ 1.5 $ 2.2 $ 2.7 $ 2.9 $ 4.6 $ 4.2 $ 4.5 $ 4.8 $ 5.5 $ 6.0 $ 6.6 $ 6.6 $ 3.4 $ 7.1 $ 16.2 $ 22.9
Average Shares - Diluted 15.1 15.2 16.2 16.8 17.3 20.4 20.3 20.5 20.7 21.0 21.2 21.6 17.1 16.5 15.7 19.6 21.1

EPS - Diluted $ 0.05 $ 0.10 $ 0.14 $ 0.16 $ 0.17 $ 0.23 $ 0.21 $ 0.22 $ 0.23 $ 0.26 $ 0.28 $ 0.31 $ 0.39 $ 0.20 $ 0.45 $ 0.83 $ 1.08

Depreciation & Amortization $ 0.8 $ 0.8 $ 0.8 $ 0.8 $ 0.8 $ 0.8 $ 0.8 $ 0.8 $ 0.7 $ 0.7 $ 0.7 $ 0.7 $ 4.1 $ 5.2 $ 3.0 $ 3.0 $ 2.8
EBITDA $ 1.8 $ 2.8 $ 3.3 $ 3.9 $ 4.2 $ 5.1 $ 4.5 $ 4.8 $ 5.1 $ 6.0 $ 6.6 $ 7.4 $ 13.4 $ 9.5 $ 11.8 $ 18.7 $ 25.1

Margin Analysis
Gross Profit 39.3% 47.0% 45.6% 46.8% 49.3% 51.4% 51.4% 51.4% 51.5% 51.5% 51.5% 51.5% 43.8% 35.7% 44.9% 50.9% 51.5%
SG&A 17.6% 18.6% 17.5% 16.4% 15.2% 16.5% 16.8% 16.5% 16.0% 15.3% 14.9% 14.2% 17.2% 17.5% 17.5% 16.3% 15.0%
R&D 14.0% 13.6% 9.9% 10.4% 13.8% 13.1% 14.7% 14.5% 14.6% 13.6% 13.3% 13.1% 9.8% 10.3% 11.8% 14.0% 13.6%
Operating Income 7.8% 14.8% 17.3% 20.0% 20.3% 21.8% 19.8% 20.4% 20.8% 22.6% 23.3% 24.2% 16.7% 7.9% 15.3% 20.6% 22.8%
Pretax Income 8.3% 14.7% 18.4% 21.0% 22.0% 30.0% 28.8% 29.2% 29.3% 30.4% 30.7% 31.1% 16.2% 8.6% 16.0% 27.7% 30.5%
Net Income 6.1% 10.8% 14.7% 17.0% 17.0% 23.1% 22.2% 22.4% 22.6% 23.4% 23.7% 24.0% 11.8% 6.3% 12.5% 21.3% 23.5%
Tax Rate 27.0% 27.0% 19.8% 19.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 27.0% 27.0% 22.0% 23.0% 23.0%

Percent Change Over Prior Year


Sales -17.2% -1.1% 17.2% 30.9% 34.3% 44.3% 27.6% 26.6% 23.2% 17.4% 34.2% 37.5% 46.8% -2.1% 5.7% 32.9% 28.2%
Cost of Sales -12.6% -17.5% -7.9% 1.2% 12.1% 32.3% 14.0% 15.7% 17.9% 17.1% 33.9% 37.2% 16.3% 11.9% -9.4% 18.3% 26.7%
Gross Profit -23.5% 27.4% 73.6% 96.7% 68.5% 57.8% 43.8% 39.0% 28.7% 17.7% 34.5% 37.8% 121.3% -20.2% 32.9% 50.8% 29.6%
SG&A -10.9% -6.3% 20.4% 26.3% 16.2% 27.9% 23.1% 27.3% 30.0% 9.0% 18.8% 18.2% 23.6% -0.4% 5.6% 23.9% 18.4%
R&D 35.9% 37.0% 2.6% 12.8% 33.0% 38.8% 89.4% 76.4% 30.4% 22.3% 21.4% 24.1% 27.7% 2.4% 21.6% 57.4% 24.4%
Operating Income -63.7% 108.2% 724.0% NM 251.1% 113.1% 46.0% 29.2% 26.6% 21.5% 57.5% 63.3% NM -53.8% 105.0% 78.8% 42.1%
Pretax Income -62.5% 85.9% 552.3% 943.4% 256.6% 193.9% 100.0% 75.7% 64.2% 19.1% 43.3% 46.9% NM -48.0% 96.1% 130.3% 41.2%
Taxes -62.5% 86.6% 379.1% 634.2% 203.8% 150.3% 132.0% 112.7% 64.2% 19.1% 43.3% 46.9% NM -48.1% 59.6% 141.2% 41.2%
Net Income -62.5% 85.6% 616.3% 1057.7% 276.1% 210.0% 92.1% 67.0% 64.2% 19.1% 43.3% 46.9% NM -48.0% 109.6% 127.2% 41.2%
EPS - Diluted -56.2% 114.7% 611.7% 909.8% 229.8% 130.5% 53.4% 36.5% 37.0% 15.8% 37.2% 39.4% NM -49.4% 125.5% 85.9% 30.9%

* Does not include $8.3 million loss on a foundry investment in IC WORKS.


** Does not include restructuring charge of $7.3 million associated with the closing of the Company's
fabrication facility in Mountain View, California.
*** Does not include a $5.0 million gain associated with the IC WORKS investment and a $0.3 million restructuring
charge associated with the closing of the Company's fabrication facility in Mountain View, California.

Source: Company reports and Stephens Inc. estimates

Stephens Inc. 75
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Stephens Inc. 76
POWER SUPPLY FUNDAMENTALS

Basically, every electronic device is powered from a dc (direct current) source.


Since utilities deliver electricity in ac (alternating current) form, power
converters are needed to transform the power into something that can be used by
these electronic devices. In addition to simply transforming ac power to dc
power, the power must be processed much in the same way that crude oil is
refined to make fuel for automobiles. Power supplies perform this function for
the electronics industry.

Just as electronic devices are as diverse as personal digital assistants (PDAs) and
medical diagnostic equipment, so too are power supplies. The differences range
from the technology used in their construction, to the power output that they
supply, to the architecture used in their configuration. This diversity has allowed
a large number of companies to get into the business and stake a claim on one or
more of the many niche markets.

The worldwide market for power supplies is large and growing. In 1995 the
market was $15.0 billion and reached $26.6 billion in 1999. According to Micro-
The current worldwide Tech Consultants, by 2004, the global power supply market is expected to reach
market for power approximately $43.1 billion, a CAGR of 10.2% from 1999 to 2004. Also looking
supplies is $26.6 billion. forward through 2004, North America will lead the growth with a CAGR of
It is estimated to be at 11.6%, followed by Europe at 9.3%, Asia at 8.6% and the rest of the world at
$43.1 billion in 2004 9.7%. Within the total market, the communications segment is growing at the
fastest pace, fueled by the proliferation in networking and wireless services. The
computing market is the largest market segment but is forecasted to grow at a
slower pace than the communications market segment.

In order to capitalize on this large and growing market, we believe that there are
several key market dynamics that companies within the industry and investors
should consider:

The importance of one-stop turnkey shopping for OEM customers


OEM customers seek suppliers that offer one-stop shopping. Size matters.
Companies that possess the scale in terms of manufacturing, marketing,
management, product offerings, engineering talent and buying power have a
clear advantage in the power supply industry.

The emergence of a three-tier market the main three markets are now
information technology, industrial/instrumentation, and military/aerospace.
There are several key The information technology market (computers and communications) is the
market dynamics in force fastest growing, with projected revenue growth between 15% and 20%.
which companies must
understand in order to The increasing importance of distributed power and point-of-load
succeed in the power technology We are forecasting dc/dc converters sold to the
supplies industry communications market to grow at an annual rate of 56% through 2003. This
growth is being driven by the adoption of distributed power architecture by
communications equipment manufacturers.

The merchant market is growing faster than the captive Merchant


manufacturers design and manufacture power supplies for others. Captive
manufacturers design and manufacture power supplies primarily for use in-
house.

Stephens Inc. 77
The highly fragmented power supply industry is consolidating
The number of North Currently, there are 1,000 merchant power supply manufacturers worldwide.
American power supply
In 1998, approximately 725 of them generated less than $5 million in
manufacturers has
decreased to 250 from revenues. Numerous opportunities exist for consolidators. In the North
300 several years ago American market, the number of companies has decreased from 300 to 250
over the past several years.

Customers are consolidating their supplier base Suppliers that have


broad product offerings and high service capabilities are making the cut.

More alliances are being formed Due to the complexity of the business,
companies are focusing on their strengths and compensating for weaknesses
through alliances.

There is no single strategy to becoming successful in the power supply industry.


However, there are trends and market dynamics that cant be ignored. By
thoroughly understanding the market and its participants, we plan to identify
those companies that are best positioned to prosper in the power electronics
marketplace.

PRODUCT PROFILE

This report will focus on Power supplies are electronic components that deliver the proper voltage and
ac/dc power supplies, current to various types of electronic equipment or to the various circuits within
dc/dc converters and the electronic equipment. As we define the industry, there are basically five
telecom power plants types of power supplies in common use today: 1) ac/dc power supplies, 2) dc/dc
converters, 3) telecom power plants, 4) uninterruptible power supplies and 5)
ac/dc inverters.

Chart 17
Power Supply Devices

AC/DC Telecom Uninterruptible


DC/DC AC/DC
Power Power Power
Converters Inverters
Supplies Plants Supplies

Source: Stephens Inc.

In this industry report, we will focus on ac/dc power supplies, dc/dc converters,
and telecom power plants. Ac/dc power supplies and dc/dc converters are
manufactured for electronic OEMs (original equipment manufacturers). Telecom
power supplies, manufactured for communications service providers, is a
segment enjoying rapid growth. Power supplies have evolved through the years
from large, rack-mounted units employing vacuum tubes and dangerously high

Stephens Inc. 78
voltages to todays compact solid-state power supplies with their lower, and
relatively safe, dc voltages.

Electricity Review

Before we delve too deeply into our discussion of power supplies, we believe it
would be useful to review some basic information regarding electricity and its
distribution. There are two forms of electrical current, alternating current (ac)
and direct current (dc). With ac power, electrons flow back and forth, from
positive to negative several times per second. This flow represents the frequency
of the ac current. With dc power, electrons flow in one direction and at a
constant flow rate. Current is the movement of electrical charge and is measured
in amperes (amps). Voltage is the electrical pressure and is measured in volts.
Volts multiplied by amps equals the total power, which is typically referred to as
watts. (See Appendix D.)

Why Do We Need Power Supplies?

There was a great debate when electric power distribution was in its infancy:
Electric utilities deliver Should the utility distribution infrastructure be developed to transmit ac power or
electricity in ac form dc power? Many influential scientists of the day, including Thomas Edison,
because it is cheaper backed dc power, believing it to be far more utilitarian for consumers. However,
and easier to distribute most industrialists favored the ac form because it was easier to transform (step
voltage up or down) and cheaper to transmit. Today, electric utilities deliver
power in ac form because it is indeed cheaper. Ac power can be stepped up and
down through the use of transformers to transmit power over long distances.
According to the electric utility industry, it is four to five times more expensive
to transmit dc power than it is to transmit ac power.

The majority of electric ac power used to supply todays sophisticated electronic


systems comes from what are termed primary power sources. These primary
sources include hydroelectric, coal- and natural gas-fired, and nuclear generators.
An electric utilitys chief objective is to produce or procure large quantities of
electric power in the most economic fashion possible. The quality of the
electricity is a secondary consideration.

Additionally, the voltage and frequency at which the ac power is delivered varies
depending on the geographic region or country. Consequently, there is a wide
range of extremely high voltages available around the world to power the many
different types of electronic devices in use today. The following table lists the
distribution voltages and frequencies for selected countries.

Stephens Inc. 79
Table 12
AC Line Voltages Selected Countries

Country Volt Freq Country Volt Freq

Argentina 220 50 The Netherlands 220 50


Australia 220 50 Norway 230 50
Belgium 110/220 50 P.R. of China 220 50
Brazil 110/220 60 Russia 220 50
Canada 110 60 South Africa 220 50
Ac voltages and
frequencies can vary
Denmark 220 50 Spain 110/220 50
from country to country Finland 220 50 Sweden 220 50
France 220 50 Switzerland 220 50
Germany 220 50 Taiwan 110 60
Ireland 220 50 U. K. 220 50
Italy 110/220 50 U.S.A. 110 60
Japan 110 50/60 Venezuela 110 60
Mexico 110/220 60 Wales 220 50

Source: Current Solutions, Inc. and Trend-On

In most cases, the voltages identified in Table 12 are far more than most
electronic devices can handle. And as has already been stated, electronics are
powered by direct current, not alternating current. Therefore, we need power
supplies to accept the raw ac power from a power source, usually the electrical
wall outlet, process it, then deliver usable dc power to the many electronic
devices in use around the world.

Types of Power Architecture

Most modern electronic systems require more than a single operating voltage. In
The two basic types of a personal computer, the microprocessor needs 5 volts; semiconductor memories
power architecture are
may need 12 volts; analog circuits often operate on 15 volts; and the motors in
centralized and
distributed
disk drives require 24 volts. There are two types of power architectures that can
be designed to handle these requirements: centralized and distributed.

Centralized power architectures are characterized by systems that use a single


component to generate the end-use system dc voltages from the electric utilitys
ac input. Such systems are widely used in cost-sensitive applications such as
personal computers and consumer electronics. In some applications, centralized
architecture is easier to use because the components are centralized in one
assembly. Chart 18 illustrates the differences between centralized and distributed
power architecture.

Stephens Inc. 80
Chart 18
Centralized Vs. Distributed Architecture

Centralized Distributed

120-VAC INPUT 120-VAC INPUT

FULLY Mounted
SEMI- Mounted
REGULATED on REGULATED on
System System
AC/DC Chassis
AC/DC Chassis
CONVERTER CONVERTER

Mounted
1.8VDC 3.3VDC REGULATED REGULATED
REGULATED REGULATED DC/DC DC/DC
on
OUTPUT OUTPUT CONVERTER CONVERTER Circuit
Boards

1.8VDC 3.3VDC
REGULATED REGULATED
OUTPUT OUTPUT

Source: Power-One Inc.

Distributed architecture uses two levels of conversion. Primary front-end


rectifiers convert the electric utilitys ac power to an intermediate dc voltage
level. Secondary downstream dc/dc converters provide the final output voltages
required by the load. These downstream dc/dc converters are typically
positioned on the consuming circuit board.

Even though distributed power architecture design is still relatively new, it does
Distributed power
offer one major benefit over centralized power architectures. That is the ability
architecture is required to provide point-of-load regulation. Simply stated, substantial improvements can
when voltages drop be realized in electrical performance by moving the dc/dc converter away from
below 3.3 volts the ac/dc power supply and moving it as close to the load as possible. The farther
the voltage is bussed to the load, the greater the voltage loss. The benefits of
distributed power architecture are numerous. The handicap is usually price.

For example, it is not uncommon to see ac/dc centralized power systems selling
Distributed power for $0.15 to $0.30 per watt. Therefore, to be reasonably competitive with the
architecture is perceived traditional centralized power systems, dc/dc converters would need to be priced
to be more costly at approximately $0.20 per watt, because the cost of the ac/dc front-end rectifier
(approximately $0.10 per watt) to complete the total system must be added. Once
the $0.20 per watt dc/dc conversion barrier is broken, the market for these
converters could expand exponentially.

Recent studies, particularly those done on systems that require redundancy, have
indicated that the overall cost of the distributed power system is actually less than
the traditional architectures. We believe that the number of distributed power
architecture systems will grow rapidly in the future. The total dollars spent in
North America on distributed power architecture are expected to increase from
approximately $1 billion in 1999 to $2.5 billion in 2004, as depicted in Chart 19.

Stephens Inc. 81
Chart 19
North American Consumption of
Distributed Power Architecture
CAGR: 19.3%
$3.0
$2.5
$2.0

(BIllions)
$1.5
$1.0
$0.5
$0.0
1999 2000E 2001E 2002E 2003E 2004E

Source: Micro-Tech Consultants

AC/DC POWER SUPPLIES

The ac/dc power supply segment makes up the largest portion of the OEM power
Ac/dc power supplies are supply market and is the most widely used. Most large power supply
the most widely used types manufacturers offer multiple ac/dc power supplies in their product mix.
of power supplies
Although ac/dc power supplies should remain the largest sector, this sector is not
growing as fast as dc/dc converters.

There are many growth areas for the ac/dc power supply segment, ranging from
personal computers with their associated peripheral equipment to engineering
workstation servers and networking equipment. Ac/dc power supplies have
benefited from the computer and communications revolution. However, a move
to distributed architecture has eroded the growth rates of ac/dc products.

No significant new technological advances have been introduced in the last few
years. The technology has been more evolutionary in nature than revolutionary.
Ac/dc power supply In contrast, over the last 15 years, technology has dramatically increased the
technology has been speed of personal computers while reducing the size and lowering the cost. This
evolutionary not has not been the case for ac/dc power supplies. Advances have been made but at
revolutionary a more evolutionary pace. The immediate future promises more of the same.
There does not appear to be a major technological breakthrough on the horizon
that will dramatically impact the power electronics industry. In fact, the trend is
to less complex ac/dc front-end components that are sold in conjunction with
distributed power architectures.

Basic technology has not been a big marketing/selling advantage. The focus is
on manufacturing efficiencies and the resulting low price. For this reason China
and other low-labor-rate countries have emerged as the choice manufacturing
locations. As a result, there are several Taiwan-based power supply companies
that are prospering, including Delta Electronics, Lite-On, and AcBel. The Asian
manufacturers dominate the low-end, commodity-like power supply market
segment. This type of low-end power supply goes in electronic equipment
ranging in sophistication from a PC on down. Delta is the undisputed leader in
this market and remains the company that is responsible for setting pricing
benchmarks.

Stephens Inc. 82
Chart 20
Simple AC/DC Power Supply

AC
Wall
Power
In

Voltage DC
Rectifier Filter
Regulator Current

Converts Purifies Provides


AC to DC Current Constant
Voltage
Source: Stephens Inc.

As shown in Chart 20 above, a power supply converting ac line voltage to dc


power performs several important functions.

Voltage transformation - Changing the ac line voltage into another more


suitable voltage. As the current flows through a semiconductor rectifier, the
rectifier suppresses (chops) one half-cycle of the ac current and allows the
other half-cycle to pass. This produces a pulsating direct current.
The primary function of
an ac/dc power supply is Filtering - Smoothing the pulsating dc current (ripple) of the rectified
to convert ac voltages to
voltage.
dc voltages
Regulation - Controlling the output voltage to give a constant value with
line, load, and temperature changes.

Isolation - Electrically separating the input and output of a power supply.

An ideal power supply would have several important characteristics: 1) constant


output voltage regardless of variations in line voltage, load current, ambient
temperature, or time; 2) output impedance of zero for all frequencies; 3) 100%
conversion efficiency; and 4) no ripple or noise on the output voltage.

Pricing is difficult to judge in ac/dc power supplies because there is a lack of


standard products across the market that can be judged on a uniform basis.
However, according to Micro-Tech Consultants, ac/dc prices are expected to
decrease by a range of 10% to 15% by 2004. Table 13 portrays the expected
pricing trends in the ac/dc market in 1999 and 2004.

Stephens Inc. 83
Table 13
Pricing Trends In AC/DC Power Suppliers
($/watt)

Product Type 1999 2004


Ac/dc pricing is
expected to decrease by High-volume (200W) $0.10 - $0.25 $0.08 - $0.15
a range of 10% to 15% Adapters (25W 50W) $0.15 - $0.25 $0.10 - $0.20
by 2004 Medium volume (500W) $0.50 - $0.75 $0.40 - $0.60
Low volume (1000W)* $0.75 - $1.00 $0.70 - $1.00
Low volume (1000W)** $1.50 - $5.00 $1.50 - $4.00
* industrial applications
** military applications

Source: Micro-Tech Consultants

Switching vs. Linear Power Suppliers

There are two types of ac/dc power supply technologies in use today: linear and
switching. Linear regulation is a mature power supply design technique. While
Switching power
supplies incorporate linear power supplies have many desirable characteristics such as simplicity, low
power semiconductors noise, excellent line and load regulation, and fast recovery time, they are not
in their design particularly noted for their efficiency. Efficiency is the measure of total output
power to total input power. Input power that is not converted to output power
manifests itself in the form of heat, an undesirable and potentially damaging
byproduct.

Switching power supplies are made with power semiconductors and are much
more complex than linears. They are popular due to their high efficiency and
high power density. Table 14 compares some of the features of linear and
switching power supplies. Line and load regulation are usually better with linear
power supplies, but switching power supplies excel in output regulation.

Table 14
Linear Vs. Switching Power Supplies

Specifications Linear Switching


Line Regulation 0.02% - 0.05% 0.05% - 0.1%
Load Regulation 0.02% - 0.1% 0.1% - 1.0%
Input Voltage Range + or - 10% +15% to -22%
Efficiency 40% - 50% 60% - 80%
Power Density 0.05W/in3 2.3W/in3
Hold-Up Time 2 msec. 32 msec.

Source: Artesyn Technologies, Inc.

Stephens Inc. 84
Switching power supplies are not new. They were developed in the 1960s and
Switching power used primarily in military and aerospace systems. However, in recent years
supplies were first used switching technology has improved, and the cost of switching components has
in military and come down significantly, leading to practical industrial- and consumer-grade
aerospace applications switching power supplies. Switchers began by replacing the large linear units
because of size and heat dissipation problems and have been gradually working
their way down to lower power levels.

Efficiency

A linear power supply converts an unregulated dc voltage to a lower regulated


voltage by throwing away the difference between the two voltages as heat.
Consequently, the linear power supply is inherently inefficienttypically rated at
only 45% efficiency for a 5V output regulator.

By contrast, a switching power supply converts a similar unregulated dc voltage


to a lower regulated voltage by storing the difference in a magnetic field. When
the magnetic field grows to a pre-determined level, the unregulated dc is
switched off and the output power is provided by the energy stored in the
magnetic field. When the field is sufficiently depleted, the unregulated dc is
switched on again to deliver power to the output, while the excess voltage is
again stored in the magnetic field. Consequently, the switching power supply is
more efficienttypically rated at 75% for a 5V output regulator.

Size

another great advantage of switchers, in addition to high efficiency, is the high


Switching power
supplies offer a greater power density, or power-to-size ratio. This density of course is the result of the
power-to-size ratio than reduction in the size of various components. Mainly, the large power
do linear products transformers found in linear units are replaced with miniature ferrite core
transformers and smaller filter capacitors to produce smaller, more powerful
units.

EMI and RFI

Switching power supplies, unlike linear supplies, can be a source of


electromagnetic (EMI) and radio frequency (RFI) interference. There are two
basic types of interference conducted and radiated. The source of the
interference is a short burst of high frequency-content energy caused by the rapid
switching voltage and current transients in a switcher. Internal and external
filters can be employed to suppress the radiated EMI/RFI.

To summarize the discussion of linear power supplies vs. switching power


supplies, linears are not as sensitive to changes in input frequency and provide
better regulation, but they are less efficient. Switchers are small, light, and
efficient, and can provide constant power through dropouts in the ac input
voltage. However, they are complex, have a slower transient response than
linears, and can produce high-frequency noise, which requires additional
filtering.

In general, at lower power levels, linears are the power supply of choice, while
switchers are generally employed at high power levels. Three general parameters
can be used to compare linears and switchers: relative cost per watt, regulation
versus transient response time, and power density (watts per cubic inch).

Stephens Inc. 85
Custom, Standard and Modified Standard Products

Ac/dc power supplies typically fall into one of three classes: custom, standard, or
modified standard. Power supply manufacturers are sometimes identified as
being a custom manufacturer or a standard manufacturer. In reality, most of the
larger suppliers manufacture both types of components.

Custom power supplies, as the name implies, are custom-designed for a specific
application. The life of a custom power supply typically matches the life of the
product for which it was designed. Custom products tend to sell in higher
volumes and generate lower gross margins.

Standard power supplies are company-specific, not industry-specific. There are


no industry standards relating to ac/dc power supplies. Standard power supplies
can be used for multiple applications. Standard products generally sell in lower
volumes and generate higher gross margins than do custom products.

Modified standard power supplies are standard products that have been slightly
Power supplies usually reconfigured. This saves time as compared to waiting for a custom product to be
account for 2% to 5% of designed and produced. Since a power supply component is only 2%-5% of the
product costs cost of a product, reducing time-to-market for an OEM can generate substantial
incremental revenue opportunities for the OEM.

Output Segmentation

Another way to segment the ac/dc power supply product lines is by the output
watts. Table 15 summarizes the low, medium and high power ranges.

Stephens Inc. 86
Table 15
Output Segmentation
% of No.
Power Range American
Characteristics Market End-Users

LOW <150 Watts 30% PC applications


Ac/dc power supplies are
(computers, desktop
further segmented by
their energy output printers, etc.)
Lower technology
Higher volume Consumer electronics
Lower margin

MEDI 150-750 Watts 56% Internet-related


UM companies (routers,
hubs, switchers, etc.)
High technology
Moderate volume Computer workstations
Higher margin
Medical applications

HIGH >750 Watts 14% Computer mainframes

Higher technology High-end Internet


Lower volume applications
Higher margin Microwave & cellular
communications
Military radar &
satellites
Semiconductor testing
equipment

Source: Artesyn Technologies and Micro-Tech Consultants

DC/DC CONVERTERS

In 1984, Vicor introduced the Brick, a high-density dc/dc converter that


changed the future of power system design. When high-density converters were
introduced to the market, they made a very large impact. The technology was the
Vicor invented the high-
most revolutionary thing that had ever happened to the industry. While being
density dc/dc converter
in 1984
technically superior at the time and very popular, the first-generation converters
covered a limited segment of the total power supply market. For over a decade,
the first-generation converters were forced to fit the needs of popular applications
such as telecom, networking, industrial, and mid- to high-end electronic data
processing.

As new applications expanded into these and other markets, the unsuitability of
the original devices became obvious. Consequently, a number of power supply
manufacturers, led by Lucent Technologies, have developed product lines that
are more suitable to the emerging markets. Along with Vicor and Lucent,
companies that participate in the dc/dc converter space are Power-One, Artesyn,

Stephens Inc. 87
Ericsson, Emerson Electric, Lambda/Invensys, C&D Technologies, and privately
owned R.O. Associates, PowerCube, Galaxy, Di/Dt and Syncor.

Dc/dc converters act as Dc/dc converters are widely used to transform and distribute dc power within
transformers to produce electronic devices. Dc power is typically made available to a system by an ac/dc
the desired voltage power supply or battery. This power may be in the form of 5V, 24V, 48V or
other dc voltages, may be poorly regulated and have a high noise content. A
dc/dc converter acts as a transformer to produce the desired output voltage in a
usable form.

Dc/dc converters are used in four different applications:

As a primary converter, where the battery is used as a source and a simple


conversion is required. This application serves a high-volume market mainly
dominated by semiconductor companies. As equipment gets more portable,
we expect the use of converters for this application will increase.

As an application-specific converter, where it is used to convert to a


specific voltage. In this case, the main power supply is typically telecom
power plant.

As a component in a distributed power application (DPA). As DPAs


become mainstream, dc/dc converters are expected to gain considerable
market share in this sector. At present, the communications and military
equipment categories are two of its major markets.

As a building block component in an ac/dc power supply. This particular


category holds true potential for dc/dc converters as a component of a power
system. This market is in its infancy and, for the right converter price, can
hold a large-volume potential.

The dc/dc converter can be defined by its power density (watts per cubic inch)
Several new start-ups and within power electronics is perceived as high-tech. In the last few years,
are focusing exclusively
more companies making ac/dc power supplies have successfully entered the
on dc/dc converters
dc/dc converter market. Additionally, several new start-up companies like Di/Dt
and Syncor focus exclusively on the dc/dc market.

Reliability, now as always, is an extremely important factor for power supply


companies. However, customers now expect reliability as a given rather than an
enhancement. As a result, for most large volume customers, reliability is not as
much of a marketable/discriminating parameter.

While prices are expected to decline in the dc/dc market, we do not expect them
to decline as much as they have in the ac/dc market. The following Table
illustrates dc/dc converter price ranges for 1999 and the estimated ranges in
2004.

Stephens Inc. 88
Table 16
DC/DCConverter Pricing Trends
($/Watt, 500-Piece Quantity)

Watts 1999 2004


50 $1.50 - $1.75 $1.00 - $1.55
75 $0.85 - $1.15 $0.75 - $1.00
100 $0.80 - $1.00 $0.75 - $0.90
150 $0.60 - $0.80 $0.50 - $0.70
200 $0.50 - $0.75 $0.40 - $0.65
300 $0.40 - $0.65 $0.30 - $0.55
400 $0.35 - $0.60 $0.25 - $0.50
500 $0.30 - $0.55 $0.25 - $0.50
Source: Micro-Tech Consultants

Dc/dc converters are growing approximately twice as fast as ac/dc power


supplies. Reasons for the higher growth rate include:

A move to distributed power architecture brought about by digital


semiconductors operating at lower voltages.

A significant price reduction in almost all applications requiring high- to


medium-volume shipments.

TELECOM POWER PLANTS

Telecom power plants are components that are external to the equipment that
they power. Telecom power plants include ac/dc rectifiers/battery chargers,
Telecom power plants
dc/dc converters, power distribution panels, and monitoring and control systems.
power the
communications
Telecom power plants are also called energy systems or battery power
infrastructure plants. The products are used in traditional wireline installations to power the
equipment in central offices, in fiber-optic networks to power regeneration sites
and in wireless applications to power mobile phone switching offices and
antenna sites.

These products are an extremely critical component of the communications


infrastructure. As stated previously, the service providers that operate the
communications infrastructure need electricity that is both pure and reliable, and
they need a lot of it. The electric utility grid delivers dirty power that is
reliable 99.9% of the time, which equates to about eight hours of outage a year
for a typical consumer. Eight hours worth of power outages over the course of a
year is an inconvenience for you and me but a financial nightmare for
communications service providers. With some of the larger telecom companies
billing customers at a rate of over $4 million per minute, no expense is spared by
the telecom companies to keep the electricity flowing. Additionally, minute
fluctuations in the quality of the electricity can have disastrous effects on the
sensitive equipment that routes the voice and data traffic around the world.

A description of a typical central office is a good way to introduce a few of the


dynamics at play in the communications high-voltage power systems market. A
central office is a physical location housing equipment that routes, switches,
multiplexes, and demultiplexes communications traffic. For example, voice and

Stephens Inc. 89
data traffic from telephones, PCs, pagers, personal digital assistants (PDAs) and
wireless phones is carried through the air and over copper lines, coaxial cables
and glass fibers and converges at the central office. In other words, there is a lot
of power hungry equipment in a central office.

To ensure that this equipment is up and running around the clock, service
providers install an uninterruptible power supply (UPS) system. This UPS
system usually consists of a telecom power plant, generators and batteries. The
power plant is the brain of the UPS system. It rectifies the electric utilitys
alternating current to a 48-volt direct current that is used to power all of the
communications equipment at the site. In addition to powering the equipment,
the telecom power supply system keeps the batteries charged and, in the event of
a power outage, draws electricity from the batteries until the back-up generators
can come on line. Once on line these generators act as the primary power source,
which still needs to be rectified by the power supply rack before being bussed to
the communications equipment. All this switching takes place without the
microprocessors in a router ever knowing its power source was compromised.

With all this equipment competing for floor space in a building that was probably
Switch-mode telecom originally designed to handle only voice traffic, size matters. The power plants
power supplies take up that have dominated these installations in the past are called ferro-resonant power
less space than ferro- plants. We estimate that ferro-resonant power plants still power over 50% of the
resonant power supplies telecom market. However, as space availability becomes more critical, telecom
switch-mode power plants have become much more attractive. Telecom switch-
mode power plants use one-fifth of the space required by ferro-resonant power
plants. Although it will not happen overnight, we expect switch-mode power
plants to be the power plant of choice going forward for these backbone
companies. A second advantage is that repairs can be made to switch-mode
power supplies much faster rate than to ferro-resonant power supplies.

POWER SUPPLY INDUSTRY OVERVIEW

The growth of the power supplies industry has paralleled that of the general
The growth of the power
supply industry will be
electronics industry. The proliferation of electronic equipment within the past 15
driven by strong demand years has created greater demand for power supplies. Going forward, growth
for communications prospects remain bright due to increasing demand from end-uses such as servers,
applications storage devices, networking equipment for Internet services and
telecommunication equipment for wireless applications.

An extensive survey of power supply manufacturers conducted by Micro-Tech


Consultants (July 2000) revealed that most believe that today can be
characterized as the best of times for the power supply industry. There were
reasons given for the optimism:

General economic growth


Almost insatiable demand for networking equipment, wireless
communications, and optical switching
Continued shift from in-house, captive manufacturing to merchant buying
Continued improvement in power supply manufacturing

We believe that the power supply industry is in the midst of major change. The
evolving nature of the industry is summarized in Table 17.

Stephens Inc. 90
Table 17
Power Supply Industry

Yesterday Tomorrow

There are no real


standards in the power No industry standards Some de facto industry standards in ac/dc and
supply industry dc/dc have evolved; low power dc/dc is
standardized

Significant diversity Expected to continue

Complex competition Expected to increase

Lack of capital resources A few large companies have dedicated resources

No real large volumes Personal computer applications have


large volumes; network computers and
communications applications will have
larger volumes

Old industry which has not Older industry that still hasnt reached maturity
yet reached maturity

Source: Micro-Tech Consultants

Intense Industry Fragmentation

The power supply industry is extremely fragmented, consisting of around 1,000


There are over 1,000
manufacturers worldwide. No one manufacturer holds more than five percent of
power supply
manufacturers the total market. Most manufacturers concentrate on niche markets, whether
worldwide and 250 in power ranges or industry segments. Although consolidation has been an issue,
the North American there are still more than 250 merchant power supply companies in the U. S.
market market with no one company dominating the industry. Following is a list of the
top ten 1999 power supply manufacturers in North America in terms of revenue.

Stephens Inc. 91
Table 18
Ten Largest North American
Power Supply Companies* - 1999 Sales
($ in millions)

1999 North
Manufacturers American Sales
Delta Electronics $550
The Company with the
most revenue derived in
Astec/APS/Emerson Electric 460
North America in 1999 Lucent Technologies 340
was Taiwanese-based Artesyn Technologies 335
Delta Lite-On 210
Celestica Power Systems 170 - 190
Power-One 150 - 155
Vicor 143
Cherokee International 130
Lambda Electronics/Invensys 125

*(Ac/dc power supplies, dc/dc converters and telecom power plants)

Source: Micro-Tech Consultants

The worldwide power supply market is even more fragmented than the U.S.
market. A list of the top 15 power electronics companies in the world along with
their worldwide sales figures for 1999 is provided below.

Table 19
Largest Worldwide Power Supply Companies* - 1999 Sales
($ in millions)

Company Base 1999 Sales

Lucent Technologies Products U.S. $1,200


Delta Electronics Taiwan 850
In 1999, Lucent was the Astec/APS/Emerson Electric U.S. 830
largest power supply Lambda Electronics/Invensys U.K. 830
manufacturer in the Siemens Germany 600-700
world. Lucent is
currently in the process Ericsson Sweden 560
of selling its power Artesyn U.S. 517
supply division Marconi U.K. 360
Shindengen Japan 357
Lite-On Taiwan 320
Ascom Energy Switzerland 309
AcBel Polytech Taiwan 260
FRIWO EMC Germany 250
Tamura Corp. Japan 250
NMB Technologies Japan 222

*(Ac/dc power supplies, dc/dc converters and telecom power plants)

Source: Micro-Tech Consultants

Stephens Inc. 92
Barriers to Entry

Even though the industry is mature, few barriers to entry exist. The expertise
required to construct a low-power-range power supply is relatively low.
However, just having a working power supply does not necessarily lead to a
profitable business. With no industry standards for power supplies, it is very
difficult to design out an existing power component, which prevents large
companies from quickly gaining market share.

Foreign Competition

Foreign competition has become difficult to define in the power supply industry
Taiwan is home to more because many U.S. companies are owned by foreign ones. Moreover, many U.S.
power supply companies have manufacturing locations in low-labor-rate countries like Mexico
manufacturers than any and China, making it possible for them to manufacture products as competitively
other country as a foreign supplier. This capability is especially important for ac/dc
manufacturers, but not as key for dc/dc converter makers. Taiwan has the largest
number of power supply manufacturers, with more than 100 that sell either
directly or indirectly to U.S. companies.

The Asian manufacturers have historically dominated the low end of the power
supply market. By low end, we are talking about commodity-like power supplies
that are found in consumer electronics and PCs. The line dividing the low end of
the market and the mid to high end is moving up. A case study of the computer
workstation and enterprise-level file server markets is an excellent way to convey
whats happening at this critical delineation point in the market.

Advances in microprocessor technologies are enabling a wider range of power


The line dividing the low supply manufacturers to enter the workstation and enterprise level server
end of the market and markets. In the past, a relatively large number of small, high-end power supply
the mid to high end also manufacturers had a stranglehold on these markets. The personal computer
divides the commodity market was the exclusive domain of the larger, low-end power supply
power supply manufacturers. These manufacturers developed strategic strengths in order to
manufacturers from the survive and meet the needs of the fast-growing personal computer market. They
higher-end utilized low-cost labor and increased material purchases to dramatically lower
manufacturers product costs. High volume manufacturing processes were developed to meet the
growing demand for quality, reasonably reliable products. Since personal
computer architectures were relegated to desktop applications, the impact of
power supply failure, while unwanted, was relatively minimal. Consequently,
price was the key driver in making the sale.

For the enterprise-level servers and engineering workstations, high-end


proprietary architectures ruled. These systems required power supplies that were
as individual and unique as the computer systems they powered. Manufacturers
that supplied this market could command higher margins for their highly
engineered, reliable power supplies. Cost was not the primary consideration.

With advances in microprocessor technology and software, personal computer


architectures have evolved to the point that they are now penetrating the
workstation and server markets. Companies that previously dominated this
market are migrating their architectures to an Intel and Windows NT platform,
and the traditional PC suppliers are becoming formidable competitors in the
high-end computer market segment. Most important to power supply
manufacturers is the fact that these new PC competitors also bring their entire
supply chain up into the workstation and enterprise-level server markets.
Stephens Inc. 93
Traditionally, mid- to high-end power supply manufacturers have not had to
worry about the competitive antics that typify the huge electronics
manufacturers. The emergence of the more cost-conscious, low-end power
supply manufacturers is changing the playing field.

Continued Industry Growth

As indicated earlier, the power supply industry has experienced exceptional


Annual growth is
forecast at 10.2% from
growth on the back of the general electronics industry. The growth is expected to
1999 through 2004 for continue with some minor shifts between markets and products. As reflected in
the power supply Chart 21, the worldwide market for ac/dc power supplies and dc/dc converters
industry was approximately $26.6 billion in 1999 and is expected to grow to $43.2 billion
by the year 2004. Of the worldwide total, the North American market was $11.4
billion in 1999 and is expected to grow to $19.7 billion by 2004.

Chart 21
Global Power Electronics Market*
($ in Billions)

1999
North
America
$11.4
$15.2
Foreign
In 1999, the North
American market
accounted for
approximately 43% of
the overall market. It
is expected to
increase to 46% 2004
of the total market by
North
2004
America
$23.5 $19.7
Foreign

(Ac/dc power supplies and dc/dc converters)

Source: Micro-Tech Consultants

Global consumption of ac/dc power supplies is expected to increase from $11.1


billion in 1999 to $14.5 billion in 2004. This increase represents an average
annual growth rate of 5.5% (see Chart 22).

Dc/dc converters are an important component in an ac/dc power supply and, as


Dc/dc converters are such, will benefit from the growth in that market. Additionally, dc/dc converters
expected to grow at a will benefit as distributed power architecture continues to gain in popularity.
CAGR from 1999 Global consumption of dc/dc converters is forecast to increase from $6.2 billion
through 2004 of almost in 1999 to $11.3 billion in 2004, an average annual growth rate of 12.8%. The
13% telecommunications market is expected to drive dc/dc converter growth. We

Stephens Inc. 94
estimate that, in 1999, the telecom high-density dc/dc converter market was
around $1 billion. However, by 2003, the market is expected to reach
approximately $6 billion, making it the fastest growing segment of the power
supply business.

Chart 22
Global Power Supplies Consumption

$30.0

$25.0

$Billions $20.0

$15.0

$10.0

$5.0

$0.0
1999 2000E 2001E 2002E 2003E 2004E

AC/DC DC/DC

(Ac/dc power supplies and dc/dc converters)

Source: Micro-Tech Consultants

The third segment, telecom power plants, is expected to grow at a rapid pace (see
Dc/dc converters are Chart 23). Telecom power plants include ac/dc rectifiers/battery chargers, dc/dc
forecasted to grow faster converters, power distribution panels, and monitoring and control systems.
than ac/dc power Telecom power supplies can also be called energy systems or battery power
supplies plants.

Stephens Inc. 95
Chart 23
Global Telecom Power Plant Consumption

$10.0

$8.0

(Billions)
$6.0

$4.0

$2.0

$0.0
1999 2000E 2001E 2002E 2003E 2004E

Source: Micro-Tech Consultants

Market Segments

In the last few years, the communications segment has emerged as the fastest-
growing segment, mainly due to the demands of the networking equipment and
portable communications devices. Add to that the increasing growth of
Communications is the
fastest-growing market telecommunications in underdeveloped nations as well as upgrades to current
segment systems, and its easy to predict that this sector will continue to grow. According
to Standard & Poors, the global communications equipment industry will grow at
a 15% clip in 2000 and 2001, with certain segments growing much faster. Some
of the exceptionally high-growth segments are served by companies under our
coverage list, including optical networking, wireless, and Internet access.

The computing market segment is the largest of the power electronics markets.
With continued improvements in PCs and peripheral devices, along with growth
in the sale of minicomputers and supercomputers, this market is expected to
continue to show steady growth. According to eTForecasts, worldwide PC
revenues in 1999 were $226.3 billion (we are grouping servers, desktop PCs, and
mobile PCs under the term PC). By 2005, PC revenues should reach around
$356.9 billion, for a CAGR of approximately 8%. The CAGR for unit shipments
will be much higher over the same time frame, around 12.5%, due to significant
price declines. For many companies, the products and services for this segment
are not significantly different than those for the communications segment.

The industrial market segment has remained a lucrative segment for the
The industrial market
participants, but it is not a high-growth segment. However, due to a rebound in
has improved as a result
of the increase in
the semiconductor capital equipment market beginning in 1999, the growth rate
demand for has increased somewhat. Capital spending has also increased in this market
semiconductor capital within the last year, signifying further growth prospects. This is the only
equipment segment that has not gone through a fundamental change like computers and
telecommunications. The market is smaller, and the participants are entrenched.

Most ac/dc power supply manufacturers serving the military have had declining
sales for many years, while dc/dc converter manufacturers have grown modestly.
Though this market is not expected to grow dramatically over the next several
years, the steep decline may be behind us. Most experts believe that the period
Stephens Inc. 96
of massive downsizing in defense spending has ended, and there might be
increased military spending going forward as new platforms come to the market.

Additionally, the retrofit business has been increasing as well as the commercial
aerospace business, mainly from increasing airplane production by Boeing and
The decline in military Airbus. Our defense forces are expected to increase purchases of electronic
power electronics sales components as they upgrade their current systems. An upside of the downsizing
appears to have that has occurred in the military is the decrease in captive defense power
bottomed out
electronics manufacturers. With fewer contracts being awarded, defense
contractors must cut back on departments, often cutting the power supply
division. These cuts have led to an increase in military purchases of power
electronics from the merchant market.

Chart 24
North American Power Supplies
Consumption by Market Segment

$12.0
$11.0
$10.0
$9.0
The networking/ $8.0
($ in billions)

telecom segment is $7.0


projected to be the fastest
$6.0
growing market in North
America $5.0
$4.0
$3.0
$2.0
$1.0
$0.0
1999 2000E 2001E 2002E 2003E 2004E

Computers & Peripherals (7.1% CAGR) Net working/T elecom (14.2% CAGR)
Indust rial (5.6% CAGR) Military (5.7% CAGR)

Source: Micro-Tech Consultants

Growth Opportunities by Power Supply Category

The merchant market There are two main categories which power supplies manufacturers fall under,
should grow at around merchant and captive. A merchant manufacturer is an independent entity that
12% through 2004, sells power supplies to various vendors. A captive manufacturer, also called in-
much faster than the house manufacturer, is a manufacturer that makes power supplies for its own use
captive market and does not sell to outside vendors. The merchant market has been experiencing
strong growth the past year and is expected to remain strong going forward, with
a 1999 to 2004 CAGR of 12.1%. The chart on the following page illustrates the
demand for merchant switching power supplies in the North American market.

Stephens Inc. 97
Chart 25
North American Merchant Power Supplies Consumption

$9.0
$8.0
$7.0
$6.0

($ in billions)
$5.0
$4.0
$3.0
$2.0
$1.0
$0.0
1999 2000E 2001E 2002E 2003E 2004E

Source: Micro-Tech Consultants

When breaking down the merchant market by product (ac/dc power supplies and
dc/dc converters), the dc/dc side is growing at a much faster rate. In 1999, dc/dc
merchant sales totaled approximately $1.2 billion. Dc/dc merchant sales are
expected to grow to $3.1 billion by 2004, a CAGR of 21.0%. On the other hand,
ac/dc sales in 1999 were $3.6 billion and are expected to reach $5.4 billion by
2004, representing a CAGR of 8.4%.

Increased Outsourcing

For North American power supply companies, the merchant opportunity is


forecasted to grow from 65.6% of the total North American market in 1999 to
74.5% in 2004. The merchant market will have a CAGR over that time of
12.1%, versus the captive market of 3.0%.

Stephens Inc. 98
Chart 26
North American Power Supplies Consumption
(Merchant vs. Captive)

Total: $7.4B $8.2B $9.1B $9.9B $10.7B $11.5B

25.5%
25.8%
26.9%
28.4%
30.0%
34.4%

74.5%
74.2%
73.1%
71.6%
70.0%
65.6%

1999 2000E 2001E 2002E 2003E 2004E

Merchant Captive

Source: Micro-Tech Consultants

The pending sale of Lucent Technologys captive power supply division is a


perfect example of the trend towards increasing merchant sales. Some of the
primary reasons for the increased outsourcing are:

The general growth in the electronic equipment industry.

Companies continue to move from linear power supplies to switching power


supplies, which are more difficult to design and manufacture.

The emergence of a new type of electronic equipment manufacturer: one that


is a systems integrator as compared to a vertical company manufacturer and
integrator. These new companies typically do not have power electronics
expertise.

Overall marketplace changes. Movement from mainframes to personal


computers and from wired telecommunications to wireless cellular and
digital. These changes have created more opportunities for the merchant
power electronics companies.

Consolidating Industry

There is a widening gap between large and small companies. The recent growth
in the industry has created a few large companies for the first time in the
The power supply
industry continues to be
industrys history (see Chart 27). The lack of standards and the possibility of
ripe for consolidation niche markets are making it possible for hundreds of smaller manufacturers to
survive in the industry but, at the same time, the technology development,
financial strength, and marketing expertise required to participate in this industry
warrant a larger organization. This dichotomy will influence the evolution
towards an industry with a few large companies supplying a generic product
Stephens Inc. 99
and many smaller companies supplying products for niche markets. There are
now around 250 power supply companies in North America, down from 300 a
few years ago.

Chart 27
Fragmented Merchant Power Supply Industry
(1998 Sales In Millions)

Over 1,000 worldwide


merchant suppliers in the
industry, ranked by 13 Companies
revenues
$300 +

30 Companies
$100 - 299

101 Companies
$20 - 100

133 Companies
$5 - 20

723 Companies
UNDER $5

Source: Micro-Tech Consultants and Power-One, Inc.

The power supply industry is moving from one that was made up of small private
Merger and acquisition companies to one that is composed principally of either public companies or
activity is almost divisions of larger companies. We feel that acquisition and merger activity, is
commonplace in the driving this trend. Over the last several years, a significant amount of
power supply industry consolidation has taken place in the industry. Table 20 highlights a few of the
most recent deals.

Stephens Inc. 100


Table 20
Recent Consolidation in the Power Electronics Industry

Date Acquirer Target


6/00 Cherokee Mitra Power
4/00 Power-One Powec
2/00 Power-One HC Power
Emerson Electric and
Power-One have been 11/99 Converter Concepts MicroEnergy
the two most active 10/99 Celestica VXI
consolidators 10/99 Texas Instruments Power-Trends
10/99 Xantrex Statpower
8/99 Ascom Energy ABB PS Inc.
7/99 Unipower Power Micro
5/99 SL Industries Todd Products
1/99 Emerson Electric Ericsson Energy System
1/99 Power-One IPD

Source: Micro-Tech Consultants

Chart 28 illustrates the expected consolidation in the power supply industry. The
amount of the merchant power supply market held by the top ten OEM
companies is projected to grow significantly from 1999 to 2004.

Chart 28
North American Market Share
Held by Top 10 Merchant Power Supply Manufacturers

1999 2004

Rest
Rest Top 10 30.8% Top 10
45.6% 54.4% 69.2%

Source: Micro-Tech Consultants

Other Market Dynamics

Consolidation of supplier base Like many other industries, electronics,


communications and computer OEMs are reducing the number of suppliers
with which they do business. Typically, suppliers that have broad product
offerings and high service capabilities fare better.

Accelerated new product introduction by OEMs Users of power


electronics, especially computer and communications companies, are
themselves highly competitive, making time-to-market a critical variable in
determining success in these industries. Product life cycles are shortening
within the electronic equipment industry. Since a power system typically
Stephens Inc. 101
represents only 2% - 5% of the total cost of an OEMs product, shortening
the time-to-market is a critical variable in the success of power electronics
manufacturers.

Alliances are being formed Due to the business complexity of this


industrys sales channels, there are alliances being formed by various
companies to either sell each others products or license each others
technologies. Companies are focusing on their strengths and compensating
for weaknesses through alliances.

Potential of the Internet as a sales tool At this time, power supply


companies are not taking full advantage of the Internet. Currently, the
Internet is being used primarily as an information tool rather than a sales
tool. The main portion of high-volume sales are done in a direct face-to-face
manner with familiar customers. The Internet offers smaller companies the
ability to garner nice, low-volume sales.

Using company stock to attract engineers As mentioned earlier, the


lifeblood of power supply companies is the ability to attract and maintain a
strong engineering base. Offering stock compensation is an important factor
in this effort.

POWER SUPPLY SECTION CONCLUSION

There is no single strategy to becoming successful in the power supply industry.


Companies have to make compromises between high growth versus high profits,
standard products versus custom, local versus global markets, distribution versus
direct sales, and many other strategic choices. However, we believe that there
are a few key industry dynamics that successful companies will understand and
profit from in the future.

In our opinion, the industry will most certainly continue its consolidation trend.
The larger companies will look to broaden their product lines and sales channels
by acquiring smaller, niche players. Additionally, size, and the attributes that
normally accompany it, such as greater financial leverage, larger customer
service departments, larger R & D budgets, broader product lines, and greater
distributor influence, will become more and more important as competitors battle
for market share.

Power supply companies must continue to improve manufacturing efficiencies.


While product quality will continue to be the number one factor influencing
buying decisions, price will become more of a consideration as competition for
the high-margin business intensifies. Those companies that have quality internal
tracking systems and manufacturing facilities in low-cost, strategic areas will
probably have the advantage.

Finally, the power supply industry is not unlike other industries; those companies
that best understand their customers needs and design and deliver products that
meet those needs will likely be the most successful.

Stephens Inc. 102


Power Supply Company Profiles

Stephens Inc. 103


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Stephens Inc. 104


Artesyn Technologies Inc. (ATSN-NASDAQ)

High: 43.13
ARTESYN TECHNOLOGIES INC
Price (close on 9/15/00): $37.50 ATSN 9/15/99 to 9/15/00
Low:
Last:
15.00
37.50
USD

52-Week Range: $43.13 - $15.00 40

35

Market Capitalization: $1.4 billion 30

Shares Outstanding: 37.4 million 25

Debt/Capital: 23.8% 20

3-Year Estimated CAGR: 25% 15


Millions
1.46

Daily Volume (shares): 493,845 0.73

Price Target (12-month): $52 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Rating: BUY
Chart Courtesy of FactSet Research Systems Inc.

Cash Earnings Per Share % P/E Revs. EBITDA Enter./


Year 1Q 2Q 3Q 4Q DecFY Chg. Ratio $ Mil $ Mil Sales
1998A $0.24 $0.16 $0.21 $0.25 $0.86 NA 43.6X $532.4 $68.5 2.7X
1999A $0.20 $0.28 $0.33 $0.35 $1.16 35% 32.3X 594.2 85.0 2.4X
2000E $0.29A $0.32A $0.35 $0.40 $1.36 17% 27.6X 695.9 98.3 2.1X
2001E $0.37 $0.42 $0.46 $0.50 $1.75 29% 21.4X 829.9 125.4 1.7X

Company Description

Headquartered in Boca Raton, Florida, Artesyn Technologies is a leading


Artesyn has three main supplier of power conversion products, communication subsystems and repair
product divisions:
services. It employs more than 6,500 people worldwide, with operations in 14
power conversion,
communications, and countries. Artesyns products include power conversion products for electronic
repair and logistics equipment used in commercial and industrial applications and also for single-
board computers, systems, and sub-systems for real-time applications.

Investment Highlights and Summary

Despite component shortages, Artesyn has provided upside earnings


surprises over the last two quarters. After lowering earnings expectations for
FY00 during 4Q99s conference call, Artesyn Technologies turned in a first
quarter that provided a nice upside surprise for investors, $0.32 cash EPS versus
our estimate of $0.30. Artesyns 2Q00 EPS results also came in above our
expectations. For the quarter, the Company recorded $0.27 GAAP EPS and
$0.32 cash EPS, one cent and two cents ahead of our expectations, respectively.
Demand has been strong for ATSN's products across all its divisions.

However, industry-wide component shortages, particularly of tantalum


capacitors, plagued Artesyn during the second quarter and caused the Company
to push approximately $15 million in expected sales from 2Q00 to 3Q00.
Despite the fact that the $15 million in expected sales was pushed to 3Q00,
ATSN only missed our revenue expectation by approximately $3 million in
2Q00. For the quarter, ATSN generated $164.3 million in total sales. Demand
for Artesyns products continues to remain strong across the board, and we
remain comfortable with the Companys ability to meet our EPS projections
going forward.

Stephens Inc. 105


Artesyn focuses exclusively on the fast growing communications and
computing industries. Following the arrival of Joseph ODonnell in 1994 as
CEO, management immediately began emphasizing the development of
products exclusively for this fast-growing market. In addition, ATSN is a
leading provider of communication subsystems and repair and logistic services.
The chart below depicts our estimates of ATSNs end-market as a percentage of
total revenue.

ATSNs End-Market Breakdown

Wireless
6% Other
Computing/storage 6%
and networking make Internet
Computing/
up the bulk of ATSNs Access
Storage
revenues. Going 7%
46%
forward, we see the
wireless and internet
access revenues
growing the fastest Carrier/
Enterprise/
Networking
35%

Source: Company Information

R&D spending has been on the rise. Artesyn has increased its new product
introductions through increased spending on R&D. Several quarters ago,
management announced its intention to increase spending by approximately $6
million, which reduced our FY00s EPS estimate by ten cents. The reason for the
investment increase was to expand ATSNs presence in high-growth Internet
Artesyn had 57 new applications such as routers, mass-storage, servers, fiber channels, fiber
program wins during switching, and DSL. Through the first six months of FY00, ATSN recorded 57
the first six months of new program wins and is well on its way to surpassing its goal of 75 by year-end.
FY00
The success of Artesyns new products provides us with additional comfort in
our earnings projections for FY01. The new non-isolated dc/dc converters
designed for the mid- to low-end server market and the new high-voltage
products designed for wireless base stations are beginning to gain footing in the
marketplace. During ATSNs most recent quarter, the Company had two
program wins for low- to mid-range servers that should generate $60 million in
annual revenue at full production.

We believe shares of Artesyn remain attractively priced. Artesyn is trading at


a discount to its peers. The Company is trading at approximately 27.6X and
21.4X our FY00 and FY01 Cash EPS estimates, respectively. Artesyns two
closest comparable companies, Power-One and Vicor, trade at an average of
79.3X and 50.4X to their FY00 and FY01 estimates, respectively. While
projected revenue growth rates vary significantly between these three companies,
in our opinion, the disparity in valuations is too great.

Stephens Inc. maintains a market in the common stock of Artesyn Technologies and may act as
principal in these transactions.

Stephens Inc. 106


ARTESYN TECHNOLOGIES, INC.
Historical Earnings Summary & Projections
(in millions, except per share amounts)

1999 2000E 2001E


1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE 1QE 2QE 3QE 4QE 1998* 1999 2000E 2001E

Sales $ 135.1 $ 150.4 $ 152.8 $ 155.8 $ 159.6 $ 164.3 $ 179.0 $ 193.0 $ 192.1 $ 201.9 $ 212.0 $ 223.9 $ 532.4 $ 594.2 $ 695.9 $ 829.9
Cost of Sales 101.6 112.3 111.9 114.7 118.6 119.2 130.7 140.9 140.4 147.4 154.5 162.8 392.9 440.5 509.3 605.1
Gross Profit 33.5 38.1 40.9 41.1 41.1 45.2 48.3 52.1 51.7 54.5 57.5 61.1 139.5 153.7 186.7 224.8
SG&A 13.6 12.9 12.9 13.0 14.8 17.6 17.8 18.2 18.5 18.7 19.0 19.3 54.5 52.4 68.4 75.5
R&D 8.9 9.4 9.2 8.9 10.3 10.8 12.4 12.8 13.1 13.3 13.6 13.8 33.4 36.4 46.3 53.8
Operating Income 11.1 15.9 18.8 19.1 15.9 16.7 18.1 21.1 20.1 22.6 24.9 28.0 51.6 64.9 71.9 95.6
Interest (Income)/Expense 0.3 0.4 0.5 0.4 0.6 0.9 1.0 1.0 1.0 1.0 0.9 0.9 1.6 1.7 3.5 3.8
Other (Income)/Expense - - - - - - - - - - - - - - - -
Pretax Income 10.8 15.4 18.3 18.7 15.4 15.8 17.1 20.1 19.1 21.6 24.0 27.1 50.0 63.2 68.4 91.8
Taxes 3.4 5.0 5.9 5.5 4.8 5.2 5.7 6.6 6.3 7.1 7.9 9.0 16.6 19.8 22.3 30.3
Net Income $ 7.3 $ 10.4 $ 12.5 $ 13.2 $ 10.6 $ 10.6 $ 11.5 $ 13.5 $ 12.8 $ 14.4 $ 16.1 $ 18.2 $ 33.4 $ 43.4 $ 46.1 $ 61.5
Average Shares - Diluted 39.1 38.9 39.3 38.7 38.4 38.8 38.9 39.0 39.4 39.5 39.7 39.9 40.6 39.0 38.8 39.6

GAAP EPS - Diluted $ 0.19 $ 0.27 $ 0.32 $ 0.34 $ 0.28 $ 0.27 $ 0.30 $ 0.35 $ 0.32 $ 0.37 $ 0.41 $ 0.46 $ 0.82 $ 1.11 $ 1.19 $ 1.56
Cash EPS - Diluted $ 0.20 $ 0.28 $ 0.33 $ 0.35 $ 0.29 $ 0.32 $ 0.35 $ 0.40 $ 0.37 $ 0.42 $ 0.46 $ 0.50 $ 0.86 $ 1.16 $ 1.36 $ 1.75

Depreciation & Amortization $ 4.7 $ 4.8 $ 5.6 $ 5.0 $ 5.7 $ 6.7 $ 7.0 $ 7.1 $ 7.2 $ 7.4 $ 7.5 $ 7.7 $ 16.9 $ 20.1 $ 26.5 $ 29.8
EBITDA $ 15.8 $ 20.7 $ 24.4 $ 24.1 $ 21.6 $ 23.4 $ 25.1 $ 28.2 $ 27.3 $ 30.0 $ 32.4 $ 35.7 $ 68.5 $ 85.0 $ 98.3 $ 125.4

Margin Analysis
Gross Profit 24.8% 25.3% 26.8% 26.4% 25.7% 27.5% 27.0% 27.0% 26.9% 27.0% 27.1% 27.3% 26.2% 25.9% 26.8% 27.1%
SG&A 10.0% 8.6% 8.4% 8.4% 9.3% 10.7% 9.9% 9.4% 9.6% 9.3% 9.0% 8.6% 10.2% 8.8% 9.8% 9.1%
R&D 6.6% 6.2% 6.0% 5.7% 6.4% 6.6% 6.9% 6.6% 6.8% 6.6% 6.4% 6.2% 6.3% 6.1% 6.7% 6.5%
Operating Income 8.2% 10.5% 12.3% 12.3% 10.0% 10.2% 10.1% 10.9% 10.5% 11.2% 11.8% 12.5% 9.7% 10.9% 10.3% 11.5%
Pretax Income 8.0% 10.3% 12.0% 12.0% 9.6% 9.6% 9.6% 10.4% 9.9% 10.7% 11.3% 12.1% 9.4% 10.6% 9.8% 11.1%
Net Income 5.4% 6.9% 8.2% 8.5% 6.6% 6.4% 6.4% 7.0% 6.7% 7.2% 7.6% 8.1% 6.3% 7.3% 6.6% 7.4%
Tax Rate 32.0% 32.5% 32.0% 29.6% 31.0% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% 33.2% 31.4% 32.5% 33.0%

Percent Change
Sales -8.2% 23.5% 22.6% 12.3% 18.1% 9.2% 17.2% 23.9% 20.3% 22.9% 18.4% 16.0% 1.0% 11.6% 17.1% 19.2%
Gross Profit -12.2% 17.6% 20.2% 17.9% 22.4% 18.5% 18.1% 26.8% 25.9% 20.7% 19.0% 17.3% -1.6% 10.1% 21.5% 20.5%
SG&A -5.4% -10.5% -3.6% 5.1% 9.1% 36.8% 37.9% 39.6% 24.9% 6.1% 6.7% 6.0% 5.7% -3.9% 30.6% 10.3%
R&D -1.0% 13.1% 9.6% 15.6% 16.1% 15.6% 34.4% 43.0% 27.2% 22.2% 9.7% 8.1% 11.6% 9.0% 27.2% 16.1%
Operating Income -25.6% 62.9% 53.6% 30.0% 43.6% 5.2% -3.5% 10.5% 25.9% 35.2% 37.5% 32.6% -14.3% 25.7% 10.8% 33.0%
Pretax Income -25.9% 64.9% 53.4% 32.1% 43.0% 2.3% -6.6% 7.5% 24.1% 36.6% 40.3% 34.9% -12.6% 26.5% 8.2% 34.2%
Taxes -30.2% 57.7% 48.5% 22.2% 38.5% 3.8% -3.6% 20.0% 32.1% 36.7% 40.3% 34.9% -7.3% 19.7% 12.2% 36.1%
Net Income -23.6% 68.6% 55.9% 36.7% 45.1% 1.6% -8.0% 2.3% 20.5% 36.5% 40.3% 34.9% -15.1% 29.9% 6.4% 33.3%
GAAP EPS - Diluted -18.9% 77.9% 60.2% 39.8% 47.6% 1.7% -6.9% 1.5% 17.4% 34.3% 37.5% 32.1% -16.0% 35.2% 7.0% 30.6%
Cash EPS - Diluted -16.7% 75.0% 57.1% 40.0% 45.0% 14.3% 6.1% 14.3% 27.6% 31.3% 31.4% 25.0% -15.7% 34.9% 17.2% 28.7%
* FY98 figures do not include an after-tax, merger-related charge of $9.6 million.
Source: Company reports and Stephens Inc. estimates

Stephens Inc. 107


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Stephens Inc. 108


C&D Technologies (CHP-NYSE)

High: 61.38
C&D TECHNOLOGIES INC
Price (close on 9/15/00): $52.50 CHP 9/15/99 to 9/15/00
Low:
Last:
15.50
52.50
USD
60
52-Week Range: $61.38 - $15.50 50

Market Capitalization: $1.4 billion 40

Shares Outstanding: 26.0 million 30

Debt/Capital: 31% 20

3-Year Estimated CAGR: 35%


Thousands
701

Daily Volume (shares): 345,315 351

Price Target (12-month): $64 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Rating: BUY
Chart Courtesy of FactSet Research Systems Inc.

Earnings Per Share % P/E Revs. EBITDA Enter./


Year 1Q 2Q 3Q 4Q JanFY Chg. Ratio $ Mil $ Mil Sales
1999A $0.22 $0.23 $0.26 $0.22 $0.94 21% 55.9X $314.0 $49.3 5.0X
2000A $0.25 $0.27 $0.31 $0.35 $1.18 26% 44.5X 465.6 80.2 3.1X
2001E $0.41A $0.49A $0.52 $0.53 $1.95 65% 26.9X 586.0 118.8 2.5X
2002E $0.55 $0.57 $0.60 $0.60 $2.32 19% 22.6X 676.0 138.0 2.1X

Company Description

C&D Technologies, headquartered in Blue Bell, Pennsylvania, was founded in


1906 by Frank Carlile and Leon Doughty. Through the years, the Company has
Seventy percent of
maintained a focus on industrial power systems. Today, C&D Technologies is
CHPs revenues come
from energy storage
composed of four divisions: PowerCom, Dynasty, Power Electronics, and Motive
systems that back up Power. The PowerCom and Dynasty divisions manufacture lead-acid batteries
the nations and related electronics that are used to back up the communications
communications infrastructure. C&Ds Power Electronics division manufactures ac/dc power
infrastructure supplies and dc/dc converters. The Motive Power division is a major supplier of
batteries and charging electronics for electric material-handling vehicles and
other industrial applications.

Investment Highlights and Summary

C&D Technologies is finally hitting on all cylinders. Throughout calendar


1999, we consistently said that C&D Technologies was growing remarkably well
while only hitting on two of its four cylinders. Granted, the two cylinders that
were driving the growth accounted for approximately 70% of total revenues.
Now, for the first time in several years, the Power Electronics Division is
contributing in a meaningful way. The division contributed operating profits of
$1.5 million in 2Q01 versus a loss of ($3.5 million) in all of FY00. The
improvement in performance can be directly attributed to the divisions line of
high-density dc/dc converters.

Stephens Inc. 109


Demand is outpacing C&D Technologies manufacturing capacity. Because
of the huge demand for CHPs energy storage sytems that are used to back up the
communications infrastructure, the Companys lead-times have stretched to over
three months. Management believes that CHP is on track to hit its capital
We estimate that CHP expenditures target of $50.0 million this year. This level of spending is much
will spend higher than the $15.0 million the Company has spent each of the last two years.
approximately $50 Approximately $40 million of this is earmarked for the battery divisions, and
million in capital $5.0 million will go towards the power electronics division. The capacity
expenditures this year
expansion program should provide an additional $100.0 million in revenue
in order to meet
demand capacity. With manufacturing capacity tight at all four of the major suppliers of
industrial batteries, CHP is the only supplier that is aggressively expanding
capacity. Going forward, we believe that CHPs industrial battery business will
be better positioned than its competitors. The Company primarily competes with
East Penn Manufacturing, Yuasa and GNB (a division of Pacific Dunlap).

The outlook for CHPs Power Electronics Division has improved


dramatically. Over the last year, the Power Electronics Division has been
restructured, and its management has been replaced. During that chaos, CHP
was working to get its dc/dc bricks qualified at several of the larger
CHPs power communications equipment manufacturers. Those efforts are beginning to pay
electronics division off. C&Ds Power Electronics Division recorded sales of $24.4 million in the
has turned the corner most recent quarter, a sequential increase of approximately 23%. The Power
and is now the fastest Electronics Division recorded an operating profit of $1.5 million during 2Q01,
growing division versus $766,000 in 1Q01. Demand for CHPs dc/dc converters continues to
outpace supply. These bricks are targeted at communications equipment
manufacturers such as Cisco, Alcatel, Sycamore, and Nortel. During the most
recent quarter, this division accounted for approximately 17% of total sales.
Dc/dc converters are the fastest growing segment in the power supply industry.
There are only a handful of companies that make this product, and all of them
have seen sales climb dramatically.

Stephens Inc. 110


C & D Technologies, Inc.
H istorical Earnings Sum m ary & Projections
(in millions, except per share data)

2000* 2001E 2002E Fiscal Y ear E nding January


A pr Jul O ct Jan** A pr Jul O ct Jan Apr Jul O ct Jan
1Q 2Q 3Q 4Q 1Q 2Q 3Q E 4Q E 1Q E 2QE 3Q E 4Q E 1999 2000 2001E 2002E

Sales $ 99.6 $ 111.8 $ 126.8 $ 127.3 $ 133.5 $ 146.6 $ 152.0 $ 154.0 $ 160.0 $ 167.5 $ 173.5 $ 175.0 $ 314.0 $ 465.6 $ 586.0 $ 676.0
Cost of Sales 72.7 82.1 93.6 92.4 94.4 103.4 107.2 108.6 112.8 118.1 122.3 123.4 227.8 340.8 413.5 476.6

G ross Profit 26.9 29.7 33.3 34.9 39.1 43.1 44.8 45.4 47.2 49.4 51.2 51.6 86.2 124.7 172.5 199.4
SG& A 13.0 14.5 15.2 15.3 16.4 16.9 17.3 17.4 17.9 18.8 19.2 19.3 40.3 57.9 68.0 75.2
R& D 2.3 2.2 2.2 2.2 2.5 2.5 2.7 2.9 3.1 3.2 3.3 3.3 8.3 9.0 10.6 12.9

O perating Incom e 11.6 13.0 15.9 17.3 20.3 23.7 24.8 25.1 26.2 27.5 28.7 29.0 37.6 57.8 93.9 111.4
Interest Expense 1.6 1.9 2.2 2.1 2.2 1.4 1.2 1.0 0.8 0.7 0.4 0.2 0.1 7.9 5.8 2.1
Other Expense - - - - - - - - - - - - 0.2 - - -

Pretax Incom e 10.0 11.1 13.7 15.2 18.1 22.287 23.6 24.1 25.4 26.8 28.3 28.8 37.2 49.9 88.1 109.3
Taxes 3.6 4.0 5.2 5.6 6.8 8.3 8.7 8.9 9.4 9.9 10.5 10.7 13.2 18.3 32.8 40.4
M inority Interest - - 0.3 0.3 0.3 0.6 0.5 0.5 0.5 0.5 0.5 0.5 - 0.6 1.8 2.0
N et Incom e $ 6.4 $ 7.1 $ 8.2 $ 9.3 $ 11.1 $ 13.4 $ 14.4 $ 14.7 $ 15.5 $ 16.4 $ 17.3 $ 17.7 $ 24.1 $ 30.9 $ 53.5 $ 66.8

A verage Shares 25.7 26.3 26.1 26.5 26.8 27.4 27.6 27.8 28.0 28.6 29.0 29.4 25.7 26.2 27.4 28.8
EPS $ 0.25 $ 0.27 $ 0.31 $ 0.35 $ 0.41 $ 0.49 $ 0.52 $ 0.53 $ 0.55 $ 0.57 $ 0.60 $ 0.60 $ 0.94 $ 1.18 $ 1.95 $ 2.32

D epreciation & A mortization $ 4.9 $ 5.9 $ 5.8 $ 5.8 $ 5.9 $ 6.1 $ 6.3 $ 6.6 $ 6.6 $ 6.6 $ 6.7 $ 6.7 $ 11.8 $ 22.4 $ 24.9 $ 26.6
EBITDA $ 16.5 $ 18.9 $ 21.7 $ 23.1 $ 26.2 $ 29.8 $ 31.1 $ 31.7 $ 32.8 $ 34.1 $ 35.4 $ 35.7 $ 49.3 $ 80.2 $ 118.8 $ 138.0

M argin A nalysis
G ross Profit 27.0% 26.6% 26.2% 27.4% 29.3% 29.4% 29.5% 29.5% 29.5% 29.5% 29.5% 29.5% 27.4% 26.8% 29.4% 29.5%
SG& A 13.1% 12.9% 11.9% 12.1% 12.3% 11.5% 11.4% 11.3% 11.2% 11.2% 11.1% 11.0% 12.8% 12.4% 11.6% 11.1%
R& D 2.3% 2.0% 1.8% 1.7% 1.9% 1.7% 1.8% 1.9% 1.9% 1.9% 1.9% 1.9% 2.6% 1.9% 1.8% 1.9%
O perating Incom e 11.7% 11.6% 12.5% 13.6% 15.2% 16.2% 16.3% 16.3% 16.4% 16.4% 16.5% 16.6% 12.0% 12.4% 16.0% 16.5%
Pretax Incom e 10.0% 9.9% 10.8% 11.9% 13.6% 15.2% 15.5% 15.7% 15.9% 16.0% 16.3% 16.5% 11.9% 10.7% 15.0% 16.2%
N et Incom e 6.4% 6.4% 6.5% 7.3% 8.3% 9.1% 9.5% 9.5% 9.7% 9.8% 10.0% 10.1% 7.7% 6.6% 9.1% 9.9%
Tax R ate 36.1% 35.8% 38.0% 36.8% 37.4% 37.4% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 35.3% 36.8% 37.2% 37.0%
D epreciation & A mortization 4.9% 5.3% 4.6% 4.6% 4.4% 4.2% 4.1% 4.3% 4.1% 3.9% 3.9% 3.8% 3.7% 4.8% 4.2% 3.9%
EBITDA 16.6% 16.9% 17.1% 18.2% 19.6% 20.4% 20.5% 20.6% 20.5% 20.3% 20.4% 20.4% 15.7% 17.2% 20.3% 20.4%

Percent C hange
Sales 26.2% 39.6% 55.4% 73.5% 34.0% 31.1% 19.8% 21.0% 19.9% 14.3% 14.1% 13.6% 1.9% 48.3% 25.9% 15.3%
Cost of Sales 24.9% 40.8% 62.0% 72.8% 29.8% 25.9% 14.5% 17.5% 19.5% 14.2% 14.1% 13.6% 0.4% 49.6% 21.3% 15.2%
G ross Profit 30.0% 36.6% 39.5% 75.4% 45.4% 45.3% 34.8% 30.3% 20.7% 14.6% 14.1% 13.6% 6.2% 44.8% 38.3% 15.6%
SG& A 36.7% 42.7% 34.3% 62.8% 26.0% 16.8% 14.3% 13.4% 9.4% 11.2% 10.8% 10.9% 2.6% 43.6% 17.3% 10.6%
R& D 13.0% 9.9% 7.8% 4.7% 8.0% 13.4% 21.0% 30.5% 24.8% 26.0% 22.2% 13.8% -4.1% 8.8% 18.1% 21.4%
O perating Incom e 27.0% 35.7% 51.3% 107.5% 74.5% 82.4% 56.2% 45.1% 29.3% 15.7% 15.6% 15.5% 13.1% 53.9% 62.4% 18.6%
Pretax Incom e 9.9% 17.3% 31.1% 83.2% 81.7% 101.1% 72.6% 59.0% 40.2% 20.1% 19.8% 19.5% 19.9% 34.0% 76.6% 24.0%
Taxes 8.8% 14.9% 41.7% 104.4% 88.2% 110.3% 68.2% 59.9% 38.6% 18.8% 19.8% 19.5% 15.8% 39.4% 78.7% 23.3%
N et Incom e 10.8% 18.6% 20.9% 66.7% 73.4% 88.2% 75.6% 58.8% 40.1% 22.2% 20.5% 20.1% 22.3% 28.5% 73.0% 24.9%
EPS 10.7% 16.0% 18.6% 61.9% 65.9% 80.5% 65.7% 51.3% 34.1% 17.1% 14.7% 13.6% 20.5% 26.0% 65.1% 19.0%

* Includes acquisition of the Industrial Battery business of Johnson Controls Inc. (JC I - $59.58) effective M arch 1, 1999. Excludes restructuring charges.
** D oes not include $2.0 million inventory write-down relating to the Power Electronics D ivision.
Source: C ompany reports and Stephens Inc. estim ates

Stephens Inc. 111


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Stephens Inc. 112


Power-One, Inc. (PWER-NASDAQ)

High: 89.81
POWER-ONE INC
Price (close on 9/15/00): $84.63 PWER 9/15/99 to 9/15/00
Low:
Last:
4.88
84.63
USD

52-Week Range: $89.81 - $4.88 80

60

Market Capitalization: $6.0 billion 40

30

Shares Outstanding: 71.1 million 20

Debt/Capital: 3.8% 10

3-Year Estimated CAGR: 60%


Millions
3.88

Daily Volume (shares): 1,672,176 1.94

Price Target (12-month): $88 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Rating: BUY
Chart Courtesy of FactSet Research Systems Inc.

Cash Earnings Per Share % P/E Revs. EBITDA Enter./


Year 1Q 2Q 3Q 4Q DecFY Chg. Ratio $ Mil $ Mil Sales
1998A $0.06 $0.06 $0.03 $0.02 $0.18 NA 470.2X $119.5 $17.3 54.6X
1999A $0.03 $0.05 $0.10 $0.12 $0.30 67% 282.1X 237.2 38.8 27.5X
2000E $0.13A $0.19A $0.23 $0.26 $0.80 168% 105.8X 495.9 108.4 13.2X
2001E $0.28 $0.30 $0.33 $0.35 $1.26 57% 67.2X 750.0 174.2 8.7X

Company Description

Power-One Power-One, Inc., located in Camarillo, California, is a designer and manufacturer


manufactures ac/dc of more than 2,500 high-quality brand name power supplies. The Company's
power supplies, dc/dc power supplies are designed to meet the power needs of various subsystems and
converters and components within electronic equipment. PWERs customers include industry
telecom dc power leaders such as Cisco, Nortel, Teradyne, Lucent Technologies, Alcatel, Nokia,
plants Hewlett-Packard, Siemens and Ericsson.

Investment Highlights and Summary

We expect PWERs organic revenue growth to be 50% to 60% over the next
two years. This type of growth is possible because of a series of four strategic
acquisitions that complemented PWERs legacy standard ac/dc power supply
We expect significant product line. The acquisition of International Power Devices allowed PWER to
earnings leverage on
quickly become an industry leader in the fast growing dc/dc converter market.
higher revenues
The more recent acquisitions of HC Power and Powec position the Company in
the telecom dc power plant business. An earlier acquisition of Melcher
significantly expanded Power-Ones sales presence in Europe. We estimate that
PWER will earn cash EPS of $0.80 in FY00 and $1.26 in FY01, increases of
168% and 57%, respectively. Revenue is expected to increase 109% in FY00
and 51% in FY01. Backlog at the end of the PWERs most recent quarter stood
at $196.0 million, up 81.0% sequentially and further reflecting the strength in
PWERs core markets.

Power-One is focused on serving the fast growing communications industry.


We estimate that by the end of FY00, the communications market will account
for approximately 70% of total revenue, versus 50% in FY99 and 25% in FY98.
Power-One has a strong communications customer base, which includes, in
addition to those mentioned above, companies such as Juniper Networks,

Stephens Inc. 113


Sycamore Networks, Extreme Networks, MCI Worldcom, Motorola, and many
others.

Meeting scheduled demand is now the greatest challenge facing the


Company. We estimate that the market for telecom dc/dc converters was
approximately $1.0 billion in 1999 and will grow to $6.0 billion 2003. The
staggering growth of this market segment should positively impact PWERs two
fastest growing product lines: dc/dc converters and telecom dc power plants.

Since acquiring International Power Devices (IPD) in January 1999, IPDs dc/dc
The Company is in the converter business has grown significantly faster than the market. We believe
process of expanding that this trend will continue over the next three years. In September of last year
capacity and should when we visited PWERs Mexico manufacturing facility where the converters
have 13 SMT lines in
are made, the Company had three surface mount technology (SMT)
place by the end of
FY00
manufacturing lines. Today, PWER has in place, or on order, thirteen SMT lines.
Each line is capable of producing between $40 million and $50 million per year
in revenue.

Demand for the telecom dc power plant product lines that were recently added
with the acquisitions of HC Power and Powec should also grow as a result of the
anticipated dc/dc converter growth. The telecom power plants provide the
regulated 48 volt dc bus that powers the equipment found in telecom central
offices and other telecom installations. This equipment (routers, optical
switches, lasers, etc.) that utilizes distributed power architecture is what is
driving the demand for the dc/dc converters. As the demand for dc/dc converters
grows, so too grows the demand for the telecom dc power plants. Management is
in the process of adding an additional 275,000 square feet in manufacturing space
to accommodate the expected growth.

Stephens Inc. maintains a market in the common stock of Power-One and may act as principal in
these transactions. An officer/director/employee of Stephens Inc. is a director of Power-One.
Affiliates of Stephens Inc. also control a substantial percentage of the outstanding common stock of
Power-One, Inc. Stephens Inc. has managed or co-managed an underwriting for Power-One
within the past three years.

Stephens Inc. 114


P O W E R -O N E , IN C .
H isto ric a l E a rn in g s S u m m a r y & P ro je c tio n s
$ in m illio n s, ex ce p t p er sh a re a m o u n t

1999 2000E 2001E F is c a l Y e a r E n d in g D e c e m b e r


1Q 2Q 3Q 4Q 1Q 2Q 3Q E 4Q E 1Q E 2Q E 3Q E 4Q E 1998 1999 2000E 2001E
S a les $ 3 8 .9 $ 5 1 .7 $ 7 2 .6 $ 7 3 .9 $ 7 7 .0 $ 1 1 3 .8 $ 1 4 5 .0 $ 1 6 0 .0 $ 1 7 0 .5 $ 1 8 2 .0 $ 1 9 3 .0 $ 2 0 4 .5 $ 1 1 9 .5 $ 2 3 7 .2 $ 4 9 5 .9 $ 7 5 0 .0
C o st o f G o o d s S o ld 2 3 .5 3 0 .3 4 4 .9 4 3 .3 4 5 .0 6 6 .9 8 6 .3 9 4 .7 1 0 0 .4 1 0 6 .7 1 1 2 .7 1 1 8 .8 7 2 .9 1 4 2 .1 2 9 2 .9 4 3 8 .6
G ro ss P ro fit 1 5 .4 2 1 .4 2 7 .7 3 0 .6 3 2 .1 4 6 .9 5 8 .7 6 5 .3 7 0 .1 7 5 .3 8 0 .3 8 5 .7 4 6 .5 9 5 .1 2 0 3 .0 3 1 1 .4
S e llin g 5 .3 6 .3 6 .7 6 .8 6 .6 8 .7 1 0 .4 1 1 .2 1 1 .6 1 2 .0 1 2 .5 1 3 .1 1 3 .8 2 5 .0 3 6 .9 4 9 .2
A d m in istra tiv e 3 .0 4 .2 4 .6 6 .4 6 .2 7 .5 9 .7 1 0 .4 1 0 .9 1 1 .5 1 2 .0 1 2 .7 9 .1 1 8 .2 3 3 .8 4 7 .0
E n g in ee rin g 3 .4 4 .0 4 .7 4 .9 4 .7 5 .5 8 .7 9 .6 1 0 .2 1 0 .9 1 1 .6 1 2 .3 8 .1 1 7 .1 2 8 .5 4 5 .0
Q u a lity 0 .8 1 .1 1 .2 1 .2 1 .2 1 .5 2 .0 2 .0 2 .2 2 .4 2 .5 2 .7 2 .0 4 .4 6 .8 9 .8
A m o rtiz atio n 1 .2 1 .3 1 .4 1 .3 1 .3 2 .8 3 .4 3 .4 3 .4 3 .4 3 .4 3 .4 2 .6 5 .2 1 0 .9 1 3 .6
O p e ra tin g In c o m e 1 .7 4 .3 9 .1 1 0 .0 1 2 .0 2 1 .0 2 4 .4 2 8 .7 3 1 .7 3 5 .2 3 8 .3 4 1 .6 1 0 .9 2 5 .2 8 6 .1 1 4 6 .8
O th e r E x p en se s (0 .4 ) 0 .1 0 .2 (0 .2 ) (0 .1 ) 1 .4 - - - - - - 0 .5 (0 .3 ) 1 .3 -
In te re st E x p en se 0 .7 1 .0 1 .1 (0 .4 ) (0 .4 ) 0 .9 1 .1 1 .1 1 .1 1 .2 1 .3 1 .4 (0 .4 ) 2 .4 2 .6 5 .0
P reta x In c o m e 1 .4 3 .3 7 .8 1 0 .6 1 2 .6 1 8 .7 2 3 .3 2 7 .6 3 0 .6 3 4 .0 3 7 .0 4 0 .2 1 0 .8 2 3 .1 8 3 .5 1 4 1 .8
T a x es 0 .5 1 .4 2 .6 2 .6 4 .3 6 .2 8 .5 1 0 .1 1 1 .3 1 2 .6 1 3 .7 1 4 .9 2 .7 7 .2 2 9 .1 5 2 .5
N e t In co m e $ 0 .8 $ 1 .9 $ 5 .2 $ 8 .0 $ 8 .3 $ 1 2 .5 $ 1 4 .8 $ 1 7 .5 $ 1 9 .3 $ 2 1 .4 $ 2 3 .3 $ 2 5 .3 $ 8 .1 $ 1 5 .9 $ 5 4 .4 $ 8 9 .3

A v e ra g e S h ares 5 7 .9 5 8 .2 5 9 .9 7 3 .9 7 2 .3 7 7 .1 7 7 .8 7 8 .4 7 9 .0 7 9 .4 7 9 .8 8 0 .0 5 8 .3 6 2 .5 7 6 .4 7 9 .6

G AAP EPS $ 0 .0 1 $ 0 .0 3 $ 0 .0 9 $ 0 .1 1 $ 0 .1 1 $ 0 .1 6 $ 0 .1 9 $ 0 .2 2 $ 0 .2 4 $ 0 .2 7 $ 0 .2 9 $ 0 .3 2 $ 0 .1 4 $ 0 .2 5 $ 0 .7 1 $ 1 .1 2
C a sh E P S $ 0 .0 3 $ 0 .0 5 $ 0 .1 0 $ 0 .1 2 $ 0 .1 3 $ 0 .1 9 $ 0 .2 3 $ 0 .2 6 $ 0 .2 8 $ 0 .3 0 $ 0 .3 3 $ 0 .3 5 $ 0 .1 8 $ 0 .3 0 $ 0 .8 0 $ 1 .2 6

D e p re cia tio n $ 1 .6 $ 2 .0 $ 2 .1 $ 2 .7 $ 2 .5 $ 2 .9 $ 2 .9 $ 3 .1 $ 3 .2 $ 3 .4 $ 3 .5 $ 3 .7 $ 3 .7 $ 8 .4 $ 1 1 .4 $ 1 3 .8
E B IT D A $ 4 .5 $ 7 .7 $ 1 2 .6 $ 1 4 .1 $ 1 5 .8 $ 2 6 .6 $ 3 0 .7 $ 3 5 .2 $ 3 8 .3 $ 4 2 .0 $ 4 5 .2 $ 4 8 .7 $ 1 7 .3 $ 3 8 .8 $ 1 0 8 .4 $ 1 7 4 .2

M a r g in A n a ly sis
G ro ss P ro fit 3 9 .5 % 4 1 .3 % 3 8 .2 % 4 1 .4 % 4 1 .6 % 4 1 .2 % 4 0 .5 % 4 0 .8 % 4 1 .1 % 4 1 .4 % 4 1 .6 % 4 1 .9 % 3 9 .0 % 4 0 .1 % 4 0 .9 % 4 1 .5 %
S e llin g 1 3 .6 % 1 2 .1 % 9 .2 % 9 .2 % 8 .6 % 7 .6 % 7 .2 % 7 .0 % 6 .8 % 6 .6 % 6 .5 % 6 .4 % 1 1 .5 % 1 0 .5 % 7 .5 % 6 .6 %
A d m in istra tiv e 7 .7 % 8 .2 % 6 .4 % 8 .6 % 8 .0 % 6 .6 % 6 .7 % 6 .5 % 6 .4 % 6 .3 % 6 .2 % 6 .2 % 7 .6 % 7 .7 % 6 .8 % 6 .3 %
E n g in ee rin g 8 .7 % 7 .8 % 6 .5 % 6 .6 % 6 .1 % 4 .8 % 6 .0 % 6 .0 % 6 .0 % 6 .0 % 6 .0 % 6 .0 % 6 .8 % 7 .2 % 5 .7 % 6 .0 %
Q u a lity 2 .1 % 2 .2 % 1 .7 % 1 .7 % 1 .6 % 1 .3 % 1 .4 % 1 .3 % 1 .3 % 1 .3 % 1 .3 % 1 .3 % 1 .7 % 1 .9 % 1 .4 % 1 .3 %
A m o rtiz atio n 3 .1 % 2 .6 % 1 .9 % 1 .8 % 1 .7 % 2 .4 % 2 .3 % 2 .1 % 2 .0 % 1 .9 % 1 .8 % 1 .7 % 2 .2 % 2 .2 % 2 .2 % 1 .8 %
O p e ra tin g In c o m e 4 .4 % 8 .4 % 1 2 .5 % 1 3 .5 % 1 5 .6 % 1 8 .4 % 1 6 .9 % 1 7 .9 % 1 8 .6 % 1 9 .3 % 1 9 .8 % 2 0 .3 % 9 .2 % 1 0 .6 % 1 7 .4 % 1 9 .6 %
T ax R a te 3 9 .3 % 4 3 .3 % 3 3 .4 % 2 4 .5 % 3 4 .0 % 3 3 .3 % 3 6 .5 % 3 6 .5 % 3 7 .0 % 3 7 .0 % 3 7 .0 % 3 7 .0 % 2 5 .0 % 3 1 .1 % 3 4 .8 % 3 7 .0 %
E B IT D A 1 1 .5 % 1 4 .9 % 1 7 .3 % 1 9 .0 % 2 0 .6 % 2 3 .4 % 2 1 .2 % 2 2 .0 % 2 2 .5 % 2 3 .1 % 2 3 .4 % 2 3 .8 % 1 4 .4 % 1 6 .4 % 2 1 .9 % 2 3 .2 %

P er c en t C h a n g e
S a les 26% 91% 160% 128% 98% 120% 100% 116% 121% 60% 33% 28% 30% 99% 109% 51%
G ro ss P ro fit 25% 99% 153% 144% 108% 120% 112% 113% 119% 61% 37% 31% 29% 104% 113% 53%
S e llin g 82% 143% 56% 69% 25% 39% 57% 65% 76% 38% 20% 17% 98% 82% 48% 33%
A d m in istra tiv e 21% 169% 109% 122% 107% 77% 109% 63% 76% 53% 23% 22% 33% 100% 85% 39%
E n g in ee rin g 98% 166% 157% 62% 38% 36% 83% 95% 119% 98% 33% 28% 116% 111% 67% 58%
Q u a lity 59% 95% 119% 257% 51% 32% 63% 63% 79% 58% 24% 33% 4% 120% 53% 44%
A m o rtiz atio n 140% 164% 100% 39% 8% 105% 151% 162% 157% 24% 0% 0% 29% 99% 109% 25%
O p e ra tin g In c o m e -6 0 % 10% 552% 628% 608% 382% 168% 186% 164% 68% 57% 45% -25 % 130% 242% 70%
N e t In co m e -7 4 % -3 9 % 329% 1086% 905% 569% 184% 119% 132% 72% 57% 45% -2 % 96% 242% 64%
GAAP EPS -7 4 % -3 9 % 317% 834% 705% 405% 119% 107% 112% 67% 53% 42% -26 % 83% 180% 58%
C a sh E P S -5 3 % -2 1 % 233% 414% 322% 283% 125% 117% 120% 59% 45% 35% 67% 168% 57%

A ll h isto ric a l re su lts a re fro m o p e ra tio n s a n d e x clu d e n o n -re c u rrin g c h a rg e s a n d g a in s.


S o u rce : C o m p a n y re p o rts a n d S te p h e n s I n c. estim a tes

Stephens Inc. 115


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Stephens Inc. 116


Vicor Corp. (VICR-NASDAQ)

High: 45.75
VICOR CORP
Price (close on 9/15/00): $42.25 VICR 9/15/99 to 9/15/00
Low:
Last:
17.50
42.25
USD
45
52-Week Range: $45.75 - $17.50 40

Market Capitalization: $1.8 billion 35

30

Shares Outstanding: 43.1 million


25

Debt/Capital: 0%
20

3-Year Estimated CAGR: 40%


Thousands
509

Daily Volume (shares): 110,353 254

Price Target (12-month): $52 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Rating: BUY
Chart Courtesy of FactSet Research Systems Inc.

Earning Per Share % P/E Revs. EBITDA Enter./


Year 1Q 2Q 3Q 4Q DecFY Chg. Ratio $ Mil $ Mil Sales
1998A $0.12 $0.10 $0.07 $0.08 $0.37 (39%) 114.2X $164.6 $30.0 10.6X
1999A $0.09 $0.10 $0.13 $0.13 $0.45 22% 93.9X 189.9 39.0 9.2X
2000E $0.16A $0.19A $0.21 $0.24 $0.80 79% 52.8X 259.3 63.9 6.7X
2001E $0.27 $0.30 $0.33 $0.36 $1.26 56% 33.5X 349.9 95.2 5.0X

Company Description

Headquartered in Andover, Massachusetts, Vicor was initially incorporated in


Vicor focuses almost 1981 and began trading as a public company in April 1990. The Company also
exclusively on high- has locations in Sunnyvale, California; Lombard, Illinois; Germany; the UK;
density dc/dc
France; Italy; Hong Kong; and Japan. Vicor focuses almost exclusively on high-
converters
density dc/dc converters. Vicor primarily targets original equipment
manufacturers (OEMs) in the communications, data processing, industrial
control, test equipment, medical, and defense electronics markets.

Investment Highlights and Summary

Vicor invented the high-density dc/dc converters. In 1984, Vicor introduced


the Brick, a high-density dc/dc converter (first-generation product) that
changed the future of power system design. When high-density converters were
introduced to the market, they made a tremendous impact. The technology was
the most revolutionary thing that had ever happened to the industry. Additionally,
Vicors high-density component power offered a rapid, flexible approach to
design that used modular power system building blocks to meet individual user
needs. Today, Vicor is the largest merchant manufacturer of high-density power
components, with an installed base of millions of units. It is well entrenched in
all market segments. We believe that the Companys foresight and top-notch
execution spawned its impressive growth.

Increased production and sales of the Companys second-generation product


Vicors second line should be the catalyst for share price appreciation. Since 1991, Vicor
generation product has had on the drawing board its second-generation product line. The new design
line covers a
is a complete overhaul and redesign of the first-generation product line. The
broader section of
the market
Companys new products are smaller, more efficient, more flexible and cover a
broader section of the market (50 watts to 600 watts) than Vicors mature product

Stephens Inc. 117


line. The control circuitry in the first-generation power module has been
combined into two integrated circuits. The end result is a reduction in parts from
a typical range of 115 to 200 to as few as 33 parts. The Company has stated that
it ultimately plans to make the modules available in an unlimited variety of
standard versions, to the extent that the line between custom and standard
modules will become almost indistinguishable. In the Companys most recent
quarter, the second-generation book-to-bill ratio was 1.4:1, versus the overall
indsutry ratio of 1.09:1.

Product Comparison

1st-Generation 2nd-Generation
Custom-Switching Component Component
Parameters Power Supply Power System Power System

Size 3 Watt/in.3 10 Watt/in.3 20 Watt/in.3

Development 6 months 2 months 0.5 months


time

Cost $0.15 to $1/ watt $0.50 to $2/ watt $0.35 to $2/ watt

Source: Electronic Design, September 2, 1997

We believe that an investment in Vicor is an investment in not only the


Companys technology but also an investment in the Companys vision of
the future of power system design. This vision is somewhat unique in the
industry. We are convinced that if Vicor had introduced its second-generation
There is far more product four years ago, it would enjoy a commanding market leadership position
competition in the today. However, taking as long as it has to get the new products to the
dc/dc converter space marketplace has allowed other competitors to close the technology gap and even
today than there was take the technology in new directions. We continue to maintain that the catalyst
when Vicor invented for share price appreciation at Vicor will be significantly increased production
the product in 1984 and sales of its second-generation line of products.

Over the long term, we believe that the future is bright for Vicor, as well as for
other manufacturers that compete in the dc/dc converter market. The bottom line
is that the potential market is big enough for everybody. There is no doubt that
today the competition is stiffer than it was in 1984 when Vicor introduced its
revolutionary high-density dc/dc converter. However, Vicors second-generation
products still have the potential to make a significant technological leap forward
and reap the financial rewards that its innovations deserve.

Stephens Inc. maintains a market in the common stock of Vicor and may act as principal in these
transactions.

Stephens 118
Vicor Corporation
Historical Earnings Summary & Projections
(In millions, except per share amount)

1999A 2000E 2001E Fiscal Year Ending December


1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE 1QE 2QE 3QE 4QE 1998 1999 2000E 2001E

Sales $ 42.0 $ 44.8 $ 49.4 $ 53.7


31.4 $ 57.8 $ 62.8 $ 66.7 $ 72.0 $ 77.5 $ 83.5 $ 90.5 $ 98.4 $ 164.6 $ 189.9 $ 259.3 $ 349.9
Cost of Goods Sold 23.3 26.0 28.0 31.4 33.0 35.6 37.7 40.5 43.4 46.3 49.8 53.6 90.7 108.7 146.9 193.1
Gross Profit 18.7 18.8 21.4 22.3 24.8 27.2 29.0 31.5 34.1 37.2 40.7 44.8 73.9 81.2 112.4 156.8
SG&A 8.9 8.6 9.1 10.3 10.3 10.6 10.9 11.2 11.6 12.5 13.6 14.7 34.9 36.8 43.0 52.4
R&D 5.2 4.9 4.9 5.0 5.3 5.3 5.5 5.9 6.2 6.7 7.2 7.9 20.7 19.9 22.0 28.0
Operating Income 4.6 5.4 7.4 7.0 9.2 11.2 12.6 14.4 16.3 18.0 19.9 22.2 18.4 24.4 47.4 76.3
Interest and Other, Net (0.7) (0.8) (0.8) (1.2) (1.2) (0.8) (0.8) (0.9) (0.9) (1.0) (1.0) (1.1) (4.9) (3.4) (3.7) (4.0)
Pretax Income 5.4 6.1 8.2 8.2 10.4 12.0 13.4 15.3 17.2 19.0 20.9 23.3 23.3 27.9 51.1 80.3
Taxes 1.7 2.0 2.6 2.5 3.3 3.8 4.3 4.9 5.5 6.1 6.7 7.5 7.5 8.8 16.2 25.7
Net Income $3.7 $4.2 $5.6 $5.7 $7.1 $8.2 $9.1 $10.4 $11.7 $12.9 $14.2 $15.8 $15.8 $19.1 $34.8 $54.6
Average Shares 41.9 42.2 42.4 43.2 43.3 43.1 43.3 43.4 43.4 43.5 43.5 43.6 42.8 42.4 43.3 43.5
EPS - Diluted $ 0.09 $ 0.10 $ 0.13 $ 0.13 $ 0.16 $ 0.19 $ 0.21 $ 0.24 $ 0.27 $ 0.30 $ 0.33 $ 0.36 $ 0.37 $ 0.45 $ 0.80 $ 1.26

Depreciation & Amortization $ 3.2 $ 3.9 $ 3.7 $ 3.8 $ 4.0 $ 4.0 $ 4.2 $ 4.3 $ 4.5 $ 4.7 $ 4.8 $ 4.9 $ 11.6 $ 14.6 $ 16.5 $ 18.9
EBITDA $ 7.8 $ 9.3 $ 11.1 $ 10.8 $ 13.2 $ 15.2 $ 16.8 $ 18.7 $ 20.8 $ 22.7 $ 24.7 $ 27.1 $ 30.0 $ 39.0 $ 63.9 $ 95.2

Margin Analysis
Gross Profit 44.5% 42.0% 43.3% 41.5% 42.9% 43.3% 43.5% 43.7% 44.0% 44.5% 45.0% 45.5% 44.9% 42.8% 43.4% 44.8%
SG&A 21.2% 19.1% 18.3% 19.2% 17.8% 16.9% 16.3% 15.6% 15.0% 15.0% 15.0% 14.9% 21.2% 19.4% 16.6% 15.0%
R&D 12.3% 10.9% 10.0% 9.3% 9.1% 8.5% 8.2% 8.2% 8.0% 8.0% 8.0% 8.0% 12.5% 10.5% 8.5% 8.0%
Operating Income 11.1% 12.0% 15.0% 13.1% 16.0% 17.8% 18.9% 20.0% 21.0% 21.5% 22.0% 22.6% 11.2% 12.9% 18.3% 21.8%
Pretax Income 12.8% 13.7% 16.6% 15.2% 18.0% 19.1% 20.1% 21.2% 22.2% 22.7% 23.1% 23.7% 14.1% 14.7% 19.7% 23.0%
Net Income 8.7% 9.3% 11.3% 10.6% 12.3% 13.1% 13.7% 14.4% 15.1% 15.4% 15.7% 16.1% 9.6% 10.1% 13.4% 15.6%
Tax Rate 32.0% 32.0% 32.0% 30.3% 31.5% 31.5% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 31.5% 31.8% 32.0%

Percent Change
Sales -2.8% 7.4% 25.6% 33.0% 37.7% 40.1% 35.2% 34.0% 34.1% 33.0% 35.6% 36.7% 1.5% 15.3% 36.6% 34.9%
Cost of Goods Sold 3.7% 13.7% 26.8% 35.0% 41.9% 37.0% 34.7% 29.0% 31.4% 30.1% 32.0% 32.3% 15.9% 19.9% 35.1% 31.5%
Gross Profit -9.9% -0.2% 24.0% 30.3% 32.5% 44.4% 35.9% 40.9% 37.7% 36.8% 40.3% 42.3% -12.0% 9.8% 38.5% 39.4%
SG&A 6.9% -0.3% -0.1% 15.0% 15.6% 24.0% 20.4% 8.4% 13.2% 18.1% 24.5% 31.3% 15.2% 5.4% 16.7% 22.0%
R&D -6.6% -6.0% 0.7% -1.6% 2.3% 9.8% 11.5% 18.6% 17.6% 24.9% 31.6% 33.4% 16.5% -3.5% 10.5% 27.1%
Operating Income -32.8% 5.7% 125.5% 127.0% 98.4% 108.3% 71.1% 104.8% 76.5% 60.3% 57.6% 54.6% -48.9% 33.0% 94.1% 61.0%
Pretax Income -35.3% -4.2% 88.1% 93.6% 92.7% 95.6% 64.4% 86.8% 65.4% 58.0% 55.6% 52.6% -43.1% 19.7% 83.3% 57.3%
Taxes -40.7% -12.4% 100.8% 148.2% 89.6% 92.5% 64.3% 97.4% 68.0% 60.6% 55.6% 52.6% -49.8% 17.8% 84.9% 58.4%
Net Income -32.3% 0.3% 82.7% 76.8% 94.2% 97.1% 64.4% 82.2% 64.1% 56.9% 55.6% 52.6% -39.2% 20.5% 82.6% 56.8%
EPS -29.5% 2.4% 82.6% 72.3% 87.8% 92.7% 60.8% 81.3% 63.9% 55.5% 54.9% 51.9% -38.5% 21.6% 78.8% 56.0%

Source: Company reports and Stephens Inc. estimates .

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Stephens Inc. 120


Appendix A

POWER ELECTRONICS VALUATION ANALYSIS Ann. FactSet Last Twelve Last Twelve
9/15/00 Shares Market Total Debt/ Calendar EPS 99-01 P/E Multiple Ent. Value/ Months Months
Ticker Price Out Cap. L-T Debt Capital 1999A 2000E 2001E CAGR 2000 2001 LTM EBITDA ROE ROA

Advanced Power Tech. (BUY) APTI $34.81 7.9 $275.0 $0.0 0.0% $0.16 $0.46 $0.70 109.2% 75.7 x 49.7 x NA NM NM
Analog Devices ADI 92.06 353.8 32,571.7 0.0 0.0% 0.73 1.78 2.52 85.8% 51.7 x 36.5 x 20.9 x 25.3% 18.0%
Artesyn Technologies* (BUY) ATSN 37.50 37.3 1,398.8 69.6 25.7% 1.16 1.36 1.75 22.8% 27.6 x 21.4 x 9.1 x 23.3% 12.3%
Burr Brown BBRC 89.67 56.0 5,021.6 251.5 42.7% 0.78 1.59 2.16 66.4% 56.4 x 41.5 x 22.7 x 20.8% 13.1%
C&D Technologies (BUY) CHP 52.50 26.0 1,365.0 84.6 34.1% 1.18 1.95 2.32 40.2% 26.9 x 22.6 x 7.9 x 25.7% 12.1%
Cree Inc. (BUY) CREE 115.94 37.6 4,359.3 0.0 0.0% 0.56 1.20 1.59 68.5% 96.6 x 72.9 x 78.3 x 10.1% 16.8%
Elantec Semiconductor Inc. ELNT 77.13 24.0 1,851.0 0.0 0.0% 0.33 0.95 1.33 100.8% 81.2 x 58.0 x 15.3 x 39.0% 24.6%
Exar Corp. EXAR 103.31 21.3 2,200.6 0.0 0.0% 0.39 1.16 1.55 99.4% 89.1 x 66.7 x 4.8 x 6.3% 6.0%
Fairchild Semiconductors FCS 33.44 102.0 3,410.6 720.2 63.5% 0.97 2.70 3.02 76.4% 12.4 x 11.1 x NA 30.0% 9.2%
General Semiconductors SEM 14.13 37.8 533.9 252.5 64.6% 0.66 1.14 1.41 46.2% 12.4 x 10.0 x 9.5 x 26.4% 6.3%
International Rectifier (BUY) IRF 59.50 61.4 3,653.3 4.6 0.7% 0.43 2.12 2.98 163.3% 28.1 x 20.0 x 11.5 x 11.0% 7.9%
Intersil Corp. ISIL 48.00 75.0 3,600.0 116.2 25.5% NA 0.64 1.00 NA 75.0 x 48.0 x 36.7 x NA NA
Linear Technology LLTC 63.94 311.1 19,891.0 NA NA 0.71 1.08 1.37 38.9% 59.2 x 46.7 x 31.0 x NA NA
Magnetek MAG 11.25 23.2 261.0 64.0 24.8% 0.15 0.44 NA NA 25.6 x NA 17.3 x 0.7% 0.3%
Maxim Integrated Products MXIM 76.31 282.7 21,573.5 0.0 0.0% 0.72 1.09 1.45 41.9% 70.0 x 52.6 x 27.5 x 28.1% 23.7%
Micrel Inc. MCRL 65.56 83.9 5,500.7 7.9 4.8% 0.42 0.78 1.07 59.6% 84.1 x 61.3 x 30.4 x 34.0% 25.7%
Microlinear Corp. MLIN 4.75 11.5 54.6 2.7 4.7% (0.04) 0.24 0.48 NA 19.8 x 9.9 x 12.2 x -8.6% -7.2%
Microsemi Corp. MSCC 38.75 13.1 507.6 9.9 8.0% 0.47 0.85 1.18 58.4% 45.6 x 32.8 x 6.2 x 3.7% 2.2%
National Semiconductor Corp. NSM 42.75 176.5 7,545.4 48.6 3.7% NA 2.54 3.12 NA 16.8 x 13.7 x 14.7 x 48.8% 28.0%
ON Semiconductor ONNN 14.88 165.9 2,467.8 1,228.8 89.6% NA 0.69 1.19 NA 21.6 x 12.5 x NA NA NA
Pericom Semiconductor PSEM 32.75 13.6 445.4 0.0 0.0% 0.79 1.48 1.99 58.7% 22.1 x 16.5 x 6.9 x 12.5% 11.2%
Power Integrations (BUY) POWI 14.31 27.2 389.3 0.0 0.0% 0.67 0.82 1.08 27.0% 17.5 x 13.3 x 37.4 x 30.9% 25.4%
Power-One* (BUY) PWER 84.63 38.5 3,258.1 11.0 5.5% 0.30 0.80 1.26 104.9% 105.8 x 67.2 x 24.9 x 17.9% 10.4%
Semtech Corp. (BUY) SMTC 100.63 32.6 3,280.4 400.0 74.3% 0.85 1.55 2.26 63.1% 64.9 x 44.5 x 38.1 x 32.0% 12.2%
Siliconix SILI 50.25 29.9 1,502.5 1.9 0.8% 2.21 NA NA NA NA NA 10.4 x 43.5% 24.1%
Sipex Corp. SIPX 49.67 23.3 1,157.4 0.0 0.0% 0.42 0.60 1.08 60.4% 82.8 x 46.0 x 61.4 x 5.8% 5.2%
ST Microelectronics STM 54.63 934.5 51,047.1 1,051.6 28.4% 0.62 1.46 2.12 84.9% 37.4 x 25.8 x 26.8 x NA NA
TelCom Semiconductor (BUY) TLCM 14.63 20.4 298.4 0.0 0.0% 0.45 0.83 1.08 54.9% 17.6 x 13.5 x 23.0 x 19.4% 16.6%
Vicor Corp. (BUY) VICR 42.25 42.4 1,791.4 0.0 0.0% 0.45 0.81 1.26 67.3% 52.2 x 33.5 x 37.2 x 11.4% 10.2%

AVERAGE 69.5% 48.8 x 31.1 x 22.8 x 19.5% 12.3%

* EPS estimates are cash EPS (excludes goodwill)


January year-end (CHP, SMTC); March year-end (EXAR); May year-end (NSM); June year-end (CREE, IRF, LLTC, MAG, MXIM, PSEM); September year-end (ELNT, MSCC); October year-end (ADI)

Source: FactSet Research Systems, Stephens Inc. for those companies with BUY ratings, and First Call for all others

Stephens Inc. 121


Appendix B

POWER SEMICONDUCTORS - COMPARATIVE ANALYSIS


Advanced Power International Power TelCom Cree Semtech
Technology Rectifier Integrations Semiconductor Research Corporation
($ in millions except per share) (APTI) (IRF)* (POWI) (TLCM) (CREE)* (SMTC)*

Price (9/15/00) $34.81 $59.50 $14.31 $14.63 $115.94 $100.63


Market Capitalization $285.5 $3,653.3 $389.3 $298.4 $4,359.3 $3,280.4

P/E - 2000E EPS 75.7 x 28.1 x 17.5 x 17.6 x 96.6 x 64.9


P/E - 2001E EPS 49.7 x 20.0 x 13.3 x 13.5 x 72.9 x 44.5

Enterprise Value/2000E Sales 5.9 x 3.6 x 2.7 x 2.5 x 29.1 x 12.4


Enterprise Value/2001E Sales 4.4 x 2.8 x 2.1 x 1.9 x 19.2 x 9.0

Enterprise Value/2000E EBITDA 36.7 x 14.3 x 9.8 x 10.0 x 66.7 x 40.3


Enterprise Value/2001E EBITDA 23.1 x 10.3 x 7.3 x 7.5 x 43.4 x 26.2

2000E
Gross Margin 37.4% 38.7% 52.0% 50.9% 54.1% 55.8%
EBITDA Margin 15.9% 25.4% 27.9% 24.5% 43.3% 30.1%
Operating Margin 13.1% 18.9% 24.2% 20.6% 36.8% 29.0%
Net Margin 8.1% 14.8% 18.7% 21.3% 31.6% 22.6%

Balance LTM
Cash $36.0 $254.3 $43.1 $111.2 $262.1 $423.0
Debt $0.0 $4.6 $0.0 $0.0 $0.0 $400.0
Equity $41.0 $843.1 $96.0 $128.1 $463.1 $186.0
Total Assets $50.0 $1,026.0 $113.0 $143.2 $486.2 $616.1
Goodwill $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Debt/Capital 0.0% 0.5% 0.0% 0.0% 0.0% 68.3%

2000E Sales $42.5 $935.8 $127.0 $76.2 $140.9 $262.7


2001E Sales $57.0 $1,197.8 $163.8 $97.7 $213.1 $360.9
% chg 34.1% 28.0% 29.0% 28.2% 51.2% 37.4%

2000E EBITDA $6.8 $237.9 $35.4 $18.7 $61.4 $80.8


2001E EBITDA $10.8 $332.0 $47.6 $25.1 $94.5 $124.2
% chg 58.8% 39.6% 34.5% 34.2% 53.9% 53.7%

2000E EPS $0.46 $2.12 $0.82 $0.83 $1.20 $1.55


2001E EPS $0.70 $2.98 $1.08 $1.08 $1.59 $2.26
% chg 52.2% 40.6% 31.7% 30.1% 32.5% 45.8%

2000E Free Cash ($0.9) $287.4 $23.2 $13.8 $17.9 $48.9


2001E Free Cash $3.1 $389.4 $32.6 $20.7 $38.2 $75.8
% chg 432.3% 35.5% 40.5% 50.0% 113.4% 55.0%

Stephens' Rating BUY BUY BUY BUY BUY BUY

* Sales, EBITDA, EPS and multiples represent calendar year totals; June year-end for IRF and CREE, January year-end for SMTC

Source: Company reports and Stephens Inc. estimates

Stephens Inc. 122


Appendix C
POWER SUPPLY MANUFACTURERS - COMPARATIVE ANALYSIS
Artesyn C&D
Technologies Technology* Power-One Vicor
(ATSN) (CHP) (PWER) (VICR)

Price (9/15/00) $37.50 $52.50 $84.63 $42.25


Market Capitalization $1,398.8 $1,365.0 $6,524.6 $1,791.4

P/E - 2000E EPS 31.5 x 26.9 x 119.2 x 52.2 x


P/E - 2001E EPS 24.0 x 22.6 x 75.6 x 33.5 x

Cash P/E - 2000E EPS** 27.6 x 26.9 x 105.8 x 52.2 x


Cash P/E - 2001E EPS** 21.4 x 22.6 x 67.2 x 33.5 x

Enterprise Value/2000E Sales 2.1 x 2.5 x 13.2 x 6.6 x


Enterprise Value/2001E Sales 1.7 x 2.1 x 8.7 x 4.9 x

Enterprise Value/2000E EBITDA 15.1 x 12.2 x 60.2 x 26.8 x


Enterprise Value/2001E EBITDA 11.7 x 10.5 x 37.4 x 18.1 x

2000E
Gross Margin 26.8% 29.4% 40.9% 43.3%
EBITDA Margin 13.6% 20.3% 21.9% 24.8%
Operating Margin 10.3% 16.0% 17.4% 18.4%
Net Margin 6.6% 9.1% 11.0% 13.5%

Balance LTM
Cash $36.6 $5.9 $12.8 $71.3
Debt $69.6 $84.6 $11.0 $0.0
Equity $222.3 $186.6 $277.3 $253.3
Total Assets $425.7 $370.0 $457.9 $282.4
Goodwill $61.5 $72.2 $158.8 $0.0
Debt/Capital 23.8% 31.2% 3.8% 0.0%
Book Value $5.96 $7.18 $3.60 $5.97
Tangible Book Value $4.31 $4.40 $1.54 $5.97

2000E Sales $695.9 $586.0 $495.9 $259.7


2001E Sales $829.9 $676.0 $750.0 $350.1
% chg 19% 15% 51% 35%

2000E EBITDA $94.9 $118.8 $108.4 $64.3


2001E EBITDA $122.6 $138.0 $174.2 $95.2
% chg 29% 16% 61% 48%

2000E EPS $1.19 $1.95 $0.71 $0.81


2001E EPS $1.56 $2.32 $1.12 $1.26
% chg 31% 19% 58% 56%

Stephens' Rating BUY BUY BUY BUY

* C&D Technology's fiscal year end is in January.


** Cash P/E is calculated using net earnings excluding the impact of goodwill.
Source: Company reports and Stephens Inc. estimates

Stephens Inc. 123


Appendix D
GLOSSARY

Alternating Current (AC) - A periodic electrical current the average value of which over a period is zero.
Unless specified otherwise, the term refers to a current that reverses at regularly recurring intervals of time and
has alternately positive and negative values.

Amps - Short for amperes. The electron or current flow representing the flow of one coulomb per second past a
given point in a circuit.

Anode - The electron-collecting electrode of an electron tube.

Bus - The common primary conductor of power from a power source to two or more separate circuits.

Captive Manufacturer - Manufacturers that make products for their own use and do not market them for outside
sale.

Cathode - The electrode in an electrochemical cell where reduction takes place. During discharge, the positive
electrode of the cell is the cathode. During charge, the situation reverses, and the negative electrode of the cell is
the cathode.

Conductor - A medium that carries a flow of electric current.

Coulomb - The meter-kilogram-second unit of electric charge equal to the quantity of electricity transferred by a
current of one ampere in one second

Current - The rate of transfer of electrical energy measured in amps.

Custom Products - Products made according to the specifications on the customers orders.

Diode - A two-element device containing a cathode and an anode that permits flow in one direction and blocks
flow from the other direction.

Direct Current (DC) - The type of electrical power produced by batteries and power supplies. Electrons flow in
one direction.

Efficiency - The ratio of total output power to total input power, expressed as a percentage, under specified
conditions.

Electromagnetic Interference (EMI) - Any magnetism produced by an electric charge in motion that interrupts,
obstructs, or otherwise impairs the performance of electronic equipment.

Frequency - Number of cycles per second measured in Hertz. The U.S. standard is 60 Hz per second.

Induction The process by which an electromotive force is produced in a circuit by varying the magnetic field
linked with the circuit.

Input Voltage Range - The specified range input voltage within which a power supply or device operates.

Joule - Unit of work or energy in the International System (SI) of Units; it is equal to the work done by a force of
one newton acting through one meter.

Stephens Inc. 124


Line Regulation - The percentage change in electrical output due to the input voltage varying over its specified
limits, at specified load values, with all other factors constant.

Load Regulation - 1) Static: The change in output voltage as the load is changed from the specified minimum to
maximum and maximum to minimum, with all other factors held constant. 2) Dynamic: The change in output
voltage expressed as a percent for a given step change in load current.

Merchant Manufacturer - An independent manufacturer that sells its products to various vendors, including
small custom contractors.

Modified-Standard Products - A standard product modified to make it suitable for certain applications.

Newton - The unit of force in the meter-kilogram-second system equal to the force required to impart an
acceleration of one meter per second per second to a mass of one kilogram.

Noise - The random component on the power source output, which is unrelated to source and switching
frequency. Noise is typically expressed in peak-to-peak units over a specified bandwidth.

Power Supply A circuit designed to furnish operating voltages and currents for electronic devices.

Radio Frequency Interference (RFI) - An undesired radiated or conducted signal in the radio frequency
spectrum.

Rectifier - A component that passes current in one direction, e.g., a diode.

Standard Products - Products that are made before receiving any orders. Standard does not imply an industry
standard, as one does not exist.

Switching Power Supplies - Include both AC/DC switchers and DC/DC converters.

Transformer - A device that transfers energy from one circuit to another by electromagnetic induction.

Uninterruptible Power Supply (UPS) - A circuit that inhibits the power supply when output voltage falls below
a specified minimum.

Value-Added-Resellers (VARs) - Companies that buy products from manufacturers and then add value to those
products before reselling them to end-users.

Volt - A unit of measurement of electromotive force or potential difference.

Voltage - A derivative electrical quantity, measured in the unit volts and defined in terms of the independently
obtained amp, and unit of resistance.

Watt - A unit of measurement of power equal to 1 joule/sec. Watts equal volts times amps.

Source: Stephens Inc.

Stephens 125
Appendix E
North American Power Semiconductor Manufacturers
Company Web site Transistor Rectifier Thyristors ICs
ABB Semiconductors www.abbsem.com * * *
Acumentrics Corp www.acumentrics.com *
Acutech, Inc. NA *
Advanced Actuators NA *
Advanced Power Technology www.advancedpower.com *
Allegro Microsystems www.allegromicro.com * * * *
AMC Technologies www.amc.com *
Analog Devices www.analog.com *
Apex Microtechnology www.apexmicrotech.com *
API Electronics www.api-electronics.com/cont.htm * * *
BEI Sensors and Systems www.beisensors.com *
Caleb Systems www.caleb-corp.com * * *
Cherry Semiconductor NA *
Cougar Electronics www.cougarelectronics.com *
Composite Modules www.cmodules.com * *
Consolidated Electronics www.con-elec.com * *
Crydom www.crydom.com * * *
Data Device Corp. www.ddc-web.com *
Diodes www.diodes.com * *
Directed Energy www.directedenergy.com *
Dynex Semiconductor www.dynexsemi.com * * * *
Eupec, Inc. www.eupec.de * * *
Fairchild Semiconductors www.fairchildsemi.com * * *
Fujitsu Microelectronics www.fcsi.fujitsu.com *
Galil Motion Control www.galilmc.com *
General Semiconductor www.gensemi.com * *
HDL Research Lab NA *
Hitachi America www.hitachi.com/semiconductor * * *
IMP www.impweb.com *
Infineon Technologies www.infineon.com * * *
Intelligent Motion Systems www.imshome.com *
International Rectifier www.irf.com * * * *
Intersil www.intersil.com * * *
Linear Technology www.linear-tech.com *
LSI Computer Systems www.lsicsi.com *
Maxim Integrated Products www.maxim-ic.com *
Methode Electronics www.methode.com *
Microsemi www.microsemi.com * * * *
Minarik Automation and Contro www.minarikcorp.com *
Motorola www.mot.com *
National Hybrid www.nationalhybrid.com *
National Semiconductor www.national.com *
NEC Electronics www.necel.com *

Stephens Inc. 126


Company Web site Transistor Rectifier Thyristors ICs
Omnirel www.omnirel.com * * * *
ON Semiconductor www.onsemiconductor.com * * * *
Performance Motion Devices www.pmdcorp.com *
Philips Semiconductors www.us.semiconductors.philips.com/ * * * *
Power Integrations www.powerint.com *
Powerex www.powerex.com * * *
Rabun Labs www.rabunlabs.com * * * *
Rohm Electronics www.rohm.co.jp/overview/america.html * *
SanRex www.sanrex.com * * *
Sanyo Energy www.sanyobatteries.net *
Semikron International www.semikron.de/semineu/index.html * *
Sensitron Semiconductor www.sensitron.com * * * *
Shindengen America www.shindengen.com * * *
Siemens Components www.siemens.de *
Silicon Power www.siliconpower.com * * *
Sipex www.sipex.com *
Solid State Devices NA * * *
Solitron Devices www.solitrondevices.com * * *
ST Microelectronics www.st.com * * * *
Stormin Protection Products www.maxpages.com/stormin/home *
Teccor Electronics www.teccor.com * *
TelCom Semiconductor www.telcom-semi.com *
Texas Instruments www.ti.com * *
Toko America www.ictoko.com *
Toshiba Semiconductors www.toshiba.com/taex * * * *
Trace Technologies www.tracetek.com *
Tri Source www.trisourceinc.com *
TSC America www.tscus.com *
Vishay Intertechnology www.vishay.com * * *
Westcode Semiconductors www.westcode.com * * *
ZAE Research NA *
Zetex www.zetex.com * * *

Source: Frost & Sullivan

Links to Company web sites are provided for convenience only. Stephens Inc. is not responsible for any information of such web sites.
Please view Stephens Inc. web site Important Legal Information.

Stephens 127
Appendix F
North American Power Supply Manufacturers

Company Name Web site


Abbott Technologies www.abbott-tech.com
Absopulse Electronics www.absopulse.com
AcBel Polytech www.apitech.com.tw
Acme Electric Corp. www.acme-electric.com
Acon, Inc. www.acondec-dc.com
Acopian Corp. www.acopian.com
Advance Power (American Power Conversion) www.advancepower.com
Advance Power Solutions www.advpower.com
Aerospace Avionics www.aerospace-avionics.com
Arnold Magnetics www.amcpower.com
Artesyn Technologies www.artesyn.com
Ascom Energy Systems www.ascom.com
Astec (Emerson Electronics) www.astec.com
Astrodyne Corp. www.astrodyne.com
AULT, Inc. www.aultinc.com
Autec Power Systems www.autec.com
Autronics Corp. www.autronics.com
Avansys Corp. (Huawei Technologies) www.avansys.com
Broadband TelCom Power www.btcpower.com
C&D Technologies www.cdtechno.com
Calex www.calex.com
Celestica Power Systems www.celestica.com
Cherokee International www.cherokeellc.com
Condor (SL Industries) www.condorpower.com
Converter Concepts Inc. www.converterconcepts.com
Cosel, USA www.coselusa.com
Datel www.datel.com
Dee Van Enterprises www.dveusa.com
Delta Electronics www.deltaca.com
Deltron www.deltroninc.com
Digital Power Corp. www.digipwr.com
Eldec Power Systems (Power-One) www.eldec.com
Elpac Power Systems www.elpac.com
EOS Corp. (Charterhouse) www.eoscorp.com
Ericsson Microelectronics (Emerson Electric) www.emersonelectric.com
FDK America www.fdkco.jp.com
Fortron/Source www.fsusa.com
FRIWO EMC Inc. www.friwo.com
Galaxy Power www.galaxypwr.com
HC Power Systems (Power-One) www.hcpower.com
International Power Devices (Power-One) www.ipdconverters.com

Stephens Inc. 128


Interpoint (Crane Co.) www.interpoint-power.com
Intronics www.intronicspower.com
Jasper Electronics www.jasperelectronics.com
Kepco www.kepcopower.com
Lambda Advanced Analog (Smiths Industries) www.lambdaaa.com
Lambda Electronics, Inc. (Invensys) www.lambdapower.com
Lambda EMI (Siebe Controls) www.emipower.com
Lambda Novatronics (Smiths Industries) www.lambdanovatronics.com
Lite-On www.lite-on.com
MagneTek www.magnetek.com
Marconi Communications www.marconi.com
Martek Power www.martekpower.com
Martek Power Abbott www.abbottelectronics.com
Martek Power Boston www.cdipower.com
Martek Power Switch www.powerswitch.com
Martek Power Torrance www.moddev.vom
Melcher Inc. (Power-One) www.melcher-power.com
Modular Devices, Inc www.moddev.com
OECO LLC NA
Onan Power Electronics www.onancorp.com
Perkin Elmer Optoelectronics www.perkinelmer.com/
Phihong USA www.phihongusa.com
Pico Electronics www.picoelectronics.com
Pioneer Magnetics www.pioneermag.com
Potant www.potant.com
Power General www.nidec.com
Power-One www.power-one.com
Power Ten (J.F. Lehman/Elgar Corp.) www.powerten.com
Powercube Corp. (Natel Engineering) www.powercube.com
Rantec Corp. www.rantec.com
Reliability, Inc. www.relinc.com
Resonant Power Technology www.respwrtech.com
RO Associates www.roassoc.com
SAE Power, Inc. www.saepower.com
Shindengen America www.shindengen.com
Sola/Hevi-Duty www.sola-hevi-duty.com
STC Keltec www.sigtech.com
Switching Power www.switchpwr.com
Switching Systems International www.ssi4power.com
SynQor www.synqor.com
Taiyo-Yuden www.t-yuden.com
Tamura Corp. of America www.tamuracorp.com
Tectrol www.tectrol.com
Texas Instruments www.powertrends.com
Transistor Devices Inc. www.tdipower.com
Tri Mag NA
Unipower www.unipower-corp.com
VARO LLC www.varo.com
Vicor Westcor Corp. www.vicr.com
Wall Industries www.wallind.com

Source: Micro-Tech Consultants

Links to Company web sites are provided for convenience only. Stephens Inc. is not responsible for any information of such web sites.
Please view Stephens Inc. web site Important Legal Information.

Stephens Inc. 129


Public Companies mentioned in this report:

9/15/00
Company Ticker Stock Price
ABB Semiconductors ABLZF $117.50
Acme Electric Corp. ACEE $8.50
Advance Power (division of American Power Conv.) APCC $21.69
Advanced Micro Devices AMD $27.75
Advanced Power Technology (BUY) APTI $34.81
ALCATEL ALA $77.13
Alleghany Teledyne ALT $2.94
AMC Technologies APMC $12.38
Analog Devices ADI $92.06
Artesyn Technologies (BUY) ATSN $37.50
Astec (Emerson Electronics) EMR $65.00
AULT, Inc. AULT $8.63
BEI Sensors and Systems BEIQ $42.25
Bell Laboratories (division of Lucent Technologies) LU $37.69
Boeing Co. BA $56.88
Burr Brown (purchased by Texas Instruments) BBRC $89.67
C&D Technologies (BUY) CHP $52.50
Celestica Power Systems CLS $77.56
Cherry Semiconductor ONNN $14.88
Cisco Systems CSCO $62.75
Condor (division of SL Industries) SL $12.00
Cree Inc. (BUY) CREE $115.94
Delta Electronics DLEGF $7.63
Deltron Electronics DETNF $2.30
Digital Power Corp. DPW $7.63
Diodes Inc. DIOD $16.63
Elantec Semiconductor ELNT $77.13
Eldec Power Systems (division of Power-One) PWER $84.63
Emerson Electric EMR $65.00
Ericcson LM Telephone ERICY $18.00
Ericsson Microelectronics (Emerson Electronics) EMR $65.00
Eupec, Inc. (division of Infineon Technologies) IFX $51.56
Exar Corp. EXAR $103.31
Exteme Networks EXTR $90.00
Fairchild Semiconductors FCS $33.44
General Semiconductor SEM $14.13
HC Power Systems (division of Power-One) PWER $84.63
Hewlett-Packard HWP $103.00
Hitachi America HIT $120.25
IMP Inc. IMPX $1.88
Infineon Technologies IFX $51.56
Intel Corp. INTC $57.52
International Power Devices (division of Power-One) PWER $84.63
International Rectifier (BUY) IRF $59.50
Interpoint (division of Crane Co.) CR $21.31
Intersil Corp. ISIL $48.00
Invensys Plc/Lambda IVNSY $4.25
Juniper Networks JNPR $201.69
Linear Technology LLTC $62.94
Lite-On (division of Arrow Electronics) ARW $35.00
Lucent Technologies LU $37.69
MagneTek MAG $11.25
Matsushita Electric MC $252.50
Maxim Integrated Products MXIM $76.31
MCI Worldcom WCOM $29.44
Melcher Inc. (division of Power-One) PWER $84.63
Methode Electronics METHA $52.63
Micrel Inc. (BUY) MCRL $65.56
Microlinear Corp. MLIN $4.75
Microsemi Corp. MSCC $38.75

Stephens Inc. 130


9/15/00
Company Ticker Stock Price
Mitsubishi Electric Corp. MIELY $87.00
Motorola Inc. MOT $35.00
National Semiconductor NSM $42.75
NEC Electronics NIPNY $131.50
Nokia Corp. NOK $43.75
Nortel Networks NT $72.69
Omnirel (division of International Rectifier) IRF $59.50
ON Semiconductor ONNN $14.88
Onan Power Electronics (division of Cummins Engine) CUM $33.25
Pericom Semiconductor PSEM $32.75
Perkin Elmer Optoelectronics PKI $94.25
Philips Semiconductors PHG $46.00
Power Integrations (BUY) POWI $14.31
Power-One Inc. (BUY) PWER $84.63
Rantec Corp. (division of Esco Technologies) ESE $18.31
Reliability, Inc. REAL $3.25
Rohm Electronics (division of the Rohm Co.) ROHCF $277.00
Sanyo Energy (division of Sanyo Electric) SANYY $43.50
Semtech Corp. (BUY) SMTC $100.63
SGS-Thompson SGTMF $62.00
Siemens Components SMAWY $153.00
Siliconix SILI $50.25
SIPEX Corp. SIPX $49.67
ST Microelectronics STM $54.63
STC Keltec STCO $16.13
Sycamore Networks SCMR $105.50
Tamura Corp. of America (division of Tamura Corp.) TMURF $4.25
Teccor Electronics (division of Invensys Plc) IVNSY $4.25
TelCom Semiconductor (BUY) TLCM $14.63
Teradyne Inc. TER $51.88
Texas Instruments TXN $59.00
Toko America (division of the Toko Co.) TKCOF $3.25
Toshiba Semiconductors TOSBF $9.25
Vicor Corp. (BUY) VICR $42.25
Vishay Intertechnology VSH $35.50
Wall Industries (division of Continental Resources) CTTI $7.75

Stephens Inc. 131


Private companies mentioned in this report:

Acon, Inc.
Acopian Corp.
Acumentrics Corp
Acutech, Inc.
Advance Power Solutions
Advanced Actuators
Aerospace Avionics
Apex Microtechnology
API Electronics
Arnold Magnetics
Astrodyne Corp.
Autec Power Systems
Autronics Corp.
Broadband TelCom Power
Caleb Systems
Calex
Cherokee International
Composite Modules
Consolidated Electronics
Converter Concepts Inc.
Cougar Electronics
Crydom
Data Device Corp.
Di/Dt
East Penn Manufacturing
Elpac Power Systems
EOS Corp. (Charterhouse)
Fortron/Source
Frost & Sullivan
Galaxy Power
Galil Motion Control
HDL Research Lab
Intelligent Motion Systems
Intronics
Jasper Electronics
Kepco
LSI Computer Systems
Minarik Automation and Control
National Hybrid
OECO LLC
PEMA
Performance Motion Devices
Pico Electronics
Pioneer Magnetics
Power Ten
R.O Associates
Rabun Labs
Resonant Power Technology
RO Associates
SAE Power, Inc.
Sensitron Semiconductor
Silicon Power
Sola/Hevi-Duty
Solid State Devices
SPCO
Stormin Protection Products
Switching Power
SynQor
Trace Technologies
Transistor Devices Inc.
Tri Mag
Tri Source
Unipower
VARO LLC
Westcode Semiconductors
Xantrex
ZAE Research

Stephens Inc. 132