Greater Focus on Telecommunications Pays Off for Power-One

Two years ago, managers at Camarillo-based Power-One looked at the telecommunications industry and saw their chance to accelerate their company’s growth. At the time, 20% of their revenues came from that industry; their stock sold for $5 a share.

Now, 71% of Power-One’s revenues come from telecommunications, and the stock sells for $38.75 a share. No one, particularly Chief Executive Steven Goldman, considers that a coincidence.

“We saw from a demand side that the growth rate of communications would be faster than any other market in the world,” said Goldman, 43. “We felt that by focusing all of our internal R&D; in these areas and [on making] key acquisitions of companies focused on communication, it could propel our growth rate. We were very fortunate that we got just a little ahead of that shift from the technological standpoint.”

Revenue for the company, which has more than 7,000 employees around the world, went from $120 million in 1998 to a Wall Street estimate of $500 million by the end of 2000.

So far in 2000, Power-One stock has split twice, and its price-earnings ratio is rattling around at a high 77.5. The company has a market capitalization of $3 billion.

That’s not bad for a company that didn’t go public until 1997. The core of its success lies in Power-One’s ability to beat the competition to the huge wave that is the build-out of the Internet and the telecommunications industry.

Every piece of electronic equipment, from a clock radio to Internet servers, uses direct current, but electric utility companies deliver alternating current. So these devices need a component, called a power supply, to turn alternating current into direct current.

As a power supply manufacturer, Power-One makes products that take raw alternating current--or AC--out of wall outlets and converts it to high-quality, 48-volt direct current. Then DC/DC products are used to reconvert the power and supply low voltage to sensitive microprocessors and state-of-the-art communications chips.

“Our focus is strictly telecom infrastructure, not consumer products,” said Goldman, whose largest customer is networking company Cisco Systems.

High-quality power is critical for communications, more so than for any other industry, Goldman said. If power stops for even a nanosecond, a telecom or datacom network can crash.

“[Power-One is] one of the leaders, if not the leader, in the entire industry,” said Todd Cooper, vice president and power electronics analyst at Stephens Inc. The DC/DC converter is one of the fastest-growing products in the power supply market, he said. “It is not something that they’ve invented; they’ve improved on what the competition had.”

Stephens Inc., a privately held investment bank based in Little Rock, Ark., has ample reason to like Power-One. It bought 65% of Power-One’s stock in 1995 and then helped take the company public two years later. According to U.S. Securities and Exchange Commission documents, Stephens’ shares of Power-One stock, worth $58 million in March 1998, are worth 10 times that much now.

Before Stephens’ involvement, Goldman said, Power-One’s founders operated the company in “a very conservative fashion.” The company, which Goldman joined in 1982, had traditionally kept a low profile.

With Stephens’ financial backing, Goldman said, he could take what had long been a quiet private company and help it grow.

Goldman wasted no time. Since 1997, Power-One has scooped up companies that enabled the company to expand its DC/DC product line. In 1998, it bought the Ulster, Switzerland-based Melcher Group. In January 1999, it bought International Power Devices Inc. in Boston, a leading manufacturer of DC/DC power converters. Last February, it bought HC Power Inc., which makes power systems for telecommunications, Internet service providers and original equipment manufacturers.

Finally, in May Power-One bought the Norwegian firm Powec, which makes power systems for the telecommunications industry. That acquisition also brought Power-One closer to the European telecommunications colossi that dominate the industry--Nokia of Finland, Ericsson of Sweden and Great Britain’s Vodafone Group.

Not including stock transfers and debt assumption, the tab for the four acquisitions came to roughly $177 million. As part of the related growth, Power-One hired 3,000 employees this year, opened two new plants in the Boston area and started a 100,000-square-foot facility in Mexico to support its Boston operations. They join a line of facilities in Switzerland, Norway, Ireland, the Dominican Republic, Australia, Hong Kong and China.

Growth May Have a Downside

“We add them so quickly, we can’t keep up,” Goldman said. “We believe in putting the R&D; in higher-cost areas such as the U.S. and Europe, where we can gain intellectual talent. We manufacture in places like Mexico and the Dominican Republic. This gives us high-quality designs that can be manufactured at very low costs for our customers.”

Power-One’s growth may have a downside, however, said Shelby Fleck, an analyst with Morgan Stanley Dean Witter in New York. While Power-One is a leader in its field, she said, it’s “growing at a very rapid pace. Sometimes managing that level of rapid growth is challenging.”

New acquisitions, particularly those in countries with different business philosophies, can take a long time for the acquiring company to digest.

Other obstacles the company may face, Fleck said, include smoothly adding manufacturing capacity to support strong demand for its converters, and managing the inventory for its 2,000 different products. These products range from a one-watt, matchbook-sized $50 item to a half-megawatt product the size of a 15-foot by 20-foot room that sells for $500,000.

Hartmut Liebel, director of business development at Artesyn Technologies in Boca Raton, Fla., a direct competitor to Power-One, said his rival may encounter problems hiring “good and sufficient engineers to support the ongoing operations, especially in an environment where engineering talent is in great demand and relatively scarce across the nation.”

So far, Power-One continues to grow despite such obstacles, although, as Stephens’ Cooper said, some critics are amazed at its stock’s high valuation. That stock price, though, has taken plenty of hits over recent months amid a general downturn for telecommunications stocks this year.

At one point in the last four months, the company’s stock sold for almost $90 a share. As of Dec. 22, it went for $38.75 a share. On some days, the share price has risen or dropped by almost 10%.

Even at $38.75 a share, the stock costs far more than it did earlier in the year, and many company insiders have used Power-One’s good fortune to sell off some of their holdings, SEC records indicate.

Goldman, according to SEC filings, has sold 433,000 shares of company stock in 2000 for a total of $52.6 million. Stephens Inc. and at least a dozen company officials and affiliated trusts for Stephens family members have also sold millions of shares as the price has taken off.

Standard & Poor’s Pick for 500 Index

Stephens Inc. sold $69.2 million worth of its Power-One stock, SEC records show, but still holds almost 4 million more shares worth almost $600 million.

Along with the tremendous gains in value, Power-One has been picked to join the Standard & Poor’s 500 index.

“We are very honored to be selected to that special group,” Goldman said. “We intend to live up to the reputation.”

But Goldman said he feels an even greater pressure--the need to make reliable products. “If our products fail, datacom and telecom networks will fail, so our products have to be ultra-reliable and last as long as 10 years without a single failure.”

That, and the company’s larger success, has been happening, something he attributes to his team-based management style.

“I have a philosophy where I tell my executives that I do not want them to let me make a mistake,” he said. “So if we’re taking a direction and they think it’s wrong, they are encouraged to disagree. And they can come back and continue to disagree if they continue to believe in their opinion. This way we get different perspectives, and as a team we make the best decisions for the company.”

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