After being pummeled by a supply glut and the Asian economic slowdown, the semiconductor industry is struggling to come back from one of its worst downturns ever. The wreckage so far has been severe, with layoffs and factory closures across the industry.
Which is why Wall Street was caught off guard by El Segundo-based International Rectifier Corp. Amid the sea of red ink, it managed to post a break-even quarter.
Moreover, executives expect an increasingly healthy performance in the coming quarters through aggressive cost-cutting and technological innovations.
“My sense is that the pain and bloodletting has stopped, and the healing has just begun,” said Douglas Lee, an analyst at NationsBanc Montgomery Securities. “In the long run, International Rectifier will continue to dominate the market and emerge as an even more powerful market leader.”
International Rectifier is the world’s top seller of power semiconductors, which convert raw electricity into efficient energy used to power everything from cars and light fixtures to refrigerators and computers. The company is a global supplier of semiconductors for industrial, commercial and defense applications, with manufacturing plants in Mexico, England, continental Europe and Asia.
It reported net income for the first quarter ended Sept. 30 of $34,000 ($0 per share), compared with $6.1 million (12 cents per share) for the like period a year ago. Revenues declined by 4 percent, to $127.5 million.
Those may not sound like great numbers, but they’re positively blistering compared with, say, Micron Technology Inc. of Boise, Idaho, which posted an $89 million loss in its most recent quarter.
Within a few days of International Rectifier’s earnings report, its stock jumped from $4 a share to $10. It hit its 12-month high last November at almost $15 per share, before the international markets started to melt down.
“Even with a recovery, the stock remains pretty cheap for its value,” said Mona Eraiba, senior vice president of research at Gruntal & Co., who issued a “strong buy” recommendation. “Now that the market is improving, the stock can climb higher.”
Lee agreed that the stock is undervalued, but issued a “hold” recommendation until the market shows a sustained turnaround.
Sales for the $122 billion semiconductor industry fell almost 11 percent over the last year, according to the Semiconductor Industry Association, caused primarily by downward price pressure on semiconductors. But as Asian economies continue to stabilize and the international market continues to expand, the trade group projects a 9.1 percent rise in sales for 1999.
International Rectifier’s power conversion niche constitutes a $7 billion market, historically outstripping the general semi. It is still the fastest-growing sector of the semiconductor industry.
“I can really only say with confidence that the semiconductor market looks great through (the next two weeks),” said Derek Lidow, who is co-chief executive of International Rectifier along with his brother Alex. “We’re really living week by week, but the market has definitely improved.”
Over the last quarter, the Lidows cut their workforce by 5 percent, laying off more than 200 employees and bringing the total workforce to about 4,000. This came after a major restructuring in 1997, during which almost 10 percent of the employees worldwide were cut.
Meanwhile, some factories have been consolidated, and the company is working at reducing its scrap silicon material that is lost while making semiconductor chips.
“The streamlining over the last year and the last quarter lets us be brutally competitive,” said Alex Lidow. “These were major actions, but we saved $20 million in costs last year, and we expect to see our cost savings reach $60 million in the coming years.”
More crucial for long-term financial performance is the ability to push the boundaries of what semiconductor manufacturers do. International Rectifier has started to design entire power systems for its clients, instead of simply providing the components, and it has opened a new factory in Wales to accommodate the demand.
“In repositioning our company, we’re changing the rules of the game, hopefully making it harder for our competitors,” said Derek Lidow.
Lee confirmed that International Rectifier’s competitors are not doing anything similar. “This is a unique spin for the company,” he said. “They’ve successfully positioned themselves so that when the semiconductor market takes off again, they’ll be so far in front that their competitors will have a very difficult time catching them.”
The Lidows’ father, Eric, founded the company in 1947 and currently presides as chairman. Both sons hold Ph.D.s from Stanford University, and hold the patents to some semiconductor technology used widely in the industry. The company sees between $18 million and $20 million a year in revenue from patent licenses alone.
