Georgetown, Cayman Islands-based O2Micro International, Limited (OIIM) is a fabless original equipment manufacturer (OEM) of analog and mixed signal semiconductors that provide notebook power management and control LCD display backlighting. Over 70% of the firm's 530 employees work outside the United States, primarily in Japan, China, Taiwan and Singapore. As of June 2005, engineers comprised 64% of the total staff, with 221 of the 339 engineers located in China.

Semiconductor devices are broadly divided into three categories: analog, digital and radio frequency (RF). Analog semiconductors condition and regulate real world information such as light, temperature, speed, pressure, power and electrical currents. Digital logic semiconductors process information in only two states. Mixed-signal semiconductors combine both analog and digital technology into a single device. Typically, an analog sensor samples real world information, and then converts the input into an electronic analog signal, which is converted into a digital format for further digital processing. The analog and mixed-signal markets tend to be more varied and specialized, with customized products that have longer life cycles than those in the digital industry segment. There is an ongoing drive to decrease the number of discrete devices, lessen power requirements and shrink the size of the existing devices, which correspondingly increase performance and reliability. Consequently, a greater amount of functionality is being consolidated into increasingly smaller devices. The Gartner Group estimated the total worldwide semiconductor market was a $219.9 billion market in 2004. The analog market component grew 29% in 2004, to a $36.4 billion market, according to In-Stat, an industry trade group.

O2Micro's products are centered on power applications in the computing (notebooks) and consumer (LCDs) vertical end markets. The notebook computer power management segment consists of semiconductor chips that control power distribution within notebooks (PMUs), internal notebook CD drives (AudioDJ), DC power converters and the internal battery recharging process (MagicStar). The company also has a product line of LCD display backlight controllers that control the CCFL (cold cathode fluorescent light) backlights, which are the biggest power consumer in a notebook. These same LCD backlight controllers can also be found in LCD monitor and LCD TV applications within the consumer segment. A notebook computer running off its internally charged battery can be used for a longer period of time by incorporating these advanced power management/power saving products that discretely allocate the limited battery resource. These products tend to be installed into higher-end notebook computers. O2Micro also supplies plug-in card bus controller chips, as well as some products that integrate a smart card reader.

In an effort to diversify the company's product portfolio, management is developing more products for use in consumer electronics, industrial and communications applications. Some of the specific potential consumer product uses include wireless handsets, global positioning systems (GPS) and portable DVD players. For instance, Audio DJ and Super DJ enable the playing of music on a computer CD.

Being a fabless supplier, O2 outsources all production to third-party partners that provide wafer foundry services or the actual fabrication of the integrated circuits (ICs), and other companies that assemble and test. Currently, analog and mixed-signal wafer production is outsourced to X-FAB semiconductor foundry, while digital production is outsourced to TSMC and UMC.

Computer notebook OEMs like Acer, Dell, Fujitsu and Siemens are the primary purchasers of O2Micro's products. Historically, the company has always had a very concentrated customer base. In 2004, one customer accounted for 17.5% of total revenue, although no other customer accounted for more than 10%. Geographically, 99.9% of revenue comes from Asia, with only 0.1% coming from North America. Principal competitors include Linear Technology, Maxim, Texas Instruments, Ricoh Company, Monolithic Power Systems and the OEMs' in-house engineering units.

O2Micro is strongly positioned in the notebook computing market, especially in power management. However, as the notebook market has grown rapidly, new entrants into the market have created pricing pressures on the firm's products. This caused management to modify the strategic direction of the firm, leveraging products and technologies into new or high growth markets. For instance, the company successfully penetrated the broader LCD/LCD TV markets in the area of backlighting. Growth is expected to continue in the display markets, especially due to the substitution of CRTs with flat-panel displays. Flat panel displays are expected to have a 50% penetration rate in PCs and 14% in TVs by 2006. LCD panel prices have continued to drop as a result of new fabrication lines becoming operational, thus increasing the supply. The drop in panel prices to more attractive price points is likely to boost consumer demand, thus driving market penetration. Power management technology was also exported into consumer markets. For example, the company recently had a design win at a Japanese OEM for its MagicStar battery charger. The June quarter was the third consecutive quarter in which sales into the consumer market were greater than sales into the computing market.

At the same time, management remains optimistic about increasing sales into the notebook market. The new line of Intelligent Power and e-Commerce products are expected to bring growth back into this segment, as the company recorded a number of design wins. However, the revenue impact will be slow to move from design wins to actual revenue when a number of new products go into production.

The company continues to expand its intellectual property (IP) portfolio, adding 16 new patents in the March quarter and 8 more in the June quarter. (Patents jumped from 239 to 260 in This quarter) The company's new products are gaining popularity and helping it augment its presence not only in the notebook segment, but also in other related markets. OIIM has a number of products in the pipeline, including new lighting solutions for consumer and industrial applications, video DJs for digital cameras already in the sampling stage, power management ICs for portable media players and an intelligent battery product line. The launch of the VPN/firewall solutions is still on track for release later in the year, though a meaningful contribution is not expected in the current fiscal year. O2Micro's strategy of growth through diversification and its decision to withdraw from the low-margin standard CardBus business should boost margins.

On November 17, 2005 O2Micro announced that the jury in the U.S. District Court of the Eastern District of Texas returned a verdict favorable to O2Micro in its patent infringement action against Taiwan Sumida Electronics Inc. ("Taiwan Sumida").The jury found that Taiwan Sumida inverter modules incorporating inverter controllers manufactured by Monolithic Power Systems, Inc. ("MPS") infringed claims 1, 2, 9, 12 and 18 of U.S. Patent Number 6,396,722 held by O2Micro and that the infringement was willful. The jury also found that claims 1, 2, 9, 12 and 18 of U.S. Patent Number 6,396,722 were valid. A judgment has not been entered and O2Micro expects that Taiwan Sumida may file post-trial motions with the Court seeking to overturn the jury's decision. After judgment has been entered, Taiwan Sumida may appeal the case to the U.S. Court of Appeals for the Federal Circuit.

If the verdict in the Sumida trial (described above) is upheld it could mean a reduction in Legal costs of $2-$3 million per quarter and market share gains in the coming quarters. It could also be a positive for the other lawsuits going forward.

On March 26, 2007 OIIM announced that judgment has been entered and permanent injunction granted in its lawsuit against Beyond Innovation Technology Co., Ltd, SPI Electronic Co., Ltd., FSP Group, and Lien Chang Electronic Enterprise Co., Ltd. in the United States District Court in Marshall, Texas, following trial in May 2006.

On April 5th 2007 announced it agreed to settle a patent infringement lawsuit with Samsung Electronics Co. Ltd. and Samsung Electronics America Inc. in the U.S. District Court for the Eastern District of Texas. Details were not disclosed.


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