Mastering the flow: Derek Lidow, head of Isuppli in El Segundo, sells information that helps executives in the technology industry see a clear picture of the future.

It's always been hard for computer and electronics manufacturers to keep abreast of changing markets for component parts, such as semiconductors and capacitors. When the weak economy sent demand plummeting in 2000, many manufacturers--relying on faulty projections--were left with excess inventories of high-priced parts. It's a cycle that repeats itself again and again.

Derek Lidow was convinced he had a solution. So convinced, in fact, he quit his job as chief executive of International Rectifier Corp., a company that manufactures and sells components. He formed iSuppli Corp. to show that inventory supply could be balanced with customer demand.

"During this past down cycle, the industry disposed of close to $25 billion in components," said Lidow, who worked at El Segundo-based International Rectifier, a maker of power semiconductors, for 22 years. "Some were scrapped, while others got sold for pennies on the dollar. It forced companies to write off millions in losses."

ISuppli started out in 1999 analyzing market data for passive components, such as capacitors, but quickly expanded into semiconductors, the primary component used to build cellular phones and laptops.

It also began a separate business in which iSuppli became involved in the procurement process. The goal was to help customers improve forecasting and lower inventory levels and cycle times, but the supply chain/logistics service had to be closed last year, resulting in the layoff of about 30 employees.

Frank Robertazzi, vice president of worldwide distribution at Agilent Technologies Inc.'s semiconductor products group in San Jose, said iSuppli's decision not to finance and warehouse inventory, as a typical distributor does, was the reason.

"This model will only work if iSuppli can develop a way to assume the financial risk for the material," said Robertazzi. "I don't think iSuppli had the financial part of their model worked out where they could offer longer payment terms or handle product returns. They never took possession of the material."

Lidow said making the business work was "not an impossible task. But the company needed more visibility of the Asian market, where much of the manufacturing takes place. That would have required an additional investment of about $10 million.

"It simply wasn't practical from a business perspective," he said. "I don't believe the additional investment would have paid off."

Research growth

Meanwhile, the research business has thrived. In November 2000 the company paid several million dollars to purchase Stanford Resources Inc., a 25-year-old Santa Clara research firm focused on displays for PDAs, bank ATM machines, and flat panel and plasma screens.

Today the company staffs roughly 80 analysts that crunch numbers and analyze data gathered from executives throughout the technology industry. They build financial models that identify market trends for printers, MP3 players, stereos, televisions and other electronics. Based on those numbers, they generate more than 400 analyses, pricing recommendations or supply/demand forecasts each year.

"We have more than one million bits of information that span many market segments in the electronics industry because companies can't make an accurate forecast for one market without analyzing another," Lidow said.

The information is sold to clients that include Dell Inc., Hewlett-Packard Co., International Business Machines Corp., Sony Corp., Siemens AG and Samsung Corp. Wall Street investment firms and reporters also tap into iSuppli data.

While it has not been easy building iSuppli into a profitable research firm, the company received an initial $2 million investment, and it has had ample capital from investors NeoCarta Ventures, CMEA Ventures and Tyco Ventures.

And by closing its supply chain/logistics model, iSuppli turned a sharper eye toward building on its string of analysts from California to New York and London to Shanghai. As a result, there is more demand for iSuppli's analysis and research.

"We attribute this, in part, to being in a niche market, and tend to think of ourselves as offering research that is different from (competitors) IDC and Gartner (Inc.)," Lidow said.

Revenue jumped to $10 million in 2003, he indicated, from about $6 million the previous year. The company is not yet profitable, having lost nearly $1 million in 2003, Lidow estimated. But he expects to turn a profit, starting in the current first quarter.

"In 2004, we will have our first profitable year and should see profits in the high single-digit percentage," Lidow said. "We have a goal to reach $100 million by the end of the decade."

Reaching those levels will require a renewed emphasis in Asia.

By 2006, China is expected to represent 35 percent of the demand for the electronics industry and consume 26 percent of all semiconductors, according to iSuppli analysts.

Wall Street analysts put the research market for information technology at between $1.5 billion and $2 billion. Research firm Gartner Inc., which holds the largest market share, should report $467 million in 2004, up from $465 million for calendar year 2003, when the company reports year-end revenue, according to Daniel O'Sullivan, an analyst at Sidoti & Co. in New York.

"Research is easily stripped out of the budget when companies are trying to contain costs, but the demand for information is coming back," O'Sullivan said.

PROFILE

iSuppli Corp.

Year Founded: 1999

Core Business: Technology research

Revenue in 2002: $6 million

Revenue in 2003: $10 million (estimate)

Employees in 2002: 134

Employees in 2003: 100

Goal: Reach $100 million in revenues by 2009

Driving Force: Continuous change and demand for technology-related statistical data and information