Power-One patent lawsuit could shape firm's future in industry.

After a lengthy string of quarters in the red, Camarillo-based power conversion manufacturer Power-One, Inc., recently announced some good news, that it had posted third quarter net income of $1.5 million.

Yet the company's long-term fate could hinge upon a lawsuit that Power-One recently filed against competitor Texas-based Artesyn Technologies, concerning the nascent technology of digital power management.

In the suit, Power-One is alleging that Artesyn is infringing two of its patents by making, selling, using and offering to sell a new type of digital power converter. The lawsuit seeks compensatory damages and a permanent injunction to prohibit Artesyn from selling and manufacturing the products.

The case is crucial to Power-One's future goals. If it wins, the field would be cleared for Power-One to be one of, if not, the most dominant force in its industry.

"This technology and the marketplace to which it applies is still in its infancy, and we are clearly seeking to establish our technology as the de facto standard in this field while the market is still developing," Randall H. Holliday, the secretary and general counsel of Power-One, said. "We don't want to sit back and let someone else capture market share with an alternative technology. It's not a case where someone is going to get hundreds of millions for patent infringement. It's more of a forward issue of what technology is going to be the predominating standard in this field."

Todd Cooper, an analyst for Stephens Inc., has been watching this industry for a long time and asserts that digital power management has been a "holy grail" of sorts for the industry. Additionally, he maintains that if Power-One is victorious in its suit, the field will be cleared for it to dominate the landscape.

It's a big lawsuit. It's a foregone conclusion within the industry that digital power is certainly gaining traction," Cooper said. "It has been the industry's holy grail for the last decade and Power-One already has seven patents and 14 more on the way. If they are deemed to be valid, then they've got a really strong position, similar to what Qualcomm had in the late 90s."

Currently, Power-One's stock is trading in the mid $5 range. However, Cooper believes that the stock has the potential to go much higher, particularly if the company wins the lawsuit.

"Since the communications bubble burst at the end of 2000, companies like Power-One have struggled to downsize for the new market," Cooper said. "Power-One's finally gotten there with their last restructuring initiative. The first domino has fallen on their path to recovery, in that they were profitable in the third quarter. They've got enough leverage now that with any pickup in revenues, it's going to flow to their bottom line. I think they can pretty easily grow the top line through 2006."