EZchip: Financials ladder, Cisco snake

Shlomi Cohen

Investors fret over EZchip's relationship with Cisco, but it never looked in better shape.

US investors left for a long weekend, with Presidents Day falling Monday, with a weekly rise of 2-3% in the main indices behind them. Nasdaq led, with a rise of 3%, and the stock with the highest weighting, Apple (AAPL), rose 5%. Apple thus completed a 10% correction from the low of under $500 to which it fell after the release of its results three weeks ago.

Apple rose because of aggressive share buybacks amounting to $14 billion in two weeks, but also thanks to an extensive interview given by CEO Tim Cook to the "Wall Street Journal", in which he promised product launches in new categories this year. The timing of the interview was probably not coincidental: next week, at the huge Mobile World Congress in Barcelona, the launch of Samsung's Galaxy S5 is expected to make a very big splash, and Apple, as usual, will not be there.

Among the Israeli stocks in my portfolio, EZchip Semiconductor Ltd. (Nasdaq: EZCH; TASE:EZCH) and Camtek Ltd. (Nasdaq: CAMT; TASE:CAMT) released results last week. Camtek's share price shot up in the fourth quarter, and on unprecedentedly large volumes. The big fuss was over old news, connected to a unique PCB (printed circuit board) printing machine, to which a marketing brainwave attached the magic label "3D", and set the stock alight.

It was not possible to understand from the financials and the conference call why the share price took off. The first printing machine is currently entering service at Eltek Ltd. (Nasdaq: ELTK), and it is too early to tell to what extent, if at all, this will affect Camtek's sales line. It seems that semiconductors expert Avigdor Willenz did not understand what all the fuss was about either, because, according to a notice from him on Friday, he took advantage of the rise in Camtek to exit at a handsome profit from the holding of nearly 6% he built up in the company over the past few years.

Investors liked EZchip's results, guidance and conference call, and sent the share price higher when the results were released, but the following day, following Cisco's (CSCO) results, they sent it all the way back down again. It's amazing to see, time after time, how investors latch onto general headlines, and don't bother reading the small print. EZchip founder and CEO Eli Fruchter said explicitly in the conference call that he expected Cisco's sales to grow this year, and that it would be a more than 40% customer.

In Fruchter's view, the number of platforms in which Cisco integrates EZchip processors may grow with the launch of the fifth generation processors in the second half of the year. I have no doubt that the collaboration with Cisco will deepen much more once the NPS processors developed in Kiryat Gat are launched. In addition to the routers market, these processors are also aimed at the data storage centers market, and this will happen without Marvell (MRVL) as intermediary.

Cisco CEO John Chambers also said in interviews after the release of his company's results that the orders were at a peak. That should translate to higher sales later in the year, including of routers, which is EZchip's specific market. Another important EZchip customer that will increase its purchases this year is China's ZTE, which raised them by 164% in the fourth quarter following the start of investment in LTE networks in China.

Fruchter thinks EZchip will grow this year in comparison with 2013, because of the substantial growth expected in sales to Cisco and ZTE, but finds it difficult to give numerical estimates for annual growth, because of a third important customer, Juniper (JNPR). Years ago, Juniper announced that it was abandoning EZchip and switching to in-house development of network processors, but it continues to buy second generation processors that were launched ten years ago. Last year, Juniper bought processors to the tune of nearly $14 million, and this year those purchases should drop significantly, but it is not possible to predict by just how much. If, despite the expected sharp drop in sales to Juniper, EZchip still sees year-on-year growth, it means that they are very confident indeed in growth in sales to the other customers, chiefly Cisco and ZTE. Incidentally, in my opinion, Juniper will go back to working with EZchip for the NPS processors.

EZchip is in an excellent position today, better than ever. The NPU processors are growing strongly, and since 2002, in three-year cycles, a new, much more powerful generation has smoothly replaced an older generation, while producing a $200 million cash mountain. In addition, since 2010 the NPU processors have provided tens of millions of dollars to finance the development of the new processor family, the NPS, for the next generation networks, which represent a far larger market.

The writer serves as a consultant and investor in securities, and advises the Pia Select Nasdaq fund. This column should not be seen as advice or a recommendation to buy or sell securities, including securities mentioned in the column. Anyone who acts in reliance on the column is exclusively responsible for any damage or loss they may incur.

Published by Globes [online], Israel business news - www.globes-online.com - on February 17, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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