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Cisco’s Once-in-a-Decade Router Propels EZchip: Israel Overnight

May 18, 2014

By the time last week that Cisco Systems Inc. was declaring the ASR 9000 its most successful high-end router in a decade, investors in EZchip (EZCH:US) Semiconductor Ltd. were already reaping the benefits.

Hours earlier on May 14, EZchip reported record first-quarter revenue, saying a boom in its sales to Cisco was behind the increase. Within the first 60 minutes of trading, EZchip -- which makes the processor that powers the ASR 9000 -- had soared (EZCH:US) more than 10 percent, setting the stock up for its biggest weekly advance in a year. The shares dropped 2 percent to 87.19 shekels at 2 p.m. in Tel Aviv today.

Cisco’s sales of the ASR 9000 climbed 59 percent in the quarter ended April 26, making it the company’s fastest-growing high-end router since the introduction of the 7500 model more than ten years ago, Chief Executive Officer John Chambers told investors on a call later that same day. EZchip’s revenue rose 33 percent in the first three months of the year to $20.3 million, above the $20.1 million average analyst forecast.

“That’s a good testament to EZchip’s prospects going forward,” Jay Srivatsa, an analyst with Chardan Capital Markets, said by phone from San Francisco on May 15. “There is realistically no big threat from Cisco going internal until the end of 2015,” said Srivatsa, who has a buy rating on the stock and a $32 price target.

Yokneam, Israel-based EZchip rallied 12 percent last week to $25.28 for the best performance on the Bloomberg Israel-US Index of the most-traded Israeli companies in the U.S., which fell 0.3 percent.

Video Streaming

EZchip’s record quarterly sales were fueled by a 37 percent increase in the revenue it gets from Cisco, Chief Executive Officer Eli Fruchter said on a May 14 conference call with investors. The company reported first-quarter earnings of 33 cents per share (EZCH:US), compared with the 32-cent average estimate of seven analysts in a Bloomberg survey.

Cisco, which was responsible for about one-third of EZchip’s revenue in the previous quarter, is selling more high-end routers to help Internet service providers like Comcast Corp. and Vodafone Group Plc process streaming video, according to Srivatsa. That is bolstering demand for EZchip processors and allaying concern Cisco will follow rival Juniper Networks Inc., which is cutting purchases from EZchip and developing its own technology in-house.

“We continue to feel very comfortable with Cisco and expect our revenues from Cisco to grow significantly year-over-year in 2014,” Fruchter said on the call.

Kenny Green, an investor relations representative for EZchip, didn’t respond to an e-mailed request for comment sent after business hours in Israel on May 16.

’Lumpy Revenue’

EZchip is betting top customers like Cisco, which it expects to represent 40 percent of revenue this year, and Shenzen, China-based ZTE Corp. (763) will migrate to a more powerful line of network processors known as the NP-5, which it will begin selling in the second half of 2014.

The company’s stock is up 2.7 percent this year, after plunging 26 percent in 2013, the worst performance since 2005.

Even after the retreat, the stock is not a buy to Barclays Plc, which said revenue from large customers like ZTE can be “lumpy” and unpredictable, according to a May 14 research note. EZchip got about 75 percent of its first-quarter revenue from its top three customers, Cisco, ZTE, and Juniper.

“We believe that for the stock to rise substantially above our $30 price target, which remains unchanged, that growth needs to accelerate from here,” Joseph Wolf, an analyst at Barclays who rates EZchip the equivalent of hold, wrote in the note. “The stock already reflects 20 percent growth.”

Four out of nine analysts (EZCH:US) have a buy rating on EZchip, while the remaining five recommend holding the shares.

Srivatsa of Chardan Capital Markets said EZchip will continue to post strong earnings as Cisco strengthens its commitment to the company’s technology.

“The more Cisco gets more entrants to its EZchip solution, the better the conviction people will have that Cisco’s not going to drop them.”

To contact the reporter on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net Marie-France Han


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Companies Mentioned

  • EZCH
    (EZchip Semiconductor Ltd)
    • $21.4 USD
    • -0.01
    • -0.05%
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