Cisco’s Dominance Bolsters Discount in EZchip: Israel Overnight

Feb 16, 2014 2:58 pm ET

Feb. 16 (Bloomberg) -- EZchip Semiconductor Ltd.’s New York shares are trading at a discount to their Tel Aviv stock after concern mounted that the chipmaker is becoming too dependent on its biggest client, Cisco Systems Inc.

Shares of EZchip, based in Yokneam, Israel, were little changed in New York on Feb. 14, rising 0.4 percent to $25.58 after plunging 5.6 percent the previous day in the biggest selloff in five months. The stock is trading at an 81 cent discount versus the Tel Aviv shares. The Bloomberg index of the most-traded Israeli companies in the U.S. gained 4.2 percent. Caesarstone Sdot Yam Ltd., the maker of kitchen countertops, rallied 28 percent after fourth-quarter earnings beat estimates.

EZchip Chief Executive Officer Eli Fruchter said last week that he expects the company’s reliance on Cisco to rise above 40 percent of total revenue this year. Growing dependence on one client could undermine the chipmaker’s earnings in the longer term, Oppenheimer & Co. and Chardan Capital Markets LLC said. Clients including Juniper Networks Inc. and Huawei Technologies Co. have said over the past four years that they’ll develop chips in-house.

“Cisco isn’t going away, but on the flip side they’ve also conceded that Huawei,” and other companies have “internal solutions,” Jay Srivatsa, an analyst at Chardan Capital Markets LLC in New York, said by phone on Feb. 13. “Until we see a real ramp-up in fiscal business from the company, those fears will be keeping a lid on the stock.”

EZchip’s revenue from Cisco rose 18 percent in 2013 to represent 39 percent of total sales, Fruchter said on a Feb. 12 conference call with investors. EZchip expects Cisco to be “a greater-than-40 percent customer for us,” he said.

More Dominant

Sales increased 32 percent from a year ago in the fourth quarter of 2013 to $20.1 million, the second consecutive quarter of record sales. Adjusted earnings were 34 cents a shares, above the 33-cent average of seven analyst estimates compiled by Bloomberg.

EZchip should benefit this year as Cisco, the biggest maker of networking equipment, grows more dominant in its router business, said Srivatsa, who has a buy rating on the shares and predicts they will rise 25 percent in the next 12 months.

Even with record sales, EZchip’s reliance on Cisco and the decision of customers like Sunnyvale, California-based Juniper and Shenzen, China-based Huawei to build their own chips internally mean EZchip’s stock is vulnerable to further declines, according to Andrew Uerkwitz, an analyst with Oppenheimer in New York.

“Customer concentration risk weighs heavily on the mind,” Uerkwitz wrote in a Feb. 13 report. “We like what we see in execution and strategy to diversify, but we see street expectations ahead of themselves and customer concentration risk not appropriately priced in.”

New Clients

EZchip is cultivating a new group of clients outside its top three customers Cisco, Juniper, and Shenzen-based ZTE Corp., as of August 2013, Fruchter said on the Feb. 12 call. It’s also developing a new line of so-called NPS network processors with a target market twice as large. The company expects to start winning customers for the new chips in the second half of 2014 and to start production in 2016, he said.

“We believe that we will be able to win in these market segments and significantly diversify our customer base as a result, easing our current dependency on three customers that generated more than 70 percent of our revenues in 2013,” 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.

Caesarstone, MagicJack

The Bloomberg Israel-US gauge rose to 113.84 last week, extending this year’s advance to 2.3 percent. That compares with a 0.1 percent gain for the TA-25 gauge.

Caesarstone, based in Sdot Yam, Israel, surged last week to a record $56.12 after reporting adjusted earnings-per-share that were 24 percent higher than the 40 cent average estimate of four analysts.

MagicJack VocalTec Ltd., whose founders pioneered voice- over-Internet technology, rallied 25 percent last week to $17.25, the biggest weekly gain since May 2011, after hedge-fund manager Whitney Tilson said the stock has the potential to emulate the eightfold rally in Netflix Inc.

--Editors: Marie-France Han, Tal Barak Harif