EZchip (EZCH) A Top Small-Cap Stock Winner For Senior Analyst; Find Out His Other Semicon Stock Picks
September 2, 2010 - The Wall Street Transcript has just published Semiconductors Report offering a timely review of the Semiconductor Equipment sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Jeffrey Schreiner is the semiconductor Analyst at Capstone Investments. Mr. Schreiner incorporates fundamental and quantitative research for finding potential investment opportunities. Mr. Schreiner earned a B.A. degree in business administration from Ottawa University and holds Series 7, 24, 63, 86 and 87 licenses.
TWST: What do you cover in semiconductors?
Mr. Schreiner: My current coverage is EZchip Semiconductor (EZCH), Rambus (RMBS), Cypress Semiconductor (CY), Cirrus Logic (CRUS), MIPS Technology (MIPS), AuthenTec (AUTH), Immersion (IMMR), Integrated Silicon Solution (ISSI), Standard Microsystems (SMSC), IXYS Corporation (IXYS) and Synaptics (SYNA).
TWST: Who within your group are the standouts and why?
Mr. Schreiner: Our top pick in the mid cap is Rambus. Our top small-cap pick is EZchip. The other two names within our coverage we're really pushing in terms of the long side would be Cirrus Logic and Cypress.
TWST: What makes EZchip a good pick?
Mr. Schreiner: This was a name that we've talked about before, and we believe it's a company that's focused on doing a certain thing very well. That certain thing is network processors. Those would be similar to the microprocessor for the PC, but these are for large networking systems found typically in the carrier Ethernet switch/router market or in the CESR market. Previously they were a very, very small company and there had been about 20 to 30 companies trying to be in the network processor market during the 2000 to 2005 time frame - the likes of Intel, Broadcom, others. But all those have exited and really EZchip is one of the only companies left. And we're now reaching the point where the technology that they offer is filling the needs within the telco equipment space. They're replacing what used to be the in-house secret sauce to the Cisco (CSCO) and Junipers (JNPR) of the world for their edge routers. Instead of building it internally, they're outsourcing it to EZchip. That started with Juniper in 2005, and these are long design cycles and long product cycles. So when they started with Juniper in 2005, it took to almost 2008 before the product started getting out to the field and then really began ramping over the last few years. Juniper, right after they signed with EZchip in 2005, came to a decision to move back to an internal ASIC because when they signed with EZchip, EZchip maybe was likely doing only about 1 million, 2 million in revenue. This is Juniper's/Cisco's bread and butter. To trust it to a company of that size, what could potentially happen? They can't really turn it around on a dime, and also Juniper became concerned because Cisco was talking with EZchip. Now Cisco also signed with EZchip around 2006, and their new product line, the ASR 9000, is based on EZchip's NPU.
And it's the next generation - one generation after what Juniper was incorporated - and this generation was called the NP3. So as Juniper transitions over the next two to four years off of EZchip to more of an internal solution, Cisco will be ramping up the NP3. Cisco has three times the market share of Juniper in the CESR market. In addition, there are two times the chips used for Cisco versus Juniper. Now you get almost a six-times factor in terms of what Cisco can generate for EZchip. However, EZchip recognizes Cisco revenue as a quasi royalty because they work with Marvell, who helps develop the chip and provides stability that Cisco wants for such a flagship product. And EZchip gets paid back by Marvell in the form of what they would have received in a gross margin from Cisco. So if we were just to assume 50% gross margin for simple math, you get almost a three-times factor of what Cisco can contribute to Juniper.
Cisco has also signed up for their next-generation NP4 solution, as have three other CESR vendors. They are very large vendors who are going to be shipping products probably in 2012. The NP3 will likely ship for the next five to seven years, and it's just beginning initial shipments. The NP4 will trail that and layer on revenues as NP3 reaches peak. NP4 will start in 2012 and go from five to seven from there. Those are all done, signed, sealed and delivered contracts. It's really hard to back out at this point due to the length of the design. So essentially, you're looking at a small company who's got the opportunity to take a very large portion of the merchant market within the CESR market, and they've added an additional product line in the access market - basically low-speed access and high-speed access. We believe EZCH is likely going to have a growing market with limited competition and gross margins that likely could exceed on a non-GAAP basis 80% by next year and be stable because of the Cisco contribution.
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