Andrew Uerkwitz 212 667-5316 [email protected]Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures and Certifications" section at the end of this report for important disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable. Stock Price Performance Q1 Q2 Q3 Q1 20 24 28 32 36 40 2011 2012 1 Year Price History for EZCH Created by BlueMatrix Company Description EZchip Semiconductor is a fabless company that provides Ethernet network processors for networking equipment. February 22, 2012 TECHNOLOGY/EMERGING TECHNOLOGIES AND SERVICES Stock Rating: PERFORM 12-18 mo. Price Target NA EZCH - NASDAQ $38.01 3-5Yr. EPS Gr. Rate 12% 52-Wk Range $38.01-$26.55 Shares Outstanding 27.0M Float 26.5M Market Capitalization $1,025.4M Avg. Daily Trading Volume 256,538 Dividend/Div Yield NA/NM Fiscal Year Ends Dec Book Value $5.08 2012E ROE 7.4% LT Debt NA Preferred NA Common Equity $241M Convertible Available No EPS GAAP Q1 Q2 Q3 Q4 Year Mult. 2010A 0.23 0.26 0.32 0.31 1.14 33.3x 2011A 0.19 0.33 0.35 0.22 1.09 34.9x 2012E 0.24 0.27 0.34 0.41 1.25 30.4x 2013E -- -- -- -- 1.93 19.7x Adjusted for stock-based compensation. EZchip Semiconductor Great Story, Fully Priced, Initiate with Perform SUMMARY We are initating coverage of EZchip Semiconductor with a Perform Rating. While there is a lot to like—excellent product in a fast-growing market—we believe the company is fully valued after 34% stock appreciation in the past 6 weeks vs. a NASDAQ gain of 13%. This network processor company is poised to grow revenue and earnings rapidly as its next generation product ramps up in the next 2-3 years. The higher ASP product with a larger customer base should double revenues in 2-3 years. Moreover, market opportunities remain robust, driven by a fierce appettite for data across networks. With EZCH trading at 19x 2013E adjusted EPS, the stock looks fairly valued vs. its peer group changing hands at 14x. KEY POINTS ■ What EZchip Does: A fabless semiconductor company, EZchip designs high-speed network processors for carrier Ethernet switches and routers. It supplies 6 of the 7 largest carrier equipment manufacturers. As customers move to newer generation products, the company is poised to grow faster than the market. ■ Market Opportunities: Driven by a transition from copper line to Ethernet-based IP networks, EZchip estimates its addressable market should nearly double from 2010 to 2015. In high-speed networks, where EZchip leads, the company estimates this segment will grow from $116M to $450M. ■ Long Term: With an expanding product portfolio, high switching costs for customers, and a fast-growing addressable market, EZchip is positioned to accelerate its growth in the long term. Management has estimated it could grow revenue fourfold by 2015. This could be conservative considering NPU volumes should triple while the ASP is higher. ■ Strong Financials: EZchip's fabless business model, incorporation in Israel, and a royalty payment agreement with its largest customer have created a strong financial position. With gross margins expected to be 81% in 2012, operating margins of 49%, and net margins higher (based on lower tax and interest income), EZchip generates lots of cash. ■ Fairly Valued: While there is a lot to like, we see the upside limited as the stock approaches 52-week highs. It currently trades at 19x 2013E EPS, near the high end of peers. The 34% appreciation over the last 6 weeks makes us initially cautious, and we begin coverage on the sidelines. EQUITY RESEARCH INITIATION OF COVERAGE Oppenheimer & Co Inc. 300 Madison Avenue New York, NY 10017 Tel: 800-221-5588 Fax: 212-667-8229
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Embed
Stock Rating: EZchip Semiconductor · 2 Investment Thesis We are initiating coverage of EZchip Semiconductor with a Perform rating. We believe that EZchip: 1. will continue to be
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Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research reports. Asa result, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision. See "Important Disclosures and Certifications" section at the end of this report forimportant disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risksto Price Target" sections at the end of this report, where applicable.
Stock Price Performance
Q1 Q2 Q3 Q120
24
28
32
36
40
2011 2012
1 Year Price History for EZCH
Created by BlueMatrix
Company Description
EZchip Semiconductor is a fabless companythat provides Ethernet network processors fornetworking equipment.
February 22, 2012 TECHNOLOGY/EMERGING TECHNOLOGIES AND SERVICES
Stock Rating:
PERFORM12-18 mo. Price Target NA
EZCH - NASDAQ $38.01
3-5 Yr. EPS Gr. Rate 12%
52-Wk Range $38.01-$26.55
Shares Outstanding 27.0M
Float 26.5M
Market Capitalization $1,025.4M
Avg. Daily Trading Volume 256,538
Dividend/Div Yield NA/NM
Fiscal Year Ends Dec
Book Value $5.08
2012E ROE 7.4%
LT Debt NA
Preferred NA
Common Equity $241M
Convertible Available No
EPS GAAP Q1 Q2 Q3 Q4 Year Mult.
2010A 0.23 0.26 0.32 0.31 1.14 33.3x
2011A 0.19 0.33 0.35 0.22 1.09 34.9x
2012E 0.24 0.27 0.34 0.41 1.25 30.4x
2013E -- -- -- -- 1.93 19.7x
Adjusted for stock-based compensation.
EZchip SemiconductorGreat Story, Fully Priced, Initiate with Perform
SUMMARY
We are initating coverage of EZchip Semiconductor with a Perform Rating. While
there is a lot to like—excellent product in a fast-growing market—we believe the
company is fully valued after 34% stock appreciation in the past 6 weeks vs. a
NASDAQ gain of 13%. This network processor company is poised to grow revenue
and earnings rapidly as its next generation product ramps up in the next 2-3 years.
The higher ASP product with a larger customer base should double revenues in 2-3
years. Moreover, market opportunities remain robust, driven by a fierce appettite for
data across networks. With EZCH trading at 19x 2013E adjusted EPS, the stock
looks fairly valued vs. its peer group changing hands at 14x.
KEY POINTS
■ What EZchip Does: A fabless semiconductor company, EZchip designs
high-speed network processors for carrier Ethernet switches and routers. It
supplies 6 of the 7 largest carrier equipment manufacturers. As customers move
to newer generation products, the company is poised to grow faster than the
market.
■ Market Opportunities: Driven by a transition from copper line to
Ethernet-based IP networks, EZchip estimates its addressable market should
nearly double from 2010 to 2015. In high-speed networks, where EZchip leads,
the company estimates this segment will grow from $116M to $450M.
■ Long Term: With an expanding product portfolio, high switching costs for
customers, and a fast-growing addressable market, EZchip is positioned to
accelerate its growth in the long term. Management has estimated it could grow
revenue fourfold by 2015. This could be conservative considering NPU volumes
should triple while the ASP is higher.
■ Strong Financials: EZchip's fabless business model, incorporation in Israel,
and a royalty payment agreement with its largest customer have created a
strong financial position. With gross margins expected to be 81% in 2012,
operating margins of 49%, and net margins higher (based on lower tax and
interest income), EZchip generates lots of cash.
■ Fairly Valued: While there is a lot to like, we see the upside limited as the stock
approaches 52-week highs. It currently trades at 19x 2013E EPS, near the high
end of peers. The 34% appreciation over the last 6 weeks makes us initially
cautious, and we begin coverage on the sidelines.
EQUITY RESEARCH
INITIATION OF COVERAGE
Oppenheimer & Co Inc. 300 Madison Avenue New York, NY 10017 Tel: 800-221-5588 Fax: 212-667-8229
2
Investment Thesis We are initiating coverage of EZchip Semiconductor with a Perform rating. We
believe that EZchip:
1. will continue to be the leading provider of Ethernet network processors;
2. confronts an addressable market that has tremendous growth potential as the
proliferation of connected devices demand expanding networks;
3. has a business model and product that give it distinctive advantages such as
high margins and product longevity.
4. has a current valuation that we feel rightly values the stock, especially after year-
to-date 34% appreciation vs. 13% from the NASDAQ.
We like a lot... EZCH has a lot to like. Since 2008, revenue has nearly doubled while
adjusted net income has quintupled. Looking to 2015, based on market opportunity,
pricing and technology dynamics, it is very possible the next four years could see even
better success. First, with its NP-4 processor ramping in 2012 and 2013 and offering four
times the possible revenue streams as NP-3 due to higher ASP and additional customers,
the medium term looks promising. Additionally, we expect the addressable market—the
carrier Ethernet equipment market—to triple from 2010 to 2015. And last, the
programmability of EZchip’s NPU, the cost savings and quickness to market afforded
customers mean product ―stickiness‖ (i.e., loyalty or reluctance to switch) is high.
…however, recent stock appreciation makes us initiate on the sideline. The stock
has appreciated 34% over the last six weeks compared with a 12% gain for the NASDAQ.
And looking at valuation, the stock looks adequately priced. We would look to be
opportunistic if any weakness presented itself.
Exhibit 1: Relative Stock Price Performance
0.70
0.80
0.90
1.00
1.10
1.20
1.30
EZCH S&P Semi Index S&P 500
Source: FactSet Note: These results cannot and should not be viewed as an indicator of future performance.
3
Addressable Market Potential: Management believes its addressable NPU market will
grow from approximately $400 million in 2010 to $800 million by 2015. More important,
nearly all of this growth is in the high speed segment, in which EZchip is the clear leader.
Growth in high-speed processors is driven by several factors including increasing
outsourcing of NPU design and continued transition to an IP based network from a copper
wire infrastructure. An IP based network is more dynamic and allows carriers to handle
the explosion in growth of voice, video, and data traffic being driven by a proliferation of
connected devices as well as the use of video across them. The move toward high speed
Ethernet routers and switches allows carriers to have a more dynamic network with high
capacity and speeds.
Exhibit 2: IP Traffic Growing Quickly
-
20,000
40,000
60,000
80,000
100,000
2010 2011 2012 2013 2014 2015
Fixed Internet Managed IP Mobile Data
Source: Cisco VPI
Leading Customer Base With Stickiness: Cisco, the largest carrier Ethernet (CE)
equipment maker, is the primary customer for EZchip. In the high speed segment, Cisco
has a market share of about 70%. Further, the CE equipment market can be broken up
into 5 segments. The largest—carrier Ethernet switches and routers—is primarily
controlled by 7 players. Here EZchip supplies NPUs to 6 of them. Customers rarely
switch NPU vendors. Because EZchip’s NPUs are programmable and often customized,
customers can save on R&D and time to market by moving to the next-generation EZCH
NPU. Additionally, to switch NPU vendors or to develop in-house is a multi-year decision.
For example, Juniper made the decision to design its next generation NPU in-house
several years ago, yet it is still purchasing from EZCH due to the long cycle time. So while
EZCH has customer concentration risk, we don’t view it as a near-term concern.
Cisco Not Only One Driving Growth: Cisco has been (and will continue to) growing its
share of EZchip’s revenue. In 2009, it was 8%; in 2011, Cisco’s share was 27%. With the
ramp of NP-4, this percentage of revenue is expected to grow even more. Cisco is the
leading edge router provider. In the 10Gbe space, its market share is 70%+. However,
EZchip is more than a Cisco supplier story. We expect the NP-4 rollout to greatly expand
EZchip’s market share, not only as Cisco rolls out additional products using this
technology, but also as the NP-4 is being used by a broader base of customers. We
expect 3 additional customers to become 10% revenue share owners once this product is
fully ramped.
4
Strong Financials. EZchip is a fabless semiconductor company. Because of this, it has
a low cost structure. The company currently employs 170 people–mostly in R&D.
Additionally, under its agreement with Cisco, the networking behemoth pays a royalty
comparable to the gross margin had EZchip sold the chips directly to Cisco. This leads to
80%+ gross margins. With the low employee count, EZchip has operating margins around
45%. As the company is incorporated in Israel, it also has a low tax rate. Put together,
the net margins are also north of 40%. The company currently has $130 million in cash
and no debt.
Exhibit 3: Strong Ability to Grow Cash
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
Source: Company Presentations; Oppenheimer & Co. Inc.
Technology has built-in growth: One of the issues with networks is that the proliferation
of different types of connected devices has caused the complexity of processing data to
greatly increase. One way to alleviate this pressure is to upgrade to Ethernet switches
and routers, i.e., products based on EZCH technology. And as needs arise, to stay ahead
of the pace of technology, carrier suppliers continue to introduce newer, faster, and more
integrated products. Due to the programmability of EZCH NPUs, customers are finding it
cost–effective, due to the reduction in time to market, to move to EZCH’s next chip. For
example, the NP-5, the latest product (entering testing in 2012), has enhanced video
support and an embedded search engine—two options the previous iteration doesn’t
have. This added functionality typically pushes customers to the next generation. We
believe most, if not all, customers that have committed to the NP-4 will commit to the NP-
5. For EZCH, this means increased revenue as the next generation has higher ASPs
(pricing). And as EZchip becomes more embedded at its customers, more products will
be offered with EZchip NPUs. For example, the NP-3 addresses 40% of the market while
the NP-4 is expected to address 60%. We expect the NP-5 will push this percentage even
higher.
Comparables Show Little Near-term Upside: To find comparables, we look to the
fabless semiconductor space as well as the IP space. We think a good list includes
companies in fast -growing market segments. For example, we include Broadcom and
Qualcomm, two companies with exposure to the fast-growing smart phone segment. We
include CEVA as it has high gross/operating margins as well as having corporate offices
located in Israel. Looking at Exhibit 4, we see that EZCH’s P/E ratio based on 2013 EPS
forecast is at the top of the range. While we think the stock deserves a premium due to
5
the growth profile over the next 2-4 years, we aren’t convinced that more multiple
expansion is justified. Thus, we think the upside is limited.
Source: Company Data, Oppenheimer & Co. Inc. Estimates.
18
Investment Thesis
EZchip is poised to continue its leadership position in the high-speed network processors for the ethernet switching and routing market.
There is a lot to like as we expect EZCh will outpace the industry's low-teens growth rate over the next several years as the company
expands is customer base with its new network processor, the NP-4 as well as being focused on the fastest growing segments, the
10GbE and 40GbE space. However, we believe the stock is fairly valued after its recent run-up as it is currently trading above its
historical forward P/E multiple.
Important Disclosures and CertificationsAnalyst Certification - The author certifies that this research report accurately states his/her personal views about the
subject securities, which are reflected in the ratings as well as in the substance of this report.The author certifies that no
part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views
contained in this research report.
Potential Conflicts of Interest:
Equity research analysts employed by Oppenheimer & Co. Inc. are compensated from revenues generated by the firm
including the Oppenheimer & Co. Inc. Investment Banking Department. Research analysts do not receive compensation
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Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered byOppenheimer & Co. Inc:
Rating and Price Target History for: EZchip Semiconductor (EZCH) as of 02-21-2012
Created by BlueMatrix
All price targets displayed in the chart above are for a 12- to- 18-month period. Prior to March 30, 2004, Oppenheimer &
Co. Inc. used 6-, 12-, 12- to 18-, and 12- to 24-month price targets and ranges. For more information about target price
histories, please write to Oppenheimer & Co. Inc., 300 Madison Avenue, New York, NY 10017, Attention: Equity Research
Department, Business Manager.
Oppenheimer & Co. Inc. Rating System as of January 14th, 2008:
Outperform(O) - Stock expected to outperform the S&P 500 within the next 12-18 months.
Perform (P) - Stock expected to perform in line with the S&P 500 within the next 12-18 months.
Underperform (U) - Stock expected to underperform the S&P 500 within the next 12-18 months.
Not Rated (NR) - Oppenheimer & Co. Inc. does not maintain coverage of the stock or is restricted from doing so due to a potential
conflict of interest.
Oppenheimer & Co. Inc. Rating System prior to January 14th, 2008:
Buy - anticipates appreciation of 10% or more within the next 12 months, and/or a total return of 10% including dividend payments,
and/or the ability of the shares to perform better than the leading stock market averages or stocks within its particular industry sector.
Neutral - anticipates that the shares will trade at or near their current price and generally in line with the leading market averages due to
a perceived absence of strong dynamics that would cause volatility either to the upside or downside, and/or will perform less well than
higher rated companies within its peer group. Our readers should be aware that when a rating change occurs to Neutral from Buy,
aggressive trading accounts might decide to liquidate their positions to employ the funds elsewhere.
Sell - anticipates that the shares will depreciate 10% or more in price within the next 12 months, due to fundamental weakness
perceived in the company or for valuation reasons, or are expected to perform significantly worse than equities within the peer group.
20
Distribution of Ratings/IB Services Firmwide
IB Serv/Past 12 Mos.
Rating Count Percent Count Percent
OUTPERFORM [O] 334 55.90 146 43.71
PERFORM [P] 257 43.00 87 33.85
UNDERPERFORM [U] 7 1.20 4 57.14
Although the investment recommendations within the three-tiered, relative stock rating system utilized by Oppenheimer & Co. Inc. do not
correlate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, Oppenheimer & Co. Inc. has assigned
buy ratings to securities rated Outperform, hold ratings to securities rated Perform, and sell ratings to securities rated Underperform.
Company Specific DisclosuresOppenheimer & Co. Inc. expects to receive or intends to seek compensation for investment banking services in the next 3
months from IDTI.
Oppenheimer & Co. Inc. and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities
issued by EZCH.
Oppenheimer & Co. Inc. makes a market in the securities of EZCH, BRCM, CAVM, CEVA, IDTI, MRVL, PMCS, and
QCOM.
Additional Information Available
Please log on to http://www.opco.com or write to Oppenheimer & Co. Inc., 300 Madison Avenue, New York, NY 10017,
Attention: Equity Research Department, Business Manager.
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