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EZchip Drops to Two-Year Low on Sales Outlook: Tel Aviv Mover

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Feb. 14 (Bloomberg) -- EZchip Semiconductor Ltd. tumbled to the lowest level in almost two years in Tel Aviv on concern more customers may develop the Israeli chipmaker’s technology in-house, reducing revenue growth.

The shares of Yokneam, Israel-based EZchip slumped 18 percent to 97.2 shekels, or the equivalent of $26.41, the lowest since April 2011, at the close in Tel Aviv. The company’s U.S.- traded shares slid 21 percent to $25.56 yesterday, sending valuations to 20 times estimated earnings, the lowest level since December 2011. Israel’s benchmark TA-25 Index dropped 0.4 percent today.

Huawei Technologies Co., a Chinese maker of telecommunications equipment, is developing an internal processor and will use EZchip’s product only “when needed,” Eli Fruchter, the chief executive officer of the Israeli company, said on a conference call after EZchip reported 2012 earnings. The shift follows Juniper Networks Inc.’s decision to switch to their own chip in 2009, eliminating part of their need for EZchip’s technology, Chardan Capital Markets LLC said.

“If EZchip loses Huawei, that means the market share the company was expected to reach will be significantly lower,” Dov Rozenberg, an analyst at Clal Finance Batucha Brokerage Ltd., said today by phone. “The company’s shares trade on their long-term growth expectations, which are now weaker.”

Rozenberg cut the share-price estimate for the company to $37 dollars from a previous $44, while maintaining his buy recommendation.

Fruchter said that Huawei’s development was still “mere speculation,” according to the call transcript. A phone message and e-mail left for Jannie Luong, a North American spokeswoman for Shenzhen-based Huawei, wasn’t returned.

‘Serious Impact’

Huawei, together with Ericsson AB and Tellabs Inc., comprised about 5 percent of EZchip’s revenue in 2012, Fruchter said on the call. If a company like Cisco Systems Inc., which accounted for 43 percent of last year’s sales, decided to internally develop its processors, “investors would essentially throw in the towel on this one,” Jay Srivatsa, an analyst at Chardan Capital Markets LLC, who rates the stock sell, said by phone yesterday from New York.

Juniper, which in 2009 accounted for 54 percent of EZchip’s revenue, is transitioning to internally developed chips for its networking systems, a move that could “seriously impact” EZchip’s sales if other customers don’t make up for the loss, Srivatsa wrote in a note to clients.

EZchip said yesterday that 2012 revenue fell 14 percent to $54.7 million as adjusted earnings sank 16 percent to 92 cents per share. Revenue could reach $160 million by 2016, down from the roughly $250 million the company earlier expected based on previous predictions.

Lost Opportunity

“Huawei is a very, very big company, and if they have designs to become a major player in EZchip’s market, this could be a huge opportunity lost,” Mike Burton, an analyst at Brean Capital LLC who has a hold rating on EZchip, said by phone from New York.

Shares in New York through yesterday traded at a 25 percent premium to the average valuation for companies on the Nasdaq Composite Index, the smallest gap in six months, according to data compiled by Bloomberg. EZchip’s slump in the U.S. yesterday was the biggest since Aug. 8 when the company forecast third-quarter sales that missed analyst estimates by about 50 percent.

To contact the reporter on this story: Victoria Stilwell in New York at vstilwell1@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net

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