EZchip Plunges as Cisco Router Plan Overshadows Earnings Report

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EZchip Semiconductor Ltd. sank to a five-year low in U.S. trading as concern that revenue will be hurt by Cisco Systems Inc.’s plan to phase one of its chips out of a networking product overshadowed sales that beat estimates.

The stock plunged 24 percent to $14.84 in New York Wednesday. Trading volume of 2.1 million shares was more than 23 times the three-month average. In Tel Aviv, the shares closed 0.5 percent higher after sliding 26 percent Wednesday.

Cisco plans to develop its own chip for the next generation of a component used in its routing platform, which recently began shipping with EZchip’s NP-5 network processor, the Israeli chipmaker said in its first-quarter earnings report. Revenue will probably start being affected after three years, the time needed to bring a newly developed chip into production, the company said.

“When a big client like Cisco is switching to making its own chips and thus becoming not a customer but a competitor, this is a really big deal,” Jay Srivatsa, the director of equity research at Chardan Capital Markets LLC who has a hold rating on the stock, said by phone from San Francisco Wednesday. “EZchip will probably have a hard time offsetting the revenue loss.”

Biggest Customer

Cisco is EZchip’s biggest customer. Sales to the San Jose, California-based company, the world’s biggest maker of network routers and switches, accounted for 35 percent of first-quarter revenue, EZchip said in a conference call Wednesday.

On a scale from 1 to 5, EZchip’s New York-traded stock has a consensus analyst rating of 3.3, the fourth-lowest among 16 global peers, data compiled by Bloomberg show. Five out of six analysts advise clients to hold the stock. One assigns a buy rating, down from a peak of eight in March 2013.

Analysts have been backpedaling from their bullish calls after Juniper Networks Inc., then the company’s second-largest customer, began using in-house alternatives to EZchip’s processors in 2012. When Cisco said in Sept. 2013 that it will start to develop its own processor, EZchip shares dropped 21 percent. The stock rebounded in the following weeks as the company said Cisco intends to use the NP-5 processor in “all key platforms.”

EZchip is focused on expanding its customer base to reduce dependence on those such as Cisco, ZTE Corp. and Juniper, three of its largest, Chief Executive Officer Eli Fruchter said in Wednesday’s conference call.

Sales Outlook

“If we cannot win back that specific platform, I hope to have more 10 percent customers or many more 5 percent to 10 percent customers than a single 30 percent customer,” Fruchter said. “That has been our goal for long a time.”

EZchip’s first-quarter revenue rose 33 percent from a year earlier to $26.9 million, the company said. Analysts surveyed by Bloomberg had forecast a 31 percent increase. The chipmaker said second-quarter sales will be in the range of $27.5 million to $28.5 million. That compares with a $28.1 million average estimate of analysts.

The stock has dropped 22 percent in New York this year after two consecutive annual declines. EZchip was the worst performer Wednesday in the Bloomberg Israel-US Equity Index, which added 0.6 percent to 128.93.

“While EZchip may gain wallet share with emerging players and other clients, this is a significant uphill challenge as they are attempting to fill a large hole that Cisco leaves,” Yousef Abbasi, a global market strategist at JonesTrading Institutional Services LLC in New York, said by e-mail Wednesday. “It is going to be challenged to achieve the anticipated level of growth over the next few years.”

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