EZChip Bullish Calls Dialed Down as Juniper Sees Slowdown

The biggest rout in shares of EZchip Semiconductor Ltd. in a year is prompting analysts to pare back bullish calls as signs mount that the telecommunications industry is slowing.

EZchip, which counts Cisco Systems Inc. and Juniper Networks Inc. as its largest customers, said Oct. 6 that third-quarter sales would miss its own guidance by more than 10 percent, sparking a 14 percent retreat in its New York-traded shares last week. The drop erased the stock’s gain for the year while analysts scaled back their 12-month price targets. The shares will gain about 22 percent to $25.88, according to the average estimate, 13 percent below the price target before the report.

Chief Executive Officer Eli Fruchter said weaker spending among telecom companies had crimped demand for the company’s chips, which power routers used by operators like Verizon Communications Inc. and China Telecom Corp. to speed up data moving through their networks. He echoed comments by Cisco CEO John Chambers in August, who warned of a slowdown in emerging-market sales. Juniper said Oct. 9 it would miss its earning forecast after phone carriers delayed equipment purchases.

“This is part of the business, unfortunately, the limited visibility that the management team has,” Jeffrey Schreiner, an analyst at Feltl & Co., said by phone from Menlo Park, California on Oct. 9. “Customers can push out a project, and it’s not a big deal for the customer, but it can be a huge deal for a supplier like EZchip.”

Lower Expectations

Schreiner downgraded his recommendation on Yokneam, Israel-based EZchip to buy from strong buy on Oct. 6 and lowered his 12-month price target to $25.50 from $31. Five of nine analysts still have a buy rating on the stock, with four rating it hold, according to data compiled by Bloomberg.

EZchip, down 36 percent since 2012, fell to $21.16 last week, trading near a four-year low. The stock was the third-worst performer on a Bloomberg index of Israeli stocks in the U.S., which lost 7.2 percent. Juniper tumbled 14 percent to $19.04 and Cisco shares slipped 7.8 percent to $23.34 in the five days.

EZchip’s shares traded in Tel Aviv retreated 1.9 percent to 79.50 shekels so far this week.

Fruchter said EZchip would report third-quarter revenue of about $19 million, 14 percent lower than the $22 million estimate the company gave on an August earnings call. The company reports third-quarter earnings on Nov. 12, a day before Cisco.

Kenny Green, an investor relations representative for EZchip, didn’t respond to an e-mailed request for comment sent after business hours in Israel on Oct. 9.

Misplaced Concerns

Investors initially turned bearish on EZchip in 2012 as sales slumped as Juniper, its second-largest customer, began using in-house alternatives to EZchip’s processors. The shift spurred concern key customers like Cisco would follow suit.

Schreiner, who has had a buy rating on EZchip since August 2012, said those concerns are misplaced. He also said the stock should rally in the long term because the company has won new customers with its upcoming NPS processor.

“They don’t stand a chance of losing Cisco business at all until the 2016-2017 design cycle comes around,” he said. “A lot of the catalysts have been pushed out a bit, there’s going to be more announcements of more customers signing up, that’s going to reduce the customer concentration concerns that have been there in the past.”

Even if EZchip succeeds in curbing its reliance on Cisco, which made up 39 percent of revenue at the end of March, that won’t help it escape a broader weakening of demand from Cisco customers, said Yousef Abbasi, market strategist at JonesTrading Institutional Services LLC in New York.

“That kind of softness doesn’t bode well for earnings growth,” Abbasi said by e-mail Oct. 10. EZchip’s “2015 numbers are going to have to come down.”

EZchip will report a 21 percent increase in net income to $47 million on sales of $119 million next year, according to the average of at least five analyst estimates compiled by Bloomberg.

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