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Why EZchip is misunderstood by Wall Street

By Gerald Gehman

Here is an update on two key holdings in the Undervalued Growth Companies portfolio: QuickLogic (QUIK) and EZchip Semiconductor (EZCH).

QuickLogic reported better earnings for Q4, 2013 and EZCH reported a record quarter in revenues and net income for Q4, 2013. We have waited a long time for such good news.

EZchip Semiconductor

EZCH has been the most frustrating because they have developed, and are developing the fastest commercial processors to transmit information through edge routers on the Internet. I believe they are also developing a revolutionary product that will start with customer wins later in 2014, will provide customer samples in 2015 and should go into production in 2016.

The stock languishes for various reasons. Sales have been slow to ramp, EZCH cannot accurately predict quarterly sales numbers because they do not sell to the ultimate buyers, and finally, the traditional equity analysts do not understand the unusual accounting that EZCH must follow.

Though I have no hard evidence to support this, but I believe these factors are all changing rapidly. Edge Router sales are ramping up. Also, as EZCH sales ramp up, equity analysts are paying more attention to the company.

In my opinion analysts, in general, have not been analyzing EZCH numbers correctly. They plug total sales numbers into their model and come up with mediocre numbers. However, Cisco has been generating 33% to 44% of revenues and provides most of the profit for EZCH. Marvel, a much larger company, supplies the EZCH processors to Cisco and pays a royalty fee that has no expenses for EZCH.

EZCH reported Q4, 2013 earnings of $20.1 million, up 32% from Q4, 2012 and up 7% from the prior quarter. Eli Fruchter, CEO, during the earnings call said "Revenues increased year-over-year to a record $71 million with an outstanding 60% net margins…."

Of even greater importance, EZCH's success in the NPU markets will provide the financing for continuing development and sales of the new NPS product.

Rick Neaton, in his Market Currents commentary dated Feb. 13, 2014 said "NPS is a potentially disruptive and ascendant technology in the same manner that CDMA disrupted the old way of transmitting wireless telephone calls." NPS affects the way that "programmable processors fit into networks of all types. It enables virtualized networks. It enables networking customers to design their own networks without having to tear down current architecture before its useful life ends." "NPS is the reason that you want to own EZCH. The NPU (sic) line is now simply a means to that end….."

EZCH generated $12.9 million cash from operations in Q4 and $37.6 million for the year. Total cash and equivalents is now $202.9 million, with no debt. EZCH is now financially strong enough to make direct sales to major customers. Based on the above analysis, it is possible to expect EZCH's stock price may work higher through the remainder of the year.


QuikLogic reported their Q4 earnings on Feb. 5. The CEO, Andy Pease said that when he took over three years ago, his team set short term tactical objectives and longer-term roadmap goals. They evaluated their assets and determined how to "leverage those assets to build a solid revenue base and strategic relationships with key customers and leading silicon suppliers. I believe we accomplished these objectives in 2013."

QUIK management has set aggressive goals for 2014, which will incorporate the company's transition from "display bridges" to "smart connectivity and senor hubs" that should generate "significant year-over-year new product revenue growth."

QUIK Q4, 2013 had total revenue of $8.9million, and $7.0 million of new product guidance which were both significantly above guidance. "Samsung accounted for 69% of total revenue during the fourth quarter…"

I am not an engineer, but as an investor, I am happy that QUIK has accomplished one of the most difficult challenges of a small company - to develop a number of new products that large companies need to access new markets. There is always risk investing with a small company with big ideas, but I believe that Andy Pease and his team will continue to grow QUIK on a rational and rapid growth pattern.

If we don't encounter any road bumps, I believe the stock is prepared to trade much higher through the remainder of 2014.

DISCLAIMER: The investments discussed are held in client accounts as of January 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Investments in securities of small-cap and growth companies may be especially volatile. Past performance is no guarantee of future results.
Gerald Gehman

Gerald Gehman

Gehman Capital Solutions, Ltd. is an investment management company based in New York City. Gerald P. Gehman founded the company

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