EZchip Semiconductor's CEO Discusses Q2 2012 Results - Earnings Call Transcript

EZchip Semiconductor Limited (EZCH)

Q2 2012 Earnings Call

August 8, 2012 10:00 am ET


Ehud Helft – Investor Relations, CCG Investor Relations

Eli Fruchter – President and Chief Executive Officer

Dror Israel, Chief Financial Officer


Gary Mobley – The Benchmark Company, LLC

Daniel A. Berenbaum – MKM Partners LLC

Joseph Wolf – Barclays Capital

Daniel Meron – RBC Capital Markets

Jay Srivatsa – Chardan Capital Markets LLC

Paul McWilliams – Next Inning Technology Research

Sundeep Bajikar – Jefferies & Co.



Ladies and gentlemen, thank you for standing by. Welcome to the EZchip Second Quarter 2012 Results Conference Call. All participants are at present in listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, August 8, 2012.

I would like to remind everyone that forward-looking statements for the respected company’s business, financial condition and results of its operations are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated.

Such forward-looking statements include but are not limited to, product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development and the effect of the company’s accounting policies as well as certain other risk factors which are detailed from time to time in the company’s filings with the various securities authorities.

I’d now like to hand the call over to Mr. Ehud Helft of CCG Investor Relations. Mr. Helft, please go ahead.

Ehud Helft

Thank you, operator, and good day to everybody. I would like to welcome all of you to EZchip’s second quarter 2012 conference call and thank EZchip’s management for hosting this call. With us on the line today are Mr. Eli Fruchter, CEO; and Mr. Dror Israel, CFO.

Before we begin, I’d like to point out that during this call certain non-GAAP financial measures will be discussed. These non-GAAP measures are used by management to make strategic decisions and forecast future results, and the company believes that these figures provide a better method of evaluating the company’s current performance. A full reconciliation of the company’s non-GAAP financial measures to GAAP financial measures is included in the earning release.

I’d now like to hand over the call to EZchip’s CEO, Eli Fruchter. Eli?

Eli Fruchter

Thank you, Ehud. Good day, everyone, and welcome to our second quarter 2012 conference call. Revenues for the second quarter totaled $15.8 million dollars, up 10% sequentially and down 9% compared to the second quarter last year. Gross margin on a non-GAAP basis for the quarter reached 82.2%, with non-GAAP net income of $8.4 million for the quarter representing an outstanding 53.4% non-GAAP net income margin. Furthermore, we increased our cash balance by $8.5 million to $154 million with zero debt at the end of the quarter, further solidifying our already very strong financial position.

Looking at our quarterly revenues in further detail. Second quarter revenue from Cisco reached $5.8 million, 37% of our revenues in the second quarter, down 18% sequentially and up 9% from the second quarter of last year. Moving forward, we continue to feel very comfortable about Cisco, especially with the ASR 9000 product that is expected to be our main revenue generator at Cisco and with the ASR 5000 that is also using the NP-4 and is in initial production.

There is one additional NP-4 based platform at Cisco, which is scheduled to move to production later in 2012. We continue to believe that Cisco will contribute approximately 40% of our revenues in 2012, up from 27% in 2011 and 20% in 2010. We’re seeing more opportunities at Cisco for NP-4 and NP-5 and believe that we will be able to expand to additional platforms.

Second quarter revenues from ZTE reached $3.6 million or 23% of revenues, up 137% sequentially and up 64% from the second quarter last year, making ZTE our second largest customer for the first time. We are pleased with ZTE’s strong revenue growth in the second quarter attributed to strong NP-3 based product purchases and to significant increase in initial production shipments of NP-4 based systems. We recently won another platform at ZTE with the NP-4L, our low cost version of NP-4 and are expecting this platform to move to production before the end of the year. Overall, we see a lot of activity at ZTE that is expanding the use of our product and we are benefiting from the use of the NP-4 software investment across multiple platforms.

As we stated in our last earning call, ZTE is selling to large carriers that do not purchase evenly throughout the year, but rather make large occasional project purchases and this can result in lumpiness in quarterly revenues. Additionally, carrier spending in China is currently low and is expected to remain low until the end of the year. We therefore expect to see a strong decline at ZTE in the third quarter, but a significant increase in 2012 over 2011 and continue to believe that ZTE will continue to be a greater than 10% customer throughout 2012 and beyond.

Second quarter revenues from Juniper totaled $2.2 million or 14% of the quarter’s revenues, up 24% sequentially and down 33% from the second quarter last year. We continue to expect a considerable decline in full year 2012 sales to Juniper versus 2011.

All other customer as a group, excluding Cisco, Juniper and ZTE, totaled $4.2 million dollars or 26% of the second quarter’s revenues, up 3% sequentially and down 35% from the second quarter of last year. The three large potential customers in this group, Huawei, Ericsson and Tellabs that made up 32% of Q4 2011 revenues and 7% of Q1 2012 revenues made up only 2% of the second quarter revenues and expected to have minimal contribution to our revenues in the third quarter as well. These customers are still at the design phase with NP-4 and are still using the large amounts of samples they purchased last year to complete their systems testing and move to production.

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