The next step in network processing technology should significantly expand this company’s sales, writes Paul McWilliams of Next Inning Technology Research.
I recently had an opportunity to speak with Eli Fruchter, CEO of EZchip Semiconductor (EZCH) after his presentation at the Roth conference. Some of the important points Eli made during the fourth-quarter 2012 conference call were reiterated or clarified:
Sales to Juniper Networks (JNPR) of NP-2 network processors may increase sequentially in 2013. This is important beyond the revenue contribution, since it clearly illustrates how sticky a EZCH edge router design is, and how long the life cycle of the design can last. I believe 2013 marks the eighth year for the NP-2.
Eli expects that all of EZCH's NP-4 customers will use the upcoming NP-5. The reason Eli expects EZCH average selling prices to increase going forward is because the NP-4 can handle more ports than the NP-2 or NP-3. The point here is the cost per port for EZCH customers will decrease as expected, but EZCH will receive more money per average part shipped due to the revenue mix shifting to the higher-performance NP-4.
EZCH revenue is expected to increase due to the fact the aggregate demand for ports is forecasted to increase dramatically going forward. This increase in demand for ports is consistent with forecasts from a number of sources, including Infonetics.
Huawei will use the NP-4 in production and orders may start shipping as early as the second quarter of 2013. However, Eli does not believe aggregate demand from Huawei will be as high as EZCH expected it to be when presenting the opportunity last year.
Eli expects this is due to the market strategy being executed by Huawei. As I noted in a recent report, Huawei does not have opportunities in the US or in a number of other developed markets where there are requirements for the sophisticated routing functions enabled by EZCH's NP-4 (network processors).
Eli believes this has led Huawei to focus its design efforts on routing solutions that do not demand the features that can be delivered with EZCH network processors, and therefore can be supported with in-house ASIC designs. This is highly consistent with how I presented the case in our recent report, and I view it as a logical conclusion.
Please note though, this conclusion should be taken as speculation. Eli was clear that he is not speaking for Huawei, and is just speculating this is the case.
It is this speculation that Huawei will be a smaller than expected customer that led Eli to reduce his potential growth outlook for 2016 to a range of 2.8 to 3.7 times 2012 revenue. Please note, this projection does not include any revenue contribution from the upcoming NPS processor.