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EZchip Semiconductor Limited (NASDAQ:EZCH)

Q1 2013 Earnings Call

May 8, 2013 10:00 am ET

Executives

Kenny Green – CCG Investor Relations

Eli Fruchter – President and Chief Executive Officer

Dror Israel – Chief Financial Officer

Analysts

Joseph Wolf – Barclays Capital

Paul McWilliams – Next Inning Technology Research

Jeff Schreiner – Feltl and Company

Daniel Berenbaum – MKM Partners

Gary Mobley – The Benchmark Company

Dov Rozenberg – Clal Finance Batucha

Andrew Uerkwitz – Oppenheimer & Co.

Rick Neaton – River Shore Investment Research

Jeff Schreiner – Feltl and Company

Mike Burton – Brean Murray, Carret & Co.

Jason Polansky – JP Capital Management

Steve Baughman – Divisar Capital Management, LLC

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the EZchip’s First Quarter 2013 Results 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, May 8, 2013.

I would like to remind everyone that forward-looking statements for the respected company’s business, financial condition and the results of its operation 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 would now like to hand the call over to Mr. Kenny Green of CCG Investor Relations. Mr. Green, please go ahead.

Kenny Green

Thank you, operator, and good day to everyone. I’d like to welcome all of you to EZchip’s first quarter 2013 conference call and I’d like to 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 are included in the earnings release today.

I will now hand over the call to EZchip’s CEO, Mr. Eli Fruchter. Eli, go ahead please.

Eli Fruchter

Thank you, Kenny, good day, everyone and welcome to our first quarter 2013 conference call. Revenue for the first quarter totaled $15.3 million, up 1% sequentially and up 6% compared to the first quarter last year. Gross margin on a non-GAAP basis for the quarter reached 81% with non-GAAP net income of $6.7 million for the quarter, representing 44% non-GAAP net income margin. We increased our cash balance by $6.3 million to $174.3 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. First quarter revenues from Cisco reached $4.9 million or 32% of our revenues in the first quarter, down 24% sequentially and down 30% from the first quarter of last year. The lumpiness in quarterly revenues from Cisco can continue, but we feel very comfortable with Cisco and expect our revenues from Cisco to grow significantly year-over-year in 2013.

We believe revenues from Cisco should be monitored on an annual basis for a better understanding of our business with Cisco. First quarter revenues from ZTE reached $2.1 million or 14% of revenues, up 44% sequentially and up 39% from the first quarter last year. We continue to see a lot of activity at ZTE that is expanding the use of our products, but revenues from ZTE can be lumpy as we have seen in previous quarters. First quarter revenues from Juniper totaled $4.1 million or 27% of the quarter’s revenues, up 27% sequentially and up 122% from the first quarter last year.

We recently saw an increase in Juniper’s orders and forecasts and it is possible that sales to Juniper will increase in 2013 over 2012. We also expect that we will continue to see some level of NP-2 revenues from Juniper beyond 2013 as well. It is a strong indication to the long life cycle of design wins in strategic platforms. All other customers, as a group, excluding Cisco, Juniper and ZTE, totaled $4.2 million or 27% of the first quarter’s revenues, up 4% sequentially and up 4% from the first quarter of last year.

I am pleased to say that our three potentially large customers in this group, Huawei, Ericsson and Tellabs, are in production with their NP-4 based platforms and have started placing production orders. As we said in our last earnings call, we believe that Huawei is planning to offer a lower end in-house solution in parallel to their high end NP-4 solution that could lower our long-term revenue potential at Huawei. However, we are pleased with Huawei’s first production order for NP-4 that will ship during the second quarter and we can now say that all our NP-4 customers are in production with at least one NP-4 platform. We believe that substantially all NP-4 platforms at all customers will be in production by the end of the year.

Turning now to our next generation products. During the quarter, we taped out the NP-5 after two years of extensive development and expect samples in June and production next year. This is a major milestone for the company. We continue to believe that substantially all NP-4 customers will select the NP-5 for their next generation platforms that will sell for approximately eight years.

As said earlier, NP-4 platforms at all customers are now in production with strong growth potential and all remaining platforms are expected to enter production by the end of the year. Last year, in its first full production year, NP-4 already reached a revenue run rate that exceeded the NP-3 and during the first quarter, the NP-4 run rate exceeded the NP-3 by far. We believe this clearly demonstrates the great potential of the NP-4. The NPS, our new Network Processor for Smart networks, continues to receive very positive feedback from both carrier and data center vendor who indicate that they view the NPS as a game changer for their next generation platforms and that it offers a better solution than that offered by other merchant silicon and in-house solutions.

We believe that we will sign a selected number of tier one customers before the part samples. We have selected TSMC's 28 nanometer process for the NPS and we intend to sell the NPS directly to all customers, thereby shifting from the business model we applied for the NP-3, NP-4 and NP-5 where we used a royalty-based model for Cisco.

We believe that the royalty-based model, although providing an extremely high gross margin, limits our ability to significantly increase our top line revenue. A direct model also removes the risk of being dependent on a partner that may become a competitor. We feel that the company reached a point in which we are more comfortable being independent and believe that all our key customers will be comfortable buying the NPS directly from EZchip.

2013 is turning into a growth year for EZchip with NP-4 in production with all customers and all platforms expected to be rolled out by year end. The growth rate now depends on our customers’ success with their NP-4 based platforms and on carrier spending. With regards to guidance for the upcoming quarter, we expect revenues to be at the $16.5 million range with a product and customer mix that will result in approximately 84% non-GAAP gross margin.

I would now like to turn over the call to our CFO Dror Israel for a more detailed financial review, Dror?

Dror Israel

Thank you, Eli. In order to better understand our business, we are providing both GAAP and non- GAAP results. While we discuss the non-GAAP results on this call, the GAAP results and the reconciliation between the figures are included in our earnings release. The non-GAAP financial measures exclude the effects of stock-based compensation and amortization of intangible assets.

Now to the results. Revenues for the first quarter of 2013 totaled $15.3 million, up 6% from the $14.4 million in the first quarter of 2012, and up 1% from the $15.2 million in the prior quarter. Cisco, through Marvell, accounted for $4.9 million or 32% of revenues. ZTE accounted for $2.1 million or 14% of revenues. Juniper accounted for $4.1 million or 27% of revenues and our other customers, as a group, accounted for $4.2 million or 27% of revenues for the quarter. Non-GAAP gross margin for the quarter totaled 81.3%, up from the 85.4% in the first quarter of 2012, and up from the 83.7% last quarter. The decrease in gross margins this quarter resulted mainly from a lower portion of revenues from Cisco, coming through Marvell as royalties.

Non-GAAP R&D expenses net for the quarter totaled $4.3 million. This amount included $1.1 million in R&D grants received from the Israeli Office of the Chief Scientist. On a gross basis, our R&D expenses for the quarter totaled $5.4 million.

Non-GAAP operating expenses for the quarter totaled $6.2 million compared to $5.1 million in the first quarter last year and compared to $5.5 million in the prior quarter. We expect that our annual OpEx level in 2013 will be in the range of $26 million.

Non-GAAP operating income for the quarter was $6.2 million, down 14% from the $7.2 million operating income in the first quarter last year and in the prior quarter. Non-GAAP net income for the quarter totaled $6.7 million, down 14% from the $7.8 million net income last year and in the previous quarter. Fully diluted EPS on non GAAP basis was $0.23, down from $0.27 in the first quarter last year and from $0.26 in the previous quarter.

Moving over to the balance sheet, cash, cash equivalents and marketable securities totaled $174.3 million as of March 31, 2013, compared to $168 million at the end of the previous quarter. Cash generated from operations during the quarter was $6.8 million, cash used in investing activities was $0.5 million and cash provided by financing activities was $50,000, resulting from the exercise of stock options.

With that I would like to open the call for the Q&A session. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Joseph Wolf of Barclays Capital. Please go ahead.

Joseph Wolf – Barclays Capital

Thanks. I wanted to follow up on the comment on the NPS, where you said you have very good feedback from your customers and I'm wondering on the deliverable there, what you are showing them, what they are indicating and what they are comparing it against, and also about the competitive environment, given the announcement by some others for a similar products. That would be my first question.

Eli Fruchter

Thank you, Joseph. So the NPS is getting very strong feedback and I think that what we are actually providing with NPS as we communicated in the past is the network processor performance and the CPU flexibility and that is something that does not exist today. And for our current customers in routing, we are actually providing an NPU that they can use C language to program, and that is something that does not exist with other NPS and we are also going from layer 2-3 to layers 4 to 7, which enables advanced services on the line curve of the router. So that is something that others simply don’t offer, that kind of speed. For data center what we do, we actually provide all the layers that is performance that is extremely higher than the performance that multiple CPUs provide today and that’s because we only focus on data plan and we don’t do the control plane on the NPS. So we are actually optimized for extremely high performance at all layers. And those are the differentiators. We are not aware of merchant silicon or in-house that can provide a combination of C programming layer 2-7 at extremely high performance.

Joseph Wolf – Barclays Capital

Well, that I understand. I’m just wondering, when you say that the feedback is good, what are they actually seeing? And have you walked through or can you walk through with us what kind of software investment a customer would have to make to design around the NPS?

Eli Fruchter

So the customers that design around NPS will need to develop a code like they do with every processor. We are providing C environment including Linux operating system. So it’s a very friendly, open and known environment to programmers, a lot simpler and easier than the assembly, if you like, language that are being used on NPUs, so it’s a friendly open environment and we get good feedback from a customer today. So being to combine the speed that the NPS can run it with programming C is a combination that does not exist and this is the type of feedback that we get from our customers.

Joseph Wolf – Barclays Capital

Okay, and just one question about visibility. With the numbers going up, are you feeling more confident about an acceleration in growth, or is it still cautious on the – looking out to the second half of the year?

Eli Fruchter

We are – it looks better, so we are more optimistic than we were. We see improvements in the U.S. mainly. We see it from Cisco and Juniper, obviously, that’s our customers that sell in the U.S. And I think that Europe is still weak. I think that China is still weak, but seems like it is improving. So overall I would say that they more optimistic.

Joseph Wolf – Barclays Capital

Alright, thank you, Eli.

Eli Fruchter

Thank you, Joseph.

Operator

The next question is from Paul McWilliams of Next Inning Technology Research. Please go ahead.

Paul McWilliams – Next Inning Technology Research

Thank you for taking my question. How many platforms were in production at the end of – NP-4 platforms in production at the end of Q1?

Eli Fruchter

Paul, I could not hear you, you sound very weak. Operator, maybe you can do something about it?

Paul McWilliams – Next Inning Technology Research

Is this better Eli?

Eli Fruchter

It’s much better, yes.

Paul McWilliams – Next Inning Technology Research

Okay, I’m sorry. How many NP-4 platforms were in production at the end of Q1?

Dror Israel

Hi, Paul. This is Dror, don’t know about eight NP-4 base lessons from the tier 1 customers that are currently in production, of course, there are many others from, I would say that most NP-4 customers are already in production, there are few other platforms that we expect to enter production by year end. But from the tier 1, it’s a platform.

Paul McWilliams – Next Inning Technology Research

Okay. Revenue for just Huawei, Tellabs and Ericsson, is that a number you could provide?

Dror Israel

So I know we have provided these numbers last year, if you remember in 2011 especially in Q4, both substantial number of samples that they then consume throughout 2012 and then we saw that they faced a lot of difficulties with this low CapEx environment from carriers. So last year, eventually all of them together did not do so well about 5% for the year. So for now we can say that they are all in production, but their impact is probably going to be to take time and until they will be a most substantial getting closer to the 10% customers, we will regard this three as part of the others.

Paul McWilliams – Next Inning Technology Research

I understand. In Q4, I had $1.2 million written down for them. And I was just wanting to make a comparison there?

Dror Israel

Okay. Again, we don’t want exactly to provide the number, but it’s not that different. And it’s not significant yet or significant enough to separately discuss each customer.

Paul McWilliams – Next Inning Technology Research

I understand. Okay. On Juniper, a very nice change of events there. Is that on their – driving that revenue, is that the SRX or is that the classical router, the MX?

Dror Israel

We believe that it’s the MX. And they think that I will direct maybe to a little towards – that you asked about the number of the platforms and most platforms are sent before they enter production. Obviously the revenue level is still below. So it’s just the beginning of production and that’s why we said that we think that we’ll the use NP-4 ramping in the next two years.

Paul McWilliams – Next Inning Technology Research

Absolutely, right. Now, the NP-5, I think you mentioned possibly about an eight-year run for that. Did I hear that correctly?

Dror Israel

Yeah. We are saying that based on that we’ve done a lot of shapes there, carriers are not changing technologies weekly and we see that NP-2 that started to sell in 2005. Actually, we will do this year probably more than last year and that’s our eight year of selling. So I would say that eight year is the – it could even go more than that, given that it had started in 2008 is still selling pretty well.

Paul McWilliams – Next Inning Technology Research

Excellent, excellent. Now, do you think the NP-5, though, coming out so quickly after NP-4, and my understanding, and please correct me if I’m wrong here, is the software transition, NP-4 to NP-5 is a bit more simple than the NP-3 to NP-4. So my question is based on that understanding, what we’re transitioned to NP-5 constructed or less than the number of the years of NP-4 is that revenue driver?

Eli Fruchter

I’ll answer that, but lesser that as the last question, because there are many that are…

Paul McWilliams – Next Inning Technology Research

I agree.

Eli Fruchter

Yeah. So NP-5 will actually go to production, I believe, next year, it will take us time to test the samples and so it will take time for customers to test the sample. In next year 2014, after the NP-4 entered production, which was 2011 and before that then between 2008 and then between 2005. So I think that we are keeping more or less a gap of three between our product generations and I don’t see that it’s different for the NP-5. We expect NP-5 to start production next year and go for 8 years or more.

Paul McWilliams – Next Inning Technology Research

Thank you, Eli, and congratulations on the progress you’ve made.

Eli Fruchter

Thank you, Paul.

Operator

The next question is from Jeff Schreiner of Feltl and Company. Please go ahead.

Jeff Schreiner – Feltl and Company

Thank you, gentlemen, for taking my questions. Eli, the first question I wanted to talk to you about is, when you are talking to your customers, what’s the current utilization rate within edge routers for line cards? And I'm just trying to look at this because is the majority of the Juniper contribution that's this kind of re-acceleration, is that just simply adding in line cards to systems already within the network?

Eli Fruchter

Hi Jeff. Yes, that would be my guess. I think that initially when a customer is starting to ship a new platform, many of the boxes just shipped with the minimal number line cards. So right now when those platforms all have been in the field, I assume that the carriers will like to fill those platforms before they buy new traffic. So that’s like I think that I would say that our portion in the router revenue increases obviously when there are more platforms in the field.

Jeff Schreiner – Feltl and Company

Okay. And I guess also I would like to follow up, I guess, on Mr. Wolfe's comments. What gives you the confidence to make the statement that tier 1 customers are going to sign for NPS before sampling?

Dror Israel

I think that the confidence is the result of the fleet business we get from customers that are extremely enthusiastic about the product. Actually with our current product line, we always get design win before the product sample but with our current product line, I think that it’s simpler because all the software investment were from the previous generation. EZchip, it’s a new part and you would expect that the customers will want to see samples before they actually decide to go with that. We think that based on the feedback that we get, based on the fact that we can demonstrate the features and the capabilities through software, through tools, stimulators, we have chip running already on hardware emulator in-house. So those are a lot of good signs that make customers feel comfortable and they’ve seen us also they called an execution and make them feel that we will deliver on what we promise.

Jeff Schreiner – Feltl and Company

One last quick question from me, given that you feel more optimistic than you did earlier in the year, tell us about the outlook. The prior outlook of outpacings (inaudible) has increased, decreased, remained the same?

Eli Fruchter

Can you repeat, I could not hear the part of the question?

Jeff Schreiner – Feltl and Company

Yes, sorry, Eli. I was just wondering, I think that on the last call you kind of gave full year guidance for 2013 that you had said would outpace levels reported in 2010 and 2011. I'm just wondering now that you are a bit more optimistic per your comments, do you think maybe the full-year levels for EZchip now increase, stay the same or decrease?

Eli Fruchter

I don’t remember providing guidance for the year. I think what we said last time, we said that we spoke specifically about Huawei and the long-term impact that we could have from Huawei specifically. I don’t think that we gave guidance for the year and so, but as I said before, even if we do not give numbers, then I think that we – I am more optimistic now than I was last quarter.

Jeff Schreiner – Feltl and Company

Okay, thank you very much, gentlemen.

Eli Fruchter

Thank you, Jeff.

Operator

The next question is from Daniel Berenbaum of MKM Partners. Please go ahead.

Daniel Berenbaum – MKM Partners

Hi, thanks for taking question. Circling back around to Huawei, you mentioned that Huawei is now in production with NP-4. Given your commentary on the last call three months ago, are you surprised now that they are already in production with NP-4? I'm just trying to understand what the tone change is.

Eli Fruchter

I think that the design was taking a long time, longer than we would expect. But once you get the production order, you know that they move to production. So that I would say, obviously, is positive trend now. I didn’t think last time, although I know that I got many questions from this was about it. We did not say that Huawei will not go to production and we did not say that the in–house design will replace us. We just said that we think that Huawei will use us and the in-house. They will use us for the higher-end and we’ll use theirs for the lower end.

And that’s what we said and that’s actually what I'm saying now. The only difference now is that we started to get orders and that’s the change. But there is no change in our thinking of what Huawei is doing. We think now exactly the same as we did last quarter.

Daniel Berenbaum – MKM Partners

Okay, and then along those lines, you talked about substantially all of your NP-4 customers, you think, will go to NP-5. Does that apply to Huawei as well? Do you think that Huawei will also transition to NP-5?

Eli Fruchter

Yeah, yeah I think so. And actually that line of customers have already placed a little bit for NP-5 for sample.

Daniel Berenbaum – MKM Partners

Okay, so Huawei is already sampling NP-5, great. And then, just moving over to NPS; since it's a much broader market, do you plan on segmenting the product line a little bit more than you have with your prior product? Obviously, your NP-4 and NP-A or NP-4L, do you plan on having product segmentation with the NPS line?

Eli Fruchter

Yes absolutely. So we already said that we’ll have the NPS 400 and NPS 200 and those two products are targeting I would say different weak points which translate to different market segments and those are just the two first members of the NPS family. I’m sure that will affect more products and we’ll try to target different segments with NPS.

Daniel Berenbaum – MKM Partners

Okay, great, thanks very much.

Eli Fruchter

Thank you, Daniel.

Operator

The next question is from Gary Mobley of Benchmark. Please go ahead.

Gary Mobley – The Benchmark Company

Hi guys. Let me extend my congratulations on the quarter and guidance as well. This is certainly a much more refreshing call than the call in February. I wanted to start out by asking about the R&D for the quarter, adjusting for it on a non-GAAP basis; it was up several thousand dollars sequentially. Was that all related to the NP-5 tape-out? And would you expect the R&D in the June quarter to come in a little bit on a sequential basis?

Eli Fruchter

Hi, Gary. So we guided for operating expenses of $26 million this year. And most of the costs within this operating guidance of course are coming from R&D expenses. It was not actually connected directly to a certain tape out expenses. We should expect the gradual growth towards the $26 million OpEx level. And some of that will come from, I would say, mainly NPS and a recourse and maybe take out related cost from both chips. But altogether, I would say again, a gradual growth in all the – any OpEx in general towards $26 million this year.

Gary Mobley – The Benchmark Company

Okay. With Juniper customers adding more capacity in the form aligned cards and your business on that front doing better than what you had anticipated, do you feel any better about the gross margin outlook for the remainder of the year? I know that – I believe that your gross margin outlook for fiscal year 2013 per last quarter's call, was around 81% or so. Would you expect upside to that, now that your Juniper mix might be a bit higher than what you previously thought?

Eli Fruchter

The AT1 number for model still is a number that we should use looking forward. As you remember, it’s based on 60% direct modulator and about 68% margin and then 40% coming from Cisco 100%. It’s possible that this year it will go a bit higher. So let’s say 82% would be a good number maybe.

Gary Mobley – The Benchmark Company

Okay. And I know looking back maybe a year ago you had anticipated Huawei given their edge router market share to be as big a customer as Juniper. And that was the big change in your long-term outlook per last quarter's call. Have you become any less or more optimistic relating to Huawei compared to what you were speaking about in February?

Eli Fruchter

I don't think that we are more or less optimistic. Our view with Huawei has not changed. Again, we thought of Huawei as – because Huawei is a direct model, it's not a royalty, Huawei could be a big customer, could even become our biggest customer. But based on the fact that they will be using in-house, we now think that, as we did in the last quarter, we think that they will be a lot smaller than that. So, you know, they could become maybe our third or fourth customer.

Gary Mobley – The Benchmark Company

All right, that’s it for me. Thanks guys.

Eli Fruchter

Thank you, Gary.

Operator

The next question is from Dov Rozenberg of Clal Finance. Please go ahead.

Dov Rozenberg – Clal Finance Batucha

Hi, thanks. Actually, a few follow-ons on Huawei, if that's okay; first of all, on production orders. If they went in, should we feel that in revenues in the second quarter, is that something you already see now?

Eli Fruchter

I hope so. I think we said it that they enter the production now that will already shaping the second quarter and that’s the first production order and we believe that we’ll continue to see orders from them in the following quarters.

Dov Rozenberg – Clal Finance Batucha

Okay. Now, I was wondering with the NP-5 and Huawei, is there any difference in the relationship based on following what happened with the NP-4? Or is it, it falls on the same?

Eli Fruchter

It’s more or less of the same. Obviously, it will depend always on how well their in-house is doing just as what we do and what markets they are going to compete. And I think we said in our last quarter, Huawei is focusing on Asia and they don’t sell in the U.S.

I think that last month we saw an annoucment for Huawei that is actually saying exactly the same thing. So I assume that going forward Huawei will continue with their email solution and message solutions in parallel.

Dov Rozenberg – Clal Finance Batucha

Okay, thanks. Going to Cisco, do you think they will still be over 40% this year or at least around that number?

Dror Israel

Yeah, we definitely expect them to be around that number. And it’s possible that there will be even above that, but we’ll have to wait and see.

Dov Rozenberg – Clal Finance Batucha

Okay, also with Cisco, as you’re moving with TSMC and considering the royalty shift with them, and I'm sure they – you talked, obviously, to them about the NPS. They are on board with this, I'm assuming. Does that mean also that future models, like the NP-6, et cetera would also be more in a direct way?

Dror Israel

We don’t want to speak about any specific customer here. But I think that given where the company is today versus where the company was when we started with that royalty model, we benefit three in almost 10 years when we started the development, maybe a little less. We’re in a very different situation today and the reasons for the customers want things to buy from our partner and not directly from EZchip, those leaders does not exist anymore. So we don’t see any reason of problem in selling directly to all customers.

Dov Rozenberg – Clal Finance Batucha

Okay. Last question from me, if I remember correctly, in 2011 the NP-4 sampling – even in the sampling stage, it showed some revenues, and even some substantial revenues, though given the top line was smaller back then. Do you think the NP-5 samplings, which can happen this year, if I understand correctly, at the end of this year – will that have, an impact on our numbers?

Dror Israel

Yeah. It will add some impact and I don’t know if it will be the same size as we saw on NP-4 or not. Obviously, it will be dependent on a number of boats the customers will build based samples. And we don’t have a good guess, we’ll just have to wait and see.

Dov Rozenberg – Clal Finance Batucha

Okay, thank you very much mad congratulations.

Operator

The next question is from Andrew Uerkwitz, Oppenheimer. Please go ahead.

Andrew Uerkwitz – Oppenheimer & Co.

Hey, I missed the first part of the call, so let’s have a clean up question first. Is NP-4 s shipping more than NP-3?

Dror Israel

Yes. We can say that NP-4 is now taking the lead.

Andrew Uerkwitz – Oppenheimer & Co.

Is that on revenue or like a volume basis?

Dror Israel

It’s becoming both.

Andrew Uerkwitz – Oppenheimer & Co.

Okay, so my question then becomes, I’m trying to understand this, I felt that pricing for the NP-4 was much higher than NP-3. So I'm surprised that, despite the good quarter, it's not even better, if that makes sense?

Eli Fruchter

I think that it is clear, but might be we will not clear. We said that NP-4 already exceeded NP-3 last year and in the first quarter this year, it exceeded NP-3 by revenues. So you are right on that.

Andrew Uerkwitz – Oppenheimer & Co.

Okay, thank you, I appreciate it. That's all I had, thank you.

Eli Fruchter

Thank you, Andrew.

Operator

(Operator Instructions) The next question is from Rick Neaton of River Shore Investment Research. Please go ahead.

Rick Neaton – River Shore Investment Research

Hello, Eli and Dror. A couple questions, first, this was a record revenue report for your, any first quarter; is that correct?

Dror Israel

If you say so, I’m sure that it’s correct. I don’t have all the first quarters in front of me.

Nick Neaton – River Shore Investment Research

Okay, just to clarify your statement about your optimism for this year. In your press release, you issued before your February earnings call, you said that you expected that growth for the entire year of 2013 would be greater, or revenue for the entire year of 2013 would be greater than revenue for the entire year of 2011. And so are you saying that you’re more optimistic that you’re going to meet that goal in 2013?

Eli Fruchter

Yeah. we believe that our revenues in 2013 will be higher than our revenue in 2011.

Rick Neaton – River Shore Investment Research

With your gross margin guidance for the second quarter, would it be fair to model Cisco revenue at about a 45% portion of Q2 revenue?

Eli Fruchter

No. we don’t provide the guidance by customers. We give the gross margin, and if we went up from 81 and we are saying that we’re going to 84, obviously that suggests the customer mix as different, but we are not going to provide guidance by customers.

Rick Neaton – River Shore Investment Research

Okay. one last question about the NPS use, when you talk about the expectation of design wins from tier 1 customers, does that include what you would classify as a tier 1 customer that sells to data centers and it could be a new customer?

Eli Fruchter

Yes, absolutely. As I said, we are targeting both our provisional customer that can use the NPS for the next generation routers. And we also target a new set of customers that are data center customers and either buy or sell in to data centers.

Rick Neaton – River Shore Investment Research

Okay, thank you.

Eli Fruchter

Thank you, Rick.

Operator

The next question is a follow up question from Jeff Schreiner. Please go ahead.

Jeff Schreiner – Feltl and Company

Yeah, thanks for taking a couple extra questions, guys. The first one, Eli, I just wanted to ask – not trying to get guidance for specific customers, but in the last few years, you've certainly seen some seasonality with regards to one of your customers, ZTE, typically making purchases in certain quarters. Have you seen any data that could suggest that those seasonal trends are going to repeat?

Eli Fruchter

We spoke about it briefly and we said that things are starting to few large customers. Then they don’t buy evenly and they could have spikes in various quarters. And they don’t know that things will always be the same quarters. But we cannot expect this to just grow sequentially from quarter-to-quarter. We think it will be lumpy. And we are still seeing that basically is likely to grow end of the year.

Jeff Schreiner – Feltl and Company

Okay, and then just you talked about eight NP-4-based platforms right now and maybe a few additional platforms entering production in the second half of the year. Could you talk about the total number of NP-4 platforms versus what the total number of NP-3 platforms were?

Eli Fruchter

I think that talking about NP-4 platforms versus NP-3 and NP-2, so NP-2 really had one big platform and that’s the Juniper MX, NP-3 had, I would say two and three and with NP-4 we had over 10 and eight of them are in production, but it’s important to say that you cannot compare all the platforms, they are not all equal and (inaudible) by far the biggest platform. So it’s important to understand it.

Jeff Schreiner – Feltl & Co.

Okay, final question from me, what process node is NP-5 going to use? And then could you discuss maybe your thoughts on moving to 28 nanometers through NPS and maybe the benefits that may offer to EZchip?

Eli Fruchter

NP-5 is using 28 nanometer and so with the NPS, so both chips are using the same process technology.

Jeff Schreiner – Feltl & Co.

And are there any benefits for you moving to 28? I was talking with one of your competitors last night. He talked about moving to 28 then to 20 and to 16; adds a lot of pressure to the internal ASIC development teams because of the cost benefits.

Eli Fruchter

I think we look at all the different process technology node and we selected the 28 nanometers, because we feel it gives us, it gives us what we need with performance cost participation. So when we look at all of that, I think that for us that right process right now.

Jeff Schreiner – Feltl & Co.

Okay, thank, gentlemen.

Eli Fruchter

Thank you, Jeff.

Operator

The next question is Mike Burton of Brean Capital. Please go ahead.

Mike Burton – Brean Murray, Carret & Co.

Hey, guys, and congratulations on the quarter. I just wanted to follow-up on this gross margin guidance. In the past, you’ve given us some color on the ex-royalty gross margins. It looks like that was 72.4% this quarter. Did you mention where that non-royalty gross margin will be next quarter or perhaps how we should think about that going forward? Thanks.

Eli Fruchter

Yeah. hi, Mike so again, when we guide for the 84% gross margin reported to combination between the royalty revenue going forward Marvell and with Cisco being the customer and then the remaining is the right model. We cannot specify down the quarter-by-quarter, because this will result in providing guidance to their customers, which we don’t like to do. As I said, in general, the model should be, long-term model should be 68% for the direct model, and we developed 60% of the revenues and then the remaining 40% at 100, and this provides for a model gross margin of 81%. Of course, there will be changes on the quarter-by-quarter basis based on the customer and product mix.

Mike Burton – Brean Murray, Carret & Co.

Okay, thanks again.

Eli Fruchter

Great. Thank you, Mike.

Operator

The next question is from Jason Polansky of JP Capital Management. Please go ahead.

Jason Polansky – JP Capital Management

Yeah. Thanks for taking the question. If I read the press release right, are you saying that you plan to sample the NP-5 in June?

Eli Fruchter

Yes, that’s correct. What we said is that we take it out and we expect samples in June.

Jason Polansky – JP Capital Management

Okay. so does that mean that you will have sample revenue in Q2?

Eli Fruchter

If we’ll have sample revenue in Q2, it will be extremely minor.

Jason Polansky – JP Capital Management

So there should be more significant sample revenue in Q3?

Dror Israel

Yeah, likely.

Jason Polansky – JP Capital Management

Okay. And then prior questioner asked the same thing, I mean I seem to remember a pretty big bump from sample revenue when the NP-4 sampled. Do you expect a similar situation?

Dror Israel

Yeah. It’s too early to say, I don’t know. Maybe another thing about this is that many NP-4 customers they purchased a large quantity of NP-4 sampled in 2011, where new customers using NP-4 for the first time and more it’s not all NP-5 customers are already out using NP-5. So it’s possible that the quantity will be loyal. We don’t know it, but to start with that.

Eli Fruchter

That’s a good point. And actually from NP-3 to NP-4, we had the customers and form NP-4 to NP-5, it’s the same customers. So a lot of the software is already developed. So we feel that they will need less samples to go to production.

Jason Polansky – JP Capital Management

So there’s something about that development efforts that would burn through more chips, so to speak?

Eli Fruchter

Yeah. The NP-4 development that will then mostly, I would guess that the number of centers for NP-5 will probably be lower.

Jason Polansky – JP Capital Management

Are they priced in line with what their production pricing will be, or would the pricing of those chips be similar to the NP-4 pricing?

Eli Fruchter

NP-5 price would be higher than NP-4, but the cost will be higher as well. And our long-term revenue model is not changing from NP-4 to NP-5. So we believe that we will continue with the similar model.

Jason Polansky – JP Capital Management

Okay. But I just don't know at all about this historically – is a sample chip priced at the same price as a production chip, you’ll price later on?

Dror Israel

Normally, it’s not. But – normally for the first year, the first sample, the price is higher. But the cost is higher as well.

Jason Polansky – JP Capital Management

Okay, thank you very much.

Eli Fruchter

Thank you, Jason.

Operator

The next question is from Steve Baughman of Divisar Capital. Please go ahead.

Steve Baughman – Divisar Capital Management, LLC

Thanks very much for taking the question guys. Just wanted to ask a question on the changing relationship with Cisco and the intention to go direct on the NPS. Eli, I think you made a comment that you thought that Marvell could be a competitor. Do you expect Marvell to compete for that same socket at Cisco externally from you?

Eli Fruchter

No I think I spoke about it more in general term and not for a specific customer. I think that – we are not aware of merchant silicon, but can compete, that actually regards at Cisco. I think that I continue to say I said it before and I say it again. I think that in-house is always our competition and not so much in merchant Silicon. In our current market in router, when we’re talking about data center, it will be mostly merchant silicon that we will compete against.

Steve Baughman – Divisar Capital Management, LLC

Great, thanks very much for taking the question.

Eli Fruchter

Thank you, Steve.

Operator

There are no further questions at this time. Before I turn the call over to Mr. Fruchter for the concluding statement, I would like to remind participants that a replay of this call will be available on the company website at www.ezchip.com. Mr. Fruchter, would you like to make your concluding statement?

Eli Fruchter

Yes, operator. I would like to thank everyone for joining us today and I am happy that I was able to provide a more optimistic message, and then looking forward to speak to you all in our next earnings call. Thank you.

Operator

Thank you. This concludes the EZchip first quarter 2013 results conference call. Thank you for your participation. You may go ahead and disconnect.

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