Cisco Set to Become EZchip's Largest Customer: Is That a Good Thing?

On Thursday, network chip maker EZchip (Nasdaq: EZCH) will report results, and I expect that for the first time in the company’s history, it will move to double digit quarterly revenue of over $10 million. In the second quarter, there was a drop to $6.7 million, after its largest customer, Juniper Networks (Nasdaq: JNPR), temporarily halted orders and used up the chips in its inventory. In addition, it turned out then that Juniper planned to use self-developed chips, rather than EZchip’s, so that in a few quarters, Cisco (CSCO) - through Marvell (MRVL) - will become EZchip’s biggest customer.

The interesting thing is that in parallel with EZchip's results on Thursday, Juniper is holding a press conference with announcements of new launches to mark the share's move from Nasdaq to the New York Stock Exchange, under the same symbol. In honor of the event, it is even unveiling a new corporate logo.

It is expected that as part of the announcements, it will introduce its new network chip. Juniper developed the chip itself, and it will replace EZchip's products. Apparently, that is the reason for the weakness that EZchip's share has displayed recently. According to the Forbes website, Juniper executives describe the new launches, which will include a new software platform as well, as "the most significant since the company was established 12 years ago."

Experience with Radvision Ltd. (Nasdaq: RVSN) has taught us that to be dependent on Cisco as a customer with a share of tens of percentage points of annual sales is quite dangerous. On the other hand, it is even more dangerous - for Cisco - to be dependent on EZchip's processors as the main engine for all its most important routers.

There are those who say that the divorce between Juniper and EZchip is not based on superior technology that Juniper found in its own company, but by the fears that one day Cisco will have to buy EZchip, leaving Juniper without a processor supplier.

Disclosure: Author holds shares as part of his portfolio tracked by "Globes".

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009. Republished on Seeking Alpha with full permission.

Comments

[AuContrarian:]

CSCO has a history of buying the chip companies with superior solution to guarantee supply and to deny competitors access to the technology, with the effect that CSCO maintains market share. The author's thesis that JNPR decided to take destiny in its own hands before that fate is prescient. CSCO's reliance on EZCH NPs could be the smarter move, given the author's belief that JNPR is adopting inferior technology to keep share. If that backfires, then EZCH is in the catbird seat: its largest customer will be the market leader, and it has (per today's concall) design wins in 9 of the top 14 carrier ethernet vendors, presumably including China's Huwaei and ZTE, who are plowing through China stimulus dollars piping the Mainland.

Oct 29 12:56 PM