EZchip Semiconductor's CEO Presents at Acquisition of Tilera Conference (Transcript)

Jul. 1.14 | About: Mellanox Technologies, (MLNX)

EZchip Semiconductor Ltd. (EZCH) Acquisition of Tilera Conference Call July 1, 2014 12:00 PM ET

Executives

Ehud Helft – GK Investor & Public Relations

Eli Fruchter – President and Chief Executive Officer-EZchip Semiconductor Ltd.

Dror Israel – Chief Financial Officer-EZchip Semiconductor Ltd.

Devesh Garg – Co-Founder, President, and Chief Executive Officer-Tilera Corp.

Analysts

Gary W. Mobley – The Benchmark Co. LLC

Joseph Wolf – Barclays Capital Israel

Jeff A. Schreiner – Feltl & Co.

Jay Srivatsa – Chardan Capital Markets LLC

Krishna Shankar – ROTH Capital Partners LLC

Paul McWilliams – Rivershore Investment Research, Inc.

Mike A. Burton – Brean Capital LLC

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the EZchip Semiconductor 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 July 1, 2014.

I would now like to hand the call over to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, please go ahead.

Ehud Helft

Thank you, operator and good day everybody. I would like to welcome all of you to EZchip’s conference call to discuss the acquisition of Tilera and thank EZchip’s management for hosting this call. With us on the line today are Mr. Eli Fruchter, the CEO; Mr. Devesh Garg, the CEO of Tilera, and Mr. Dror Israel, the CFO. You should have all received the company’s press release discussing the acquisition, if you have not received it, you may view it in the news section of EZchip’s website www.ezchip.com.

Before we begin, I would 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.

In addition, this call will contain some forward-looking statements including predications, expectations, estimates and other information with regard to EZchip or Tilera’s performance in the coming quarters. It is important to bear in mind that these forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today.

EZchip does not assume any obligation to update that information. A full discussion of the risks can be found in the company’s filings with the U.S. Securities and Exchange Commission. Eli will spend a few minutes discussing the strategic rationale and benefits of the acquisition. Then Dror will go into some of the financial specifics of the transaction and the forecasted effect it will have on EZchip’s financials in the coming quarters.

Finally, Tilera’s CEO, Devesh Garg, will spend a few minutes, giving his viewpoints. We will then open the call for the question-and-answer session.

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

Eli Fruchter

Thank you Ehud, good day everyone and welcome to today’s conference call to discuss the acquisition of Tilera. Today, we announced the acquisition of Tilera for $130 million in cash, $50 million to be paid at closing and up to an additional $80 million subject to the attainment of certain future performance milestones.

I would first like to take this opportunity to congratulate Tilera’s employees on their success in building an innovative company with an impressive portfolio of customers, products, patents and technology.

We are excited to add the Tilera team to the EZchip family and welcome Tilera’s CEO, Devesh Garg, to EZchip’s management team. Devesh will assume the position of President of EZchip, in charge of all U.S. operations and worldwide sales. We will make sure that the Tilera employees quickly become part of our family and feel that EZchip is their new home.

EZchip is a highly successful market leader, thanks to our employees and I want to use the opportunity to thank each one of you, whether you are listening to the call right now or reading the script later. It is a big day for us, it is the first acquisition we have made, and we will work hard to make it successful.

In the last couple of years, we have looked at entering new markets, expanding our Total Available Market and diversifying our product line and customer base. Tilera brings this to us, all in one. The Tilera family of multi-core processors, intelligent network interface cards and white-box appliances squarely place us immediately into new growth markets that double our Total Available Market to $2 billion.

Tilera provides us with existing customers and revenues, and an outstanding team of people. We see Tilera’s market segments as very strategic for our growth, in particular those of data centers and cloud networks. EZchip is the market leader in high-speed NPUs with the highest performance and Tilera provides the highest core-count multi-core CPUs at the lowest power dissipation available today. There is often confusion as to the role that NPUs and multi-core CPUs play and whether they are complementary or compete.

Now that we offer both, it is important that this is well understood. There is great synergy and a complementary nature in the target applications of both network processors and multi-core processors, and while the NPS offers the highest performance for the very high-end portion of these applications, the Tilera multi-core processors offer the best power and cost across all other performance points.

Together, they provide a complete portfolio of processors to address all the performance, power and cost points for carrier and data-center networking equipment. Multi-core CPUs are used in a wide variety of products and markets, particularly in network appliances, enterprise routers, cloud computing and video and voice encoders to perform security, DPI, network monitoring, routing, load balancing, SDN and NFV for data-center and carrier network infrastructure.

Tilera is a leader and innovator in multi-core processors. It offers the highest core-count per CPU and the best performance per watt in the industry. Tilera’s technology innovations have resulted in over 100 awarded and pending patents.

EZchip alone, with the addition of the NPS, is targeting a market of close to one billion dollars. We believe that with the Tilera multi-core CPUs, intelligent NICs and appliances we are doubling our total addressable market to $2 billion dollars in 2016 consisting of the data-center and telecom markets.

The Tilera customer base is diversified with close to 100 customers in various market segments, including companies such as Brocade, Check Point, Cisco, Fujitsu, Harmonic, Mikrotik, ZTE, and many more. This acquisition significantly increases the diversification of our customer base and lowers customer concentration.

With Tilera’s current products, design wins, customers and revenues we are entering the multi-core market that is expected to be the fastest growing segment of the multi-billion dollar embedded processors market. Our strategic goal with this acquisition is to leverage technologies and expertise from EZchip and Tilera to build the world’s most powerful next-generation family of multi-core processors.

It will not only have the highest core count at lowest power, but also the highest performance through the integration of EZchip’s market-proven technologies for accelerating network and packet processing. We believe that by doing so, we will be able to address the various multi-core CPU market segments with a highly differentiated solution. Finally, the acquisition will also strengthen EZchip’s U.S. presence in sales, marketing, operations and R&D, with offices in Silicon Valley and Boston.

I would like to hand over to Dror to cover some of the financials of the acquisition. Dror.

Dror Israel

Thank you Eli. As Eli mentioned, the cost of the acquisition is $50 million at closing, and subject to the attainment of certain future performance milestones, we may pay additional cash to the Tilera stockholders of up to $80 million. The transaction has been approved by the EZchip and Tilera Boards of Directors and is subject to customary closing conditions. We expect closing to take place during the third quarter.

I will now go over the main points covering Tilera’s forecasted effect on EZchip’s financials. Tilera had revenues of approximately $35 million in 2013. 2014 started with a decline in revenues in the first half of the year. We expect growth to resume in the second half of 2014 and we expect revenues to grow above the $35 million level in 2015.

Non-GAAP gross margins for Tilera are expected to be in the 60% to 65% range, depending on customer and product mix. Combined with EZchip existing gross margin range of 80%, we expect it will result in a consolidated gross margin for EZchip of approximately 75% for 2015.

Annual non-GAAP operating expenses for Tilera are expected to be in the $22 million range, representing break-even point at revenues of $35 million. This will result in a consolidated OPEX for EZchip of approximately $55 million in 2015.

Overall, we expect the Tilera acquisition to be neutral to slightly dilutive to our 2014 EPS and accretive to earnings per share on a non-GAAP basis in 2015. In our Q2 earnings call in August, we intend to provide our guidance for Q3, which will already include the consolidation of Tilera’s financials for a portion of the third quarter.

I will now hand over the call to Tilera’s CEO, Devesh Garg. Devesh?

Devesh Garg

Thank you Dror, and thank you, Eli. Today, we announced our agreement to join the EZchip family, creating one of the world’s leaders in network processing for both control and data-plane applications. I would like to thank all those who made this possible including our investors, customers, partners, and of course, our team who is excited about being able to join together with EZchip.

As has been stated by Eli, we bring an added dimension of manycore general purpose processing capabilities to the EZchip product offering, which expands the overall markets we can serve. Given the complementary nature of the EZchip network processors and our multi-core processors, we will create a formidable product portfolio.

This along with our organizational center of gravity in the Silicon Valley and Boston areas allows our combined entity to be closer along with more resources to key customers and fast-growing geographies. We are excited about the next phase of the Tilera story and look forward to working with the EZchip team. We thank Eli, Dror and all those at EZchip for the opportunity to come together as one team.

Let me hand it back to Eli for some concluding remarks.

Eli Fruchter

Thank you, Devesh. We are very excited about the opportunities that the addition of Tilera to EZchip provides to us. This acquisition will leapfrog us into a new fast growing market, immediately making us a significant player in the multi-core CPU arena. It doubles our Total Available Market to $2 billion, it significantly broadens both our customer base, and product line, and it will help us penetrate both the data center, as well as the cloud network markets, both areas in which we had a desire to increase our presence.

The addition of Tilera’s great employee base in both Silicon Valley, as well as Boston will significantly strengthen EZchip’s U.S. presence. And finally, we have a clear roadmap strategy for integrating both of our market-leading technologies in order to bring to the market differentiated multi-core products.

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. (Operator Instructions) The first question is from Gary Mobley of Benchmark. Please go ahead.

Gary W. Mobley – The Benchmark Co. LLC

Hey, guys, congratulations on the acquisition. Dror, did you mention that you anticipate Tilera’s revenue in fiscal year 2014 to be $35 million or was that fiscal year 2015?

Dror Israel

Hi, Gary. Yes, it’s $35 million or above $35 million for the 2015 and I said $35 million we expect the Tilera business to all already break-even and that’s why we believe that 2015 can already be accretive to EPS.

Gary W. Mobley – The Benchmark Co. LLC

Okay. You mentioned that revenue for Tilera is in a decline mode or at least it was in the first half of the year, could you speak to what’s driving the revenue down and then Devesh if you can maybe talk about what has been maybe in impedance to the company’s growth or having some significant higher revenue level as the company that been private since 2005 and I guess really gaining momentum more so just in the past five years.

Devesh Garg

Okay, Gary. So I will talk – so about 2014 the year started lumpy with delivering of decline and as we said we expect the course to resume in the second half. We mostly are concerned about the fourth quarter, because the acquisition is expected to close somewhere towards the middle or end of the third quarter, so we are really more focused about the fourth quarter and of course in 2015which by then as I said we already expect them to be accretive to earnings.

Gary W. Mobley – The Benchmark Co. LLC

Okay. And Devesh, if you maybe speak to what has worked in favor of Tilera in recent years and what has worked against the company and perhaps as well explaining that who has Tilera been buddy heads up against in the multi-core processors market the most?

Devesh Garg

Hey, Gary.

Eli Fruchter

Okay. Devesh please go on.

Devesh Garg

No. Please go ahead, Eli.

Eli Fruchter

I think that Gary, Tilera group significantly in recent years and became a significant players in their multi-core reaching $35 million in revenues in 2013 and since start of this year there is a decline, we believe that that’s a temporary decline and once the company is part of that as Dror said in the fourth quarter, it will be we believe back in the growth cycle and that’s why we assume that in 2015 it will be a accretive to us. And I will let Devesh answer you regarding competitive advantages in his market.

Devesh Garg

Gary. The progress that we’ve seen in the recent past with Tilera products is predicated on the inherent architecture and our ability to deliver the highest performance per watt across a family of processors that we have in production today. Those include 9, 16, 36 and 72-core devices and we have a family of not only processors, but also intelligent NIC cards or application cards coupled with some white-box appliance capabilities that we have.

these three elements comprise of our product portfolio. And what we’ve seen that’s enabled us to make some of the progress we’re having in the marketplace is really to focus our efforts on those markets that are very synergistic with our product capabilities that data networking security, they happened to be high growth areas and the differentiated capabilities that we provide in terms of scalable performance along with our power, efficiency and our C-based, Linux-based programming model that entire set of focused capabilities is what’s allowed us to have the positive momentum that we’re seeing.

Gary W. Mobley – The Benchmark Co. LLC

Okay. just one last question, I’ll jump in the queue. Tilera I understand uses its proprietary ISA instructions architecture, I could think you dub it iMesh, and if I’m not mistaken, the MTS from EZchip is based on a arch process core, I think both 64-bit, and larger competitors are stimulating are moving with some parts DC, perhaps away from MTS. I’m just wondering what the long-term plans are for an ISA for a combined Tilera, EZchip product portfolio or, will these things continue to be on, on different roadmaps?

Eli Fruchter

So, let’s be honest to that, Gary, we see the EZchip MTS product line or the network processor continuing, and we see multi-core is continuing, and we see both using three different processors. but we certainly see in the future that the software solutions will become similar between the two solutions. We believe that the architecture that we use in the MTS is to really optimize for extremely high-speed. so using – we are using the processor that enable that, and we focused on data-plane, while the multi-core, the Tilera products of doing control and data-plane, and they’re using sample processors.

In the future, the Tilera product line that is actually being developed right now will continue to be the highest core-count at the lowest power dissipation. and in addition to that, it will integrate accelerators from EZchip that exist in our product line today. And when you combine the two, we will actually come out with the family of multi-core processors that will be the highest core-count, the lowest power dissipation and the high-performance with the EZchip accelerators, and we will also move towards using the standard processors. and when time comes, we will announce our new product line, and then we will also – we’ll also disclose what architecture we are using and what type of processors.

Gary W. Mobley – The Benchmark Co. LLC

All right. thank you, guys.

Eli Fruchter

Thanks, Gary.

Operator

The next question is from Joseph Wolf from Barclays. Please go ahead.

Joseph Wolf – Barclays Capital Israel

Hi, thank you. Just a question about the timing of the earnout, and your confidence in the revenues, I know that this is a part of question asked about the decline. But I’m wondering if you could attribute it to the end markets, customer push outs, or any specific projects that you think you’re going to come back and then how that ties into the timing of the earnout?

Dror Israel

Hi, Joseph. So in terms of the earnout, we have two way tranches. The first one is up to $50 million for revenue target, starting at $35 million and up to $45 million during the 12 months ending June 30, 2015, meaning the next four quarters. And then the next tranche, which is up to $30 million for revenues of between $25 million and $31 million for the following six months, ending December 31, 2015.

So, looking at both of them, it means that it will have to reach revenues of at least $60 million within the next 18 months in order to start getting some of the earnout and up to $75 million for the same period in order to get the full earnout.

Joseph Wolf – Barclays Capital Israel

Okay. Are there any balance sheet changes, or is it the cash on hand that the acquisition provides, or is it just a clean transaction?

Dror Israel

It’s a few cash transaction. and at this point, we are not disclosing any additional information, other than one that I already discussed, which I think is, and also at this point to build some kind of a model and understand financially between now and 2015.

Joseph Wolf – Barclays Capital Israel

And then just finally, you talked about the control-plane and the data-planes in both products. Could you give us perhaps an example in SDN application where the data center application where you use both sides of the business in the $2 billion plan?

Dror Israel

I think that there are various applications for each of the two different product lines in all the different market segments including at the end, and in a week. And as I said before, the difference between the two product families of the MTS is targeting the very high-end data-plane only, while the market called the Tilera products are targeting lower speeds, actually, all the remaining speeds, and they combined the control-planes and the data-planes. So I think that with the two product lines to get this, I think that we are actually covering the entire market.

Joseph Wolf – Barclays Capital Israel

Without be like a front-end and a back-end of a system potentially?

Dror Israel

There could be applications where is the front-end to back-end, but not necessarily as an example, the NPS can reside in top of light switch, and Tilera can reside in appliances, okay.

Joseph Wolf – Barclays Capital Israel

Okay, perfect. All right. I will leave the questions to other people. thank you very much. Congratulations.

Dror Israel

Thank you, Joseph.

Operator

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

Jeff A. Schreiner – Feltl & Co.

Yes, thank you for taking my questions gentlemen. congratulations on acquisition. I would just – I’m going to have to come back to this revenue point here. Can you give us Eli some more understanding in terms of maybe where revenues are going to decline, because it certainly seems that revenues are going to decline in 2014, if we’re just going to get back to $35 million in 2015? What confidence do you have, are there new programs, new design wins that are going to be shipping in the second half that gives you the confidence to make those assumptions right now, following the acquisition?

Eli Fruchter

Yes. So what we said in the – let me be clear on that, we are not saying that revenues will go back to $35 million in 2015, we’re actually saying that it would be above $35 million, and the $35 million that’s break-even. so that’s why we are saying that the acquisition will be accretive in 2015, because that’s when revenues will go above $35 million.

Now as for 2014, since we are only going to add the Tilera revenues, maybe in the second half of Q3 and mainly Q4, then that’s when the revenues are back on the growth. So that’s so we’re not seeing the entire 2014 revenues, but we only see a quarter-over-quarter in a half. So we believe that once we add that then we said that it will be mutual to slightly dilutive and accretive in 2015.

Jeff A. Schreiner – Feltl & Co.

And I guess just to come back once again, I’m just trying to understand, why growth is going to resume if the company did $35 million in the first half seems to be quite negative, is there a new project, new product, new customer ramp it’s going to be happen in the second half that gives you the confidence that the growth is returning when you get to the fourth quarter and entering calendar year 2015 just trying to really get at, where the confidences is coming from at this point.

Eli Fruchter

It’s coming from understanding exactly why that’s decline happened understanding what customers all customers the decline came from and seeing their focus and the backlog they’re moving forward. So based on all that we now assume in the pretty high level of confidence that the goals will resume in the first quarter.

Jeff A. Schreiner – Feltl & Co.

Okay. And can you talk about obviously it looks like you’re adding about 100 or more new customers, but this a situation like your other revenue segment and which you have 50 to 60 customers but not more than 1% or 2% of your revenue. How many 10% customers are you going to be adding on with the acquisition on Tilera?

Eli Fruchter

So it consists of 100 customers obviously that are found that are more meaningful than others. We will discuss those customers once Tilera becomes part of EZchip and if such a customer or customers are greater than 10% wanted about of EZchip we will discuss then specifically. Okay. And that that’s we will be done probably either of the sales above the fourth quarter for the first time.

Jeff A. Schreiner – Feltl & Co.

Okay. And final question for me it just head of, I guess it’s pretty back in a little bit of what Gary was asking, Tilera has been unknown player here in Silicon Valley for a long time and you have a $1 billion TAM that you are signing based on your assumptions for the company’s business yet that’s well less than 5% at this time, how fragmented industry right now in terms of our market share and what are going to be the drivers that can get Tilera to be double-digit market share player?

Eli Fruchter

I’ve seeing that that Tilera today is in the market that Broadcom and Cavium, I would sell the main players. I think that with Tilera’s technology that is the highest score county in the market and the lowest participation combined with our accelerator. We think that when we take those full technologies into one sheet we believe that the next generation that we will be build – that we will be building together will actually be a lot more differentiated than the time Tilera product sell and they thing that we will be able to gain market share with that – with that new product. And in the meantime I think that with the current products the segment Tilera now becomes part of EZchip will also benefit us and I believe they just based on this we will be able to get a more design wins and increase the market share.

Jeff A. Schreiner – Feltl & Co.

Okay. I will step for now. Thank you for your time.

Eli Fruchter

Thanks Jeff.

Operator

The next question is from Jay Srivatsa of Chardan Capital Markets. Please go ahead.

Jay Srivatsa – Chardan Capital Markets LLC

Well, thanks for taking my question. Eli congratulations on the acquisition in terms of the customer base itself you’re going from working with the handful of customers and now dealing with over 100 customers. How do you hope to consolidate the sales effort, are you going to walk away from some of the smaller guys, or are you planning on scaling the sales force to be more in a broad base across all the different customers. Can you help us understand how you’re looking at the sales strategy going forward?

Eli Fruchter

The Tilera sales force is dealing with these customers today, we have our sales force we’ll combine the two sales force together, so I don’t see an issue to deal with all these customers. And moving forward, we will focus more and more obviously on larger customers that provide much high revenue potential. So as we move forward we’ll try to get more and more strategic deals with more Tier-1 customers.

Jay Srivatsa – Chardan Capital Markets LLC

Okay and then in terms of the product, new product introductions, EZchip has been on a product cycle of a very long design cycles, while Tilera seems to be designed over a handful of products with a – scattering for tonne of platforms. Help us again understand how do you hope to consolidate the design efforts so that both these products are coming out in sync with each other as you look ahead to the next few years?

Eli Fruchter

I think that the two product lines are not – they are complementary to each other and you see different design cycles in high-speed NPUs that go into alter, where the design cycles are very long and products tend to stay there for many, many years. It is different from the multi-core market where design cycles are shorter than product are shorter and lean, but once we become a player in both, we actually provide solutions that in many cases others cannot provide, we can actually provide both and down the road with the same software offering that will actually give us an advantage in both. So we believe that the fact that we have two product lines even though the design cycles are different that’s a big advantage for us.

Jay Srivatsa – Chardan Capital Markets LLC

Okay. And then last question from me, EZchip has been dependent on the CapEx cycle of service providers specifically related to the carrier Ethernet market, what are some of the macro factors that Tilera is dependent on as you look at the next few years?

Eli Fruchter

I think that the multi-core market is a lot more diversified, different applications, different customers. So it is not like we are in, to a large extent, we depend on carriers as you said, and even more specifically on the edge of our tale. So with the Tilera product line we are diversifying that and we are seeing many different market segments that these products can play in.

Jay Srivatsa – Chardan Capital Markets LLC

Thank you, good luck.

Eli Fruchter

Thank you, Jay.

Operator

The next question is from Krishna Shankar of ROTH Capital. Please go ahead.

Krishna Shankar – ROTH Capital Partners LLC

Yes, congratulations Eli and Devesh on the deal. Can you comment on kind of the next product roadmap where you combine EZchip and Tilera capabilities, can you talk about what elements you see in terms of common architecture whether it’s C programmable, the fabric that Tilera has an EZchip’s NPS architecture, can you talk about how you plan to sort of unify these architectural elements in your next generation architecture?

Eli Fruchter

We are not willing to do it now, it is too early, we will announce the product. What I can say at this stage is that we are going to use the strengths of each company and bring to market a product that combines these strengths and I already said that Tilera strengths is the many-core architecture, the mass that can actually connect many-core in a single chip, very efficiently and at a very low participation. And what we bring is extremely high performance. We have in our chips, network accelerators that simply boost the performance. so we will do that part. So the next family of multi-core products that will come from the combined company will have the benefits of both product lines.

Krishna Shankar – ROTH Capital Partners LLC

Okay. Then can you remind us again, I think there are some comments at the beginning [Audio Gap] existing customers. Can you mention the key customers again, please?

Eli Fruchter

I could not hear to answer you both, can you repeat please?

Krishna Shankar – ROTH Capital Partners LLC

Yes, you had mentioned some key customers for Tilera at the beginning of the call; I missed that. can you repeat that, again?

Eli Fruchter

Yes, I mentioned a few customers like; I mentioned the Brocade, and Check Point, and Cisco, and Mikrotik and several other customers. We will place the script on our website after the call, so you can – you are welcome to look at that and you will see the list that we pull there.

Krishna Shankar – ROTH Capital Partners LLC

Okay. and then my final question for Devesh, you guys have had a successful adapter and white-box appliance business, can you talk about how that is doing now and the synergies you see that EZchip in growing that adaptor card market?

Eli Fruchter

Please Devesh.

Devesh Garg

Yes. Hi, Krishna. The way I think about our product capability set is, whether it manifests itself as a chip, or a card, or a white-box appliance. The fundamental product capability around scalable performance, low power using a standard C and Linux-based programing model, all of those differentiated and unique capabilities that we have reside in each of our product offering. So what the physical manifestation is really intended to be able to provide a solution depending on what the end customers’ requirements are.

So at the highest level, the value that you can describe to Tilera products is the same and the physical manifestation maybe different. and so we do see some customers who would like to take advantage of cards and/or appliances that are readily available to accelerate their time to market, or allow them to focus their efforts on the software side, and less so, on the hardware side. So I really see it simply as an extension of our core capabilities and being able to provide a solution that needs a specific end customer’s requirements.

Krishna Shankar – ROTH Capital Partners LLC

Okay. thank you.

Operator

The next question is on Paul McWilliams of Rivershore Investment Research. Please go ahead.

Paul McWilliams – Rivershore Investment Research, Inc.

Hi, guys, congratulations. this looks like a very good deal for all of us. Can you help me a little bit under by defining, or give me a rough definition of the Tilera ASP range for the chips?

Eli Fruchter

Hi, Paul. Yes, it’s quite a large range depending on the different chips and Qualcomm, it may range between, we believe the 200 to 800 and even before.

Paul McWilliams – Rivershore Investment Research, Inc.

Okay. so the high-end of their range, they were kind of getting into MTS territory. is that correct?

Eli Fruchter

It’s correct, it sounds correct from the price point. remember that, the Tilera is actually it combines the control and data-plane, while MTS is just data-plane. So it comes close to the territory price wise, but not performance wise.

Paul McWilliams – Rivershore Investment Research, Inc.

Understood, absolutely, and that’s why I like the deal so much. One of my big concerns in the beginning was being able to carve out a niche for yourself at the lower end, and this answers that question, and I think very well. Now within the Tilera product line, do customers have IP portability across a given platform; say TILE-Gx or TILEPro?

Eli Fruchter

Devesh.

Devesh Garg

Yes, they do. Fundamentally, our programing model is a standard C-based environment, and we support a Linux-based environment as well. And what this allows is any software that’s been developed for the particular product to be reported and recompiled immediately onto another product. So, for example we have a 9-core part, a 16-core part, a 36-core part, and a 72-core part in our TILE-Gx family.

If you develop software for any of those individual devices you are able to immediately take advantage of that and use there are any of the other remaining three devices. So, you have software portability across that entire range and in addition to that from our previous generation the TILEPro to the new generation. You do have the ability to also take software that was developed on the TILEPro and migrated forward onto the new generation products as well.

Paul McWilliams – Rivershore Investment Research, Inc.

Excellent, excellent. I think there has been one of Cavium quarter zones for their success. We’d be fair just for modeling purposes to put around number on the Tilera Q4 of about $9 million?

Eli Fruchter

Well, you may.

Paul McWilliams – Rivershore Investment Research, Inc.

Okay, you won’t share that with responsible way with me, I understand. Now, you guys have you been working, talking in any detail about this new combined product line for a while leading up to today’s announcement?

Eli Fruchter

Was that the question Paul?

Paul McWilliams – Rivershore Investment Research, Inc.

Yes, yes, so basically have you been working with Tilera on defining those new product lines prior to today’s announcement?

Eli Fruchter

We’re talking for sometime now and we share the views on different things and many things and of course the next generation product is one of them. So, yes we did exchange a deal about how that new product line is going to look like.

Paul McWilliams – Rivershore Investment Research, Inc.

Okay, you may have answered or at least declining answer those next question already I’m not sure, when might we see the first joint parts?

Eli Fruchter

No, we did not answer that, and we’re not yet ready to give an answer like that. But I believe that when we announce it will obviously also give all the details about. What architecture is using what processors and when we expect the part of center.

Paul McWilliams – Rivershore Investment Research, Inc.

Okay one last question. Do you have commonality with your fab partners and well it’s a two part question. What they have noticed Tilera using on their most current generation parts?

Eli Fruchter

They’re using faulty on the current part and we will decide together on what the next technology will be.

Paul McWilliams – Rivershore Investment Research, Inc.

Okay, and for the third partner is DSMG?

Eli Fruchter

Yes.

Paul McWilliams – Rivershore Investment Research, Inc.

Very good. Thank you very much for your time.

Eli Fruchter

Thank you, Paul.

Operator

The next question is a follow-up from Gary Mobley. Please go ahead.

Gary W. Mobley – The Benchmark Co. LLC

Hi guys. I had a couple of follow-up questions. We just say a competitive bit process and draw your model – financial model has been dependent somewhat on these really nature of the company, both in terms of tax rate in R&D grants, how does this acquisition change that?

Eli Fruchter

Okay, so with regard to Israeli operation and then the existing EZchip operation nothing really changes. So, we are the tax model is pretty much tax is still at 2021 we believe that with the addition of Tilera and based on the net operating losses that we can use in addition to net operating losses that we already according of U.S. subsidiary. We believe that we will not be paying any taxes at least until 2017 and after that it will be based – it will start to pay gradual taxes of course based on earnings and performance and based on our ability to use the net operating losses.

Gary W. Mobley – The Benchmark Co. LLC

Okay and what about the R&D grants, does this is acquisition changed the availability of those grant it all?

Eli Fruchter

You know there all kinds of tax credit and tax planning that we will get into and you know we may share some more information after closing. At this point I think that for modeling purpose you can assume zero taxes up to 2017 inclusive and then start to gradually put some tax in the model.

Gary W. Mobley – The Benchmark Co. LLC

Okay and was this a competitive bid?

Eli Fruchter

Excuse me I’m not sure I understand the question.

Gary W. Mobley – The Benchmark Co. LLC

Were there multiple bidders in addition to EZchip for Tilera?

Eli Fruchter

Multiple bidders?

Gary W. Mobley – The Benchmark Co. LLC

Were there multiple interested parties in buying Tilera?

Devesh Grag

Okay. We are now going to comment on this.

Gary W. Mobley – The Benchmark Co. LLC

All right, very good thanks guys.

Devesh Grag

Thank you.

Operator

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

Mike A. Burton – Brean Capital LLC

Hey, thanks and congratulations on the deal. Can you help us understand the issues of why Tilera’s revenues were down in the first half when your competitors were putting up some healthy year-over-year growth? I was wondering is it share loss, customer share loss, production issues or anything you can help there. Thanks.

Devesh Grag

I think that question was asked from every possible angle so far and I think that we gave our answers and I don’t think that we have better answer than what they gave. We think that its temporary, based on what we check and what we sold and spoke to customers, we believe that that’s not going to continue and the company will be back in the growth path in the second half of year.

Mike A. Burton – Brean Capital LLC

Okay and then how many 10% customers did Tilera have?

Devesh Grag

We will count the 10% customers only when Tilera is part of EZchip, and there are customers 10% of EZchip. and that will be done once we are consolidating those companies.

Mike A. Burton – Brean Capital LLC

Okay, thanks.

Eli Fruchter

Thank you.

Operator

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

Jeff A. Schreiner – Feltl & Co.

Yes, my question is for Devesh. Could you help us, obviously, there is a broad range for ASPs, based on the number of cores, our customers might be using. Can you maybe give us a breakdown of how calendar 2013 revenues were spilt amongst low, mid, high-end type products? Just trying to understand in terms of what your mix is right now between maybe 9 core, 36, or 72, any information you can provide would be very helpful?

Devesh Garg

Jeff, let me jump and heel, since Tilera is going to be part of EZchip, and we are not – we don’t like to break our revenues between different products, and product lines. We are not going forward, we are looking – we are going to look at all of our products as one segment and as I don’t want to start giving numbers like that, I would know and that will be based for questions around it in the future.

Jeff A. Schreiner – Feltl & Co.

Okay. I’ll just leave it at that. Thank you very much.

Devesh Garg

Thank you. Thanks, Jeff.

Operator

(Operator Instructions) There are no further questions at this time. Before I turn the call over to Mr. Fruchter for his concluding statement, I’d 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. Thank you, everyone for joining us in such a big day for us. It’s our first acquisition, we are going to make it successful. We are joining quarters of two first-class teams, and we are sure that it will result with winning products.

I’m looking forward to talk to you in the coming earnings calls. Thank you.

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