EZchip, Cisco Look To Accelerate Despite Projections

Includes: CSCO, MLNX
by: Shlomi Cohen

The indices are breaking multi-year records, but not without reason. After a better-than-expected reporting and guidance season, U.S. macro data are also bringing pleasant surprises, and both these things are happening despite the crisis in Europe and the dollar's jump against the euro, which hits U.S. exporters. The Nasdaq index has opened 2012 with a storm, rising 300 points, or 11.5% since the beginning of the year, which invites some sort of correction.

Cisco's (NASDAQ:CSCO) financials, due on Wednesday after the close, are likely to provide the trigger for a temporary correction-- even if they don't disappoint, or if they are a little better than expected-- for there is no chance that Cisco will stun us with financials like those of Apple (NASDAQ:AAPL). On the other hand, there is also no chance that Cisco will do to us on Wednesday what its financials for the corresponding period did in 2011.

For those who may have forgotten, 2011 also opened with strong rises on Nasdaq, until, exactly this week twelve months ago, Cisco's dire report for the January quarter came along, with guidance for a slowdown to come, which sent its share price down 16% in a day. As the year wore on, CEO John Chambers-- whom some called upon to resign-- left no stone unturned until he proved with the last financials, at the end of November, that he had been written off prematurely.

Cisco approaches Wednesday's financials at a share price 50% higher than its 12-month low, which means that Chambers must not miss-- as has happened to some of his smaller competitors, such as Juniper (NYSE:JNPR) and Riverbed (NASDAQ:RVBD). Cisco will be the first to report on a period that includes January, so its financials will be very important for understanding where business is headed at the start of 2012, in respect of all its different kinds of customers-- namely governments, enterprises, and telecommunications service providers. As usual, Chambers will also report on sales and orders in specific countries.

Telecommunications service providers are the category of Cisco customer from which the results and guidance of EZchip Semiconductor Ltd. (Nasdaq: EZCH) will derive. EZchip is also due to report on Wednesday, but before the opening, that is, before Cisco.

In its previous conference call, EZchip considerably reduced its guidance for the fourth quarter, and it is unlikely that it will not meet it. The share price will respond to the guidance for the March quarter, and to judge from the large short position in the stock-- 2.3 million shares-- someone is waiting for further disappointment. On the other hand, the 22% leap in the share price since the beginning of the year signifies just the opposite.

I suppose the short players must feel comfortable betting against EZchip on the eve of its financials, with the company being traded at a market cap of close to $1 billion, and with a sales multiple of more than 10 and a p/e ratio of more than 26 for 2012. What's more, analysts are projecting a fall in investment in telecommunications infrastructure this year, in continuation of the fall seen already in the fourth quarter of 2011, especially at the two U.S. giants-- Verizon (NYSE:VZ) and AT&T (NYSE:T).

EZchip is a stock that should be examined according to its p/e ratio rather than its sales multiple, because its revenue from Cisco comes via Marvell (NASDAQ:MRVL) in the form of net royalties straight to the profit line, and it is known that, within a few quarters, Cisco will become its most important customer by some way from the rest. With accelerated growth in the profit line as a result of acceleration at Cisco, today's ratio of 26 will look too low, and irrelevant later in the year, and then the share price is likely to climb to hitherto unknown peaks.

In the guidance on Wednesday we will perhaps receive the first hint of such acceleration at Cisco, because according to the analysts at Deutsche Bank who review the stock today in advance of the results, two of its important platforms-- the ASR 9000 family of network routers and the ASR 5000 systems for cellular infrastructure-- will sell well among service providers constructing LTE networks, at the expense of Cisco's competitors, because of its "architectonic advantages", despite the general decline in investment.

The analysts do not go into detail but I presume that they mean advantages made possible by-- among other things-- the fourth generation of EZchip products, that have been incorporated into these systems in recent months, and on which EZchip makes far higher profits than on previous generations. The analysts see a technological gap of a year to two years vis-à-vis competitors like Juniper and Alcatel (ALU), with Cisco's cellular systems acting as a trigger for higher sales of its network routers.

Published by Globes [online], Israel business news - www.globes-online.com - on February 6, 2012 Reprinted on Seeking Alpha with permission © Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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