Over recent years, LanOptics has viewed its sole asset - EZchip Technologies Ltd. - as an early stage start-up that was not yet mature enough to know how to conduct itself in the capital market - advising investors of dates for results and holding conference calls at which forward guidance is usually given too. The analysts themselves did not press LanOptics for more details on this, since no one covers the company in any case. That said, the company has benefited from the fantastic support of tech stocks guru George Gilder on his subscriber-only investment review site gildertech.com.
When I visited LanOptics in the autumn of 2006 together with Avi Armon, an Israeli investor who lives in the U.S. and who is one of the key contributors to the Gilder newsletter, EZchip's founder and CEO Eli Fruchter told us quite explicitly that once he had good visibility, he would begin working with the capital market just like any other proper Nasdaq-listed company. In view of the latest announcement, it looks like that moment has finally arrived, so I feel that we can expect good guidance when LanOptics unveils its results, although I would not be pinning my hopes on the first two quarters of 2007, but rather on the second half of the year and then 2008 and 2009.
Aside from the fact that EZchip's visibility has improved, last Friday's stock climb and large volume were, I feel, signals that the final stage in LanOptics' plan to assume full ownership of EZchip is now underway. The conversion of the remaining 22% of EZchip's shares to LanOptic shares will make EZchip a wholly owned subsidiary of LanOptics, a move that will enable the latter to change its company name to the brand name itself, i.e. EZchip, and also its symbol on Nasdaq.
The 22% EZchip stake that has not yet been converted is held by Goldman Sachs Group (GS) and the Chicago-based venture capital fund JK&B. It is reasonable to assume that with LanOptics currently trading at upwards of $15, they will agree to the conversion, and thus record an impressive exit for their funds, since I assume that they made their investments at much lower levels.
Rumor has it that Goldman Sachs is not content with a passive holding in EZchip through its venture capital fund, and that it is fairly active behind the scenes as the next stage unfolds. It is likely to support EZchip during the essential process of making an IPO under the new name symbol in coming months at extremely high prices. The fact that the market is expecting a flotation later in the year will prompt analysts to participate in the conference call when LanOptics unveils its results, even though no one is currently covering the company.
I expect that LanOptics will reveal another key customer, either on the day of the results or just before, that has recently begun selling telecommunications equipment based on EZchip's network processors. Last time round it was Chinese manufacturer ZTE, and judging from the presentation two months ago, another customer from the company's 100-strong list of design wins will be revealed at the end of every quarter.
It is rumored that the customer that will make a significant contribution in the second half of the year alongside ZTE is Juniper Networks (JNPR), which will be joined in 2008 by market leader Cisco Systems Inc. (CSCO). It is set to purchase from telecommunications cards from Marvell Technology Group (MRVL), cards that can be fitted with EZchip's brand new third generation network processors. The target market for EZchip's high speed processors is the switch and router market, which in coming years will see the telecommunications equipment giants selling their products to telephone companies so that the latter can offer their subscribers IP-based triple play services.
LNOP 1-yr chart:
Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.