Lanoptics Ltd. (MM) (LNOP) Quote

LanOptics Subsidiary EZchip In Bed with Cisco

Posted on Jun 28th, 2007 with stocks: LNOP

Ohad Hammer submits: With the soaring demand for bandwidth-hungry services like IPTV, VOD and other forms of digital media, carriers are facing constant pressure to increase the amount of delivered bandwidth. Not only the change is in the amount of traffic, it is in the complexity and variety of the data as well. The days of "one network, one service" networks are long gone, with converged packet-based networks taking the lead. As a result, communication networks are faced with unprecedented challenges which require a higher level of efficiency, reliability and flexibility.

Networking equipment vendors like Cisco (CSCO) have been dependent on in-house application-specific integrated circuits (ASICs) in order to launch improved and advanced products, coping with last years' developments. However, according to certain observers, traffic has reached a threshold, in terms of amount and complexity of data, raising the demand for a more intelligent and flexible solution – high-speed network processors (NPUs).

Network processors combine the speed advantages of silicon chips with the intelligence and flexibility of microprocessors. Offering a combination of performance, speed and flexibility, NPUs As there is no argue about their advantages, NPUs’ high price and complexity has always represented a barrier for large-scale adoption. Opinions are split as to the true need for NPUs and their potential market size. Some estimate that NPUs will be the basis of most high-end network boxes while others view them as tiny niche products. On one end of the spectrum we can find George Gilder and the Linley group, who foresee monstrous growth and industry-wide adoption of NPUs. On the other end, technology analysts like Andrew Schmitt believe dedicated hardware can support most of vendors' needs, leaving NPUs as a viable solution only in niche cases "where the flexibility they bring to the table matches the cost and risk premium".

The company most identified with high-speed NPUs, EZchip, has positioned itself as the undisputed leader in the field. Even though current market for NPUs is still small, EZchip has over 100 design wins, including some of the top communication vendors in the world. In its first years, no one was really paying attention to the company, except George Gilder, who has been following and recommending it enthusiastically long before “YouTube” and IPTV became such buzzwords. When asked what made EZchip’s technology so appealing Gilder has a clear answer: Scalability. EZchip’s NPUs are built in such a flexible and sophisticated manner, that it enables them to scale together with market demands and technological advances. In the same manner that Intel’s processors can evolve with the PC market, so can EZchip’s NPUs evolve with the networking equipment market.

EZchip was incorporated as a subsidiary of LanOptics (LNOP) on December 1999, right before the dot-com bubble burst. By 2002, LanOptics started shipping the NP-1, its first NPU. Ever since, the company has done nothing but scaling, always one step ahead of market needs. EZchip launched its second generation (the NP-1c) and third generation (NP-2) NPUs on December 2003 and July 2006 respectively. The fourth generation NPU, the NP-3 is already being sampled, while the 5th generation, NP-4, a single-chip 100-Gigabit network processor with integrated traffic manager, is expected to be available for sampling during 2008.

Although EZchip's sales grew on a year-over-year basis for the last 4 years, financial results were unimpressive with most of the design wins not maturing into meaningful sales. Relatively low revenues and rigorous R&D took their toll on the bottom line, with an average annual loss of 10.5$ million for the last 4 years. However, after years of anticipation (and cash burn), it looks like things are finally happening, with 2008 representing the inflection point. According to the company, a substantial growth in the largest NPU market- the CESR (Carrier Ethernet Switches and Routers) market, is expected. This fast growing market, dominated by Cisco, Alcatel-Lucent (ALU) and Juniper (JNPR) is expected to be worth 6.5$ billion in 2007, growing to more than 9$ billion in 2010. EZchip's management hopes that the migration towards ultra-fast, converged networks will ultimately lead vendors to design and build their platforms based on

The CESR market is dominated by three large Vendors (Cisco, Alcatel-Lucent and Juniper), two of which are EZchip's customers.

EZchip is in volume shipments to a tier-1 customer (rumored to be Juniper) which has based "several" of its new platforms on NP-2. This customer is expected to be active throughout 2007 and 2008, switching to NP-3 some time next year. Juniper’s first Ethernet box, launched October 2006, is thought to be one of several platforms based on EZchip's NP-2.

A second tier-1 customer (Rumored to be Cisco, the market leader) has selected the NP-3 for "several" platforms as well. EZchip has already shipped Cisco a special version of the NP-3, co-developed with Marvell, and expects volume shipments to start in 2008.

The third Tier-1 vendor, Alcatel-Lucent, is sticking with its own ASICs for now, so NPUs are irrelevant for it. Among the rest of the CESR players, EZchip expects to have a 50% market share. Altogether, EZchip's management expects to command at least 60% of the overall CESR NPU market.

In terms of competition from other NPU companies, the two prime competitors are Sandburst (now part of Broadcom (BRCM)) and Xelerated, neither of which has design wins with either Cisco or Juniper. Although the relation between EZchip and its two large customers is not exclusive, EZchip's CEO estimates that chances to be displaced by other NPU companies are low thanks to the "sticky" nature of the business. Each platform containing EZchip's NPUs is a result of a great deal of joint integration and customization efforts, so it is unlikely that Cisco or Juniper will go through such process again with a different vendor. Paradoxically, the complicated design and long customization for each platform become advantageous in fending off competition. EZchip is in bed with Cisco, and plans to stay there.

EZchip's gross margins currently stand at, and are expected to remain around 60% according to management, not bad for a chip company. I wonder whether shipping large quantities to Cisco, who is notoriously known for pressuring its suppliers' margins, won't hurt LanOptics's profitability. Yet, the fact management explicitly chose to forecast their margins might imply that it already knows how much Cisco is willing to pay.

With OPEX around 3-3.5$ million per quarter, EZchip has a breakeven point of 5.5$ million in revenues per quarter. This level might be achieved quite easily as soon as 2007 with the ramp up of shipments to Juniper combined with several other smaller customers.

Even though EZchip is not a publicly traded company, LanOptics, holds 78% of EZchip's share capital with the other 22% held by Goldman Sachs and JK&B Capital. This makes EZchip an "almost publicly traded" company. LanOptics has been gradually exchanging its shares for EZchip’s shares and eventually expects to assume full ownership of EZchip. So far, GS and JK&B have been reluctant to exchange their EZchip shares with LanOptics shares, but this situation won't last for long, as EZchip's CEO estimates a share swap could happen within the next 6-12 months. The current opinion shared by most people who follow this company is that once full ownership of EZchip is achieved, LanOptics will officially change its name to EZchip, change its symbol and do a fancy SPO under its new name. The higher LanOptics' shares climb, the higher the odds are for the share swap to materialize. There are two obvious events that can push LanOptics shares substantially higher: Reaching profitability and commencement of volume shipments to Cisco. If the CEO believes the conversion will occur in the next 6-12 months, it may imply that either profitability or volume shipments (or both) are 6-12 months ahead.

LanOptics’ market cap is currently 230$ million, putting a 300$ million price tag to EZchip itself, not cheap for a company who had revs of 4$ million in Q1. However, if the NPU market grows as fast as some forecast and if EZchip is successful in getting large orders from Cisco and Juniper (These are two big “If”s) the price could skyrocket in the coming 12-18 months.

EZchip's visibility is still very low (8-10 weeks) so it does not provide any guidance. However, management does quote future market size and market share estimations that should obviously be taken with a pinch of salt. Nevertheless, the numbers are breathtaking:

The high speed NPU market is forecasted by The Linley Group to be around 225$ million in 2008-9. By that time, EZchip’s two large customers (Cisco and Juniper) are expected to represent more than 50% of the CESR market, and a large portion of the NPU market. Assuming EZchip gets 40% of the market (90$ million), and maintains gross margins of 60% with OPEX of 14$ million annually, leaves them with 40$ million in annual operating profit. Even if in 2008 they earn half of that, a PE of 25 should get their market cap around 500$ million. All of the sudden a 300$ million valuation doesn't look overpriced.

When taking a more bottom-up conservative approach, the numbers look saner. EZchip expects to be inside “several” platforms of each of their two large customers. Assuming the minimal number the term "several" can refer to is three, we are looking at a minimal potential of at least six platforms. According to the company, each successful CESR platform from a leading tier-1 vendor can potentially generate sales of tens of thousands chips annually, while each successful platform from a smaller vendor can potentially generate sales of several thousands chips annually. Assuming an average of 25,000 units per 6 tier-1 platforms and 2500 units per 10 small platforms, the numbers of chips sold annually might be around 175,000. Assuming a price per unit of 250$, total sales could reach 43.75$ million. Gross margins of 60% and OPEX of 14$ million, leaves EZchip with 12.25$ million in annual operating profit somewhere in 2008-9. A multiple of 25 assigned to EZchip leads to the current 300$M market cap.

Despite the differences between the two valuations, both represent massive growth for EZchip’s business. Such anticipated growth is certainly not assured, with the actual degree of NPUs adoption remaining unclear. Regardless of EZchip’s future performance, the optimism within the company’s headquarters in northern Israel, is felt all the way to Wall St.

Disclosure: Author has a long position in LNOP

http://chip.seekingalpha.com/article/39626

Hi Aiming

I like this quote from my previous post:
>>It now expects to add a new top-flight
customer every quarter.>>

Dubi

Thanks for another good company to follow Dubi... Aiming4.

Lanoptics comes good
The giant customers that Lanoptics unit EZchip has signed up, and why $100 million is better than $80 million for Orckit.
Shlomi Cohen 27 Mar 07 17:10
One month on from the nosedive by the markets and the switch to negative annual returns, Federal Reserve Board Chairman Ben S. Bernanke has managed to pull off a turnaround. Using different wording, less hawkish than that of his predecessors, in the announcement released last Wednesday by the Federal Reserve's Open Market Committee which he chairs, Bernanke delivered the reassuring message that no further interest rate hikes were in the offing. For jittery investors, this all-clear sign was the signal that they had been waiting for, and the stampede for shares was soon in full swing, with indices moving back into positive territory.
Yesterday morning, the Russell 2000 Indices showed a return of 2.7% since the beginning of 2007, the Nasdaq 1.6%, the S&P 500 Index 1.2%, and the Down Jones 0.1%. The present trading week is also the final week of the first quarter of 2007, and after the severe profit warning issued by Motorola Inc. (NYSE: MOT) last week, more companies are likely to follow suit over the coming weeks.


The index returns I mentioned give a clear picture. The small cap shares, such as those in the Russell 2000, are the first to undergo a sharp upturn just as they are the first to plummet in crises, unlike the heavier Dow Jones and S&P 500 stocks.

An outstanding example in my portfolio of small stock that made a sharp U-turn is LanOptics Ltd. (Nasdaq: LNOP; TASE:LNOP). It has risen 36% from the $11.40 low it reached during the slide on February 27 to an annual high of $15.57 during last Friday's session.

Any irregular movement in LanOptics draws an instant response on the site of tech stocks guru George Gilder. "Gilder has been aggressively buying the stock for his hedge fund," was how the investors logging on to his forum saw it. Gilder wasted no time in responding and said that he was indeed "guilty" but not of buying stock for one fund or another, but because in recent days, 'I met with investors that have been moving stock and I talked to them about the EZchip Technologies Ltd. potential.

I, on the other hand, believe that in addition to the phenomenal marketing that Gilder has been doing on behalf of the small network processor developer from Yokne'eam, last Friday's steep gain for LanOptics could well be a sign that the final stage has begun in the process of discarding the name LanOptics, under which it has been traded since1992. It will then adopt the name of its subsidiary, EZchip, and could be re-listed under a new ticker (perhaps EZCH). This is not mere semantics but rather a sign that the company's managers feel that they have good visibility and that they can start behaving like any other Nasdaq company with proper conference calls and quarterly guidance.

At the end of December, LanOptics increased its holding in EZchip to 78%, when it allocated some of its own shares to EZchip's shareholders, among them Star Ventures, and BlueRun Ventures in exchange for their holdings in EZchip. The remaining 22% is held largely by company managers and employees and Goldman Sachs. These will probably also agree to a stock swap in the near future, and once this is complete, LanOptics will wholly own EZchip and make a fresh start. This will also entail a secondary offering, to finance the tremendous growth that it will experience.

The first hint that this process is already in motion came two weeks ago with the announcement that Chinese telecommunications equipment giant ZTE had selected EZchip's NP-2 and NP-3 network processors for the platform it sells for broadband infrastructure. The most important part of this announcement was the explicit statement that "ZTE is already shipping several products for the high-end enterprise, carrier access and core based on EZchip's network processors." This leads me to conclude that ZTE has been an EZchip customer since the fourth quarter, in which the company reported $3.4 million in sales.

ZTE one of EZchip's lesser known customers, and since this announcement is a departure from the company's standing policy of not disclosing its customers' names, another potential announcement of a customer of a different scale altogether could work wonders for the stock and lift it to levels where a secondary offering would much more feasible. Juniper Networks (Nasdaq: JNPR), for example, is almost certainly an regular customer, and Cisco Systems Inc. (Nasdaq: CSCO) will also become a key customer through Marvell Technology Group (Nasdaq: MRVL) next year.

Moreover, in its presentation from last month which now appears on its site, EZchip states explicitly that its potential customers are Cisco, Juniper, and Alcatel-Lucent (NYSE: ALU). It adds a clear hint that two of them already are customers, so one does not need to be Sherlock Holmes to assume that the reference is to the first two. The company adds that in the third quarter of 2006 it began deliveries to a leading customer, with another customer joining in the fourth quarter. It now expects to add a new top-flight customer every quarter.

Overall, EZchip's target market for its network processors is the broadband telecommunications infrastructure sector, primarily in metro networks serving large cities. Through this equipment, telecommunications services providers plan to offer what are now called triple-play services, especially video. This is the same market as is targeted by Orckit Communications Ltd. (Nasdaq: ORCT; TASE: ORCT) subsidiary Corrigent Systems.

EZchip, as mentioned earlier, is just beginning its commercial development, with sales of processors totaling a few million dollars a quarter. Orckit, on the other hand, has already sold $150 million worth of equipment to KDDI Corp. (TSE: 9433), over 2005 and 2006. Despite this, not many people know that EZchip's value is double that of Orckit, since EZchip will have 24 million shares once all the stock swaps and dilutions have been completed, even before the secondary offering goes ahead.

The gap in values between these two companies is even larger when one takes into account that Orckit has more than $80 million in cash, while EZchip has just $15 million. Why is the gap so large? Because EZchip has George Gilder and Orckit has a multitude of investors that find themselves frustrated by its volatile record and treat it warily.

An example of this was seen in the convertible bond issue that is due to close this week on the Tel Aviv Stock Exchange (TASE), a move that has confused investors even further. If Orckit has $80 million cash and "half a dozen contracts" in the pipeline this year, why does it need another $25 million? And if it is issuing convertible bonds, why do so at such a low conversion price, when the "half dozen contracts" could very well lift the stock back up to its January 2006 high of $30?

My explanation for the bond issue is simple. First of all, more than $100 million cash sounds a lot better to company owners than "just" $80 million. Given that the TASE is hot, and that there is no need to disclose all the company's commercial secrets in a prospectus that will in any case not be required until such time as the bonds are listed, why not make a quick issue that won't be overly diluting? When the stock reaches $30, Orckit will hold a secondary offering, and the TASE will look back favorably on this bond issue, in contrast to the $100 million one it made during the bubble years.

I once asked Galileo Technologies founder Avigdor Willenz why the company had $100 million in cash, which he wasn't using at all. There was a tone of cynicism in his reply, which I actually understood only too well. "Because I'm the son of Holocaust survivors. Look out of the window; we're surrounded by Arabs," he answered. If there was ever a company that really appreciates how important it is to have more than $100 million cash for a rainy day, it is Orckit, which went through a traumatic time during the bubble days. Were it not for that $100 million bond issue, Corrigent, with the big dream that is now on the verge of becoming reality, would never have come into being.

Published by Globes [online], Israel business news - www.globes.co.il - on March 27, 2007

LanOptics Announces 2006 Fourth Quarter and Year End Results
Tuesday February 13, 8:46 am ET

YOKNEAM, Israel--(BUSINESS WIRE)--LanOptics Ltd. (NASDAQ: LNOP - News), a provider of network processors, today announced results for the fourth quarter and year ended December 31, 2006.

For the three months ended December 31, 2006, LanOptics reported revenues of US$ 3,382,000 versus US$ 1,285,000 in the fourth quarter of 2005. All of the revenues were attributable to LanOptics' subsidiary, EZchip Technologies. Net loss for the fourth quarter was US$ 5,100,000 - including one time non-cash expenses in the amount of US $3,670,000 (composed of net interest expense in the amount of US $1,637,000 and in-process research and development charge in the amount of US$ 2,033,000, as further described below), and stock based compensation expenses in the amount of US$ 213,000 which are being reported as of January 1, 2006 pursuant to SFAS 123R - or a loss of US$ 0.42 per share, compared to a net loss of US$ 2,036,000, or US$ 0.18 per share, for the same period last year.

For the twelve months ended December 31, 2006, LanOptics reported revenues of US$ 8,469,000, compared with US$ 5,848,000 for the same period last year. All of the revenues were attributable to LanOptics' subsidiary, EZchip Technologies. Net loss for the twelve months was US$ 12,317,000 - including one time non-cash expenses in the amount of US $3,670,000 (composed of net interest expense in the amount of US $1,637,000 and in-process research and development charge in the amount of US$ 2,033,000, as further described below) and including stock based compensation expenses in the amount of US$ 609,000 which are being reported for the first time pursuant to SFAS 123R - or US$ 1.05 per share, compared to a year-earlier loss for the comparable period of US$ 10,347,000, which also included non-cash in-process research and development charge in the amount of US$ 1,475,000, or US$ 0.93 per share.

Net loss for the fourth quarter and for the year ended December 31, 2006 was increased by non-cash interest expense in the amount of US $1,637,000, attributable to the accounting treatment of Redeemable Preferred Shares issued by EZchip. As a result of the exchange transaction and the resulting increase in LanOptics' ownership position in EZchip, we expect that we will not be required to record any interest expense in the future related to such Redeemable Preferred Shares in our consolidated financial statements.

On December 22, 2006 and on June 23, 2005 we issued 3,878,234 and 1,006,486 of our ordinary shares, respectively, to various shareholders of EZchip in transactions in which we acquired the shares of EZchip held by them. These exchange transactions were accounted for according to the "purchase method" of accounting. The purchase price for the EZchip shares acquired was US$ 55,672,000 in the December 2006 transaction and US$ 7,967,000 in the June 2005 transaction, based on the average share prices of our ordinary shares two days before and two days after the respective transaction dates. The excess of the purchase price over the book value of the acquired EZchip shares was recorded as intangible assets as follows:

In-process research and development, in the amount of US$ 2,033,000 in the December 2006 transaction and US$ 1,475,000 in the June 2005 transaction, was recorded as an expense in a separate line item "In process research and development charge" in our statements of operations.
Other Intangible Assets (including "Existing Technology," "Backlog" and "Customer Base") in the amount of US$ 3,133,000 in the December 2006 transaction and US$ 517,000 in the June 2005 transaction are amortized using the straight-line method over the useful life, with the corresponding expense recorded primarily in "Cost of Revenues" in our statements of operations.
Goodwill, in the amount of US$ 31,698,000 in the December 2006 transaction and US$ 4,833,000 in the June 2005 transaction, is not amortized and is tested for impairment annually.
2006 Business Summary and Recent Highlights

"During 2006 we made significant progress in every aspect of our business," said Eli Fruchter, Chairman of the Board of LanOptics and CEO of EZchip. "We are seeing the fruits of our focus on the Metro Ethernet market, specifically Carrier Ethernet Switches and Routers (CESR) for triple play services. Two of the three leading tier-1 CESR vendors are building several of their strategic CESR platforms based on EZchip network processors. One of these customers has already started production of several NP-2 based products and is expected to roll out several more NP-2 based products during 2007 and 2008. The second customer has selected the NP-3 for various products that are still in development, and this customer is expected to start volume shipment of several of its strategic NP-3 based platforms during 2008. According to market analysts, these two EZchip customers are likely to account for the majority of the CESR market (which, according to The Linley Group, has the greatest potential for long-term growth for high-speed network processors). We hope that these two customers will pilot EZchip to long-term leadership in the high-speed network processor space.

"Carriers are providing, or will soon provide, Ethernet Services and almost every tier-1 vendor is currently building CESR products. We have over 100 design wins in total, many with tier-1 vendors that are building CESR products, including all the leading vendors in China. It is important to note, however, that tier-1 designs vary greatly. Whereas one successful strategic platform from a tier-1 market leader vendor could generate sales of tens of thousands of chips annually, another tier-1 vendor's platform may only require several thousand chips or fewer. The design wins we have with our two leading tier-1 CESR customers are for line cards in several of their strategic CESR platforms and we hope, therefore, that they will generate high volume for us in the coming years. Many other vendors are also customers of EZchip and have the potential to become high volume customers if they are successful in gaining CESR market share. Our future revenue ramp-up will continue to depend on the success of our customers' new products that incorporate our network processors, on market acceptance of these products, and on the pace of recovery in the telecommunications and related markets.

"2006 revenues showed growth compared to 2005 with the NP-2 contributing approximately 50% of the annual revenues, even though it only started shipping in production quantities in Q3. We shipped more NP-2 chips in the fourth quarter alone than NP-1 chips in the entire year. Of our design wins, over 70 are for the NP-2 and NP-3 and we expect a significant portion of these products to enter production during 2007 and 2008. At the end of Q4, a second tier-1 vendor began production of several NP-2 designs and we expect several more tier-1 vendors to enter production in the coming quarters.

"It is important to consider that our chips are utilized in communications equipment that takes an average of two years from the design win to the final product, and volume orders can be expected only after the customer's equipment enters production. Consequently, we have not yet realized the full potential of our design wins and are unable to accurately forecast our ramp-up and may see fluctuations in our quarterly revenues.

"During 2006 we were also successful in increasing LanOptics' ownership position in EZchip from 60% to 78% and by that achieved a significant step forward in our long-term plan to acquire 100% ownership of EZchip, a plan that was authorized by LanOptics' shareholders in April 2003. This increase was achieved by a share exchange transaction in which LanOptics acquired EZchip preferred shares in exchange for the issuance of LanOptics ordinary shares. Since LanOptics' business consists exclusively of the business of EZchip, the exchange ratio reflected LanOptics' ownership position in EZchip, and the resulting dilution in each LanOptics shareholder's percentage of ownership was offset by the increase in LanOptics' holdings in EZchip. As we have noted in the past, we believe that increasing our ownership in EZchip will increase the value of LanOptics and may result in greater benefits to LanOptics' shareholders over the long-term. LanOptics also believes that it is desirable to rationalize its corporate structure by unifying the shareholdings in the two companies and that such unification will also allow various efficiencies in the operation of the businesses. We will therefore continue to seek further exchange transactions until LanOptics achieves full ownership of EZchip."

About LanOptics

LanOptics is focused on its subsidiary EZchip Technologies, a fabless semiconductor company providing highly integrated 10-Gigabit and 5-Gigabit network processors. EZchip's network processors provide the flexibility and integration that enable triple-play data, voice and video services in systems that make up the new Carrier Ethernet networks. Flexibility and integration make EZchip's solutions ideal for building systems for a wide range of applications in telecom networks, enterprise backbones and data centers.

For more information on EZchip, visit the web site at http://www.ezchip.com

For more information on LanOptics, visit the web site at http://www.lanoptics.com

http://biz.yahoo.com/bw/070213/20070213005862.html?.v=1