M-Systems' rose and Check Point's thorn

Why M-Systems investors have peace of mind, and why the Check Point share is having trouble keep its head above water.

Profit warning season starts this week, and will peak in the shortened trading week that begins on January 3, 2006, after companies add up the fourth quarters numbers. The semiconductor industry is among the few that regularly updates investors during the quarter itself, and several companies did so last week.

Among the Israeli companies in the chip sector, M-Systems Flash Disk Pioneers (Nasdaq: FLSH) sent an indirect message that there was no cause for concern about its fourth quarter results. In its annual letter to investors, dated December 1, in advance of the companys December 22 shareholders meeting, president and CEO Dov Moran mentions achievement of annual sales of $500 million. Somebody who writes like that a month before the end of the quarter cant report results next month that sales didnt meet that target. On the average, analysts expect annual sales of $490 million.

Yesterday morning, M-Systems also had a soothing message for those who were worried about its relations with Toshiba (TSE: 6502; LSE: TOS; XETRA, AEX, Paris: TSBA). The two companies announced that commercial sales of the next generation of the Mobile Disk on Chip (MDOC) will begin in the third quarter of 2006. The target market for the new chip, which will be manufactured using the most advanced technologies, is smart telephones that require particularly high-volume permanent data storage solutions.

In addition, in an interview last Thursday with Bloomberg, Moran also had reassuring things to say about the entry of Intel (Nasdaq: INTC) and Micron Technology (NYSE: MU) into the NAND flash chip market: We need more suppliers, and we regard them as potential suppliers. Thats very, very good for M-Systems. Moran added that he was convinced that Intel would sign an agreement with M-Systems similar to M-Systems agreements with Toshiba and others, under which Intel would also sell M-Systems products. Intel needs to abandon its habit of selling only flash chips, without related products, which is where we have a strong position in the market, Moran explained.

Another interesting point raised in the invitation to M-Systems shareholders meeting is that Morans good friend, DSP Group (Nasdaq: DSPG) executive chairman Eli Ayalon, who was by his side in the media in the bitter disputes over the Chief Scientists budget, and against a quick sale of companies, did not offer himself for another term on M-Systems board of directors. He joined the board only two years ago, and received the handsome reward of 8,000 options. Yuval Neeman, who worked for Microsoft (Nasdaq: MSFT) until recently as corporate VP storage and platform solutions in the US, will replace Ayalon.

The upcoming shareholders meeting will grant Moran 100,000 options, a very small number, compared with other companies. In a "Globes" interview several months ago, Moran also made it clear that he would use the proceeds from the sale of these options for charities managed by his wife.

Shweds options

Morans options remind me of the two million options granted to Check Point (Nasdaq: CHKP) co-founder and CEO Gil Shwed, and the million options granted to co-founder and senior VP Marius Nacht last September. This quantity, which the two have already received before, seems to be a scandal for two founders, each of whom owns about an eighth of the company. Since when do company shareholders need an incentive to achieve success, as if they were hired employees?

According to Check Points most recent report, both Shwed and Nacht sold 500,000 shares on November 30, 2005 in a blind sale plan. The sale of these million shares definitely pushed down the Check Point share price, which has barely managed to keep its head above water in recent months.

It is well known that Check Point itself buys its shares in the market under a $200 million rollover program that is renewed every year. Since last April, Shwed and Nacht have sold shares for over $80 million. It can be concluded from this that most of Check Points buyback program is an indirect purchase of the companys shares from major shareholders Shwed and Nacht. To put it more crudely, Id say that Check Points gigantic stack of cash is finding its way into these two partners pockets, while we, the shareholders, have gotten only one thing recently: a falling share.

Shweds presentation at the Lehman Brothers conference on Thursday in the US, key points from which were reported on the "Globes" Hebrew-language website, have prepared me for a possible profit warning for the fourth quarter. The company published a profit warning for the third quarter. Concern about another profit warning, and the fact that there is no chance that investors will see a penny of Check Points enormous cash reserves in the future, such as through a just dividend distribution to all shareholders, led me to sell the share yesterday. It has given me a 14% return in two years.

Published by Globes [online] - www.globes.co.il - on December 13, 2005

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