The same tune is being played again. While it is hard for Mellanox Technologies Ltd. (Nasdaq:MLNX) investors to take on board that the threatened competition from Intel (INTC) in Infiniband is at least eighteen months to two years away, the semiconductor company across the road from Mellanox in Yokne'am, EZchip Semiconductor Ltd. (Nasdaq: EZCH; TASE:EZCH), has shed about a quarter of its value in the last two sessions, because of threats of competition from another gorilla, Cisco (CSCO).
Before we get down to the substance of the threat from Cisco, I want to remind readers that there have always been threats from American gorillas to all outstanding Israeli niche companies that have developed unique technologies. It usually takes many years of growth and technological innovation before investors realize that the threat is chimerical. Giant companies, spread over many specialties, know that it's not so simple to beat an elite corps Israeli company focused on a goal in a specific niche.
Who doesn't remember the threats to Check Point Software Technologies Ltd. (Nasdaq: CHKP) from its first day as a public company, threats that grew and grew with every billion dollars the company added to its market cap, and at a certain point fell silent? In the spring of 1988, I attended a lecture by Steve Ballmer, then deputy to Microsoft (MSFT) CEO Bill Gates, who offered Check Point something like "cooperation or war", in response to which Check Point's share price plunged for a few days. Ballmer will soon be retiring, and Check Point is stronger than ever.
Last Thursday, Cisco announced that, on Tuesday, it would unveil the first generation of a new, powerful network processor of its own devising, intended to deal in the coming years with the trillions of network events that will be generated by the explosion of traffic in the Internet of Everything (IoE). Cisco estimates that, by 2020, there will be around 50 billion things of all kinds connected to the web, from smartphones and tablets, through cars and electricity, gas and water meters, to food and drink vending points, or for example tankers at sea identified by means of a wireless chip.
Cisco has not revealed for what platforms, existing or future, these new network processors are designed, nor for when, but it fairly spooked EZchip investors. This is because Cisco is EZchip's biggest customer, by a long way. If, for example, these processors are intended for Cisco's terminal routers, that is an immediate threat to EZchip's NPU processors. If they are intended for data storage centers, then they are potential rivals to the new processor that EZchip is developing in Kiryat Gat, the NPS.
Not only does Cisco have very many platforms unconnected to EZchip, it also develops in-house very many processors that do not compete with EZchip, including the family of network processors that it launched back in 2008. That too induced needless dread among EZchip investors. So it's by no means clear that there's any threat here at all, and, if there is, whether it will affect the working relationship between the two companies immediately or in the future.
Responding to analysts' question, EZchip founder and CEO Eli Fruchter said that he thought that Cisco would continue to rely on his company's current generation of network processors, NPU-4, and on the next one, NPU-5. In other words, the supplier-customer relationship will remain for many more years. If Cisco's new processor competes in another couple of years with the NPS processors, which are designed for, among other things, data storage centers, then, in Fruchter's view, EZchip's processor, developed in the past few years at Kiryat Gat, will be the most advanced on the market.
Until the fog clears, it's worth understanding what's involved when it comes to replacing heavy-duty processors in complex platforms.
Let's go back to Mellanox for a moment. Last week, at an investor conference, the company's CFO, Jacob Shulman, was again asked about possible competition from Intel. Among other things, he explained that Oracle (ORCL), for example, which bases its cloud platforms on Mellanox, had written 30 million lines of code for that purpose, and that if it should wish to switch to Intel, it would have to write them all again.
To end with, if we are talking about "The Internet of Everything", it's worth paying attention to Telit Communications plc (AIM:TCM), which describes itself as "making machines talk". In other words, it is a big player in the M2M niche. It is traded in London, and has a large center in Israel. Last week, its share price jumped 19% on high volumes, bringing it to a market cap of $170 million, almost double the low to which it sank early this year.
Telit, managed by Oozi Cats, is profitable, and will have sales of about $220 million this year, after posting sales of $108 million in the first half, compared with $98 million in the first half of 2012.
Published by Globes [online], Israel business news - www.globes-online.com - on September 16, 2013
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