Aaron Katsman
www.IsraelNewsletter.com
Just in time for the State of Israel’s 60 birthday, IBM (IBM) continues to only buy blue and white (the colors of the Israeli flag). It looks like IBM is set to acquire Israeli storage solutions developer Diligent Technologies Corp. for $200 million. This will be the third purchase of an Israeli start-up by IBM since the beginning of ‘08.
Back in Jan. IBM purchase storage technology company XIV for around $300-350 million, and last week it bought data recovery company FilesX Ltd. for about $70-90 million. That makes about $600 million in purchases, not bad. It reminds me of the Richard Pryor classic, “Brewster’s Millions” where, as per the Wikipedia definition “Brewster is an aging minor league baseball pitcher, with the (fictional) Hackensack Bulls. He suddenly finds that he is an inheritor of an eccentric millionaire who wanted to discourage him from spending excessively. To do so, Brewster must spend the entirety of $30 million within a strict time limit in order to inherit $300 million. There are some conditions attached: the money cannot simply be destroyed nor can he buy expensive goods and destroy them.”
As we have posted previously, IBM has stated that they plan to spend freely to buy technology companies. To date they have stuck to Israeli storage companies. IOI has speculated that a move into the security space may make sense for IBM, and if so, Checkpoint (CHKP) may become a target. That speculation has been met with a “when pigs fly” type of response from certain investors. All can say is who would have thought that we would live to see IBM as a real life Brewster!
Disclosure: Author’s fund has a position in CHKP, fund has no position in any other stock mentioned as of 4/17/08.
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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.
Zack Miller
IsraelNewsletter.com
Why is everyone getting so excited if Zoran (ZRAN), a developer and marketer of integrated circuit cores (ICs) and embedded software for DVDs, digital cameras, and set-top boxes, guided all segments, except for DTV (Digital TV), to be down next quarter?
Good question. The stock was up 15% yesterday (over 20% the past couple of days) on the back of the earnings coverage found here. Most outlets assumed that it was off the back of an upgrade by Needham.
Revenues were all much stronger than consensus. In short, ZRAN had a blow out quarter ($146M over expected $138M and $.51 vs. $.37). Zoran achieved record revenues for DTV and their Printer Imaging units, while also seeing strength in the DVD market as well. Digital Cameras shipped a record amount of units.
Revenues were up almost 13% Q/Q and 13.2% Y/Y. Gross margins were down from the previous quarter but still above where they were tracking 1 year ago. Cash was up 6% Q/Q and almost 30% Y/Y.
Although there will be some near-term volatility in earnings, ZRAN has certainly become more consistent in their results. Those of us who have traded ZRAN in the past are familiar with its volatility in performance — it looks like ZRAN has matured operationally.
So, what’s going to take this puppy up even more so that even my colleague, Aaron “Buy Everything” Katsman wants to own it?
Needham cites a few 2008 revenue drivers:
1) Ramp to ATSC converter boxes: Did you know that in February 2009, the US will turn off analog TV broadcasts, forcing the conversion to digital TV? In order to receive the new signals, the installed base of analog TVs will need to connect to an ATSC converter box. Congress has approved a coupon program such that each qualifying household will receive two $40 coupons to defray the cost of buying a converter box. Management estimates that the number of converter boxes sold ahead of the turnoff could reach 20-25 million units. Zoran typically sees a high-single digit dollar content off of these units. Nice driver.
2) Growth in DTV and tier-one OEM design win: Zoran markets a SupraHD product to the DTV market. Zoran experiences sequential growth of 41% and forecasts more DTV revs in Q4. Zoran is positioned well in Insignia, Magnavox, RCA and Sanyo (found in Best Buy) and has new wins at Fujitsu and Mitsubishi. The company feels confident it can secure a tier-one win with an LCD TV OEM in 2008.
3) Launch of Approach processor for handsets: LG will be marketing its U990 touch-screen, 5MP camera phone. Based on initial design wins, Needham believes that Approach revenues could reach 5% of total sales next year, up from virtually 0 this year.
4) Further market grab in DCAM (digital cameras): Zoran has about 30% market share of the DCAM silicon market. Given current penetration and the market opening up for high-end digital SLRs, Needham thinks ZRAN can eke out some more share grab and exit 2008 with 35% of a growing market.
With a lot of cash on the books and some potential upside to margin expansion, ZRAN may look picture-perfect for our incessant march to a digital life.
Say cheese.
Disclosure: Author’s fund has a position in ZRAN as of 10/24/07.
Please see our Disclaimer HERE.
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Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@profile-financial.com
