Stock of the Month: ZRAN

Zoran (Nasdaq: ZRAN), was January’s Stock of the Month as part of our new subscription newsletter, Israel Opportunity Investor. You can find out more about the product and the opportunities we cover at www.israelnewsletter.com

Background

Zoran develops and markets integrated circuits (ICs) that provide digital signal processing (DSP) capabilities to a variety of consumer electronic products. These products are used in DVD players, home theatre systems, and digital cameras. The company also develops products for digital video delivery via set-top box or television. The company sells through Original Equipment Manufacturers (OEM) who package them into digital and audio products sold to consumers.
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Aaron Katsman
www.IsraelNewsletter.com

Zoran (ZRAN), a developer and marketer of integrated circuit cores (ICs) and embedded software for DVDs, digital cameras, and set-top boxes, is getting nailed today on the back of an analyst downgrade. A Deutsche Bank analyst cut his price target for the company down to $20. In lowering his rating on the chip industry analyst Arnab Chanda said, “While the stocks have declined dramatically in the fourth quarter and year to date, we do believe that for the vast majority of companies, the next six months is not likely to yield positive returns.”

Well, I disagree. The stock has gotten hit. Since the end of October the shares are down 38%. Now he decides to downgrade the stock? Thanks for playing.

In one of the best named posts we have had here at IOI my colleague Zack “Let’s get Jiggy” Miller has a great analysis of all that’s right with Zoran. One potential catalyst is 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.

At under $15 a share this looks like an interesting long-term play.

Disclosure: Author’s fund has no position in any stock mentioned as of 1/15/08.

Please see our Disclaimer HERE.

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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.

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Aaron Katsman
IsraelNewsletter.com

Zoran (ZRAN), a developer and marketer of integrated circuit cores (ICs) and embedded software for DVDs, digital cameras, and set-top boxes, announced that US Securities and Exchange Commission (SEC) has notified the company by letter dated November 2, 2007, that the staff’s investigation of Zoran’s historical stock option granting practices has been terminated and that no enforcement action against Zoran has been recommended to the Commission. Zoran’s NASDAQ listing was in jeopardy, as they delayed publishing their financial reports while the SEC investigation was on-going.

This should help lift a cloud that was hanging over the company and allow them to focus solely on executing their business model.

My man, Zack “FACEBOOK” Miller had a great piece on Zoran, and he is really getting jiggy.

Take a good look at Zoran, as they continue to be an attractive long-term play.

Please see our Disclaimer HERE.

Disclosure: Author has a position in ZRAN as of 11/9/07.

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Aaron Katsman is the 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.

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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

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