Zoran pushes play on its DVD chips
By Chris Kraeuter, CBS.MarketWatch.com
Last Update: 12:09 AM ET July 18, 2002
SANTA CLARA, Calif. (CBS.MW) -Zoran's stock price has held up better than its microchip brethren this year, but will the key holiday season provide a needed catalyst for the maker of DVD semiconductors?
Investors will get a better indication of second-half expectations when Zoran reports quarterly financial results after Thursday's closing bell.
The holiday season is expected to be a good one for Zoran (ZRAN: news, chart, profile), mostly due to the ongoing rapid adoption of DVD players, but its stock has dropped since April when it traded around $30.
The stock currently trades around $19, 13 percent below where shares began the year. In contrast, the Philadelphia Semiconductor Index ($SOX: news, chart, profile) is off 24 percent from where it began the year.
Also, Zoran's stock has yet to approach its Sept.11 induced low of $11. However, Zoran's shares did fall 20 percent during one session last week on concerns about pricing for its chips. The stock fully recovered.
"What's happened is that they've found a sector that is going against the tide and they have the market share that allows them to grow along with this healthy sector," said Ken Pearlman, director of research for Firsthand Funds, which owns Zoran shares.
Larger rival ESS Technologies (ESST: news, chart, profile), which established its strength at the low end of the market, boosted its second-quarter financial expectations twice during the quarter leading to expectations that Zoran will trounce its own targets.
The Santa Clara, Calif.-based company is expected to earn 10 cents a share on revenue of $32.8 million, on average, according to analysts surveyed by Thomson Financial/First Call.
For the year, analysts expect earnings of 62 cents a share on revenue of $147 million, on average. Last year, Zoran earned 26 cents a share on revenue of $107.7 million.
Growth
Such growth is not surprising considering how quickly DVD players have been accepted into entertainment systems around the world. Zoran gets 71 percent of its revenue from the sale of DVD chips.
Paul O'Donovan, senior analyst of consumer applications with Gartner Dataquest, called the market growth rate "phenomenal," with an estimated adoption rate 10 times that of the CD player.
His firm estimated 21 million DVD players were sold in 2000 which generated $4.17 billion in revenue. This year, Gartner expects 44 million units to be sold worth $7 billion. By 2004, that number is expected to reach 80 million on revenue of $10.8 billion.
These numbers outstrip the expected growth rates of the broader semiconductor industry.
Such attractive opportunities will inevitably attract competition, not to mention the natural progression toward slower growth rates.
"As competition increases, there is going to be less pie to share around for all the players," O'Donovan said.
He said the DVD chipmakers that target the high-end and the low-end markets will survive, but those in the middle will get squeezed out due to increasing functionality at the top and economies of scale at the bottom.
To that end, Zoran has carved out space in the high-end of the market, with a considerable customer list among Japanese DVD manufacturers, like Sharp, Toshiba and Sanyo.
Firsthand's Pearlman said Zoran has not operated within a vacuum since focusing on this market. "There will always be competition, but no one is close to them in terms of technology and market position."
Zoran, which has been in business for two decades, has traditionally focused on developing technology to enable digital audio and video playback. Its products enable more and more features to be added to electronics products at lower costs while improving performance.
One step ahead
As for driving future sales, Zoran started shipping sample quantities of an integrated DVD chip, which combines front-end and back-end functions on a single chip, earlier this month. Zoran says this chip, which should ship toward the end of the year, provides higher performance at higher profits to DVD manufacturers.
It is this sort of chip that DVD manufacturers are seeking and chipmakers are clamoring to provide. Zoran's competitors are also planning to roll out integrated chips later this year and into 2003.
Gartner's O'Donovan said continuing to scale the technology curve is a necessity. "If the semi vendor doesn't do it, they know a competitor will. As margins are so tight in the consumer electronics market, only those semi vendors that can offer integration at a lower cost to the equipment manufacturer will be one step ahead of the competition."
Zoran also gets about 10 percent of its revenue from chips used in digital cameras. Eric Ross, semiconductor analyst with Investec, said in a recent research note that this market will heat up as major product manufacturers begin to outsource their chip needs.
"Similar to the DVD player market, as new features are added at increasing rates, we believe the top-tier will find it increasingly difficult to remain competitive while developing silicon internally," Ross said.
He estimated unit growth of 20 million units this year to 45 million in 2006 and he pegged chip revenue for digital cameras at $950 million this year and $1.7 billion in 2006.
"We believe consumer, especially DVD players and digital cameras, will grow much faster than other end semiconductor markets," Ross said.
Chris Kraeuter is a reporter for CBS.MarketWatch.com in San Francisco.
[Harry: May explain the weakness in ESST as ZRAN raports tonight, nervousness of a miss by ZRAN having a spill over
effect on ESST. The downgrade comes at a time of maximum effect also.] |
