EZchip Achieves Record Revenues of $10.7 Million in Third Quarter 2009

EZchip Semiconductor Ltd. (NASDAQ:EZCH), a provider of network processors, today announced its results for the third quarter ended September 30, 2009.

Third Quarter 2009 Summary:

• Third quarter revenues increased 18% year-over-year and 60% sequentially, reaching $10.7 million
• Gross margin for the quarter reached 67.5% on GAAP basis and 72.6% on non-GAAP basis
• Net income for the quarter of $1.8 million (17% of revenues) on GAAP basis
• Net income for the quarter of $3.9 million (36% of revenues) on non-GAAP basis
• Cash increased by $5.2 million during the quarter; Net cash position, as of end September 2009, totaled $60.6 million

Third Quarter 2009 Results:

Total revenues in the third quarter of 2009 were $10.7 million, an increase of 18% compared to $9.0 million in the third quarter of 2008, and an increase of 60% compared to $6.7 million in the second quarter of 2009.

Net income, on a GAAP basis, for the third quarter of 2009 was $1.8 million, or $0.07 per share (diluted), compared to net income of $0.8 million, or $0.03 per share (diluted), in the third quarter of 2008, and a net loss of $0.7 million, or $0.03 loss per share, in the second quarter of 2009.

Net income, on a non-GAAP basis, for the third quarter of 2009 was $3.9 million, or $0.15 per share (diluted), compared to non-GAAP net income of $2.4 million, or $0.09 per share (diluted), in the third quarter of 2008, and non-GAAP net income of $1.2 million, or $0.05 per share (diluted), in the second quarter of 2009.

Cash, cash equivalents and marketable securities as of September 30, 2009, totaled $60.6 million, compared to $55.4 million as of June 30, 2009. Cash generated from operations during the third quarter was $4.9 million, cash provided by financing activities was $0.2 million and an additional $0.1 million resulted from unrealized gains in marketable securities.

First Nine Months 2009 Results:

Total revenues for the nine months ended September 30, 2009 totaled $27.2 million, a year over year increase of 13% compared to $24.0 million for the nine months ended September 30, 2008. Net income on a GAAP basis for the nine months ended September 30, 2009 was $2.5 million or $0.09 per share (diluted), compared to a net loss of $5.6 million, or $0.25 loss per share for the nine months ended September 30, 2008. Net income on a non-GAAP basis for the nine months ended September 30, 2009 was $8.5 million or $0.33 per share (diluted), compared with non-GAAP net income of $4.2 million, or $0.16 per share (diluted), for the nine months ended September 30, 2008.

Eli Fruchter, CEO of EZchip commented, “This was a very strong third quarter for EZchip with record revenues, profits and cash generation. Revenues from our principal customer grew significantly this quarter and reached record levels. Revenues from our other leading CESR customer, which has the potential to become our largest customer over time, are not yet material. We are extremely pleased that we were able to achieve our growth this quarter even before this customer has started to ramp.

“We are also very pleased with the significant revenue growth resulting from our other networking customers. We expect this group of customers to become a significant growth driver as their NP-2 based products have reached volume production, their NP-3 based products are moving into production and they are now selecting the NPA and the NP-4 for their next generation products. These customers grow our presence in other Carrier Ethernet segments, beyond CESR, and we believe that we will benefit from the growth in these segments in the coming years, growth that will eventually lead to a more diversified customer base.

“This quarter we also made progress in the development of our next generation network processor, the NP-4, and remain on track for sampling before the end of 2009. Our NPA family of products, targeting the access market, is also progressing as planned. We are currently in advanced laboratory testing, and we expect to move into production in the first quarter of 2010.

“We believe we are on track for long term growth. We expect continued revenue growth in the fourth quarter, both sequentially and year over year, and, based on our initial indications, we expect to continue generating year over year revenue growth in 2010.”

Conference Call

The Company will be hosting a conference call today, October 29, 2009, at 10:00am ET, 7:00am PT, 2:00pm UK time and 4:00pm Israel time. On the call, management will review and discuss the results, and will be available to answer investor questions.

To participate through live webcast, please access the corporate website, http://www.ezchip.com, at least 10 minutes before the conference call commences.

To participate through dial-in, please call one of the following teleconferencing numbers. Please begin placing your calls at least 15 minutes before the conference call commences. If you are unable to connect using the toll-free numbers, please try the international dial-in number.

US Dial-in Number: 1 888 668 9141		UK Dial-in Number: 0 800 917 5108
International Dial-in Number (Israel): +972 3 918 0609		Israel Dial-in Number: 03 918 0609

For those unable to listen to the live call, a replay of the call will be available the day after the call under the 'Investor Relations' section of the website.

Use of Non-GAAP Financial Information

In addition to disclosing financial results calculated in accordance with United States generally accepted accounting principles (GAAP), this release of operating results also contains non-GAAP financial measures, which EZchip Semiconductor believes are the principal indicators of the operating and financial performance of its business. The non-GAAP financial measures exclude the effects of stock-based compensation expenses recorded in accordance with SFAS 123R, amortization of intangible assets, in-process research and development charge and net loss/ (income) attributable to noncontrolling interest. Management believes the non-GAAP financial measures provided are useful to investors’ understanding and assessment of the Company's on-going core operations and prospects for the future, as the charges eliminated are not part of the day-to-day business or reflective of the core operational activities of the Company. Management uses these non-GAAP financial measures as a basis for strategic decisions, forecasting future results and evaluating the Company's current performance. However, such measures should not be considered in isolation or as substitutes for results prepared in accordance with GAAP. Reconciliation of the non-GAAP measures to the most comparable GAAP measures are provided in the schedules attached to this release.

ABOUT EZCHIP

EZchip is a fabless semiconductor company that provides Ethernet network processors for networking equipment. EZchip provides its customers with solutions that scale from 1-Gigabit to 100-Gigabits per second with a common architecture and software across all products. EZchip's network processors provide the flexibility and integration that enable triple-play data, voice and video services in systems that make up the new Carrier Ethernet networks. Flexibility and integration make EZchip's solutions ideal for building systems for a wide range of applications in telecom networks, enterprise backbones and data centers. For more information on our company, visit the web site at http://www.ezchip.com.

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements that are not historical facts and may include financial projections and estimates and their underlying assumptions, statements regarding plans, objectives and expectations with respect to future operations, products and services, and statements regarding future performance. These statements are only predictions based on EZchip's current expectations and projections about future events. There are important factors that could cause EZchip's actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Those factors include, but are not limited to, the impact of general economic conditions, competitive products, product demand and market acceptance risks, customer order cancellations, reliance on key strategic alliances, fluctuations in operating results, delays in development of highly-complex products and other factors indicated in EZchip's filings with the Securities and Exchange Commission (SEC). For more details, refer to EZchip's SEC filings and the amendments thereto, including its Annual Report on Form 20-F filed on March 30, 2009 and its Current Reports on Form 6-K. EZchip undertakes no obligation to update forward-looking statements to reflect subsequent occurring events or circumstances, or to changes in our expectations, except as may be required by law.

-- FINANCIAL TABLES FOLLOW --

EZchip Semiconductor Ltd. Condensed Consolidated Statements of Operations (U.S. Dollars in thousands, except per share amounts) (Unaudited)
		Three Months Ended						Nine Months Ended
		Sept. 30,		June 30,		Sept. 30,		Sept. 30,		Sept. 30,
		2009		2009		2008		2009		2008
Revenues		$ 10,651		$ 6,673		$ 9,023		$ 27,172		$ 23,981
Cost of revenues		2,970		1,860		2,958		7,636		8,934
Amortization of purchased technology		496		497		496		1,489		1,586
Gross profit		7,185		4,316		5,569		18,047		13,461
Operating expenses:
Research and development, net		3,361		3,237		3,216		9,882		9,515
In-process research and development charge		--		--		--		--		5,125
Selling, general and administrative		2,150		2,028		1,973		6,316		5,500
Total operating expenses		5,511		5,265		5,189		16,198		20,140
Operating income (loss)		1,674		(949)		380		1,849		(6,679)
Financial income, net		232		213		396		721		1,005
Income (loss) before noncontrolling interest		1,906		(736)		776		2,570		(5,674)
Less: Net (income) loss attributable to noncontrolling interest		(85)		25		16		(51)		37
Net income (loss)		$ 1,821		$ (711)		$ 792		$ 2,519		$ (5,637)
Net income (loss) per share:
Basic		$ 0.08		$ (0.03)		$ 0.03		$ 0.11		$ (0.25)
Diluted		$ 0.07		$ (0.03)		$ 0.03		$ 0.09		$ (0.25)
Weighted average shares used in per share calculation:
Basic		23,357,356		23,350,668		23,337,336		23,350,765		22,934,305
Diluted		23,363,095		23,350,668		23,400,877		23,364,395		22,934,305

EZchip Semiconductor Ltd. Reconciliation of GAAP to Non-GAAP Measures (U.S. Dollars in thousands, except per share amounts) (Unaudited)
		Three Months Ended								Nine Months Ended
		Sept. 30,			June 30,			Sept. 30,		Sept. 30,				Sept. 30,
		2009			2009			2008		2009				2008
GAAP gross profit		$ 7,185			$ 4,316			$ 5,569		$ 18,047				$ 13,461
Stock-based compensation		51			51			32		144				84
Amortization of purchased tangible & intangible assets		496			522			612		1,539				2,161
Non-GAAP gross profit		$ 7,732			$ 4,889			$ 6,213		$ 19,730				$ 15,706
GAAP gross profit as percentage of revenues		67.5%			64.7%			61.7%		66.4%				56.1%
Non-GAAP gross profit as percentage of revenues		72.6%			73.3%			68.9%		72.6%				65.5%
GAAP operating expenses		$ 5,511			$ 5,265			$ 5,189		$ 16,198				$ 20,140
Stock-based compensation:
Research and development		(676)			(674)			(430)		(2,042)				(1,166)
Selling, general and administrative		(543)			(525)			(431)		(1,551)				(964)
Amortization of purchased intangible assets:
In-process research and development charge		--			--			--		--				(5,125)
Selling, general and administrative		(210)			(210)			(118)		(630)				(356)
Non-GAAP operating expense		$ 4,082			$ 3,856			$ 4,210		$ 11,975				$ 12,529
GAAP operating income/(loss)		$ 1,674			$ (949)			$ 380		$ 1,849				$ (6,679)
Non-GAAP operating income		$ 3,650			$ 1,033			$ 2,003		$ 7,755				$ 3,177
GAAP net income/(loss)		$ 1,821			$ (711)			$ 792		$ 2,519				$ (5,637)
Stock-based compensation		1,270			1,250			893		3,737				2,214
Amortization of purchased assets		706			732			730		2,169				2,517
In-process research and development charge		--			--			--		--				5,125
Net income (loss) attributable to noncontrolling interest		85			(25)			(16)		51				(37)
Non-GAAP net income		$ 3,882			$ 1,246			$ 2,399		$ 8,476				$ 4,182
Non-GAAP net income per share - Diluted		$ 0.15			$ 0.05			$ 0.09		$ 0.33				$ 0.16
Non-GAAP weighted average shares - Diluted*		23,467,558			23,477,245			23,547,840		23,452,991				23,022,404
* In calculating diluted non-GAAP net income per share, the diluted weighted average number of shares outstanding excludes the effects of stock-based compensation expenses in accordance with SFAS 123R.

EZchip Semiconductor Ltd. Condensed Consolidated Balance Sheet (U.S. Dollars in thousands)
			September 30,		December 31,
			2009		2008
			(Unaudited)		(Audited)
ASSETS
CURRENT ASSETS:
Cash, cash equivalents and marketable securities			$ 60,557		$ 48,115
Trade receivables, net			5,252		5,040
Other receivables			1,130		623
Inventories			2,159		3,884
Total current assets			69,098		57,662
LONG-TERM INVESTMENTS:
Prepaid development and production costs, net			--		50
Severance pay fund			3,944		3,148
Total long-term investments			3,944		3,198
PROPERTY AND EQUIPMENT, NET			214		273
Goodwill			96,276		96,276
Intangible assets, net			4,575		6,694
TOTAL ASSETS			$ 174,107		$ 164,103
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Trade payables			$ 406		$ 888
Other payables and accrued expenses			6,125		4,220
Total current liabilities			6,531		5,108
LONG TERM LIABILITIES:
Accrued severance pay			4,624		4,081
EQUITY:
Share capital			134		134
Additional paid-in capital			250,787		247,356
Accumulated other comprehensive income (loss)			746		(705)
Accumulated deficit			(92,125)		(94,644)
Noncontrolling interest *			3,410		2,773
Total equity			162,952		154,914
TOTAL LIABILITIES AND EQUITY			$ 174,107		$ 164,103
* Due to initial application of SFAS 160 "Noncontrolling interests in Consolidated Financial Statements, an amendment of ARB No. 51".