More than 25 years ago, Levy Gerzberg faced the challenge of defending his thesis at Stanford University on digital-signal-based medical devices. His research involved a multidisciplinary approach to create a comprehensive system design based on a chip roadmap and an OEM blueprint.
Four years later, Gerzberg used that mind-set to create Zoran Corp., which for the last two years has watched sales of its high-end DVD controllers triple, accounting for more than 85% of the company's revenue of $131 million. That growth has also helped Zoran establish itself as the leading supplier of high-end DVD controllers.
"At Stanford, we learned to integrate the know-how of medical electronic devices with a very deep understanding of signal processing. Each chapter of my thesis dealt with one of several applications: system design, signal processing, and silicon design, and the mathematics of silicon," said Gerzberg, Zoran's president and chief executive.
"I've since believed that the main advantage for our customers stems from our ability to integrate many disciplines. Our engineers, for example, design entire DVD systems as a production-ready box for our customers, as well as [chipsets], digital processors, and software," he said.
But as Gerzberg continues to apply what he calls an "integration of disciplines" to his company's digital video R&D and business acumen, the stakes are higher than during his ivory tower days at Stanford. Now, high-end DVD ICs face fierce pricing pressures. In addition, the company must try to second-guess what technology could replace DVDs.
Since demand for Zoran's DVD controllers began to take off in 1999, the company's high-end devices, which offer digital scanning and video playback, have helped Zoran gain a leading share of the DVD controller market.
Against competitors such as Cirrus Logic, ESS Technology, LSI Logic (formerly C-Cube), and STMicroelectronics, Zoran has gained a more than 40% share of the DVD controller market, according to analysts. The company's DVD business has also enabled it to consistently beat analysts' earnings estimates during the past four quarters, despite financial charges associated with its acquisition of PixelCam Inc. in July 2000, as well as the semiconductor industry's worst downturn.
Zoran also saw its pro forma net income read in the black in the second quarter, coming in at $1.03 million, and profit is expected to grow to $6.7 million in the current quarter.
DVD picture uncertain
But the outlook for the company and the high-end DVD IC market is not entirely sanguine, according to analysts. New IC entrants in the Far East, such as Taiwan's Via Technologies Inc., are pressuring DVD controller prices.
According to The Envisioneering Group, Seaford, N.Y., DVD player shipments worldwide are expected to grow from 12 million units in 2001 to 24 million in 2003. Counter to the strong unit growth, however, per-unit DVD controller prices are expected to decline 25% a year, said research firm Investec, New York.
Additionally, Zoran lags in China, analysts said. "Zoran has a very small presence in the Chinese market, which is where most of the [DVD OEM] business is," said Eric Gomberg, an analyst at Thomas Weisel Partners LLC, New York. "Unfortunately, China is not where their business comes from."
Since its inception in the early 1980s, Zoran has had trouble finding high-volume market opportunities, said analyst Dan Scovel of Needham & Co. Inc. in New York. "If you go back a decade ago, Zoran had difficulty getting its business off the ground," he said. "But they have always done signal processors well and are DSP wizards, so when they left the military and medical areas, they did better."
Zoran began in 1992 to orient its offerings and design know-how to more market-driven technologies, Gerzberg said. "We found that by moving to consumer applications and integrating the right disciplines, we could then provide very affordable solutions for high-volume applications," he said.
Zoran is not hanging its hat exclusively on DVDs, either. Software licensing revenue consistently represents about 5% of its sales. The Santa Clara, Calif., company also continues to develop digital camera video processor and codec technologies based on its two decades of digital-signal video experience. Digital camera applications represent 6% of the company's sales and could hold significant opportunities, according to Gerzberg.
"In 1999 we began to move into the digital editing business by reacting to the market's needs," he said. "We have experienced fantastic growth in revenues and profits in this market, and have focused on applying our proprietary algorithms to video [camera applications] and expect to see growth there like we have in DVD."
A new era in DVD applications could also hold much in store for the company, Scovel said.
"Consumer television applications such as video games, TiVo, and cable set-top boxes could, during the next five to 10 years, collapse into one system that would go into the TV," he said. "Between here and there it would be a wild guess to describe what the system will be, but I would argue that DVD could serve as the hub with its standard and open chip architectures.
"Zoran is already in the DVD space and is in a pretty darn good position to participate," Scovel said.