Zoran Corporation

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Zoran Corporation

1390 Kifer Road
Sunnyvale, California 94086
U.S.A.
Telephone: (408) 523-6500
Fax: (408) 523-6501
Web site: http://www.zoran.com

Public Company
Incorporated: 1981
Employees: 1,071
Sales: $378.8 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: ZRAN
NAIC: 334413 Semiconductor and Related Device Manufacturing; 511210 Software Publishers

Zoran Corporation develops integrated circuits and embedded software used in digital videodisc players, digital video recorders, digital cameras, and in high-definition television sets. The company also provides processors and products to serve the multimedia mobile telephone market. Zoran focuses its efforts on technologies that allow customers to connect and to share video and audio files. The company serves original equipment manufacturers (OEMs) such as Apex Digital, Samsung, Sanyo, Sharp, JVC, Sony, and Toshiba. Zoran operates offices in North America, China, England, Germany, Japan, Korea, Taiwan, and Israel. Its subsidiary in Haifa, Israel, is of particular importance, employing many of the engineers that develop the company's products. Zoran derives nearly 60 percent of its sales from DVD hardware products.

ORIGINS

Zoran experienced two distinct periods of development during its first two decades in business, changing its strategic stance to adapt to changing market conditions seen by its founder, Levy Gerzberg. A dual citizen of Israel and the United States, Gerzberg pursued his academic career in both countries, attending the Technion-Israel Institute of Technology in Haifa and Stanford University in Palo Alto, California. In Haifa, he earned a bachelor's degree in electronic engineering and a master's degree in medical electronics, completing his studies in Palo Alto, where he earned a doctorate in electrical engineering. After receiving his Ph.D., Gerzberg stayed at Stanford, becoming the associate director of the university's electronics laboratory.

Gerzberg left the academic world to join the business world in 1981, founding Zoran, "silicon" in Hebrew, in December. From its Santa Clara, California, headquarters, Zoran began the first chapter of its history, using Gerzberg's expertise in digital signal processing to provide sophisticated and expensive semiconductors to industrial and military customers. The company focused on developing digital signal processors (DSPs), chips that allowed devices to translate sound, pictures, and light into strings of binary code, the zeros and ones that formed basic number systems used by computers. Gerzberg found his footing and did well with his debut as an entrepreneur, developing technology that found a receptive audience among companies involved in industrial automation, medical imaging, and manufacturing broadcast equipment. Defense contractors, in particular, favored Zoran's DSPs, using the chips to process analog data from radar images and turn the data into digital form. By the mid-1980s, after venture capitalists had invested nearly $30 million in Zoran, companies such as Magnavox Electronics Systems were designing defense products to use Gerzberg's chips, fueling the growth of the small Santa Clara start-up. Sales, which totaled $2 million in 1986, jumped to more than $10 million the following year and continued to climb until the end of the Cold War forced Gerzberg to reassess his market strategy. With more than half of its annual revenue coming from defense-related work, the company felt the pinch of reduced military spending. The market for DSPs fell into a slump, Zoran's sales wilted, and Gerzberg decided that the company's future lay elsewhere.

A CHANGE IN STRATEGY FOR THE 1990S

Zoran entered the 1990s essentially as a start-up venture, forced to reinvent itself and start over. Gerzberg wanted to use the company's expertise and technology in the consumer market, believing that the ability to convert analog data into digital information might have applications in consumer electronics. The dramatic change in strategy represented a gamble because nothing comparable to DSPs existed in consumer applications at the start of the decade, but Gerzberg sensed that just as vinyl records gave way to compact discs (CDs), CDs would be replaced by some other technology that offered multichannel digital sound. He based his thoughts on the likely premise that manufacturers would want to give consumers the purest kind of sound and pictures, which could be achieved only by converting information to digital form. There was a major challenge facing Gerzberg, however, the same obstacle that had prevented other companies from achieving what Gerzberg contemplated. "Whenever you have to deal with digitized video and audio, it turns out there is one enormous barrier," Gerzberg explained in the May-June 1998 issue of the Journal of Business Strategy. "That barrier is the amount of data you have to store. It takes a tremendous amount of memory to store a picture, for example." Given the limited amount of storage on a computer hard drive and on a compact disc, a solution needed to be found.

Gerzberg's search for a solution to the dilemma ended Zoran's years of financial comfort. The company, in pursuit of establishing a new foundation, began to lose money, sustaining its operations only by turning repeatedly to venture capitalists willing to gamble on Gerzberg's technological vision. Gerzberg decided to solve the storage capacity problem by concentrating on developing technology to compress data. He worked on ways to compress information, remove certain parts, store the information, and then reconstruct it mathematically during playback. He began designing integrated circuits that could compress audio and video data, and his company, bearing all the financial characteristics of a start-up venture, began to lose money. In 1992, Zoran generated $7.3 million in revenue and lost $2.6 million. The following year, the company lost more than it grossed, posting a $7.7 million loss on $4.7 million in sales. "There was a lot of money lost in those years," an analyst reflected in the Journal of Business Strategy 's article about Zoran. "Just look at the list of people who invested in the company. It's an incredibly long list."

Investors' faith in Gerzberg began to be rewarded by the mid-1990s. In 1995, the company posted nearly $1 million in net income, recording $23.4 million in sales for the year. The turnaround effort, five years in the making, was celebrated by Zoran's debut as a public company at the end of the year following an initial public offering of stock, giving the company's private investors the chance to cash in on their belief that Gerzberg would create a second, more powerful Zoran. A technological maverick, Gerzberg represented the vanguard of the coming digital revolution, helping to usher in a new age that ended decades of transmitting, editing, and storing data in analog formats. His digital compression techniques would find numerous uses in the proliferation of digital versatile disc (DVD) players, digital video recorders (DVRs), digital cameras, and other consumer electronics products that emerged at the century's end.

COMPANY PERSPECTIVES

Going forward, our vision is to deliver technology that allows consumers to Connect, Share & Entertain. Our solutions allow consumers to view and share their digital photos or DVD movies on high definition televisions, to connect and print their digital photos directly to digital printers, to preserve and share their video and photo memories on DVD recorder discs, and to enjoy improved digital entertainment experiences in their home with their family and friends.

Zoran's greatest growth would come once digital media components began selling in large numbers. The company's chips found their greatest use in DVD players, which did not begin to enter the mainstream market until the price of such devices began to drop shortly after the start of the 21st century. In the interim, Gerzberg built the infrastructure to support the company's operations and enhance its capabilities, something he would do in a much more aggressive fashion during the first years of the 21st century.

In 1996, the company acquired CompCore Multimedia, Inc., a developer of software-based decompression technology and software cores for audio and video decoder integrated circuits. CompCore was involved in providing the same solutions as Zoran, but it used software instead of hardware to address the problem of digital compression. Its addition to Zoran's operations gave Gerzberg two ways of approaching decompression problems, either through silicon or through software.

Also of note during the latter half of the 1990s was the company's subsidiary in Haifa, which served as the principal research and development center for Zoran's activities. By establishing itself in Haifa, Zoran was allowed to participate in research and development agreements with Israel's Ministry of Industry and Trade and the Israel-United States Binational Industrial Research and Development Foundation. Under the terms of the agreements, the two organizations funded up to 50 percent of project costs in return for a percentage of product sales and licensing revenue. By the end of the decade, Zoran employed 102 research and development personnel, 98 of whom were based in Haifa.

Zoran's financial stature increased substantially during the first years of the 21st century. The growth was attributable to the mass-market appeal of digital multimedia devices and to strategic acquisitions completed by Gerzberg that broadened the company's capabilities. Gerzberg had attempted to develop chips for digital cameras in the late 1980s, but he abandoned the effort several years later when it became apparent that the cameras were too expensive to attract large numbers of consumers. As the price of digital cameras began to drop in the late 1990s, he renewed his efforts to enter the market, taking a more aggressive stance at the dawn of the 21st century, when Zoran could help reduce costs by developing and selling inexpensive chips. In 2000, he acquired PixelCam in an effort to expand Zoran's digital camera business. PixelCam produced low-power image sensors and lenses for digital cameras, making components that were roughly one-tenth the cost of standard industry prices. Gerzberg also acquired another company in 2000, purchasing Nogatech Inc., which made chips that connected video devices with computers.

As Zoran concluded its first 20 years in business, it was beginning to reap the financial rewards of its shift from military to multimedia components. Much of the company's business, and consequently much of its growth, was related to DVD players, the sales of which were growing at a rapid rate. Industry analysts likened the popularity of DVD players to other groundbreaking consumer electronics products such as color televisions, videocassette recorders, and the Sony Walkman, a commonality that translated into vibrant growth for Zoran. The company's sales doubled between 2001 and 2003, jumping from $107 million to $216 million thanks in large part to its chips that decompressed digital information in DVD players, which accounted for 70 percent of the sales recorded in 2003. Gerzberg estimated that he controlled 30 percent of the DVD chip market in 2003, enough to make his company the leader in its field. Of the six largest DVD player manufacturers in the world, four companies—Pioneer Corp., Sharp Electronics Corp., Toshiba Corp., and Sony Corp.—used chips made by Zoran.

KEY DATES

1981:: Zoran is incorporated.
1989:: Zoran's founder, Levy Gerzberg, changes the market orientation of the company, courting multimedia customers instead of military customers.
1995:: Zoran completes its initial public offering of stock.
1996:: CompCore Multimedia, Inc., is acquired.
2003:: Oak Technology, Inc., is acquired, providing entry into the high-definition television market.
2004:: Emblaze Semiconductor Ltd., a designer of chips for the multimedia mobile telephone market, is acquired.

ENTRY INTO THE HIGH-DEFINITION TELEVISION MARKET IN 2003

Gerzberg, having established a solid business foundation with DVD hardware products, began to build the company's presence in other markets, both to reduce its dependence on a single market and to provide new avenues of growth. One area Gerzberg wanted to explore was the fast-growing market for high-definition televisions. He particularly was interested in a company named TeraLogic, Inc., which made chips for high-definition televisions, offering Gerzberg entry into the lucrative market. TeraLogic was up for sale in 2001, and Gerzberg leaped at the opportunity to buy the company, but his efforts were thwarted by the advances of another suitor. In late 2002, Oak Technology, Inc., one of Zoran's rivals, acquired TeraLogic for $50 million. Gerzberg did not give up the fight for TeraLogic, however. TeraLogic controlled 50 percent of the market for high-definition television chips, a business that Gerzberg was intent on obtaining. In August 2003, he achieved his goal by acquiring Oak Technology, paying $358 million for the TeraLogic division and Oak Technology's semiconductor design operations, which supplied chips to OEMs of digital printers and scanners.

As Gerzberg looked to the future, the increasing use of digital compression technology in consumer electronics offered a wealth of opportunities for his company to exploit. He hoped to take full advantage of the opportunities before him by remaining on the technological forefront and by expanding Zoran's breadth and depth of capabilities by acquiring other companies. In July 2004, he acquired Emblaze Semiconductor Ltd., paying $54 million for the Ra'anana, Israel-based company. Emblaze provided semiconductor-based solutions for the multimedia mobile telephone market. Roughly a year later, he signed an agreement to purchase another Israeli company, Oren Semiconductor, a Yoqne'am-based company that he had purchased 17 percent of in August 2003, the same month he acquired Oak Technology. Oren Semiconductor designed integrated circuits for high-definition televisions. Further acquisitions were likely as the company pressed ahead, attempting to fulfill Gerzberg's goal of providing digital solutions on a chip for every type of consumer electronics on the market and those to be developed in the years ahead.