高塔半導體 (TSEM) 2003 Q3 法說會逐字稿

Welcome, ladies and gentlemen, to the Tower Semiconductor third quarter earnings release. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation. I will now turn the conference over to Carmel Vernia, Chairman and CEO. Please go ahead. Sir.

Hello everyone, and welcome to our quarterly conference call. This last quarter marked an important milestone for Tower as this was the first quarter in which we recognized revenues from our Point 18 modern facility, Fab 2. Overall, I am very pleased that Tower is substantially on track with achieving its objectives on all fronts -- business, operations, technology and financing. Before I go into more detail describing recent developments at Tower, I would like to turn the floor to our CFO, Amir Harel, to briefly go over quarterly financials.

Hello everyone. Before I begin, I would like to remind you that some statements made during this call may be forward-looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those currently expected. These risks and uncertainties are more fully described in the Company's form 20F for the year '02 and our recent press releases on form 6K that have been filed with the SEC and the Israeli Securities authority, and are available through the Company's Web site. Tower assumes no obligation to update any such forward-looking statements. Now I would like to share with you some of the financial highlights of the third quarter and the nine months ending September 30th.

Tower sales were 16.1 million versus 12.9 million in Q2 '03 and 16.2 in Q3 '02. This was the first quarter in which recognized (inaudible) sales from operations. In the third quarter of '02, sales included 4 million revenue from a technology agreement. The consolidated net loss was 37.1 million versus 16.8 million in the second quarter of '03 and 14.5 million in the third quarter of '02. The loss in the third quarter includes 33.2 million (inaudible) net loss versus 14.9 million in the second quarter and 11.6 in the third quarter of '02. It is important to note that we started depreciating our Fab 2 assets in the third quarter.

Fab 2 depreciation this quarter was 17.3 million and is expected to increase in future quarters and significantly impact our consolidated net loss. Cash flow from operations in Fab 1 was positive 0.6 million in the quarter, which is in the sixth consecutive quarter with positive cash flows from operations. The consolidated cash closing balance as of September 30 was approximately 20 million and the total balance sheet as of this date was approximately $750 million. Total cash out relating Fab 2 was 64 in the third quarter and over 800 projects to date as of September 30th. The total equity as of September 30th was close to $250 million and the share count was 48.8 million and the option count is 7.6 million, including options to employees, directors banks and the construction company.

And with that, I would like to turn the call back to Carmel.

Thank you Amir. I will now describe briefly the progress we made during the last quarter in the different areas of activity. On the business front, we are pleased that Fab 2 business is on track. This quarter we had revenues from our .18 micron state-of-the-art facility for the first time. Our largest customer for this technology was SanDisk Corporation, who is also one of our strategic investors. We are delighted to have a leading, successful family company such as SanDisk as an investor and key customer.

We're also very pleased with the progress we've made with QuickLogic Corporation, another of Tower's wafer partners. QuickLogic needed a specialized process technology for its proprietary embedded programmable devices, and Tower was able to demonstrate its ability to serve such complex technological challenges in a professional and cost-effective way. In fact, this is one demonstration of Tower's strategy to become a leading foundry for specialized process technologies serving specialized markets at the .18 micron technology note.

In addition to our wafer partners, who are very loyal and supporting, we are pleased to announce that a number of customers which are not our investors have also selected Tower and are currently running their test chips and prototypes in our shuttle. One of them is the first experimental chip using our .18 micron CMOS image sensor process. We expect this process to be available for mass production next year. This is yet another demonstration of Tower's focus on specialized markets requiring a high degree of process technology expertise as well as customer service, which we aim to excel in.

On another specialized technology, .18 micron embedded Flash, we can report here that the initial silicon results from the joint project powerhead with Matsushita in Japan looks very promising. We expect to offer these technologies to customers starting around mid 2004 following the transfer of that technology to Tower's CMOS process.

On the operations front, we are on track with wrapping up capacity in Fab 2. We expect, as announced in the back, to reach a capacity of 8500 registrars per month by the end of this year. Capacity plans for 2004 are not final yet, but we expect our target to be between 13,000 and 15,000 wafer stops per month by the end of 2004. We intend to continuously balance between market demand and capacity availability, and we are prepared to accelerate the ramp up if needed to fulfill such demand.

Fab 1 continues to operate efficiently and is generating cash for the company for the sixth quarter in a row. In addition, we see it as an important asset that allows customers using our .13 micron and logic technology processes to move to our modern .18 process in Fab 2. Specifically, we've seen increasing demand for Flash products in Fab 1. In the CMOS image sensor sector, we are continuously improving our process for Fab 1. We have been selected by Kodak Corporation for development of their CMOS image sensor for digital still cameras using our .35 micron CIS process. This development strengthened our position as a specialty foundry supplier on all technology nodes.

On the funding front, I would like to report that we are very close to signing a revised financing agreement with our banks and our major investors. This agreement will be finalized and signed in a matter of days and we will make a specific announcement with the key attributes of the agreement. At this point, we can say that the revised agreement will solve many of the financing issues the Company is facing, including an (inaudible) commitment by our banks and investors if required, and will enable us to accelerate our efforts to raise the additional funding required for the completion of capacity ramp up in Fab 2.

One final note before I summarize, we are very sorry about the departure of Harold Blomquist. Harold has a personal situation that forced him to be away from his job for the last 2.5 weeks, and he requested to be relieved from his very demanding responsibilities so he can spend more time with his family. Harold contributed greatly to Tower's current strong and independent sales and marketing organization. I wish him all the best. We intend to fill Harold's position with no delay. In the interim period, Harold's responsibilities will rest on my shoulders and I will have my staff members take upon themselves additional tasks to share these responsibilities. Harold will be at the Company's disposal during the next few weeks as needed.

So, in summary, I am very confident about our execution so far and I'm very pleased with the business development of our company. This comes at a time when recovery of the semiconductor sector seems to be underway, and we plan to take big part of it. This concludes my opening statement, and I would like to open the floor for questions now.

Thank you. The question and answer session will begin at this time. If you are using a speaker phone please pick up the hand set before using any numbers. Should you have a question in Israel or the U.S. please press star one on your push button telephone. If you wish to withdraw your question please press star two. Your question will be taken in the order it was received. Please stand by for your first question. Our first question comes from Ali Irani, with CIBC World Markets. Please state your question.

Good morning gentlemen. I recognize that you don't provide specific guidance, but looking at your wafer start ramp and the nodes at which you're ramping, it seems that sequential revenue growth here in the fourth quarter appears very much on track. I'm hoping you could help quantify for us the yields that you are achieving in Fab 2 and the progress that you've made, and where you expect yields to be at the exit rate this year? Thank you.

It's very difficult to make specific comments about yields because yields are dependent on products and on design. I can quote some of our customers saying that they’ve seen our fab is very good considering the stage at which we are at right now. We expect to continuously improve the yields, and around middle of next year we expect to be a benchmark year, as comparable to any of the largest embedded foundries in the world.

Okay. Could you share with us a little bit what percentage of Fab 2's business currently is SanDisk as the largest customer, given that that's probably material at this point?

Hi, it's Amir. In the third quarter, SanDisk was by far the number one customer, and as far as we can tell it, will keep being number one during the next couple of quarters. As to specific numbers, we are not in a position to say. But it is by far number one for now.

Okay, and Amir, in terms of other customers, would you say that you're -- just to give us a general idea, would you say that your top three customers in Fab 2 represent 50, 70 percent of the business?

Currently more than that because we have few and will be more as we go along. The four names we have announced as you surely know are SanDisk, Alliance, QuickLogic from the wafer partners as well as the (inaudible). I can say that regardless of Tower, SanDisk comes around on themselves are in very good position and very good rate growth. So that probably will also be good for us.

Terrific, thank you very much.

Okay.

Once again, ladies and gentlemen if you do have a question in Israel or the U.S. please press star one on your push button telephone at this time. The next question comes from Joseph Aja, with Private Investor. Please state your question.

Yes, good morning and good afternoon gentleman. Congratulations, it looks like you're on track. Very upbeat. More upbeat than last quarter. I appreciate the upbeat-ness. Two questions, how much does -- I don't know if you can answer it, but Saifun; how much is Saifun providing to the bottom line of Tower at this point? The products mix?

Saifun -- if you refer in terms of royalties, then the number is not material at that point. Other than that, Saifun is not currently a customer with buying wafers if that's what you are asking. We had the joint technology development together, as you surely know. But they are not buying from us as a customer.

I understand, but you are supposed to be producing for them. That's one of the agreements, that their technology will be used, you're going to be -- it's going to be produced in Tower Semiconductor. I understand AMB is using their technology at this point?

I cannot comment on AMB. I can say that on the product line which we call NVM, for nonvolatile memory, the sales in the quarter were over 30 percent between MicroFlash and EPROM.

Are you hiring right now? It seems like you should be expanding Tower.

Yes, we are.

Okay. Just continue the good work, and hopefully things will work out the way they should.

Thank you.

The next question comes from Greg Farmer, private investor. Please state your question.

In the past, you have stated that your public relations/investor relations was going to improve. I think that Tower's public relations/Investor Relations type things is very poor. They don't get very much word out to what's going out -- how do you plan on seeking other investors if you can't get out good words?

We will take your comment and discuss it internally on how to improve, and if you have any specific ideas we will be happy to hear them. I think this is not the right opportunity to do it, but you are welcome to use our e-mails to share your thoughts. Thank you.

The next question comes again from Ali Irani with CIBC World Markets. Please state your question.

I'm hoping you could help qualify at least for us where you see the breakeven in the business? I'm sure you have run some models, and I realize that this is heavily mix dependent, but if you take a breakeven perspective looking out at the business -- what revenue levels would you suggest that could be possible?

Its Amir. For Fab 1, we are already cash breakeven, and for Fab 2 I don't feel comfortable to get into dollar amount for sales. But we do forecast that we'll be positive cash flow from operation, as well as positive EBITDA, within the '04 timeframe -- the second half of '04.

Great. Thank you very much. And your CapEx, Amir -- now that the year is coming to a close for 2003 and your perspective for 2004?

For this quarter the total cash out was 63 million, out of which close to 40 was for equipment. For the year '04, it will be in the range of 150 to 200.

Okay. And your budget for this year '03?

The remaining quarter will be anywhere between 50 to 100.

50 to 100. Okay, thank you very much.

Okay.

As a final reminder ladies and gentlemen if you do have a question in Israel or the U.S. please press star one on your push button telephones at this time. The next question comes from Joseph Aja, again with private investor.

Just one quick question. Most of the semiconductor makers at this point -- I have listened to the conference calls; QuickLogic actually had a very interesting one, because Tower Semiconductor was a main focus of their -- was the conference call the CEO really said that most of their production is going to be coming from Tower. But most of their focus is to get to breakeven; that's their focus on most companies. What is -- how is main focused right now? What do you focus on like the most important thing of Tower at this point.

Well Joseph, it's very hard for me to say only one thing that I have to focus on. But I guess if you forced me to say one then I would like to make sure that we ramp up as rapidly as the market demand exists. This is the number one challenge for us.

I mean, if you would be able to ramp up faster, you would be doing that now? I mean, you are doing it as fast as you can, I'm sure, but hindsight is 20/20 they say. Let's say six months ago you would have tried to ramp up faster at this point? Or do you think you…

Hindsight is very easy analysis, but I think we did a good job considering our financial constraints and our visibility six months ago in ramping up today. We have this process every month where we generate a new sales forecast for the coming 18 months, and we adjust our ramping up plan accordingly.

One thing QuickLogic said on there conference call is that their turnaround time -- they did not provide any visibility, because they said their turnaround time is between two and three weeks. Is that orders coming from Tower? Are you providing those chips that they are saying is after two to three weeks turnaround time?

This sound like a very fast number, so I would hate to say that I'm not sure about this, but I really think this is very fast. I don't want to comment about these figures.

Okay. Good luck, and I hope everything works out, as I said before.

Thank you.

The next question comes from Bob Immerman, with Target Capital. Please state your question.

It appears from other conference calls and public information that Fab capacity seems to be filling up. Is there any discussions underway with potential additional strategic partners to solve the capital problems of Tower?

We are making progress on a number of avenues regarding financing the future capacity growth. As soon as we conclude the agreement with the banks and the wafer partners, we will push it into a higher gear. Another wafer partner is one option, and we certainly are going to look at it very seriously, especially now that like you said, capacity is tightening up in the world.

Gentlemen, I'm showing no further questions at this time.

Okay. Thank you all very much, and see you next quarter.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051, or 973-709-2089, with an ID number of 310847. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.