高塔半導體 (TSEM) 2004 Q2 法說會逐字稿

Please stand by. Good day, everyone, and welcome to this Tower Semiconductor Second Quarter and Six Months Earnings 2004. Today's conference is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Carmel Vernia. Please go ahead.

Thank you. Hello, everyone, and thank you for joining our quarterly conference call. Before I turn the call to Amir Harel, our CFO, I'd like to comment that we are substantially on track with our capacity ramp and with our development programs with the emphasis shifting from 0.18-micron plain CMOS to 0.13-micron and to 0.18 specialized technologies. Amir Harel, our CFO, will now discuss some of the highlights of our financial results. Amir, please.

Hi, everyone. Before we 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 disclosed in the company's Forms F-3 and 20-F filed with the SEC on the first quarter and in our recent press releases on Form 6-K as have been filed with the SEC and the Israel Securities Authority and are available through the company's Web site. Tower assumes no obligation to update any such forward-looking statement.

And now I would like to share with you some of the financial highlights of the second quarter. Revenues were 33.7 million in Q2; 161% higher than 12.9 million in Q2 of '03 and 24% higher than 27.2 in the first quarter. The net loss in Q2 decreased to 36.5 million from 38.5 million in Q1 of '04. The increase in net loss versus Q2 of '03 is primarily attributed to Fab 2 depreciation. The decrease in net loss versus Q1 of '04 is primarily as a result of higher revenue.

Depreciation and amortization was approximately 27 million in this quarter and approximately 53 million in the first half and is expected to further increase in future quarters and significantly impact our net loss. The cash closing balance as of June 30, '04 was approximately 66 million. Total cash out relating Fab 2 was 76 million this quarter including 52 million for equipment and was approximately 1 billion project today as of June '04.

We drew additional 30 million loans in this quarter and the loan balance was 461 million as of June '04. The total balance sheet as of June '04 was 831 million. Total shareholders' equity as of June '04 was 230. As of June '04, the company had 65.6 million outstanding shares and 16.5 options, warrants, and convertible debentures.

Relating our guidance for Q3, we expect Q3 revenues to be in the range of 35 and $38 million. We further expect depreciation for the third quarter to be in the range of 29 to $31 million. I would like to emphasize that we remain committed to the following short-term milestone - capacity of 14K wafers per month in Fab 2 by December '04 and positive EBITDA in Q4 of this year.

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

Thank you, Amir, and now to a more detailed status update of the company. Our capacity ramp, as Amir mentioned, is on track to reaching full capacity of approximately 14,000 wafers per month by year-end. We worked to overcome some minor slippages in equipment supply, installation, and qualification, which may result in a slower-than-planned ramp towards the 14,000 target.

By the middle of '05, we expect to have full capacity of approximately 17,000 wafers per month. This includes the first toolset for 0.13-micron technology capable of a few hundred wafers per month. According to our preliminary plan, and I have to emphasize it is preliminary, not backed by equipment orders yet, we expect to ramp approximately 7,000 wafers per months capacity of 0.13-micron tools during the second half of '05.

I will now move on to report on the progress made on the technology front. Our 0.13 technology development and transfer from Freescale, Motorola's spin-off, is substantially on track. We plan to run the first industry-standard CMOS shuttle at Freescale later this year and run the first shuttle at Tower early next year.

We recently signed licensing agreements with two leading IP providers Artisan and Virage Logic. With their libraries in our IP portfolio in addition with our proprietary 0.13-micron library, we expect to have one of the richest IP offerings on the market. In 0.18 CMOS Image Sensor technology, we shipped prototypes to the first two customers. Both of them are likely to go into production later this year or early '05.

We recently engaged with our first 0.18 imbedded flash customer following successful proof of our 0.18 imbedded flash technology which is based on (inaudible) and co-developed with Matsushita in Japan. We expect to start rolling production early next year. The technology (inaudible) project from (inaudible) is also on schedule with Fab 1 production planned for Q2 '05.

Our high level of service continues to gain recognition, and we received Freescale's Gold Supplier Award for the fifth year in a row. On the financial front, we are constantly evaluating our financing options, realizing that additional funding will be necessary to support our growth plans.

My final note is that our customers' demand continues to exceed our current Fab 2 production capability, which indicates strong market conditions for us. With this, I would like to open the floor for questions you may have for Amir or for myself.

[Operator Instructions] And we'll take our first question today from Darius Lui with C.E. Unterberg, Towbin.

Hello, everyone. Can you talk a little bit more about the ASPs and the product mix between commodity and specialized as well as utilization rates this quarter and what you see going into Q3?

Darius, can you repeat the question? I didn't hear it clearly.

Can you talk about ASPs product mix between commodity and specialized and utilization rates for Q2 and what you see for Q3?

Darius, we typically don't give those statistics, certainly not on a quarterly basis, but overall I can say that there are no major changes. ASPs seem to be stable, and products mix as far as Fab 1 is also stable. In Fab 2, because it's a new Fab - we're only ramping up, we have primarily plain CMOS. We have very little specialized technology in Fab 2 as of now.

OK. Can I delve a little bit more into your 0.18-micron product pipeline for both the imbedded flash and CMOS Image Sensors? And when do you think a customer commitment will occur for CMOS Image Sensors for the 0.18-micron?

There are a number of customer commitments. As I said in my opening statement, we already shipped prototypes to two customers, and prototypes is beyond the commitment stage. Now we depend on their success in their markets.

We believe if they are successful, they're going to go into volume production with us later this year or early next year. In imbedded flash, we have the first customer commitment and we expect it to go into production early next year.

Early next year. OK. And then lastly, just from a housekeeping standpoint, can you break out depreciation, headcount, and the shares outstanding?

Amir?

Depreciation for the quarter was approximately 27 million, as I've noted. And although we don't break it between the fabs, since Fab 1 is fairly stable (inaudible) three million and this is a very old secret and then you can understand that the balance is for Fab 2. About the headcount, it's in the range of 1,500. And what was the last question, please?

Your shares outstanding.

The shares outstanding, as I mentioned, it's 65.6. It's somewhat different from the loss per share calculation, but the shares outstanding is the number I noted.

Can you base it on fully diluted and non-fully diluted?

The 65.6 is outstanding, meaning not diluted. And as I noted, we have additional 16.5 million options, warrants, and convertible debentures with various exercise price investing (inaudible) et cetera, but this is the total number.

OK, thank you.

OK, thank you.

And we'll take our next question from Quinn Bolton with Needham and Company.

Hi, guys. I apologize. I got on the call a little bit late. Had some problems getting into the call. But was wondering in the prepared remarks, it was press release, you talked about a stronger demand from the consumer segments. Don't know if you've gone into detail, but if you could just sort of give a sense as to where you're seeing the demand.

And then a second question. You talked about delivering a 0.18-micron CMOS Image Sensor prototypes to customers. How are the yields looking on that product? Are those yielding at sort of acceptable production levels or do you still have more work to do to get up to mature yields on the 0.18 CMOS Image Sensor process? Thanks.

Quinn, I'll start with the second question because I have an easy answer. We're still at the prototype stage. We are not yet at the stage where we can predict yields, so you'll have to defer that question to next quarter or onward.

As far as demand, our largest customers are from the consumer and digital media area. (inaudible) and we see very strong demand from both of them.

How about some of the more traditional customers in Fab 1? Are those also more consumer-related products or are those more communication or is it just a broader mix of products out of the Fab 1 facility?

In Fab 1, we see a much wider spread of market and they are fairly stable. I cannot say there is any particular trend that we can see from Fab 1.

OK, and then finally, you talked about I think a little bit slower-than-expected ramp in the near term getting to the 14,000 wafer starts by the year-end. That's entirely due to just the delivery of equipment between now and the end of the year?

Yes.

OK, thank you.

And we'll take our next question from Jesse Pichel with Piper Jaffray.

Yes, good afternoon. I'm sorry. I was a little bit late on the call. Could you tell me what tools were slipping?

No, we don't want to be specific. We're not talking about a general trend or a specific vendor and most of the slippages are not major. But, you know, even when you have a slippage of two or three weeks, it's cumulative and in the Fab R (ph) side, which is only in the early stages of ramp up, it's significant. So, it shows up in our results even though those are not significant phenomena. And, like we said, we will catch up and we will be at 14,000 capacity by the end of this year.

So it was a few tools that were a few weeks late? Is that how you'd characterize it?

Yes.

OK. Did - and also, I apologize if you already discussed this, but did Fab 1 grow sequentially in the quarter?

We decided about a quarter or six months ago to no longer provide separate pieces of information for Fab 1 and Fab 2. I can only comment that, in general, Fab 1 runs, in recent quarters, at relatively high utilization and relatively stable.

Did utilization increase then in the quarter?

Yes.

OK. And, you know, would - depreciation, you said, is about 27, so direct costs, non-depreciation costs went up, oh, about $3 million sequentially. And I was wondering if you could just kind of break that out for us there and what - the headcount or, you know, really what is that?

It's similar (ph). We don't go on difference below the cost of sales, but, in general, if you ramp up, it's materials and everything that has to do with the ramp up of the success. So it's headcount, which are operating, yes. But also the various materials and everything that goes up when any manufacturing facility is ramping.

So is it mostly materials or mostly headcount?

It's both as well as other line items.

OK. Can you update us there on the Vishay ramp and if there's any change to that - to your latest thinking there?

As I commented in my opening statement, we are on schedule with this program. The technology translate from Siliconics to Tower is on track and as we predicted when we signed the contract, we'll start running production in Q2 of '05.

What percent of Siliconics production will you be handling?

I'm not authorized to say that on behalf of Siliconics.

OK.

They have a number of suppliers and they will decide, at each point in time, how to split the (inaudible).

And just relating to your customers and markets there, there may be some indication that DVDs are pretty weak and, but DVRs and set top boxes are very strong. Do you have any idea where your customers are positioned there with the wafers that you're manufacturing?

The honest answer is no.

OK. Thank you very much.

Sure.

And our next question will come from Mike Crawford with B. Riley & Company.

Could you give an update on what your ownership is of Sci Fun and what any status of that company is?

Nothing's changed in the last few months. We own approximately 10.5% of Sci Fun on fully diluted basis and we're very happy with this ownership.

And is - when is the last time Sci Fun had a funding ramp?

Oh, Amir, do you remember?

Last time it was in the February or March timeframe, which was the second deal ...

'03.

... '03. Which was the second deal with Infineon.

OK. Great. Thank you.

And once again, if you do have a question, please press star, one at this time. And we do have a question from Kevin Beck with Denver Investments.

Hi. Can you talk about what you see depreciation ramping up to in the third quarter?

Hi, Kevin. It's Amir.

Hi.

As I said in my opening statement, we guide the depreciation for Q3 will be in the range of 29 or 31 million.

OK. And the slippage in tools, can you be more specific on what that may have cost you, at least in revenue in the ramp? And you said that's going to - you're going to make up for it. Can you be more specific when you're back on track exactly?

The only thing I can say is that it is already reflected in our guidance for Q3. Obviously, when we started the year, we thought that we would be able to do better than that in Q3 because customer demand is there. By the end of this year, we will certainly catch up. Hopefully, prior to that. So, by the end of this year, we will be back on track with 14,000 wafers per month in dual capacity.

But if you look at your budget earlier this year, how much would you say that this is costing you in Q3 ramp?

We don't share this kind of information. I'm sorry, Kevin.

OK. And new business opportunities out there? Where do you stand there?

I think we have a very good funnel of new customers. We typically disclose specific deals only when a customer goes into production because there's no point in talking about customers that are doing prototyping with us and then, for some reason, they don't go into the market or their product fails or they decide to manufacture in another location. So, all I can say is that we have a growing funnel, including the number of customers in our specialty areas, mixed-signal and (inaudible) and CMOS image-sensors, like I said. And we feel it's a very healthy funnel. Like I said, stronger demand than we can fulfill right now.

At what point do you think you guys need to make the decision about whether to pull forward in tool orders to get to 33,000?

Can you repeat the question? I'm not sure I understand.

You've talked about pulling forward, getting to 30,000 - 33,000 wafer starts a month from, you know, your original budget, which I believe was in the 2006 timeframe. Because of the slippage of tool orders and what you're seeing out there in the tool market, at what point do you think you guys need to make that decision? And subsequently, at what point do you think you need to make financing decisions?

Yes. The slippage is not a major issue. I only mentioned it because it has some short-term impact. But we don't see it as a long-term issue. We are going to make that decision about acquiring new tools very soon and we think we will accelerate our original plan.

OK. And the financing part of that question?

It's always on the table. It's a complex issue. It's always on the table. You know, we have a number of alternatives, including the Sci Fun, which you or someone else asked before about. And at the right timing and the right circumstances, we'll continue to do financing.

OK. But that - I suspect that the decision to pull forward tools is actually the decision for financing as well. So you're saying all of that will be made in the next couple of months or so?

Yes, except that only thing I would mention is that if we plan to increase capacity, the overall lead time to put in place the production line of certain capacity is about one year. So we don't need the financing now. We can make the decision now. We can do it sometime along the road.

OK. OK. Perfect. Thank you.

Thank you.

And we do have a follow-up question from Jesse Pichel with Piper Jaffray.

Kevin essentially asked my question, but let me just be direct here. Can you reaccelerate growth in Q4 based on, you know, your current outlook there of the tool situation?

What do you mean, can we ...

You're sequential growth rate for Q3 is coming down, is getting cut in half. And can you - can that improve there in Q4? Can you reaccelerate growth?

Well, if we knew for sure, we would probably be able to give you guidance. Since we only give guidance one quarter forward, that means that we cannot commit, at this point in time, to what will happen in Q4. What we can say and we've said it firmly in this call that we feel we're still on track with two things. First of all, the tool capacity by the end of this year. And the second one is the positive EBITDA at the end of the year.

OK. Can you share with us your thoughts there on Intel and specifically, as they make efficiency improvements on 300 millimeter and free up some 200 millimeter capacity, do you think they're going to get more aggressive in Flash and perhaps move into CMOS image sensors or some other applications there that could be considered specialized in nature?

Carmel Vernia; You know, I'm sorry, but I'm not being paid to make this assessment.

Well, you must think of it as a competitive threat, no?

Intel? No, I don't see Intel as a competitor.

So you don't think they will get into CMOS image sensors then.

If Intel will get into this area, that would be a very strong signal that we'd better look for other areas because, in commodity products, we have little chance to be very competitive.

All right. Fair enough. Thank you very much.

And as a final reminder, if you do have a question, please press star, one at this time. And it appears we have no further questions at this time.

OK. Thank you very much, everyone, for attending and I'll talk to you in the quarter. Thanks a lot.