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Operator
Good day, everyone, and welcome to this Tower Semiconductor's fourth-quarter 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 Chairman and CEO, Carmel Vernia.
Please go ahead, sir.
Carmel Vernia - Chairman & CEO
Thank you.
Hello, everyone, and thank you for joining our quarterly conference call.
As you have seen from our press release, we're providing substantially more information in summary of 2004 as compared to previous years.
This is in line with your expectations for Tower and with our desire to share as much relevant information with our investors as possible.
Before I go into a summary of Q4 and year 2004, I would like to turn this call to our CFO Oren Shirazi for a quick summary of the financials.
Oren, please.
Oren Shirazi - CFO
Hi, everyone.
Before we begin, I would like to remind you that some statements made during our call may be forward-looking and are subject to certain risks and uncertainties that could cause actual results to be different from those currently expected.
These risks and uncertainties are fully disclosed in the Company's Form 20-S and 6-K as were filed with the Securities and Exchange Commission and the Israeli Security Authorities and are available through the Company's website.
Tower assumes no obligation to update any such forward-looking statements?
And now let's go over the financial highlights of the fourth quarter of '04 and the year results.
Revenues for the year were $126 million, more than double our '03 revenues of $61 million.
Revenues in the fourth quarter of '04 were $30.1 million, which is 52 percent higher than $19.8 million in the comparable quarter last year and 14 percent lower than $35.1 million in the first quarter of '04.
Net loss in the fourth quarter of '04 was $23 million, 49 percent better than $36 million in the third quarter of '04 and 41 percent better than $39 million in the comparable quarter last year.
Net loss in Q4 '04 included $32 million net capital gains from the previously announced Saifun transaction.
Net loss for the year was $138 million as compared to $114 million in '03.
This net loss increase results mainly from the $117 million of depreciation expenses in '04 as compared to $54 million in '03, as well as a $2 million increase in financing expenses, both items according to plan, and offset by the previously mentioned $32 million of net capital gains.
EBITDA was a positive $19 million for the quarter and $9 million for the year as compared to negative numbers of $17 million and $61 million in the previous period respectively.
The positive numbers in '04 are (inaudible) to the net capital gain mentioned earlier.
Depreciation was $34 million in Q4 of '04 and $117 million for the year as compared to $24 million and $53 million in the previously period respectively.
Cash bonds.
The cash closing bonds as of of December 31, '04 was $87 million, as compared to $61 million as of December 31, '03.
The total balance sheet as of December 31, '04 increased to $848 million as compared to $788 million in December 31, '03.
Equity.
Total shareholders equity as of December 31, '04 was $168 million.
As of December '04, the Company had 66 million of outstanding shares and 20 million of shares (inaudible) and convertible debentures.
Bank update.
Tower's bank recently agreed to waive the Company's noncompliance with certain financial ratios and covenants for the fourth quarter of '04, and it also revised certain financial ratios and covenants for '05.
Guidance.
The Company expects Q1 '05 revenues to be in the range of $23 million and $26 million, while Q2 '05 is expected to be a turning point towards a stronger second half of '05.
We still expect to reach positive EBITDA from operating activities in the second half of this year as stated previously.
And now I will return the call back to Carmel.
Carmel Vernia - Chairman & CEO
Thank you, Oren. 2004 was the first year Fabco (ph) was in introduction with a gradually growing capacity throughout the whole year.
This enabled us to more than double our revenues as Oren stated.
During the first half of 2004, we saw very strong demand from our customers in both fab, and through most of that period, demand exceeded our fab fill production capacity.
During the second half of '04, the trend reversed and we observed weakening demand which affected our capacity utilization.
During 2004 our Fab 2 capacity almost doubled and reached approximately 15,000 wafers per month, including the first toolset for .13 micron technology.
Anticipating continued weakness in the first half of '05, we decided to be proactive and take the necessary steps for cost reduction, including the reduction of 12 percent or 170 employees from our workforce to minimize our 2005 expenses by approximately $20 million.
We also decided to hold capacity expansion during the first half of '05.
In the area of sales and marketing, 2004 saw a sharp 217 percent growth in the number of preproduction customers from six customers in '03 to 19 in '04, of which nearly 50 percent came to Tower for our specialized technology.
We view this as an important accomplishment and, therefore, are opportunistic regarding the amount of volume producing customers in the second half of '05 and onward.
Several of these 19 customers are Tier 1 customers, each representing potential volume production of thousands of wafers per month.
On the basis of this information, we expect that following a weak first quarter of '05 Q2 will mark a turning point and that revenues for the second half of '05 will be substantially higher than for the first half.
During 2004 we broadened our customer base, reduced our dependency on large IDMs and diversified our customer base both geographically and in terms of market segment.
We expect this trend to continue.
In the technology area, we made significant progress across the board.
Our .18 micron seamless image sensor process is fully qualified.
It yields excellent results according to our customers, and we currently have more than 10 products in prototyping phases.
Some of them will likely go into production later in '05.
During '04 we developed certain RF seamless capabilities which we intend to continue to expand and enhance this year.
As a result, we engaged in joint development through our RFID technology with the leading provider of RFID solutions.
In addition, we provided prototype devices of a .18 micron RF seamless product to a leading supplier of special devices for the wireless market.
We completed successfully the first customer (inaudible) of an embedded Flash device in our .18 micron process utilizing Tower's MicroFLASH technology.
During the fourth quarter, we announced the availability of the .16 technology offering which provides cost benefits to customers while requiring .18 micron designers minimal adjustment efforts.
We can now update that we already have two prototype products using this process demonstrating very promising initial yield.
We completed the transfer of the .13 micron process from free scale and expect to run the first .13 micron shuttle at Tower this quarter.
This shuttle will carry many IP blocks and possibly a number of customer test chips.
We are very close to completing the technology transfer phase in our $200 million contract with Vishay-Siliconix.
This program runs smoothly, and production start is now expected two months ahead of schedule.
Finally, I've notified the Board of Directors I decided to step down from my position as Chairman and CEO in order to pursue other interests.
I agreed to stay in my current position until the Board appoints my replacement, and I will make sure the transition is smooth.
Also, I will continue to serve on the Board of Directors of Tower.
With these final words, I would like to open the floor for questions.
With me in addition to Oren we have on the conference Doron Simon, President of Tower USA.
Operator
(OPERATOR INSTRUCTIONS).
Ali Irani, CIBC World Markets.
Ali Irani - Analyst
Good morning, gentlemen.
I'm hoping you can give us some color on the variation between Fab 1 and Fab 2.
In the first quarter outlook, you mentioned the pull of the Siliconix business.
Does this imply that Fab 1, in fact, is seeing a flattening or even an improvement on a monthly basis as you go through Q1?
Carmel Vernia - Chairman & CEO
This is Carmel.
No, I don't see a lot of variation between the fabs.
Siliconix is only going to start ramping in the end of Q1, so the general trends are similar in both fabs.
Ali Irani - Analyst
With respect to visibility, I know you talked about the second quarter being a turning point in your own words.
Is this statement based on current customer forecasts or indications to you?
Are you expecting at this point your order rates to pick up later this quarter?
Could you give us some more granularity as to what is providing you with that visibility?
Carmel Vernia - Chairman & CEO
The visibility is based on the pipeline of customers in prototyping phases.
We don't have enough visibility to give number guidance for Q2, so it is hard for us to say whether it in itself will be stronger than Q1 or not.
But we definitely see a lot of activity that I am sure we will see the signals during Q1 and Q2 for a much stronger Q3 and Q4.
Ali Irani - Analyst
Are you performing pilot runs for these customers for this pipeline in Q1?
Carmel Vernia - Chairman & CEO
Yes.
Ali Irani - Analyst
So these are customers that you're already going into pilots your expectation would be that a good number of those designs would, in fact, be turning into production in the second quarter?
Carmel Vernia - Chairman & CEO
It is a delicate line whether it is second quarter or third quarter.
That is why I am so hesitant to give you any specific guidance on Q2 regarding numbers.
I am very confident about Q3 and Q4.
When exactly the fab strength will stop, it is hard for us to say.
Ali Irani - Analyst
I understand.
Thank you very much.
Operator
Jesse Pichel, Piper Jaffray.
Jesse Pichel - Analyst
A question for Oren.
Were there any severance costs in your cost of goods in the quarter?
It looks like they went up 3 million sequentially.
Also the same question for R&D, it looks like it went up 2 million sequentially.
Oren Shirazi - CFO
As you know, severance payments are paid in advance, and as their accounting lulls, it is provided also in advance.
So, in fact, all this cost reduction activity we have done announced in November had no influence on our cash flows nor our profit and loss report.
Jesse Pichel - Analyst
So, let me ask it another way.
Why was R&D up 2 million sequentially, and why was cost of goods up 3 million sequentially, excluding depreciation and amortization?
Oren Shirazi - CFO
Sequentially, you mean comparing to Q3?
Jesse Pichel - Analyst
Correct. (multiple speakers).
I'm just trying to get to a place where I can model you now after some of the cost reductions you have made and having a problem doing that.
Oren Shirazi - CFO
Yes.
R&D, it is adjusted -- let's start with the cost of goods.
The cost of goods you had the depreciation and the changes in work-in-process.
Depreciation is continuously going and going up.
This is the main reason in addition to the changes in Whip (ph), where you see the effects of the slowdown in the semiconductor market. (multiple speakers) -- since you cannot allocate enough cost to be on the weekly sales.
In the R&D you can see that marketing and sales does -- marketing and sales are slightly decreased on the other hand.
So if you adjust a shift of expenses from one line to the other due to accounting rules, it is not any implication.
It also relates to the depreciation of expenses.
Jesse Pichel - Analyst
All right.
I will have to take that off-line with you.
I'm a little confused.
But maybe a question for Doron.
What do the die banks look like right now?
Can you give us some color there on what types of wafers you're holding there for customers and how full are they, or do you not really carry too much of a die banks?
Doron Simon - President of Tower USA
In our basic business model, we do not carry die bank to any customers.
There are occasionally a couple of exceptions based on product releases.
But in general we don't carry die bank, and if you analyze our financials, you should not take that into account.
Jesse Pichel - Analyst
Right.
Okay, I will circle back.
Thank you.
Operator
(OPERATOR INSTRUCTIONS).
Ramesh Misra, C.E. Unterberg.
Ramesh Misra - Analyst
Good evening and good morning, gentlemen.
Can you update us on the progression of wafer capacity through the year on your Fab 2?
I presume on Fab 1 they will be pretty much flat.
Carmel Vernia - Chairman & CEO
Yes.
Fab 1 we do not plan any expansion other than specific equipment for Siliconix.
On Fab 2, the only thing we can say is that for the first half we are firm not to increase our capacity beyond the 15,000 wafers per month since right now we're waiting for demand to pick up.
For the second half, we have not made decisions yet.
We are in a standby mode.
Ramesh Misra - Analyst
Can you qualitatively talk about the pricing environment?
Carmel Vernia - Chairman & CEO
Yes, it is very competitive.
Ramesh Misra - Analyst
Can you say a little more?
Was it down, up, flat, down double digits, single digits?
Carmel Vernia - Chairman & CEO
You know, I have been in this industry for a year and half, and I only saw one direction prices go, and we are feeling very strongly these days.
Ramesh Misra - Analyst
Okay.
So in the second half of the year, as your mix improves, do you anticipate that to be changing?
Is that going to be one of your goals to try to keep ASPs on a blended basis more level or perhaps going up?
Carmel Vernia - Chairman & CEO
This is definitely a goal, but I would qualify it more as a long-term goal.
I'm not sure that we're going to see very significant shift in the second half, but long-term absolutely.
We intend to grow the ratio between specialized technology and plan CMOS as we did in Fab 1 from roughly 5 percent specialized with in a few years to 75 percent or more.
This like I said is a long-term process.
You're not going to see the shift quarter by quarter, and if you do, those may be spikes.
Ramesh Misra - Analyst
Okay.
And then finally in terms of your end markets, you did say in your press release that the consumer is likely to be coming down.
Which other segments do you expect to be seeing the most growth out of?
Carmel Vernia - Chairman & CEO
The one that is very obviously in our horizon is communication.
Ramesh Misra - Analyst
Okay.
Would that the -- that would be for mixed-signal?
Carmel Vernia - Chairman & CEO
Yes.
Primarily yes.
Ramesh Misra - Analyst
Okay.
All right.
Thanks very much.
Operator
Ali Irani, CIBC World Markets.
Ali Irani - Analyst
Yes, could you help me understand a little bit.
I missed the first few minutes.
If you said this already, I apologize for the repetition.
The mix of business between the Fab 1 and the Fab 2 in the fourth quarter and with the composition by end markets and the trends that you saw, planned markets, and perhaps even now that we're in early February the trends that you're seeing by end markets in this quarter?
Thank you.
Carmel Vernia - Chairman & CEO
I will ask Doron Simon to address this.
Doron Simon - President of Tower USA
Okay.
Basically the mix between the fab, we do not break it out exactly right now.
But we do say that Fab ware 2 in general was turning to be a bigger revenue contribution than Fab 1 over the year.
With respect to the end markets, I think that it is fairly obvious that the biggest drop in the end markets that we have seen and been exposed to is the DVD market space, which Tower's revenue was close to 25 percent dependent on that market throughout last year.
So DVD is certainly the biggest impact on us, and this is also continuing into Q1 in a fairly apparent way.
As Carmel mentioned, moving forward we expect this dependency on this specific market to be reduced, and the communication segment would be going up.
Ali Irani - Analyst
Looking at that statement specifically, it seems that a big part of that is a customer-specific situation with inventories still outstanding in Q1.
Do you have an outlook of replacing either seeing a comeback from that customer or seeing a replacement product from that customer to help the second quarter buoyancy?
Doron Simon - President of Tower USA
The impact was more than a single customer.
We were playing the DVD market from a couple of other angles as well.
That specific customer you related to is, indeed, in advanced sampling status on the Next Generation device, and we expect that to be ramping sometime through Q2.
This is again going back to what Carmel mentioned.
We cannot know for sure when exactly this is going to start, but throughout Q2 expect that to be back-end and it's not related to the inventory but rather a new technology, new product, in that same space.
Ali Irani - Analyst
Great and in terms of the Q1 impact outside of DVD, the trends that you're seeing, any markets that are specifically strong or weak?
In the iCMOS business, I know you have been working on a number of new customers, but generally the handset market is on the weaker side in Q1.
How are you feeling it?
Carmel Vernia - Chairman & CEO
I would say most of the markets right now are not showing strength.
The only exception might be niche applications, especially in the industrial and medical imaging fields.
Other than that, there is not current strong market or market that is not impacted by what we see as an across the board weakness throughout the customer base.
Ali Irani - Analyst
Great.
Thank you.
Operator
(OPERATOR INSTRUCTIONS).
It appears that we have no further questions at this time.
Mr. Vernia, I would like to turn things back over to you for any additional or closing remarks.
Carmel Vernia - Chairman & CEO
Well, thank you very much.
I want to thank you all for attending the conference.
I appreciate the time you spent with us, your patience and understanding.
See you next time.
Bye-bye.
Operator
That concludes today's conference.
Thank you, everyone, for your participation.