高塔半導體 (TSEM) 2005 Q1 法說會逐字稿

We welcome you to today's conference -- this Tower Semiconductor's first-quarter earnings 2005.

Today's conference is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to Russell Ellwanger.

Please go ahead, sir.

Hello, everyone, and thank you for joining our first quarter of 2005 conference call, and as well my first call as newly appointed CEO.

By way of introduction, it is my goal and expressed desire to build shareholder equity over the long run.

I will strive to make Tower a recognize world leader for (technical difficulty) services.

During my due diligence period, prior to accepting this position, I was immediately impressed with the depth and experience of the executive team and both the technical capabilities and professionalism throughout the organization.

Further review showed a strong pipeline of new customers and projects, each at various stages of qualification, many of which utilizing Tower's specific technologies and value-added capabilities.

My interactions with the Tower Board of Directors showed them not only to be acknowledged experts in their respective fields, but also extremely dedicated and proactive towards Tower's success.

Hence, I accepted the position with excitement.

And although we have a big challenge in front of us, I believe that Tower possesses all the essential ingredients to indeed become a leader in specialized foundry services.

Now we'll address Q1, which was a very important quarter for Tower in terms of new business opportunities, as well as the implementation of additional operational efficiencies.

With me today are Oren Shirazi, CFO, and Doron Simon, President of Tower USA and Vice President of Marketing.

Before discussing the highlights of Q1, I would like to turn the call over to our CFO, Mr. Oren Shirazi, for a summary of the financials.

Oren, please?

Is Oren on the line?

Sir, we seem to be having technical difficulties with his line.

Give me one moment, okay?

Oren, your line is open.

Go ahead, sir.

Hello, everyone.

Before we begin, I would like to remind you that some statements made during the 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-F and 6-K that were filed with the Securities and Exchange Commission and the Israeli Securities Authority and are available throughout the Company's website.

Tower assumes no obligation to update any such forward-looking statement.

And now, let's go over the financial highlights of the first quarter of '05.

Revenues in the first quarter of '05 were $23.2 million.

This amount is compared to $27.2 million in the comparable quarter last year and to $30.1 million in the fourth quarter of '04.

The loss for the first quarter of '05 was $55 million versus $38 million in the comparable quarter last year and versus $23 million in Q4 '04, which included $32 million of net capital gains from the Saifun transaction.

EBITDA for the first quarter of '05 was $14 million negative as compared to $6 million negative in the comparable quarter last year.

The positive $19 million in Q4 '04 were attributed to the net capital gain from the Saifun transaction.

Depreciation for the first quarter of '05 was $33 million as compared to similar amounts in Q4 '04 and to $26 million in Q1 '04.

The cash closing balance as of March '05 was $57 million and total balance sheet as of such date was $781 million.

Equity -- total shareholders' equity as of March 31, '05, was $113 million.

As of March '05, the Company had 66 million outstanding shares and $20 million of options, warrants and convertible debentures, including 10 million options to employees and directors.

Banks update -- the Company, some of its shareholders and its banks are holding discussions for additional funding to the Company in the amount of approximately $60 million.

Accordingly, in May '05, Tower and its banks signed a letter of intent which states that the banks will provide financing in the amount of up to $30 million subject to Tower raising a similar amount from investors.

To date, certain shareholders of Tower have already informed the Company of their willingness to invest $23.5 million towards such funding.

This letter of intent is further subject to reaching a definitive amendment to the facility agreement with the banks.

Regarding the banks' financial ratios and covenants, as previously reported in January '05, our lender banks agreed to waive the Company's noncompliance with certain financial ratios and covenants for Q4 '04 and to amend certain financial ratios and covenants for '05.

Currently, we estimate that we may not be in compliance with certain financial ratios and covenants for the third quarter of '05 and beyond.

However, following the signing of the letter of intent of a Japanese client, we estimate that satisfactory arrangements will be made with the banks in this regard.

Guidance -- the Company expects Q2 '05 revenue to be in the range of $26 million and $28 million, including $8 million from a previously announced technology agreement relating sales to (ph).

And now, I will turn the call back to Russell.

Thank you, Oren.

In the first quarter of 2005, Tower's management implemented additional cost reduction measures focused mainly on manufacturing efficiencies and materials usage, as well as some other savings, all of which will begin to be realized in second half of 2005.

In the areas of sales and marketing, we continue to attract new customers.

Fab 2 preproduction customers in the first quarter of 2005 were 19, including five new customers, each utilizing our specialized technologies.

This demonstrates our strong pipeline and sets our expectations for higher production starts in the second half of '05, with revenue impact in Q4.

Several technology milestones were achieved.

We ran the initial 0.13-micron shuttle at Tower after completing the transfer of the 0.13-micron process from Freescale during the previous quarter.

This shuttle carried many IP blocks and a number of customer test chips.

We started a 0.13-micron design project with a major customer and expect to ramp production during the last quarter of 2005.

We continue to excel in customer service and support.

During the first quarter, one of our key customers on semiconductor awarded Tower the ON Semiconductor Award of Excellence for outstanding service and support.

In partnership with QuickLogic, we demonstrated benchmark-setting performance in low-power FPGAs.

In addition, Tower had been chosen to be Atmel's technology partner for their 0.18-micron next-generation CMOS image sensor products.

Tower expects to generate revenues from this agreement in 2006.

As stated by Oren, our banks and key shareholders continue to demonstrate their belief in the Company.

The banks signed a $60 million letter of intent, half of which is to be raised from investors.

Certain key shareholders have already informed us of their willingness to invest a total of 23.5 million towards such funding.

We believe it is probable to close after the proper filings and legal processes are complete.

Running large businesses at Applied Materials, I learned much about enabling our customers' success through innovative technologic and business model solutions.

I've managed through multiple industry cycles.

I know that great companies emerge from industry slowdowns with stronger capabilities and business roadmaps that are closely tailored to their customer needs.

Exactly this is our focus.

We are committed to emerge from this slowdown better positioned to meet our customers' needs and shareholders' expectations.

I'm grateful for your interest in Tower and would like to open the floor for questions at this time.

Operator?

(Operator Instructions).

Ali Irani, CIBC World Markets Corporation.

I'm hoping -- and Russell, welcome to the call.

I'm hoping you could give us a sense of the business environment in each of the fabs -- Fab 1 and Fab 2.

Obviously, this current second quarter, you're ramping the business for Vishay Siliconix, and I'm wondering if that means your Fab 1 business is already improving in the second quarter while your Fab 2 business is hitting the bottom?

And I'm wondering also if you could give us a sense, given the improving order environment and the low inventories, whether you would see generally a better second half, not just a better fourth quarter?

Thank you.

Doron, would you please address that?

This is Doron, and I'll address your questions.

First, by fab.

Indeed, you are correct for Fab 1.

With respect to Vishay Siliconix, we've recently during the second quarter started to ramp up this business to production, and we expect to start to see the initial revenues out of this ramp hitting already in Q2 and more significantly in Q3.

Having said that, we still see in many of our Fab 1 customers the inventory situation that actually prevents them from placing short-term orders while they work through their inventory situation.

So overall, I would save from the overall market point of view, Fab 1 customer base is not out of the hole yet, to a large extent.

Every once in awhile, you do have exceptions.

For Fab 2, the point with Fab 2 is that our business plan for the next few quarters is really driven by new products that are scheduled to roll into production.

We've started to see initial signs of that starting in Q2, but, as you have stated, it's mainly a second-half revenue influx that we expect to see as more and more of those customers will join -- the production-status customers.

From inventory point of view, those customers that were in production in the past for Fab 2 are basically to a certain extent sitting on inventory and still walking about with some relatively low-volume customers that are back into a more, let's call it steady-state order button already.

I hope that gives you a full picture.

It does, thank you.

And just one clarification on the $8 million technology agreement, could you remind us of what those revenues are for and what you'll be supplying in terms of services in exchange for that $8 million?

Thank you.

Doron?

Yes, basically, the technology deal we had was related to development milestone.

During the second quarter, we actually concluded and signed off their technology development deal.

And we expect there to be the last such onetime payment that you would see.

It's basically going and recognizing previously achieved development milestones in payments.

And this was with what customer for what type of products?

We have previously discussed a major Japanese OEM that we codeveloped an embedded 0.18 NVM technology.

It's still the same project?

Still the same name.

They requested not to be named in public.

Do you expect the conclusion of the technology agreement to bring in business in terms of wafer starts or activity, or at this point, is that arrangement coming to term?

The arrangement itself, as far as we are concerned, is coming to term.

Of course, the technology that we developed, they are using as being an IDM in their own sense and we are using their technology of their foundry.

And we already have customers designing into this technology and taking up products with this technology.

Again, it's a long development cycle and we expect the revenue to be hitting much later, only in 2006 for those additional customers.

Jesse Pichel, Piper Jaffray.

Are you changing your outlook for EBITDA breakeven?

When do you anticipate that?

We did not change our previous announcement of reaching or focusing to reach positive EBITDA during H2 '05, but now it looks a little bit more challenging to achieve such a goal.

Okay.

Related to the 23.5 million, how exactly would that be financed as equity, or -- and what is your outlook there for shareholder dilution?

Yes, it was not yet decided how it will be done, this $23.5 million.

It's not sure to be pure equity.

Might be in another way, but not yet decided; should be concluded, as we said, during the negotiations of the -- before the amendment to the banks' agreement.

So it's a part of the whole issue.

It was agreed that this money will be injected -- will be invested in the Company, but not yet agree in which to.

Can you talk about how many 10% of sales customers there were?

Looking at Q1 results, we have only two customers that would qualify to be above 10% customers.

Lastly, a question for Russ.

Could you talk a little bit about what additional CapEx you think is needed for Tower to really fulfill its growth plans and how might you be able to better rationalize its spending or to the extent that additional or better equipment purchasing terms on the equipment, given your background?

Thank you.

Okay.

The exact number of how much would need to be invested in CapEx at this point would be very difficult to quote, as we are in the midst of finalizing the ramp mix being at 0.18 or 0.13 copper.

That is something that we're looking at very closely at this point.

So it would make a very big difference there if we would be ramping to a great degree in a copper back end or not.

As far as the actual expenditure in the second part of your question, for 200-millimeter at this point, there's a very big difference in the actual capital cost, be one purchasing new tools or refurbished tools.

There's a fair amount of refurbished tools that are available in the market and continuing to be available in the market.

So, depending again on 0.18 aluminum back end or 0.13 copper and the analogous front-end technologies that would be driving the amount of new tool versus refurbished tool split would need to be determined.

By going in the refurbish avenue, the CapEx expenditure obviously would be reduced greatly, and that would be one of our big drives, would be to be able to drive as much refurbished CapEx as possible.

Has Tower utilized the refurbished market in the past, and could you give us some idea of what the CapEx range could be for '05, subject to successful completion of this financing we're in?

The first part of the question is, the answer is yes.

Tower has purchased refurbished tools in the past and we're looking at several refurbished tools at this point.

I would prefer not to at this time commit to an upper limit or a lower limit on the CapEx spending.

It really depends on how we formalize these plans, and as Oren said, even how we structure some of the financial deals.

Great.

Thank you very much, and we look forward to hearing your progress.

Gadi Wolf (ph).

I would like to ask about the bond that you have currently trading in the market due to be paid, I believe, at beginning of '06.

As we speak, do you have any intent regarding -- do you have a capability to pay them all off?

I didn't hear the question; the line was very busy.

Okay, you have bonds outstanding in the Israeli market currently due to be paid -- I believe the first payment is around January of '06.

Do you have any kind of intent to pay them in full, in part -- are you working toward some kind of arrangements with (multiple speakers) orders and so forth?

Of course, we have the debentures outstanding of $24 million approximately, which is payable in four installments beginning the first quarter of '06.

Of course, we have plans of course to repay this debenture fully, because the $6 million that we are supposed pay Q1 '06 is planned, of course, to be repaid after the original schedule.

There's no other plan.

As of this moment, you don't have any intentions of not paying them or negotiating with the bondholders for some kind of an arrangement?

No.

Definitely no such intention.

We have in our banks, as you could see in our financial statements released today, $67 million.

We have announced this new $60 million funding arrangement relating this letter of intent.

I don't see that any problems should become about this $6 million within eight months from now.

Thank you very much and I wish you all the luck with your business.

Ramesh Misra, C.E.

Unterburg, Towbin.

First if you -- keeping questions, guys.

What was the CapEx in last quarter?

It was $22 million, Ramesh, including 2.5 for us -- almost last payment for the technology transfer of the 0.13.

Okay, and do you have an estimate of where utilization rates were in the quarter?

Ramesh, we do not provide exact numbers of utilization overall or per fab.

I could pretty much give you the general notion that our fabs are running about half-full as of the first quarter.

Okay.

Now going forward, in order to really start ramping up revenue levels, where do you anticipate the most promising areas for Tower specifically, in terms of current technology capability, in terms of its areas of focus?

Where do you see or where do you hope to realize some of the greatest growth?

This is like your usual questions -- a very complex one to answer.

When you look at the various time horizons, we see various new customers and new technologies better in the pipeline today that are scheduled to ramp.

Probably the most immediate ones to be impacting us are the CMOS image sensors, a product that are starting to hit our customers' customers.

Over there, the design in cycle is fairly long, and -- but the ramps could be also very aggressive.

We are designed in two already certain platforms that are mainly in the VGA 1.3 and 2 megapixel arenas for some leading OEMs.

So I would say the CMOS image sensors is certainly part of the second-half ramp expectations we have.

On top of this, we do have a development with a lead customer on our RF CMOS device in the 802.11 market space.

And over there, we also expect to start ramping once we achieve all the required qualifications and SEC qualifications there.

And I would say that the rest of our customer pipelines is yet to be announced, but we do have some very interesting product applications that are going to be ramping out on what is traditionally CMOS customers with some unique features.

You know, we can't tell you a lot about that.

But as time goes by and our customers would allow us to publish what they're doing, we of course would be glad to do that.

Doron, just a clarification on this.

Now, if your CapEx plans were constrained going forward, would you still be able to capitalize on these growth areas within this year?

I do believe that the answer is yes.

The simple answer is yes, because our CapEx is pretty much tied to our ability to utilize the assets.

Of course, when we run utilization, like I quoted before, we don't run any risk.

But once the products mature and start to ramp, the CapEx would be available -- would be made available and would be put into place to support those customers.

Russell, this question is more for you.

Having come from the equipment space, you bring certain expertise obviously well-suited for that segment of the semiconductor industry.

How do you see yourself leveraging those assets and helping Tower emerge out of the situation and the tough environment it is in?

I know you two talked about it a little bit earlier.

I was hoping you could spend a little more -- provide a little more detail in that.

With regard to a specific background with equipment, hopefully those expertise will enable a bit of a furthering of fab efficiencies.

Hopefully, it will enable us to drive somewhat higher yields to be able to drive greater productivity out of each tool in the fab.

So, that would be the short answer there.

But the bigger answer is what I believe we need to do at Tower is have a very consolidated vision and drive and just spirit, enabling us to be a leading specialty foundry.

And that's the major thing that I see there as capability from a technical standpoint and that I will really foster within the executive team.

The big successes of any company really comes into understanding customers, customer needs, customer roadmaps, and being able to be very innovative in the business models with customers, to be able to have long-term win/wins with customers.

That's what we're focusing on right now and to be within the foundry business, to be focusing on our ability to respond quickly to drive those type relationship with customers, that's at least my focus and the focus of the team at this point.

(Operator Instructions).

Jesse Pichel, Piper Jaffray.

Yes, I forgot to ask what is your read on your customers die bank situation, and do you have any visibility there, if you're shipping to the bank or you are shipping directly to their assembly and test service provider?

Yes, on most of our customers, we have a fairly good visibility.

And I would say that although some of them are still sitting on inventories, the inventory situation starting from Q4 going through Q1 and the end of Q2 is slowly improving.

It's not gone yet for the big ones.

But we are starting to see that the order patterns is expected to come back to a more healthy one, probably towards the later part of the year.

On certain customers, we actually don't have that much of a visibility, especially those that are selling through vistas and channels that are more remote.

And given the 48% exposure to the consumer market, can you comment on that segment's die bank situation?

Is it more pronounced in consumer or is it in the other categories?

No, I don't think that we can really differentiate that by the application space.

Consumer was probably the biggest program of inventory later on, but -- earlier, I'm sorry.

But today, we do have a fairly well diverse product mix and customer mix and I would say the issue that we see with those customers and inventories could be just as well in communication and some of the other segments.

So I can't generalize and say consumer is the issue.

Well, thank you very much.

Gadi Wolf.

My question is you did announce cuts of a workforce a few months ago and my question is do you have any contingency plans for further cuts if you would miss some in the future and would you still be able to maintain production if you will have to resort to that measure?

Gadi, the answer is a very clear, we have no immediate plans for further reductions in headcount.

The previous reduction in headcounts was carefully put together.

We really recognize the value of human resources within Tower, was not an easy thing to have a reduction in force.

When it was implemented, it was done so with an idea of consolidation of departments so that functional capabilities were not lost for the most part.

But we have no plan at this point to go further in reduction of headcount.

We do have very strong plans on continuing to improve on operational efficiencies and to really capitalize off of the customers and products that are in the pipeline to drive up the revenue, so that we don't have to -- not that we're not going to be judicious with expense, but you need a certain core in order to drive up your revenue, and that's what we're focusing on, is the driving of revenue.

(Operator Instructions).

Ali Irani, CIBC World Markets Corporation.

Talking about the pipeline a little bit, could you give us a sense of the pricing structure of these products?

Are they all niche products or are some of them adaptable products?

And if you look at the current present capacity, what kind of range of utilization would you expect to exit the year on, assuming a balanced number of these products actually make it through the fab?

Turn it over to Doron and then I will make a comment.

Okay, Ali, certainly some of those new products and new projects are in the areas that we call specialty or valuated technologies that we provide to our customers.

And on one hand, usually those are more complex to make, and on the other hand, they do provide higher ASPs.

We do also see some of those new customers that are running more of the standard technologies, still operating with the let's call it fab filler or very competitive market mentality on the other hand.

So I would say we have a mixed bag of all potential pricing scenarios today in our upcoming and existing pipeline of products.

I would be very careful in projecting exact utilization rates going out of the year.

I can generalize and say that we expect them to be significantly higher than what we have seen in Q1, naturally.

But really the rate of getting into those new products and markets a lot of times are certainly out of our hands.

It's our customers' jobs to qualify and get the products to market, and a lot of time, it's not even up to them, and they say that they are depending on their end customers' ability to drive.

So we are in a supply chain where we are at least two steps or sometimes only one step remote from the end market.

And there's a certain ability to project that is derived from that.

When you look at your guidance for an EBITDA breakeven, Oren, what utilization level does that hinge on?

As Doron mentioned before, we do not quote the exact utilization rate of the actual, so we cannot quote also focused utilization rates.

But still, to come to that EBITDA breakeven, you have some assumptions in terms of revenues or wafer starts, let's say.

Could you give us a sense of what assumptions you're making for the breakeven so we have something to think about?

I can give you a feeling by if you look in Q4 results, not -- Q4 '04 results, you can see that we were in $35 million of revenue while EBITDA was negative $2 million, and this was before all these cost reduction measures that we have done, which will yield approximately 8 to $9 million a quarter, as we stated this previously.

So you can extrapolate and reach the results.

Has pricing been a concern since then in terms of even in your niche markets, could you give us a flavor for that?

Pricing on the existing products is today under market pressure, for sure, and also on new engagements.

But when you talk about the niche products, we just haven't had the baseline last year to compare to.

And if you compare the niche areas to the core CMOS areas, the niche areas do provide premium in pricing.

So we expect them to be more immune.

If you look at the Fab 1 experience as a baseline, certainly the niche areas are better protected from a pricing pressures point of view.

But still, there is some degree of pricing pressure.

So it would be fair to assume that you would need to post some higher revenues than that 35 million to get to breakeven?

I would say that in those areas, okay, I would classify that not so much as pricing pressure as across the board, but when you have a relatively empty fab, and Russell mentioned our ability to creatively work together with customers, you can expect that in those areas where we have market flexibility on niche technologies, we would come and offer a more competitive price to gain more market share.

So those scenarios do happen also in the niche technologies.

Ali, with regard to your question on how does the pipeline impact the Q4, the customer interactions I've had to date, and I'm right now in the midst of going around the world, meeting our customers, speaking with them, they've highlighted very strongly Tower's unique ability to have extremely quick cycle times on their requests.

They can have feature creep in their designs.

We respond quickly in our offering.

The first and foremost task of us with regard to the breakeven point is loading the fabs.

In order to do that, we have to very quickly get all of what is in the pipeline qualified.

Our capability there to respond to each customer from the idea of being a specialty foundry by driving that into our branding of quick response, tying in early on into customer development, having co-teams between us and the customers, that's where we're focusing.

Being successful will allow us to ramp the fab, to load the fab much more quickly than if we were to just sit back and wait for the normal cycles of qualification done by the customer.

So that is our focus there.

To say how quickly we will be at full capacity, at 80% capacity, whatever, that's a little bit difficult to forecast at this point.

But I'm convinced that our ability to get the customers qualified and to help them be the first to the market in their respective markets, and that's really what Tower can offer and what we need to offer.

And then depending on the acceptance of their products, with all the new products, we will ramp.

(Operator Instructions).

Since there are no further questions, I will turn it back over to you, Mr. Ellwanger.

Thank you.

So I wish to thank you for your time and your interest.

As I mentioned at the onset, I'm quite excited about Tower, excited about its prospects.

It's my belief that you will as well become as excited as we are.

And we very much look forward to sharing our progress with you over the next quarters towards the plans that have already been discussed.

So thank you again, and we do look forward to a very bright future.

Thank you.

This does conclude our call today.

You may disconnect at this time.