高塔半導體 (TSEM) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thanks for standing by.

Welcome to Tower Semiconductor's fourth quarter 2005 earnings release conference call.

All participants are present in a listen only mode.

As a reminder, this conference is being recorded.

With our phone line today is Mr. Russell Ellwanger, Tower's CEO, and Mr. Oren Shirazi, CFO.

For opening remarks and introductions, I would like to turn the conference over to Mr. Russell Ellwanger.

Please go ahead, sir.

Welcome, and thank you for joining us for today's conference call.

We'll begin with a report of the fourth quarter and the 2005 full year financials by our CFO, Oren Shirazi.

I'll then review recent achievements with respect to our product lines, technology, operations, and customer pipeline.

Finally, I'll give first quarter 2006 guidance, and some perspective on how we see 2006 unfolding.

I hope you will participate in the Q and A session immediately following our formal comments.

Oren?

Thank you, Russell, and hello, 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 uncertainties and risk factors that could cause actual results to be different from those currently expected.

These uncertainties and risk factors are fully disclosed in our form 20 F and 6-K as they are filed with the Securities and Exchange Commission and the Israeli Security Authority.

They are also available on our website as well as on our forms F1 and F3.

Tower has no obligation to update any such forward-looking statements and now let's go over the financial highlights of Q4 '05 and the year results.

Revenue in Q4 '05 were $31.1 million which is 51% higher than the $20.6 million we had in Q3 and $1 million higher than in Q4 '04.

Revenues in '05 were $102 million compared with $126 million in '04.

Revenues in '05 included $8 million from a previously announced technology related agreement as compared to $1.9 million from the same agreement in '04.

Loss in Q4 '05 was $45 million, which is $10 million better than the $55 million we experienced in Q3.

Loss per share in Q4 '05 was $0.55, which is $0.15 better than the $0.70 we had in Q3, '05.

For all of 2005, the Company reported a loss of $203 million or $2.55 per share compared with a loss of 170 million or 2.21 per share in '04, excluding a net capital gain of $32 million from the previously announced sale of our shares in Saifan Semiconductor.

The depreciation and amortization expenses for the fourth quarter of '05 were approximately $37 million compared with the same amount in the third quarter of '05 and $35 million in the fourth quarter of '04.

Depreciation and amortization expenses in '05 were $145 million compared with $121 million in 2004.

Cash at the end of December of '05 was $39 million and our total balance sheet was $679 million.

And moving to fund raising and banks updates.

In January of 2006, we completed a very successful right offering to purchase our convertible debenture in which we raised $48.2 million out of a maximum possible of $50 million meaning more than 96% effectiveness.

As previously released, our banks are committed to provide us with approximately $30 million subject to similar amounts being raised from investors.

Following that commitment and our successful $48.2 million fund raising described earlier, the banks have already provided us the entire approximately $30 million amount.

As of the balance sheet date, the Company is in full compliance with its financial ratios under its bank facility agreement.

Following the fund raising described, we fully satisfied our bank's fund raising milestones as of December 31, 2005 and March 31, 2006, and our remaining fund raising obligation towards the bank is to raise $8 million by June, '06.

Excluding the convertible bonds resulted from the previously described offering, as of December 31, 2005, the Company had 67 million outstanding shares and 28 million options , out of which 4 million are both in the money and are exercisable.

Guidance -- The Company expects Q1, '06 revenue to be in the range of $33 to 35 million.

Now moving to Q4, '05 and the yearly sales analysis.

The percentages I shall give are excluding the revenue from a previously announced technology related agreement related to Fab2.

One -- diversifying customer base.

As of the end of Q4, Fab2 had 16 customers in production growing from 13 customers in the end of the third quarter and compared to 6 customers in Q4, '04.

In addition, we had 26 customers in pre-production in Fab2 as of the end of Q4, '05.

Item number two is sales by customer base profile.

For 2005, 61% of our sales were to Fabless customers and 39% to IDM customers versus 75 and 25 in '04, respectively.

Moving to issue number three which is sales by geography.

For Q4, '05, 72% of sales were generated by U.S. based customers, 10% Israeli customers, 13% Asia Pacific and 5% Europe.

In Q3 '05, 66% of sales were made to U.S. customers, 7% to Israeli, 16 to Asia Pacific and 11% to Europe.

For Q4, '04, 65% of the sales were made to U.S. customer, 9 % to Israeli, 14 to Asia Pacific and 12 to Europe.

For the full year, 71% of the sales were made to U.S. customers, 8% to Israeli, 12 to Asia Pacific and 9 to Europe.

For the full year, '04, 61% of sales were made to U.S. customers, 20 to Israeli customers, 10% to Asia Pacific and 9% to Europe.

Next item, number four, is revenues by specialized technology.

For Q4, '05, 56% of sales were in core CMOS technology, 24% in the mixed signal technology, 20% were in the CMOS image sensor and the MVM.

For Q3, '05, 44% of the sales were in the core CMOS technology, 26% in mixed signal and 30% in the CMOS image sensor and MVM, and for Q4, '04, 62% in the core CMOS, 13% in mixed signal and 25% in the image sensor and MVM.

Going to item number five, the last item is diversifying our revenues by market segments so for the Q4, '05, 29% of the sales were designated to the consumer market segments, 21 % to communication, 6% to PC, 11% to industrial, medical, and automotive markets, and 33% to multi-market and other.

For Q3, '05, 17% of sales were designated to consumer market segments, 5% to PC, 22 to communication, 19 to industrial, medical and automotive and 37 to multi-market and other.

For Q4, '04, 57% of sales were designated to consumer market, 17% to communication, 1% to PC, 12% to industrial, medical and automotive, and 13% to multi-market and others.

I'm turning the call to Russell.

Thank you, Oren.

As we previously targeted, the Company delivered positive EBITDA from operations in the fourth quarter and this was the first time since the initiation of the Fab2 project, as well as a significant revenue growth of 51% over Q3, '05, which is the highest ever quarter to quarter top line growth rate in the history of our Company.

This is a direct result of targeted efforts over the past quarters to meet our customers’ needs and it reflects the capabilities and attitudes of our employees in providing best of breed responsiveness to our customers in all aspects of our business.

The second half of 2005 has accomplished the first step in our growth plan and we see that the implementation of a new infrastructure based upon product lines is providing stronger service to our existing customers and has been seen as added value by multiple new and potentially large customers.

We are continuing towards market leadership in several segments within both the image sensor and mixed signal product lines and have seen the product line activities better support the objective of high Fab utilization with profitable business models.

In 2005, we further executed on our strategy of growth and specialized foundry offerings giving our customers a competitive market advantage by providing them with flexible high quality manufacturing services and world class design support.

During the year 2005, we more than doubled the number of Fab2 customers in production and substantially increased the number of Fab2 customers in pre-production.

We saw significant increases in CMOS image sensor, mixed signal, RF-CMOS and Power-MOS revenues in 2005 as compared to 2004.

Throughout 2005, we began work with numerous customers, including some of the biggest names in their respective industries.

We've started production with some as is reflected in the increased number of customers and we expect that the volumes will keep increasing through 2006 as more new customers will reach production and as existing customers introduce new products at substantial rates.

Tower's .18 micron process and pixel IP is achieving excellent CMOS image sensor performance which results in the addition of Biomorphic to our growing list of customers during the second half of 2005.

Furthermore, we began shipping product this past quarter to our first Asia Pacific-based CIS customer.

With multiple additional customers at various stages in the pipeline, we expect to see a continual increase in advanced technology CMOS image sensor production throughout 2006.

We intend to leverage our current leadership position in dental and mammographic X-Ray sensors to grow our present market share in accordance to the growth of these fast emerging markets.

We anticipate that our unique stitching services, that enable our customers to build very large sensors will support this growth.

In addition, we remain aggressive on our pixel size road map to continue to meet the needs and demands of the cell phone market.

The mixed signal product line is delivering competitive performance and single integrity solutions to all of our customers in that area.

Furthermore, our RF process, device and design solutions are bearing fruit in the form of several design wins and initial production.

During Q4, we started volume production and shipments of a wireless ramp product manufactured in the .18 micron CMOS process to our first customer in this domain.

In the Core-CMOS product line we strive for higher margins by providing value added services such as design services, test and process customization.

Our focus on long term high volume agreements with large integrated device manufacturers will leverage Tower's excellent track record of process transfers.

Recently we started shipment of Zoran's demodulator chip for digital broadcast televisions and set top boxes.

The first customer product lot of .13 micron technology was shipped with good yields demonstrating Fab2's readiness for the .13 micron ramp which we expect to begin in the second quarter of 2006.

During the fourth quarter of 2005, we achieved the ISO/TS 16949 certification, the automotive industry's most stringent quality management system standard.

This certification evidence is Tower's capability and commitment to the tightest control of its manufacturing processes, work procedures and product performance.

During the second half of the year, we significantly ramped the production volume in both fabs.

We're at 95% utilization in Fab1 while maintaining close to 100% on time delivery.

The Siliconix ramp continues to plan.

Fab2's utilization continues to grow and is presently at about 50%.

We expect to reach target utilization during the second half of 2006.

During 2005, Tower focused on improving its profitability situation through a two pronged approach.

First, many cost savings programs were initiated yielding multiple million dollar per quarter in savings.

And second, we created product line PL centers to focus on profitability at the business level.

We achieved positive EBITDA at 31.1 million revenue this quarter versus a negative 2.1 million EBITDA at 35.1 million a little more than a year ago in Q3, '04, almost a $7 million improvement in operational efficiency.

Two weeks ago, we completed our rights offering through which we raised 48.2 million, which is more than a 96% exercise rate.

We're very pleased with the success, especially that it demonstrates a very strong vote of confidence from our shareholders and the financial community.

We're setting our priorities for further progress in 2006.

We shall continue to meet our customers’ needs providing world class product quality, responsiveness, tailored-made solutions and support for quick time to market.

Second, we'll continue to reinforce our pipeline of new customers and new products from existing customers and thirdly, we'll continue to focus on improvement of our financials and on meeting our shareholders' expectations.

And last but not least, we'll continue challenging and developing our employees and motivating them in order to effectively address the coming round and thereby contribute to the Company's success.

Finally, regarding our guidance, we expect the next quarter to show growth and are guiding at 33 to 35 million.

Our outlook for 2006 is promising as we look at the increased number of customers, products and volumes coupled with an overall positive business climate.

We're targeting continued quarter over quarter growth throughout 2006.

So to summarize, Q4 demonstrated a significant revenue growth of 51% over Q3 and our achievement of positive EBITDA was a substantial milestone in Tower's growth plan.

We expect Q1 of 2006 to show further revenue increase, and have confidence in a continued upward trend over the course of the year as a function of satisfied customers and the present global indicators.

Thank you.

Thank you, sir.

Ladies and gentlemen, at this time we'll begin the question and answer session. [OPERATOR INSTRUCTIONS] First question is from Yaniv Rachimi , Ramco Investment House.

Go ahead, sir.

Good evening and good morning to everybody.

First I would like to congratulate you for the improvement in the results which I hope will become a trend.

Thank you.

That's our goal.

Yes, I know.

My question is with respect to an article which I read a few weeks ago dealing with the $80 million grant from the investment center.

Can you refer to this information?

I mean whether you are expecting to receive this amount and if so, when?

Thank you.

Hi Yaniv.

It's Oren.

I said previously disclosed in the financial statement and the prospectus.

We submitted a request for the Israeli investment center for an expansion plan to begin from 2006 at least until 2008 for indeed for this $80 million and indeed I read the same as you, the article in which the manager of the investment center feels it is supporting their request.

Still, we do not yet received any formal approval from them.

What we know is that we submitted our multi-year plan to the investment center.

We got a very supportive letters both from the investment center and from them at the time the industrial minister.

We know that the industrial bank is reviewing the plan and is very progressive stages of reviewing the plan and we know that according to these procedures, the recommendation should be made to the investment center management, which is called in Hebrew [inaudible], and then for a request for special approval in the finals committee and it happened a few weeks ago with Intel, as I'm sure you know.

Well we are at final stages of this process, but yet, have not received the formal approval.

Understood, thank you.

Thank you, next question is from Jesse Pichel of Piper Jaffray.

Go ahead.

Yes, good evening.

I have several questions.

First, I'd also like to echo congratulations there and great growth in the quarter in achieving positive EBITDA.

Thank you.

You talked about reaching your target utilization in the second half of '06.

At what revenue level now is EPS break even and can you give us some guidelines of when you're targeting that to occur?

To be P&L break even, we need greater capacity in Fab2.

We right now have about 15,000 wafer start capacity.

We need to be 25 to 26,000 to be P&L positive.

To be operationally, so cash flow from operations to be positive there, that we can achieve with our present capacity and that's where we're, as we had mentioned, well maybe we didn't mention, but certainly our next target after having achieved positive EBITDA is to get cash flow positive, but as Oren mentioned, we've submitted a multi-year plan to the Investment Center and the multi-year plan deals with continued capacity growth of Fab2.

We do need about another 10,000 wafer starts to be P&L positive.

What is the CapEx requirement for the additional 10,000 or so wafer starts?

It depends, really substantially on what is available in the used tool market and some of it depends on how much we'll be doing at .13 copper versus how much we would do at .18.

You could look at the low end of somewhere between 8 to12 million per thousand wafers, and at the high end, depending on the mix and the mix of new tools, between 18 to 20 million per thousand wafers.

Could you talk a little bit more about your CMOS image sensor opportunities?

How many customers approximately do you have there now and I'm curious what the greatest megapixel sensor you offer is?

The largest that we're selling right now for camera, for cell phone, is 2 megapixel.

We have shipped in the past 14 megapixel for studio camera.

Right.

We can make 14 megapixel sensors and we've done that quite successfully.

The very high megapixel sensors are using the same stitching technology that we use for x-ray.

So that was the one question.

The other question was how many customers do we have right now?

Yes.

So right now, actual revenue from the .18, .13 we have nine customers that are in the revenue side and then an additional seven customers that are in the funnel meeting that we have started some degree of design activity up through qualification with, but we have not shipped any revenue.

And then my last question, a little bit about the environment.

Would you talk about the availability of raw wafers and the pricing environment for raw wafers?

We heard about this poly-silicon shortage and we heard a couple companies talk about price increases there for the raw wafers like MEMC, for example.

Could you talk a little bit about that?

Thank you.

Our head of Fab operations has just completed a worldwide trip meeting with multiple suppliers.

One of the areas was certainly for our silicon supply.

We do not see any constraint in our supply of silicon.

We know that others have talked about a constraint.

We have not seen it.

As far as cost increase, we have also not seen a cost increase of the raw material.

Great.

Thank you very much.

Thank you.

Our next question is from Ramesh Misra, Unterberg Towbin.

Hello?

Mr. Misra?

Can you hear me?

Yes.

Mr. Misra, are you online?

Yes.

Can you hear me?

Yes, we can hear you.

You can ask your question now, sir.

Okay, good evening.

Good evening.

Congratulations on the EBITDA positive, hitting that milestone.

Thank you.

My first question is in regards to the CapEx.

Where do you see CapEx going in '06?

Where do we see it going?

Right now, we just completed the rights offering.

We need within '06 to raise more money in order to increase our capacity in '07.

As far as our specific plan for '06 at this point, we do not have CapEx expenditure for any substantial capacity increase within the plan for '06. '07, we have substantial CapEx within our plan.

However, we're seeing several of our lead customers that are speaking with us of increased capacity for certain specific technologies, and we're looking right now at a possibility of increasing capacity for specific technologies in the Q4 time frame, but that's not a specific plan at this point.

Okay.

For the transition of .13 into production in Q2, Russell, do you have the equipment in place or is that, will that require a little bit of additional equipment?

We have equipment in place right now for several thousand wafer starts of .13 copper.

Okay.

So you don't anticipate constraints in that coming up at least for some time?

No.

Probably if we do increase capacity in '06, it will be for .13.

Okay.

All right.

Now in terms of the pre-production customers that you have, I think, Oren, you mentioned there were about 26 or so.

What kind of time line do you generally see them or in particular, in the case of these 26, what kind of time line do you see them ramping into meaningful production revenues?

It does depend really on the stage of where they're at.

If we look at the stage and the qualification phase right now, we have plus-minus 15, 16 customers that are in qualification.

From qualification up through meeting their ramp needs, you're probably looking six months at the shortest to nine months type time frame that you would start seeing them reaching what you could call a forecasted volume.

I see.

Okay.

On the average.

So there's obviously some of this 16 that are much further along in the final phases of calling their products and from final qualification, from running the qual watch, shipping them, them sending out their samples to their customers, you're looking somewhere in the order of about three to four months before you start seeing a ramp.

Okay.

And then finally, just a clarification.

Is it safe to assume that you'll be EBITDA positive for the rest of the year?

Safe to assume?

It's certainly the plan that once having achieved positive EBITDA, we'll maintain positive EBITDA.

I said that we forecast continued quarter over quarter growth, so if we went negative EBITDA, it would be a definitely not according to our plans.

So I'd hate to say safe to assume, but we have everything in place to maintain positive EBITDA.

I would not foresee us going negative EBITDA.

Okay.

All right, thanks very much.

Thank you, Ramesh.

Thank you. [OPERATOR INSTRUCTIONS] One moment, please, while we poll for your questions.

Our next question is from Doron Brrin.

Go ahead, sir.

Yes, hi.

Congratulations on the results.

I'm trying to figure out why you're not starting your CapEx plan earlier.

Why are you waiting for '07 and not trying to create some kind of continuation if you're going to reach target capacity at the second half of 2006?

Why not start CapEx in '06 already?

So really, to answer it, the first is there was substantial capital expenditure and Tower did not reach its full utilization.

We're right now still not at full utilization for the 15,000 wafer starts.

We do believe that we'll reach it in the second half.

As we had said, we're forecasted to reach it within the second half.

Our customers are in line with us on the forecast and the plans.

But in order to justify continued growth, you have to show that as far as capital expenditure, which is significant, you do have to show continued momentum to get there.

That was number one.

The number two, the rights offering that we just completed is driven towards getting us towards the cash flow positive.

In order to now do a substantial capital investment, we need to raise more funds.

There's multiple ways to raise funds and we're certainly focused on putting together everything needed to meet our plans.

We at this moment do not have yet the funds to do substantial capital investments at present.

I think our results demonstrate and the effectiveness of the rights offering demonstrate investor and shareholder confidence.

As we perform in Q1, I can show Q1 and Q2 growth, that's the time that I think we have to substantially think about raising significant money towards our further growth.

Though as I had mentioned earlier to a question, there is possibility of capital expenditure for its expansion of the .13 in the Q4.

It's not within our plan right now, meaning we don't have any formal bought off plan by the board to do that, and we're focusing at this point on the financial indicators that will allow us to do it.

Does that answer your question?

Yes, it does.

Thank you.

I have another question, if I may.

Can you, I know that you're not providing any guidance for '06 for the whole year, but can you share with us once you will reach your target utilization, what level of revenues and EBITDA will that show?

Target utilization, we can as a Fab1, Fab2 at present capacities, be somewhere in the mid 50's on revenue.

Okay.

And EBITDA?

EBITDA at that level would be -- Oren?

Hi.

Yes.

Like Russell said, $50 million or mid 50s is what I guess we mean 55.

I don't understand well English but I guess it's $55 million revenue and this is not full completely but almost full, and EBITDA would be approximately between $10 to 15 million.

So between 20 and 30% of revenues, at full utilization?

At full current utilization.

All right I'm talking about the 15,000 wafers.

Yes.

But if you are building a model, so of course if we expand capacity, so we are getting more net margin for each additional dollar so we can reach 40, 45% of EBITDA which is, by the way, the margin of Q1.

Okay, good.

Congratulations again.

Thank you.

Thank you.

If there are any further questions please press the star followed by the one.

Any final questions, please?

There are no further questions at this time.

Mr. Ellwanger, would you like to make your closing statements?

Yes.

I'm sorry, sir.

We have a question here from a private investor, Mr. Ken Hayes.

Yes, I have a question.

Evidently, some of the brokerage firms here in the United States are still confused about the rights offering.

I know some of their customers either haven't received their debentures yet or they have received the wrong amount, and I was just wondering if anybody has any information on that?

Yes.

We have a full knowledge about it.

I think you sent me an e-mail?

Yes.

So we are taking care of that.

We are fully aware of the situation.

Actually, it's very, really a matter of techniques, actually beyond our control.

It's something between the DTC, the American DTC, the American Bank of New York and the London branch of the Bank of New York, which is the trustee of the convertible.

Apparently we discovered that the London branch of the Bank of New York is a branch that is working what you called manually and transfers of forms need to be by secured delivery in an envelope, so it really made the process be slower.

We were not aware that it would be that slower.

But it's mainly resulted from the fact that the Bank of New York has decided to do the trustee for the convertible through its London branch.

Oh, I see, okay.

Well thank you very much.

I really appreciate the update.

You're welcome.

Thank you.

Mr. Ellwanger, would you like to make your closing statement, sir?

Just thank you very much for your participation in the call, for the questions, and look forward to speaking with you maybe in the interim throughout the quarter and calls, questions, investment desires, we'll always at the phone but seriously, thank you very much.

We have had substantial progress in Q4 towards a growth plan and I think we're very well poised to see continued growth throughout 2006, and then we'll see how our growth in '07 through Fab expansion as well.

So thank you, again.

Thank you.

This concludes Tower Semiconductor's fourth quarter 2005 earnings release conference call.

Thank you for your participation.

You may go ahead and disconnect.