高塔半導體 (TSEM) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Tower Semiconductor first quarter 2006 conference call. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

With us online today, Mr. Russell Ellwanger, Tower's CEO, and Mr. Oren Shirazi, CFO.

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

Please go ahead, sir.

Thank you.

And welcome for joining us for today's conference call.

We will begin on a report of the first quarter 2006 financials by our CFO, Oren Shirazi.

I will then review recent developments and achievements with respect to our capacity ramp plans, our product lines, technology, operations and customer pipeline.

Finally, I will give second quarter 2006 guidance.

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

And hello everyone.

Before we begin I would like remind you that some statements made during our call may be forward-looking and are subject to certain uncertainties and risks that could cause actual results to be different from those currently expected.

These uncertainties and risks are fully disclosed in our Forms 20-F and 6K, as were filed with the Securities and Exchange Commission and the Israel securities authorities.

They are also available on our website, as well as in our Form F-1 and F-3 .

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

And now let's go over the financial highlights for the first quarter of 2006.

Revenues in Q1 '06 were $35.9 million, 55% higher than the $23.2 million in Q1 '05, and 15% higher than the $31.1 million we had in in Q4 '05.

The loss in Q1 '06 was $45 million, a $10 million improvement over Q1 '05.

Loss per share was $0.63, which is $0.21 better than Q1 '05.

Depreciation and amortization expenses for the first quarter of '06 were approximately $38 million compared with $35 million in Q1 '05, and $37 million in Q4 '05.

Cash at the end of March '06 was $33 million, and our total balance sheet was $636 million.

MOVING TO FUND-RAISING AND BANKS UPDATE.

YESTERDAY WE ANNOUNCED AN IMPORTANT MILESTONE IN OUR GROWTH PLAN, INCLUDING LOANS RESTRUCTURING AND ISRAEL CORP INVESTMENTS, ALL TARGETED TO EXPAND OUR FAB 2 CAPACITY BY 50%.

SO I WILL START BY REVIEWING THE FINANCING PART, WHILE RUSSELL WILL REFER TO THE PLAN ITSELF.

First, for the short-term in early May '06 we signed an amendment to the facility agreement with the bank, defering approximately $100 million of principal payments formally scheduled to be repaid between October '06 and June '07, to July 2007.

In addition, yesterday we signed a MOU, memorandum of understanding, for the restructuring of all our loans according to the following three main bullets.

A., 30% of the debt is to be converted to equity for approximately 52 million ordinary shares of the Company.

B., the interest rates of the long-term loan is to be decreased from LIBOR plus 2.5% per annum to LIBOR plus 1.1% per annum.

And C., no loan's principal payment will be done before September 2009.

The financial outcome of the above-mentioned loan conversion and interest rate deduction is total interest payments savings of approximately $17 million per year based on the current LIBOR rate.

In terms of the MOU, we are subject to the closing of a definitive amendment to the facility agreement containing these terms, and to a commitment of Israel Corp to invest $100 million in total for the capacity expansion as I will now detail.

Israel Corporation committed to the bank to invest $100 million in the Company for approximately 66 million ordinary shares, subject to the closing of a definitive amendment to the facility agreement containing these terms and through our shareholder approval.

We target to execute the ramp plan as fast as possible in a way of ordering the capital equipment to be able to satisfy our customers' strong demand.

Since, as you know, it takes some time from calling shareholders meetings to actually doing it, since its approval is a condition for Israel Corp cash investments, and since it may take some time to close with the banks a definitive agreement, mentioned above, we signed with Israel Corp a back-to-back agreement according to which Israel Corp will order up to approximately $100 million of equipment in the earliest possible to equip our Fab 2.

This $100 million worth of purchase orders would be assigned to Tower under certain conditions, including Tower's raising the above-mentioned $100 million, which are expected to be from Israel Corporation as described before.

During the first quarter in January '06 we completed a very successful right offering to purchase our convertible debentures in which we raised $48.2 million out of a maximum possible of $50 million, meaning we had more than 96% effectiveness.

Since then approximately 15% of the convertibles were already converted to shares.

Following this fund-raising we fully satisfied our banks fund raising milestone as of December 31, '05, and also as of March 31 '06.

And our remaining fund-raising obligation towards the banks is to raise $8 million by June '06.

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

Equity.

As of March 31, '06 the Company had 76 million outstanding shares, 38 million new convertibles, and 26 million warrants, out of which only 5 million warrants are both in the money and are exercisable.

Guidance.

The Company expects 2006 revenue to be in the range and 42 to $45 million.

And now I will go into some details about our quarterly sales analysis in Q1 '06.

Diversifying the customer base.

During Q1 '06, we more than doubled the number of Fab 2 customers in production compared to Q1 '05.

In addition, 24 customers are currently in preproduction stages as of the end of Q1.

In Q1 '06 63% of our sales were to fabless customers, and 37% to IDMs.

Sales by geography.

In Q1 '06 61% of sales was generated by U.S.-based customers, 12% by Israeli customers, 18% by Asia-Pacific, and 9% by Europe customers.

Revenue by specialized technologies.

In Q1 '06 on a consolidated basis almost half of our revenues was generated by specialized technology products, which demonstrates the implementation of our specialized foundry strategy. 51% of sales were in core CMOS technology, while 29, mixed signal, RF and power, and 20% of sales were in CMOS image sensor and NVM product lines.

In Fab 2 specifically we saw a significant increase in the specialized technology revenues compared to previous quarter, as well as the equivalent quarter of last year. 60% of Fab 2 Q1 sales were in core CMOS technology, 20% in mixed signal, RF and power technology, and 20% were in CMOS image sensors.

In Fab 1 most the revenue was generated by specialized technology with less than 40% of Q1 sales in core CMOS, 40% in mixed signal, RF and power technology, and 21% of sales in CMOS image sensor and NVM.

The last item is switching to diversifying the revenues by market segment.

In Q1 '06 we saw a significant increase in the communications segment with 29% of our consolidated revenues coming from this segment. 28% of sales were designated to the consumer market segment, 3% to PC, 12% to industrial and medical and automotive markets, and 28% to multi-market and others.

I'm returning the call to Russell.

As had been mentioned and released yesterday, we are very pleased that our Board of Directors approved a plan to ramp Fab 2 by approximately 50%.

This will enable us to meet our customer needs and the growing demand.

The plan will take the current Fab 2 capacity to approximately 24,000 wafers per month, including a considerable increase in the 0.13 micron capacity, and will require a fund-raising of approximately 130 million during 2006.

A first step in the financing, as mentioned by Oren, is addressed through a three-pronged plan which resulted in a signed memorandum of understanding between our banks, Israel Corporation and Tower.

As stated, firstly the banks will restructure Tower's long-term debt, converting about 30% into equity, at a 2 to 1 conversion ratio, and reducing the interest rate on the remaining principal.

Secondly, the Israel Corporation will invest 100 million in the Company, subject to Tower's shareholders approval, and to the closing with the banks on the above-mentioned MOU.

Thirdly, the immediate execution of a ramp up plan for which Israel Corp will order immediately approximately $100 million worth of equipment.

In such, our Board of Directors, the banks and Israel Corp have expressed their belief in the Tower plan and our ability to execute.

We believe that now with the approved ramp plan and the financing solutions that Oren described, we're on the right track to maximize our capabilities and to realize our longer-term customer demand.

With regard to Q1 2006 results, we really are happy to report that the revenues exceeded our guidance, as we experienced in the previous quarter as well.

Operational revenues have increased sequentially for the third time, and went up 15% over the previous quarter, and 55% over the same quarter a year ago.

The increase in revenues are a direct outcome of our continued efforts over the past quarters to meet our customer needs and reflects the capabilities and attitudes of our employees, and providing best of breed responsiveness to our customers in all aspects of our business.

In Q4 2005 we achieved positive EBITDA for the first time since Fab 2 project began in early 2000, as we had announced at the Q4 release.

In Q1 '06 we grew the EBITDA to above $2 million, representing approximately a 16 million positive swing in EBITDA over the same quarter in 2005.

As is seen in our revenues and EBITDA growth, the execution of a customer centered product line structure is proving itself to add value to our financials by providing focused service to multiple existing, new, and as we believe will be seen in the future, potential customers.

We have seen a large increased demand within both our 6 and 8 inch fabs.

Our new customer qualification efforts have been successful with multiple customers, new and existing, demanding several thousands of wafers per month.

This demand, coupled with tight capacity observed in the Far East foundries, particularly in the 0.18 micron technology processes, for which the Far East has built relatively little expansion capacity as of recent, there has been an opportunity created for Tower to grow in its utilization rate and capacity, and attract more customers on our offerings of specialized technologies.

Due to this strong demand from, and the consequent increase in production volume, we have started recruiting additional engineers and operators for both fabs.

We continue to progress towards market leadership in several segments within both the image sensor and the mixed signal product line.

Both saw significant increase in revenues from those specialized technologies.

In Q1 2006 the revenues from specialized technologies accounted for approximately 50% of our total revenue.

The revenue from image sensor more than doubled compared to first quarter 2005, and increased by 50% over the previous quarter, whereas the revenue from mixed signal, RF and power segments have more than tripled compared with Q1 '05, and increased approximately 40% over the previous quarter.

Throughout the first quarter of 2006 we began working with additional customers, some of which are leaders in their respective industries.

The number of Fab 2 customers in production continued to grow, and we saw a record number of customer production tapeouts.

The number of repeat tapeouts reflects also our customers' confidence in Tower and its ability to deliver.

The number of customers that accounted for 95% of total revenues increased accordingly.

During the quarter we attained a record of 32 volume customers, a 23% increase over Q4 '05.

Six customers represented each over 5% of revenues, while four customers generated each over 10% of total revenue.

Another way to look at the customer base is by volume potential.

Using this criteria in Q1 '06 we shipped over 1,000 wafers per month, 8 inch equivalents to five customers.

We expect that this number will increase further in the coming quarters.

Our product base expanded as well, reaching approximately 300 different product shipped during the quarter, an almost 10% increase over the previous quarter.

Looking specifically at the CMOS image sensor product line, Tower's 0.18 micron technology platform with advanced pixel IP continues to achieve excellent CMOS image sensor performance, resulting in a significant increase in revenue during the quarter.

An additional large volume customer began production in Fab 2 within the cellular phone camera market segment.

With multiple additional customers at various stages in the pipeline, we anticipate continued increase in volume at our advanced CMOS image sensor technology throughout 2006.

We completed the development of our stitching technology on 0.18 micron 8 inch wafers, and are pleased to announce that this unique technology is ready for production.

The patented CMOS stitching technology enables our customers to design and build very large image sensors, which are often implemented in dental and medical x-ray, as well as in high-end digital camera applications.

We believe this stitching technology will be a contributor for our future growth in these fast-growing market segments.

Looking at the achievements in mixed signal and RF product line, we announced this quarter that we began production of data communication wireless LAN products for Atheros Communications, a leader in advanced wireless solutions.

Atheros chose Tower as its foundry out of a half-dozen alternatives.

And according to them, not only did Tower provide good process offerings, but the RF engineering team from both companies reached a unique and complete understanding of the needs and technological requirements, thereby resulting in optimal solution in a very timely fashion.

We look forward to a long-standing relationship helping to enable Atheros to continue to bring superior products to market.

The mixed signal product line is delivering competitive performance in signal integrity solutions, which continue to yield design wins, specifically five for this quarter.

Looking at the CMOS, the core CMOS product line, as mentioned this accounted for approximately 50% our revenue in Q1 2006.

This product line provides customers added value by providing services such as design and test and process customization, as well as providing the technology platform for other product lines to build upon.

Looking at our fab operations, Fab 1 continues to run at close to full utilization, while maintaining high yield and competitive cycle times.

During the first quarter Fab 2 saw an increased utilization rate, and we expect continued increases during the coming quarters.

This set the need for increased capacity spoken to earlier.

Our ramp plan is fully driven by customer demand and requirements.

During the first quarter of 2006 we achieved ISO 17799 certification from the Standards Institute of Israel for high-quality of Tower's security technology implementation.

This certification is further evidence of Tower's commitment to safeguard its customers’ information and intellectual property in all business and manufacturing process and work procedures.

Tower is well-known for its professional, best of breed design services.

During the past quarter we further increased the design infrastructure to the 0.18 and 0.13 micron, as we enhanced our 0.18 micron library portfolio to better support our customers.

We're developing new and exciting proprietary intellectual property building blocks in the NVM, CIS, and mixed signal RF space.

And we're enhancing our engineering teams and their talents by recruiting experienced engineers in order to meet the growing needs.

Finally regarding our guidance, we expect the second quarter to show further growth and are guiding at 42 to 45 million.

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

Our target being continued growth throughout 2006 in terms of revenue as well as EBITDA.

To summarize, Q1 demonstrated a significant revenue growth of 55% over the same quarter a year ago, and 15% revenue growth over the previous quarter, being the highest single quarter of revenue in the history of Tower.

We increased our positive EBITDA during this quarter, which is an important milestone in Tower's growth plan.

We are excited about our ramp plan, which will allow us to meet our customers' needs, and meet higher financial targets, which in turn will fuel our shareholders' confidence.

We expect Q2 2006 to show further significant revenue increase.

And are optimistic in the continued upper trend over the course of the year as a function of our technological capabilities, satisfied customers, improved operational effectiveness, and the positive present industry indicators.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Ramesh Misra of Unterberg.

Congratulations on the numbers and the guidance.

On a blended basis, in terms of (technical difficulty) pricing, either because of product mix or because of market conditions, can you say what is happening on your blended ASPs?

Basically ASPs currently are definitely not going down.

You know that there is a capacity shortage in the world.

AlsoTSMC announced on the allocation.

So basically prices that we see for Fab 1 and for Fab 2 are not declining in the last four or five months.

In Fab 1 we had a moderated decrease over the last five years, but currently we don't see it anymore.

And on Fab 2, if at all, ASPs may go up.

Of course not to a specific existing customer, but for new customers that come, and for new quotes that we give ASPs are certainly not decreasing, if at all, it is the opposite.

We mentioned that we are increasing in the amount of volume customers within the image sensor group, which as far as the fab mix, increases the average ASP of the fab.

Okay.

This new capacity that you're going to start bringing online, when does that start coming on?

And I realize that it is not going to be a step function, but if you could provide some kind of the roadmap as to how you expect your capacity to be increasing through the year, that would be helpful.

The tools we have been able to work very well with our suppliers with, and purchase order placement, we're able to get a good amount of the tools slotted.

Our first tools will be coming in in the middle to end of June, continuing to be coming in throughout the third and beginning of the fourth quarter.

The qualification process, the time to install, bring up and qualify takes several months.

But what we expect to see is as of the beginning of Q4 we will start to increase our out capacity from the increase in the installation.

And we should be increasing the outs up through January and February.

The starts will themselves have reached a peak in the January timeframe.

In that regard, Russell, the last time you are on that Towers Semi you had a significant capacity that was right ahead of the downturn.

And I would love to get your comments in that regard.

In terms of '07 potentially slowing down for the industry, how does -- how are you sure that this capacity is not coming online just ahead of a meaningful slowdown?

It is a very good question and I certainly can't make any forward-looking comment that the capacity is coming online, and there will be no slowdown.

The way that one would mitigate the slowdown, and the way that we going after it, is by number one, having some customers that have committed volume already off of the capacity ramp in a contractual basis.

So some of the wafers is already committed from our customer -- a commitment from our customers.

The other case it is meeting their capacity needs presently, and setting an agreement of a marketshare increases, if there is a downturn.

So where we are dual sourced it is a question of moving more of the capacity to us, as we have helped them at this point when there was a capacity crunch elsewhere.

And then in addition from the point of driving the -- not necessarily take or pay type model, but a guaranteed volume model.

That definitely is helpful.

I understand making predictions about the future are especially hard.

In regards to your order and customer pipeline for the rest of year, while I'm not asking you to make projections for Q3 and Q4, do you (indiscernible) at this point, but you should be able to continue seeing a fairly robust growth in Q3 and Q4 as well?

We will certainly be able to see growth.

Some of it is dependent upon how quickly we can bring the tools up.

For one shop it is a very aggressive ramp plan, and is difficult to predict that every tool will come up as per plan, and not have an issue during the start up of the tool.

I wouldn't want to overstate.

I can certainly say that the demand itself would allow us to grow throughout the year.

And the actions we have in place should allow us to meet the demand.

So I believe certainly if you compare 2006 to 2005, 2006 will be a much greater revenue year.

And as I have stated, we do believe to see revenue increase throughout the year.

(OPERATOR INSTRUCTIONS).

There are no further questions at this time.

Thank you very much.

Again, appreciate your attendance at the conference call.

And as a Company, we are all pretty excited about having met the milestone of the highest quarterly revenue, and increasing the EBITDA, and really the forward-looking ability of the increased capacity of the fab.

Thank you very much.

Thank you.

This concludes Tower Semiconductor's first quarter of 2006 conference call.

Thanks for your participation.

You may go ahead and disconnect.