高塔半導體 (TSEM) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Tower Semiconductor's third-quarter 2006 results conference call.

All participants are at present in a listen-only mode.

Following management's statements, instructions will be given for the question-and-answer session.

As a reminder, this conference is being recorded.

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

I would like to turn the conference to Ilanit Vudinsky, Director of Investor Relations and Communications.

Please go ahead.

Thank you and welcome to Tower Semiconductor's teleconference for the third quarter of 2006.

Our agenda for today's call is as follows.

Russell will start with remarks about the quarter progress and achievements.

Oren will follow up with the third-quarter financial results.

And then we will conclude the teleconference with your questions.

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 Forms 20F and 6K, as were filed with the SEC and the Israeli Securities Authority.

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 I'd like to turn the call to our CEO, Russell Ellwanger.

Please go ahead.

Thank you, Ilanit.

Welcome and thank you for joining us today for the conference call.

We'll begin by reviewing the developments for this past quarter and discussing achievements with respect to customer announcements, our product lines, our wrap-up plans; as well as give an overall update regarding our technology and operation.

Of which conclusion, Oren Shirazi will present a detailed summary of this past quarter's financial performance.

We'll then open for question-and-answers.

We're very pleased to report our third sequential quarter of record sales and our fifth sequential quarter of sales growth.

The third quarter closed at 51.5 million, up 150% from the 20.6 million sales revenue reported in Q3 2005.

The EBITDA for Q3 was approximately positive 9 million, up from negative 10 million in Q3 2005, for a positive swing of about 19 points.

The drive of this growth is obviously our customer base, which has grown both in absolute number as well as in the number of customers with higher-volume demand.

In Fab2, we increased from 13 production customers in Q3 2005, to 21 production customers in Q3 2006.

For the combination of Fab1 and Fab2, we grew in the number of customers who have had greater than 1,000 wafer-per-month demand from four customers in Q3 '05, to 12 customers in Q3 2006.

In late September, we closed the debt-restructuring agreement with our banks, as well as reported the additional investment for our major shareholder, the Israel Corporation, of $100 million.

As previously announced, the proceeds from this investment are being used towards funding the capacity ramp of Fab2 from the previous start capacity of about 15,000 wafers per month, to about 24,000 wafer starts per month.

We're in the midst of this ramp, with about 80% of the production equipment having been received, and in various stages of start up and qualification.

We expect the full capacity to be qualified for the 24,000 wafer starts by the end of the first quarter 2007.

For the third quarter, Fab2 utilization was about 90%.

Fab 1 utilization remained at about 100% for the third quarter.

Several projects, which did not incur incremental CapEx costs, allowed the capacity of Fab1 to increase during the quarter, and actions are in place which will realize the total of approximately 15% increase in productivity within the first quarter of 2007; this again being without additional capital expenditure.

With an eye on continuous benchmarking and improvement, we were encouraged to receive the Platinum Mark, the highest-honor award from the Standards Institute.

The Platinum Mark is awarded to companies that have achieved more than five separate international quality, safety, and information security certifications; and puts Tower among a small handful of top Israeli organizations having received such acknowledgement.

During the third quarter, SanDisk, our leading customer, invested in the expansion of our 0.13 micron capacity, and committed to purchase volume-production quantities of 0.13 micron wafers during 2007 and 2008-- having as well the right of first refusal on the use of this capacity in 2009.

SanDisk publicly announced Tower's best-of-class responsiveness to SanDisk's business needs through designed services, process know-how, and operational flexibility as a reason to want to go forward and continue the partnership with Tower.

Coming from SanDisk, the world leader in flash-storage powered products, this is a great vote of confidence.

We're thrilled to have entered into such an agreement and look forward to the continuation of our long-term partnership.

We began mass production of the 0.13 micron technology in the third quarter, and expect fourth quarter 0.13 shipments to exceed 1,000 wafers per month, growing to multiple thousands of wafers per month in Q1 2007.

During the quarter we also announced that Ikanos Communications, a leading developer of fiber-fast broadband solutions, has chosen to manufacture its Vx160 high-performance DSL network processor at Tower in 0.16 micron technology.

Tower's design support and manufacturing team worked closely with Ikanos' engineers, which resulted in a very fast product ramp to the customer's benefit and satisfaction.

We look forward to successful deployment of this product in the marketplace.

If we look at the CMOS Image Sensor product line, during the third quarter we began volume manufacturing of 3.2 megapixel cameras for camera-phone applications, using our new generation 2.8 micron advanced photo diode technology pixel.

This advanced technology enables continued benchmark performance with respect to low dark current, low noise and also implements fourth-generation high-fidelity colors.

We continue to ship volumes of x-ray image sensors for dental and medical application with two important design wins, moving to 0.18 micron large dye stitched technology.

Recently we announced that our CIS technology opened new markets for Panavision SVI's family of line scan image sensors.

Working with Panavision SVI, an innovator and developer of high-performance image sensors and related technology on their next-generation products, allows Tower further penetration into line-scan as well as array sensor markets.

Last week we announced a new partnership with SuperPix, a leading Chinese products company, to begin production of two image-sensor products.

These products will be used in cellular-phone and smart-phone camera in the Chinese market, which is the fastest-growing retail customer base for cellular products.

This is a significant venture for Tower into the Chinese market.

And we're pursuing other business opportunities in this rapidly-growing market.

The mixed signal and RF product line focuses on providing complete solutions for applications in mixed-signal domains of wireless, radio frequency identification, and high voltage.

During the third quarter we announced a new strategic customer, International Rectifier, a world leader in power management who signed a definitive long-term foundry agreement with Tower for producing high-volume wafers in Fab2; utilizing International Rectifier's proprietary technology.

Such a decision from a premiere company in the semiconductor industry validates the capability of Tower's engineering and manufacturing team.

We look forward to this developing into a long-term partnership and mutual success for multiple years to come.

For wireless and RF CMOS, several new products have been introduced into Tower's advanced Fab2 production line, and started volume production.

Specifically, Atheros Communication Incorporated, the market leader in advanced wireless solutions, selected Tower to produce its latest wireless LAN 802.11g chip.

This product, which is now ramping production in Tower's 0.18 micron technology, has been designed with the support of Tower's Netanya design-center services.

Yesterday we announced the availability of Laterally Diffused Metal-Oxide Semiconductor (LDMOS) process, the latest addition to the 0.18 micron technology platform in Fab2.

The addition of this high-voltage technology offering, enables us to provide additional solutions to a very high-volume consumer market.

This process was tuned to meet the unique specifications of portable displays, as requested by several existing customers.

So to summarize, we finished another record strong quarter, and we're forecasting continued growth in the fourth quarter with a guidance of 53 to 57 million.

While some recent reports indicate a challenging market environment, and that the worldwide foundry utilization will be down by as much as 10% in the fourth quarter of 2006, we are encouraged that our business model of specialized technologies and customized services, and a loyal, diversified and growing customer base; has enabled us to guide fourth quarter revenue growth.

We're optimistic that our customer activities, some of which were press released during the quarter and have been discussed during this call; will allow further growth throughout 2007.

I'll turn the time over to Oren.

Thank you.

Thank you Russell and hello everyone.

I'll now go over the financial highlights of the third quarter results in more details.

Sales in Q3 '06 were a record for the Company, totaling $51.5 million.

This is the third consecutive record quarter for Tower and the fifth consecutive quarter of sequential growth.

The third quarter sales represents a 2.5 times increase as compared to the $20.6 million we reported in Q3 '05 and a 15% increase over the $44.6 million we had in Q2 '06.

The accumulated sales for the nine months ended September 30, 2006, totaled $132 million; which is a 2.1 times increase as compared to the year-ago period, excluding the one-time revenue of $8 million in '05.

We recorded a net profit in Q3 '06 of approximately $40 million, including a one-time gain from the bank's restructuring deal; as compared to a loss of $55 million in Q3 '05 and a loss of $44 million in Q2 '06.

Earnings per share in Q3 '06 were $0.46, compared with a loss per share of $0.83 in Q3 of last year, and a loss of $0.55 per share in Q2 '06.

Depreciation and amortization expenses for the third quarter of '06 were $38 million.

EBITDA; we also continued to improve our quarterly EBITDA and recorded approximately $9 million of positive EBITDA, which reflects a $19 million year-to-year positive shift in EBITDA compared with the negative $10 million we had in Q3 of '05.

Balance sheet -- during Q3 '06, we significantly strengthened our balance sheet as reflected by the following items, among others.

Our shareholder's equity shifted during Q3 '06 to be approximately $150 million positive, as compared to a negative $76 million at the end of June '06.

We reduced our long-term debt from $516 million as of the end of June, to $355 million as of the end of September '06.

We finished the quarter with $62 million of cash on hand, as compared to $11 million and $39 million as of the end of June '06 and December '05, respectively.

And we improved our current ratio, which means the current assets divided by our current liabilities, to 1.72 as of the end of September '06; as compared to less than 1 as of the end of December '05 and September '05.

Looking at Q3 '06 quarterly sales analysis, diversifying customer base; as of the end of Q3 '06 we had 50 customers in Tower out of which 21 customers in production in Fab2; growing from 13 at the end of Q3 '05.

In addition, 30 customers were in pre-production in Fab2, versus 24 in the year-ago period.

In Q3 '06, 66% of our sales were to fabless customers, and 34% to IDM.

Sales by geography; in Q3 '06, 67% of sales were generated by US-based customers, 6% by Israeli customers, 15% by Asia/Pacific, and 12% by European customers.

Diversified revenue by market segment; in Q3 '06 the communication segment represented 30% of all revenue.

The consumer market represented 28% of sales.

Industrial, medical and automotive accounted for 10% of sales.

PC consisted of 7%.

And the remaining was to multi-market and others.

Fund-raising, banks and Israel Corp. updates; on September 28th we announced the closing of the definitive agreements with the banks and with Israel Corp., following the approval of Tower's shareholders and the completion of all our other closing conditions.

According to this agreement close, $158 million of long-term debt was converted by the banks into equity equivalent capital notes convertible into approximately 52 million shares of Tower. $100 million was invested by the Israel Corporation in Tower for an equity equivalent capital notes convertible into approximately 66 million ordinary shares.

The immediate effect of the above-mentioned definitive agreement, as presented in our financial statements for September 30, 2006, is as follows.

A one-time gain of $80 million was presented in the P&L.

Shareholders equity increased by more than $200 million.

Long-term debt was reduced from $516 million to $355 million.

And the interest payments on the long-term loan will decrease by 1.4% per annum, which will result in a $17 million lower interest payment on an annual basis, or $4 million per quarter; together with the above-mentioned loan amount reduction.

Guidance; in terms of guidance for the fourth quarter of '06, the Company expects growth to continue and forecasts revenue to be in the range of $53 to $57 million.

Now we will be happy to address your questions.

Thank you, sir. [Operator Instructions]

The first question is from Yaniv Rahimi from Ramco].

Hello everybody, good evening and good morning.

First, congratulations for the strong report.

Thank you.

My first question refers to the industry landscape; most of your competitors guided for a decline in demand or lower revenue for Q4 due to inventory correction, as they called it.

Can you please refer to Tower's ability to cope or to-- or how Tower will cope with further industry slowdown in the future?

I think it's a very good question.

What I can on the first order is that although the industry as a whole has, as you correctly stated, forecasted a decrease in foundry utilization in the fourth quarter, we are still showing an increase in our growth.

I think the whole purpose of us driving into a specialized model and having diversified product lines, is to become much less sensitive to the cyclicality of any one segment in the industry.

I believe that that is one area and reason why we are able to show Q4 growth.

Certainly as far as our capacity itself, the capacity is growing and our ability to grow in market share with the customers that we have established is also growing.

So I believe that that's another way that we can cope with the growth, is that we have wherewith to grow from our capacity.

So by talking about the change in our customer taxonomy, from going from four customers with a demand of more than 1,000 a month, to right now 12 with the demand of more than 1,000 a month; and the type of customers that have those types of demands are typically very large, for which our market share is maybe not supreme at this point.

So we have an ability to grow market share with multiple products as the customers see our ability to serve their needs.

And similar to SanDisk's statement about best-of-class performance, that's something that we certainly target with all of our customers.

And so the quick responsiveness of Tower, the ability to customize services and the very, very strong design-center support really allows very quick cycles from tape out to production worthiness.

And I think that that is maybe the best way that I can answer why we believe that we'll be less sensitive to the market cyclicality.

Thank you.

My second one, with your permission, with respect to Fab2, the ramp up in the capacity; assuming full utilization and the current situation in the market in prices, what would be the reasonable revenue level under those assumptions?

So, given our track record in the past year of utilization, assuming we stay at the same utilization levels at the 24,000 capacity of starts in Fab2 and with the same utilization we have in Fab1; somewhere around $80 million a quarter.

Thank you very much.

And keep on doing whatever you're doing because it looks wonderful.

Thank you.

Thank you very much.

[Operator Instructions] There are no further questions at this time.

Mr. Ellwanger--?

Really?

So I should probably call on people there.

Ramesh--?

No.

Thank you very, very much--

I'm sorry.

We do have another question from Ramesh Misra from CE Unterberg, Towbin.

Please, go ahead, sir.

Okay, good evening.

Can you hear me?

Yes, Ramesh.

How are you?

Very good, Russell and Oren.

Good numbers-- so first I had a question regarding International Rectifier and the divestiture of a portion of the business to I guess another one of your customers, Vishay.

So how does that divestiture impact you?

Is most of that business still going to be IR or does this mean some of that goes to Vishay, and potentially Vishay and you reexamine your prior agreement between each other?

The agreement that we have with IR is an agreement with IR.

What Vishay and IR have agreed to, I think is very independent of our agreements with International Rectifier.

Certainly Vishay is a prized and valuable customer.

We'd like to see ability to grow with Vishay as Vishay has greater capacity.

But we would not foresee that this has an impact in the deal that we have with IR.

Okay.

Then following up in regards to the low utilization across the industry in Q4; is this in any way showing up in terms of the wafer ASPs that you're able to command or are your other services kind of compensating for that?

It's a very good question.

I can say candidly that I haven't seen that there's an impact of the utilization with the pricing that we have with our customers.

Many, if not most of our pricings, are somewhat longer-termed where we have pricing roadmaps.

And certainly, if there is lower utilization, and if it would continue and then go substantially low, then people will start trying to compete on dollars.

But again, one of the nice benefits of having a model to where a major volume or a percentage of your volume is specialized technology; is that it's not very easy to change from one supplier to another.

So the relationships between supplier and customer are much steadier and longer-term, I would believe.

Okay.

Then on-- in terms of your process technology Russell, I believe your process so far has some commonality I believe with TSMC's process.

And I think in the past you've talked about looking at kind of expanding your process technologies to be compatible with some of the others.

Can you go a little bit into that and what ramifications that would have in terms of your [inaudible] potential?

Our flow is probably more TSMC compatible than other leading foundry.

If we were to become more compatible with the other leading foundry than you would have a larger customer base that you could possibly be drawing off of, which is certainly a possibility.

It's nothing that we've announced now or that we are announcing at this point.

But to have other IP and library access, certainly would allow you to bring on other customers more seamlessly.

Okay.

So it sounds like your focus still remains on the specialized processes rather than building stuff compatible with others.

Is that correct?

We certainly are focused on continuing to grow the specialty products, continuing to grow in the image sensor and high-end mixed signal; even within the CMOS, the whole area of secure content is an area that I think we're very strong in.

And some of that really deals with the architecture that we have with image sensor knowledge to prevent the reverse engineering of parts that have secure content.

But we definitely have a drive as well that our core flows are compatible with major foundry, so that there's not huge deviation in our customer base and that the core design, the architecture, the platform is consistent so it stays that way.

Our core technologies, as I say, were standard; the 0.18 was a process that was transferred from Toshiba and the 0.13 was a process platform that was transferred from Freescale; and the license from both of them-- and that's -- and then we have worked on them to make them foundry industry compatible.

The core platform, the building block I think is very compatible to major foundry users.

Okay.

And then finally Russell, I'm sorry, I probably missed some of your comments related to 0.13 and the capacity ramp, so can you just briefly go over that in terms of how the schedule is shaping up in that regard?

And where do you see 0.13 wafer output by the end of '07 or so?

With the present ramp schedule that we have, we'll be bringing it upwards to about 4,000 wafer per month.

That's in the present schedule and that we will have achieved in wafer starts by the end of the first quarter.

And as far as actual wafer output, we'll have 1,000 wafer per month shipments within the fourth quarter and multiple thousands of wafer per month within the first quarter; having reached the total start capacity by the end of the first quarter of 2007-- actually in the middle of the first quarter.

Okay.

And any visibility or any -- or would you like to gander a guess in terms of where you might be by year end of '07?

We have additional customer projects.

We have customers that we're working with on projects that could be demanding much higher capacity than that.

So it would depend on how the projects plan out and what an additional investment plan would be.

But where it sits right now, the present plan of record; is bringing us to 4,000 wafer starts of 0.13.

Okay.

So in regards to the previous question, with the current capacity and the capacity that's coming online, you're saying that can potentially support a revenue run rate of about $80 million a quarter?

Yes, correct.

Well, obviously at this point you're probably thinking of what happens beyond then.

Would you be willing to share with us some of your thoughts in that regard?

Growth.

Well, I mean especially in light of -- your Q3 revenues are up over 2x year over year. $80 million is not that far-- and I know this might be a little early for you to be publicly talking about it, but anything that you can share with investors would be great.

Sure.

No, I think the third quarter was a very major milestone for us.

If you compare third quarter '05 to third quarter '06, you think that the quarterly run rate on an annualized basis in '05 was $80 million.

Now the annualized basis of the quarterly run rate is $200 million.

So on a year-to-year basis, the Company went from an $80 million run rate to a $200 million run rate, which is very significant.

The next milestone is to get to a $300 million run rate, so that would be $75 million a quarter.

I think that that's a very reasonable milestone to have, and a very-- as you would say, realistic one.

So I believe that we'll be targeting -- I believe that we are targeting to get to the 75 million a quarter.

As we see that we're getting closer to the 75 million a quarter, be it in orders, be it just in customer commits on a six-month rolling forecast; then it's time to really start thinking very strongly about the capacity growth.

Now one would it be not a long-term thinker at all if one wasn't already thinking about that, if as you say, you have 2.5x growth year over year from the quarter to this quarter.

Then one would expect that the plans that brought us that far could continue to make us grow.

So we're thinking now -- what is the next step?

How would we grow?

Where would be grow?

What technology notes would we invest in capital equipment and how would that actually occur?

But that's where it sits right now.

We certainly right now have -- our next biggest operational milestone is to get the 24,000 wafers up and running, to get it all qualified and then from a business perspective to show that we can maintain the 85 to 95% utilization at that level.

And upon showing that we can be there and that it's not just a six-month forecast; that the numbers come close to it; then it's really the time to implement a plan that would get us to the next level of capacity.

Now were these discussions had?

Do we know what we would be investing, where we would be investing?

I would have to say, of course.

We're very close to entering into 2007.

We have an annual operating plan for 2007 that's been approved by the Board.

And it's a very nice plan of growth.

So, we'll see according to execution, and then comes the strong tactical discussion of when is the right time for the phase of growth.

Does that answer your question, Ramesh?

Yes, that actually was very helpful.

So thanks very much for that qualitative description of the situation.

And I wish you the best in your -- in hitting those plans.

Thank you very, very much.

I appreciate it.

Thank you.

There are no further questions at this time.

Mr. Ellwanger, please go ahead.

Shall we wait another 30-40 seconds to see if there's a question and then if not, we'll close?

Okay, if there's nothing I really do thank you for your time on the conference call.

We very much appreciate your support and hopefully you see the progress as positively as we see it.

But we really are encouraged to have hit this run rate from this quarter annualized of $200 million.

It's a major step for our Company; and I think a very different company than it was a year ago at the $80 million annualized run rate, to go to a 200.

And then as I say, we'll be driving forward hard to hit the next milestone of 75 in a quarter.

So thank you.

Thank you.

This concludes Tower Semiconductor's third quarter 2006 results conference call.

Thank you for your participation.

You may go ahead and disconnect.