高塔半導體 (TSEM) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Tower Semiconductor's fourth-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 today are Mr. Russell Ellwanger, Tower's CEO; and Mr. Oren Shirazi, CFO. I would like to turn the conference over to Ilanit Vudinsky, Director of Investor Relations and Communications. Please go ahead.

Thank you and welcome to Tower Semiconductor's conference call for the fourth-quarter and year-end 2006. Our agenda for today's call is as follows. Russell will start with remarks about the quarter's progress and achievements, as well as provide an overview on the full-year 2006. Oren will then provide an analysis of the fourth-quarter and full-year 2006 financial results. We will then take 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 well as filed with the SEC and the Israeli Securities Authority. They are also available on our website as well as in our Forms 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 very much for joining us today. We're very pleased to report fourth-quarter sales of 55.5 million, representing our fourth sequential quarter of record sales and our sixth sequential quarter of sales growth.

The fourth quarter of 2006 increased approximately 80% when compared to the fourth quarter of 2005, and 8% from the third quarter of 2006. The 8% third-to-fourth-quarter increase is significant, as compared to a third-to-fourth-quarter worldwide foundry revenue decrease of about 7%.

In May 2005, we established a new management team at Tower and restructured the Company to be more customer-focused through the creation of product line. We set an aggressive 18-month plan which targeted two significant financial milestones. The first was to achieve positive EBITDA in Q4 2005. This was achieved; and each quarter since then has been both positive and demonstrated sequential EBITDA growth.

Our second milestone in our 18-month plan was to achieve positive cash from operations in the fourth quarter of 2006. We are very pleased to announce that we achieved this target as well, at a positive 2 million against a baseline run rate of about negative $18 million, and it is the first time Tower has had positive cash from operations since Fab2 was established.

This is a significant milestone and we thank our investors, our customers and our employees for enabling it. It is our target to keep the cash from operations positive throughout 2007. In so doing, future investments in the Company will be solely to fund growth, not existence.

So now let's look at the full year. 2006 was very significant for Tower. In May of this year, we announced two essential activities. The first, in response to our customers' forecasted future demands, we decided to expand the capacity at Fab2 by more than 50%. The second was to restructure our long-term debt in order to provide us with greater financial flexibility.

We are pleased to report that at the end of 2006, we are on track towards increasing the capacity of Fab2 from 15,000 wafer starts per month to about 24,000 wafer starts per month. All process tools have been received and are in stages of qualification, with some presently running production.

Also we completed the restructuring of our debt, resulting in significant interest payment savings, as well as a stronger balance sheet.

Financially, we saw improvements across all key financial metrics, when compared to 2005. We doubled our sales, ending the year at 187.4 million; and exited 2006 with an annual revenue run rate of 220 million. We realized more than a 60 million year-over-year improvement in EBITDA, representing a significant swing from negative in 2005.

Notably, as evidenced with the improvement in EBITDA, we have positioned the Company where approximately $0.65 of every incremental revenue dollar, drops to the EBITDA bottom line. Excluding depreciation expenses, we improved our gross margins from a negative 8% in 2005, excluding the one-time technology-related income; to a positive 31% in 2006.

Operationally, Fab1 annual shipments doubled in 2006 as compared to 2005, and Fab2 shipments tripled. Both fabs are running at utilization rates well above 90%.

During 2006, we tripled the number of customers with more than 4 million annual revenue, to 12. In Q1 2005, Tower had two customers to whom it was shipping more than 1,000 wafers per month. By Q4 2006, Tower had 12 active customers that had shipped more than 1,000 wafers per month to.

In reference to our large customers, we announced a multi-year high-volume agreement with SanDisk for 0.13 micron fabrication, and continue to execute to a 10-year volume agreement with Vishay Siliconix, which speaks to a baseline loading of Fab1 of about 45% of its capacity. We are now in the second year of this agreement.

We announced as well, a multi-year volume agreement with International Rectifier, which should begin to produce revenue in the second half of 2007.

Driving these business and operational improvements is the ability of Tower to quickly respond to customer needs and a revolving product-development roadmap, and also to react quickly to market changes. Our first and foremost value at Tower is being close to our customers. We are focused continually on improving the cycle time and yield of every customer transaction.

To summarize the year, we moved Tower from about an 80 million annual run rate company in the first half of 2005, to a post 200 million annual run rate company in the second half of 2006. We feel that this is a significant result and are now focused on the next stage of growth, that of achieving a 300 million run rate.

To this end, we are truly pleased to announce Dov Moran as the new Chairman of the Board to Tower Semiconductor. Dov comes to Tower after having been the founder, CEO and Chairman of the Board of M-Systems. Among other innovations at M-Systems, Dov conceived and productized the DiskOnKey. Dov is an innovator with strong feel for the market and application.

We're truly thrilled to have Dov Moran in place and look forward to working with him to further define the Tower multi-year growth strategy. From the first month of Dov's engagement, I can vouch for his personal commitment to the success of Tower. He is not just very capable, which he indeed is. He is extremely committed. He is an active Chairman.

From a product-line perspective, we have several noteworthy milestones in Q4 which I want to highlight. These achievements enabled customer wins and resulted in the development of new products for existing customers during the year.

In our core CMOS product line, we started high-volume production in the 0.13 micron technology for SanDisk, and also began shipping volume 0.16 micron production. The CMOS image sensor product line won new major customers of products and successfully completed the development of our advanced photo diode pixel in 0.18 micron technology. We announced production starts for Panavision SVI with our line-scan image sensors and for SuperPix, our first customer in China.

This is significant, as it demonstrates that within the CMOS image sensor offerings, customers realize that Tower can help enable their success beyond what they can receive locally.

Revenues from the mixed signal, power management and RF-CMOS product line grew significantly during the entirety of 2006 due to many new customers and products, resulting from special projects and technology focus in this growing market.

Recently, we announced a new product in the sound generators product family for Modiotek, which is a good example of close partnership that drives product success through matching technology and competitive time to market.

In Q4, we released LDMOS technology, enabling higher voltage applications for power-management process platforms. We were instantly approached by several significant players in the high-voltage and power-management markets, which as we continue to work with them and make this into revenue for the Company, will position us for further increase within this market segment in 2007.

During this year, we had a number of significant customer announcements from leading companies. We previously mentioned SanDisk, our largest customer; who not only gave a volume agreement for 0.13 micron, but directly invested in the capacity expansion of the 0.13 micron capacity.

In addition, we announced multiple releases with Atheros. We announced Ikanos, Alien Technology, Zoran and Winbond, among several who did not announce and did not receive permission to publicly announce.

After having mentioned the International Rectifier, it's significant to mention that is our first long-term IDM deal for Fab2, and we expect the production ramp within the second half of the year.

Through our design services and support, we introduced new products to our customers and increased wafer manufacturing. The emphasis on customer support throughout the life cycle of the product, from the designs from tape-out qualification all through the production, enables our customers to accelerate their product ramp, ensuring they meet their end-customer requirements in a speedy fashion.

To summarize, we're very pleased with our record financial results for both the fourth quarter, as well as the full year. And having mentioned as well, we're on track to complete the ramp to 24,000 wafer starts.

Maybe to best summarize 2006, I would like to reference a quote by Semico Research Corporation, a leading industry research firm. Tower's new focused foundry strategy is resulting in sales that are outpacing the rest of the foundry segment. Tower's fourth quarter 2006 sales show an increase over the third quarter, while the top dedicated foundries experienced a quarter-on-quarter revenue decline averaging 7%. In addition, Tower's 2006 annual revenue increased at a rate more than double the growth rate of the top dedicated foundries.

In terms of revenue guidance, we expect for the first quarter of 2007, revenues at a range between 53 and 57 million, similar to Q4. This is against a backdrop of a Q1 worldwide foundry revenue guidance decrease of about 12%. We expect that several multi-year large contracts will either begin to materialize into revenue from new products, or enable substantial increase in revenue from existing customers in the second half of 2007, side-by-side to our capacity growth.

We are confident that we'll build upon 2006 and anticipate delivering further significant top-line and bottom-line growth for 2007.

I'd like to thank our employees for their continued hard work and dedication, and I look forward to reporting on our ongoing progress throughout 2007.

With that, 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 fourth quarter results in more detail.

A note; any data we'll mention regarding 2005 revenue within operational results, excludes the effect of a one-time $8 million recorded in Q2 of '05. This was as a result from our previously announced technology agreement.

Revenue in Q4 of '06 was another record for the Company, totaling $55.5 million. And I'd like to mention this is the fourth consecutive growth record quarter for Tower and a fifth consecutive quarter of sequential growth.

Fourth quarter revenue represents a 78% increase compared to the $31 million we reported in Q4 '05, and an 8% increase over the $51.5 million that we had in Q3 '06. Revenue for the year of 2006 totaled $187.4 million, which is double the 2005 revenue.

Q4 '06 recorded a net loss of approximately $38 million, which is $7 million better than Q4 '05. Loss per share in Q4 '06 was $0.40 as compared with a loss per share of $0.68 in Q4 of last year.

Depreciation for the fourth quarter of '06 totaled $41 million. For the full year, depreciation and amortization expenses totaled $155 million.

In Q4 '06, we moved into positive cash flow from operations for the first time since Fab2 was started. This is while our EBITDA continued to improve quarter-to-quarter throughout 2006.

And for the full year, we turned around the negative EBITDA of 2005 into positive EBITDA in the full year of 2006.

'06 EBITDA improved by more than $60 million over 2005, while sales increased by $93 million, representing $0.65 EBITDA growth rate for each additional dollar of sales.

Turning to the balance sheet, in 2006 we significantly strengthened our balance sheet, primarily as a result of the agreement announced during the third quarter with our banks and with Israel Corp.

The closing of the definitive agreements resulted in $158 million of long-term debt converted by the bank into equity equivalent capital note; convertible into approximately 52 million shares of Tower. As a result, long-term debt was reduced to $359 million. With the decreased debt levels, as well as the reduction of 1.4% in the applicable interest rates payable to our banks, total interest payments on our debt will decrease by approximately $17 million on an annualized basis.

We finished the quarter with $41 million of cash on hand, as compared to $39 million of cash on hand as of the end of 2005.

Shareholder equity shifted during 2006 to be a positive $133 million in the fourth quarter, as compared to negative $30 million at the end of '05.

Our current ratio, which is our current assets divided by our current liabilities, as of the end of the fourth quarter of '06; was 1.4 versus less than 1.0 at the end of the fourth quarter of 2005, further illustrating our improved financial situation.

Looking at the fourth quarter revenue analysis, highlighted by our diversified customer base; at the end of Q4 '06, we had 52 production customers at Tower; out of which 23 customers in production in Fab2 and 28 customers in pre-production in Fab2.

In 2006, 65% of our revenue was to fabless customers, and 35% to IDM. This is compared to 61% and 39% in 2005, respectively.

Regionally, revenue from the U.S. customers represented 69% of total revenue in 2006, compared to 64% in 2005. Revenue from Asia/Pacific represented 16% of revenue, compared to 20% last year. Israel and Europe made up for the remaining 15% of revenue.

As regard to Q4 '06 revenue, 70% of revenue was generated by U.S.-based customers, 4% by Israeli, 14% by Asia/Pacific and 11% by European customers.

Now we will be happy to address your questions.

Thank you, sir. [Operator Instructions]. Our first question is from Ramesh Misra of C.E. Unterberg, Towbin. Please go ahead.

It's good to see Tower cash flow positive.

Thank you, Ramesh.

My first question was in regards to design activity momentum. Can you quantify how that has been progressing in Q4 and also basically '06 over '05?

Design center activity, itself; we've been active on for quite a long time. The activities have though progressed to where at this point we're basically receiving the spec sheet from a customer, for one customer in specific; and off of their spec sheet doing the entire design and allowing them then to tape out that design into Tower.

So the fourth quarter was actually the first that we had completed, going from spec sheet to full design with a customer. And we have several handfuls that we're working on with that customer, presently; and several more that we'll be doing throughout 2007.

Now that was one customer in specific. There is another customer that we have worked with, an Israeli company, in Tower management that has a very, very unique IP block for Tower Management application that we are also side-by-side doing the designs with and doing a tape out. And in that case, it's an interesting model to where we're working with them with this IP block that will then be applicable to others of our customers within their design.

So those are the two new things that we've developed within our design capability; is actually taking the customer spec and driving it into a full design, which we've done now successfully on multiple products for one customers and then again, doing a complete design for somebody with a very, very interesting IP.

Does that answer your question, Ramesh?

I guess my question was more related to kind of your product pipeline for customers--

I thought you were talking about the pure design center activities--

Yes, not just your design center activity; although thanks for clarifying that. I think that that's a very new part of the Tower model, so thank you for clarifying that, but--

I might have answered the wrong question but I think it's an interesting answer. But I answered the question wrong.

Okay, to answer then your exact question; within Fab2 I believe there are plus-minus 28 products that are in design right now in the design stage itself. So that's pre-prototype in design. And in Fab1 we also have I think about 14 products that are in the design stage.

And how does that compare to prior quarters and say a year ago, if you happen to have those numbers?

I don't know that off the top of my head. If I look at the design, the shuttle, the proto and qual; at present in Fab2 we have some 52 customers in different stages there and we have 75 different products within that cycle. So if you're saying pre-production?

Yes.

Pre-production right now in Fab2 we have 75 products. That's certainly more than in 2005. I don't know the exact number by heart for 2005. I can get back to you on that.

Okay.

But right now, as far as the amount of products that are pre-production, if that's what your question was-- not the design cycle itself but the pre-production cycle--

Yes.

Anywhere within the design development phase, there are right now 75 different products in that funnel. I think that's a pretty reasonable number. In production right now, just as a reference, for Fab2 there are 79 products in production for a total of 25 customers.

Okay. Alright, that--

That was your question?

Yes. That is very helpful. So in terms--

Let me just give you Fab1 then as well, because what I gave you for Fab1 was just a pure design cycle, not the proto and tape out. So for Fab1 there are approximately 55 products that are in the design development cycle, so pre-production.

Okay, great. In terms of getting to that $200 million kind of run rate; I guess that's going to be your next target.

300 million.

Yes. So do you basically at this point, have enough designs in place or in stage already to kind of start thinking about that kind of target number? Or is that-- I mean this being a seasonally slower quarter you don't have that visibility right now? Sorry, I don't think I'm making myself very clear.

No, I think your question is very clear. The 300 million run rate is achievable with the 24,000 wafer ramp. So as far as the capacity in house, it doesn't take incremental investment to get there. The capacity is in-house as far as capital equipment.

When we initially did the capital equipment investment, it was off of customer forecasts. So I would still say that it's within our reach to achieve the 75 million quarterly run rate in the second half of this year, once all the equipment is qualified and we then start running the manufacturing and start shipping the revenue.

So I would say that within the pipeline, as it sits right now, we do believe that we can achieve the 75 million run rate.

Okay.

That would be in the second half of the year.

Got it. In terms of--

75 million quarterly, meaning 300 million annual.

Right, on an annual basis; got it. In terms of the efforts to improve efficiency at Fab1, without putting in any more equipment; can you provide an update on the status over there and how much more room do we have over there or is Fab1 now pretty much-- you've squeezed the last bit out of it in terms of wafer starts?

Right now in Fab1, really through efficiency measures, not through capital expenditure; we've increased the output of the fab by about 10%. And we have actions in place to increase it by about another 5% within the next-- by the end of Q2. And that's without incremental dollar investment, as far as CapEx.

Okay.

The fab is being run, I think, extremely efficient. It has been running at very high utilization throughout all of 2006.

Great, okay. The 45% of capacity that you've said that Vishay needs; are they using that amount right now or is that something that will happen some time in the future?

We mentioned that we have contracts that are increasing throughout the year-- long-term contracts. The Vishay contract ramps in the second quarter and ramps substantially. So they're using quite a bit of capacity now and then it ramps in the second quarter and stays at that level for the third and fourth.

Okay, so basically in terms of any products that may be end-of-lifing in Fab1; you basically have enough room already in regard to replacing that new contract. Is that correct?

I'm not sure I fully understand the question, but we have within our forecast, to be running Fab1 at very high utilization rates throughout the year, if that's what--

Ramesh Misra; Okay, so basically you're not concerned at all at this point about any product lines beginning to kind of segue out of their useful life in Fab1?

I would be overstating to say we're not concerned at all. I think we always have a lot of concern and we look at everything. With Vishay not at its full capacity, we ramped Fab1 at 100% utilization for the bulk of 2006. So I think we have room to make sure that it stays at very high utilization with Vishay moving up in its capacity.

All of the industrial engineering projects, to increase the capacity at the fab; were really based on the fact that we needed additional capacity to make sure that we're not pushing away business that would be ours otherwise.

Now we also have plans that are not approved as far as investment, but certainly put together; for incremental capacity increase of Fab1, which we could trigger very quickly at any given time. Fab1 being a 6-inch fab, the capital equipment expenditure for a given amount of wafer starts is relatively low. It's all used equipment in the market.

So we do have plan together that, for a very minimal investment, would allow us to get additional of about 10% of fab capacity. And we have clean-room space that we've identified that we could-- well, space that we've identified that we could make into clean-room space pretty quickly, in order to do that. So there is certainly the possibility of a need in the second half of the year to increase the capacity of Fab1.

Okay.

But it's not our plan at this point.

Got it. Does upgrading Fab1 to 8-inch; does that at all figure into your thought process at this point or--?

No, it doesn't. We have a good solid business there at 6-inch, it has good value at 6-inch-- there are certain customers that we've moved from 6-inch to 8-inch and moved them into Fab2 because of their technology needs and their roadmap itself. It made sense as they were shrinking some of their designs, to move them into Fab2. But no, we don't have any plans really whatsoever to convert Fab1 into an 8-inch fab.

Okay, and then one more question--

Fab1 is a chase and bay fab, right? Fab2 is a full ballroom SMIF fab. There are two different technologies. Not only it is not a plan, but it would be very difficult to ever try to do it.

I see. Okay, and then one last question and then I'll let someone else get in as well. In regards to the Vishay International Rectifier deal, about the PCS business that Vishay is acquiring-- is it too early to say what impact that may have on you or can you publicly talk about any of the discussions that you've had in that regard with Vishay? And thanks very much.

So in this case I cannot publicly talk about any discussions that we've had with Vishay with regard to that business. So I would say, yes; it's too early.

Okay, I understand. Thanks very much.

Thank you, Ramesh.

Thank you. The next question is from Tom Schwartz in Unterberg, Towbin. Please go ahead.

Hi, I didn't mean-- this is another Unterberg Towbin-dominated call. I apologize. I just wanted to ask a question about the prospectus that you filed on January 24th. Number one, the status of that; vis-à-vis the SEC and number two, any update regarding the ongoing discussions with the investment center over the grants and R&D credits.

Okay, I'll refer to it. This is Oren. The prospectus we filed three weeks ago-- this is just an F-3 Form for the registration of the capital notes that we issued to our banks and to Israel Corp. under the previously announced restructuring deal. As you know, the banks received equity equivalent capital note at $3.04 per share and Israel Corp. at $1.52. This was already paid for. This is already ready to go to the shareholders and the only reason for this prospectus was that we were committed to those banks and Israel Corp. to file a prospectus after the deal was closed in September.

So, it's not any prospectus to raise funds. It's not any prospectus that will bring any dilutions that were not before. And ultimately it's not a prospectus that will reveal any more trades, because those notes will not be traded. It's just to lift for resale the shares that will underlie in those notes once they will be converted.

Still both the banks and Israel Corp. are holding these notes and shares as a strategic investment. They don't have any intention, as we were told even recently, to either trade them or sell them. They want to hold them strategically.

Regarding the investment center, we are still anticipating the positive approval for our plan, which was submitted last year for approval of $80 million of grant. Actually, it's still not due because we still did not make all of the expansion. This is equivalent to expansion to fully equip the fab, which means $400 million spend, which we didn't do yet. We only did 30% of that.

Anyway, we filed the plan. The plan was approved by the investment center industrial bank, which audited it, reached a positive NPV for the plan; and recommended to the industrial ministry in Israel to approve the plan. And now it's in the governmental channels and we expect the approval to be arriving from the government.

Thank you.

Thank you.

Thank you. [Operator Instructions]. There are no further questions at this time. Mr. Ellwanger, please go ahead.

Well, thank you very much for joining us. We really appreciate your support and interest. We look forward to reporting on our progress as we complete the 24K ramp and the followed achievement of reaching the 75 million quarterly revenue run rate. Thank you again and any questions, please follow up with a call to Ilanit or Oren or myself and we'll be very happy to answer.

Thank you. This concludes Tower Semiconductor's fourth quarter 2006 results conference call. Thank you for your participation. You may go ahead and disconnect.