高塔半導體 (TSEM) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Tower Semiconductor's Third Quarter 2007 Results Conference Call.

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

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

As a reminder, this conference is being recorded, November 6, 2007.

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 Noit Levi, Director of Investor Relations and Communications.

Please go ahead.

Thank you and welcome to Tower Semiconductor's financial results conference call for the third quarter of 2007.

Russell will begin with remarks about the quarter's highlights, followed by Oren with an analysis of the third quarter financial results.

After management's prepared remarks, we will begin the question-and-answer session.

Before we begin, I would like to remind you that some statements made during this call may be forward-looking and are subject to 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 20-F and 6-K, 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.

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

Please go ahead.

Thank you, Noit.

Welcome and thank you very much for joining us today.

Tower's revenue for the third quarter of 2007 was $56.6 million, which was within our guidance range and a bit less then 1% lower than the Q2 revenue level, and it represents a year-over-year improvement of 10% compared to the same period in 2006.

For the first nine months of the year, revenue was at $169.2 million, which is a 28% improvement compared to the same period in '06.

The quarter three financials will be detailed by Oren.

I would like to spend the next bit of time describing recent key technical and business developments.

During the quarter, we announced having won a high-volume manufacturing deal with a top tier U.S.

based integrated device maker.

This deal was on par with or exceeds the highest revenue potential of any single customer activity that the Company has undertaken to date.

This technology transfer utilizes 0.13 micron technology generation.

The transfer will occur during 2008, we expect to ramp volume production in 2009.

This customer is indicative of the type of opportunities available for Tower, as IDMs continue the trend for its outsourced manufacturing.

We remain focused on our IDM transfer programs to further capitalize on this industry trend.

During the quarter, we completed the funding and purchasing of fab processing tools to expand Fab 2 capacity to beyond 30K wafers per month.

The funding was using long-term debt vehicles that provided essentially zero dilution to our shareholders.

The tools for driving towards the 30K wafer per month or beyond are for the most part used equipment, having originated from companies such as Intel and AMD, and are specific to 0.13 micron copper flow.

The tools were purchased at a cost of about one-third that of the new tool market price.

This cost should enable an about an 18 month full payback period when the cash flow generated once the tools are at full utilization.

This used tool model will also have a positive impact on the P&L as the incremental cash generated from these tools compared to the incremental depreciation is a ratio of greater than 4, as compared to a ratio of 0.8 for the previous tool acquisitions to date.

This capacity increase should as well improve Tower's productivity and operational effectiveness, resulting in approximately 60% gross margins on incremental revenue.

As mentioned in our last call, we saw softness in Fab 1 utilization.

We see certain improvements in Fab 1 utilization, but it still remains below our fab model, which is about 90% to 92% for that factory.

We continue to work with a variety of existing and new customers to expand projects and opportunities for Fab 1.

For example, we recently announced that ViTi, a Taiwan-based customer, started producing imagers for the security camera market in Fab 1.

We expect utilization rates for Fab 1 to continue to improve over the coming quarters.

Fab 2 has been running at near-full utilization.

The 24K capacity expansion is at this point fully installed and qualified.

We still have greater demand than capacity, especially of 0.13 micron, which prompted the further tool acquisition to beyond 30K wafer per month, which I just previously discussed.

Tower continues to implement its specialty foundry strategy.

The approach comprises development of new offerings for specific market segments, as well as partnerships of leading customers to bring optimized solutions to the market.

We will mention here power management and CMOS Image Sensor activities.

We recently released a new power management platform, integrates high performance switching devices on to the base CMOS platform, enabling integration of a full power management solution on a single chip.

The low series resistance of the switching device is among the best in the industry for integrated solutions.

This platform targets a very large, approximately $6 billion market, of power supplies and regulators, which itself is expanding at a fast rate due to energy saving initiatives.

With respect to Image Sensors, Tower has released a 2.2 micron pixel with a dramatic reduction in dark current to below 2 electrons per second at room temperature and as well dramatic reduction in dark current non-uniformity as compared to other foundry offerings.

Dark current is the most critical parameter for picture quality, especially at low light conditions.

Tower has a specific focus on the dental and medical markets for which in the dental markets, we command a large market share.

We are in the advanced stages of closing a comprehensive deal with a medical systems company to implement very large screen imagers for medical application.

The proprietary Tower stitching technologies alongside the Tower X-ray Pixel IP are key enablers to this program.

The previously announced International Rectifier IDM transfer deal is progressing according to schedule.

We'll start producing volumes of wafers during the present quarter.

Looking into the design service development device development related activities, Tower initiated a joint industry academia consortium called ALPHA that develops unique technology solutions for low power integrated circuits.

Among the members of the consortium are two prominent Tower customers, SanDisk and Zoran, as well as the world's largest fab equipment maker, Applied Materials.

This activity will develop multiple groupings of solutions for low power technologies, ranging from the architectural level, down to the Circuit and Physical implementations and will cover common system-on-chip (SOC) design requirements applicable to 180 nanometer, 130 nanometer and below processes with an end target of greater than 3X reduction in power consumption.

In the past month, Tower made special efforts to improve the input/output device that it offers its customers.

We developed a compact 8KV Human Body Model (HBM) ESD solution on our advanced 0.35 micron process, which has already been implemented on three products and are additionally adding a 20KV Human Body Model (HBM) compact structure with stuff which fits under an 80 micron by 200 micron pad.

This 20KV structure is also being implemented at the 0.13 micron technology node.

As part of our design services offering, Tower has introduced a proprietary porting flow algorithm for cost reduction.

It enables the existing designs being processed at 0.6 micron through 0.35 micron to gain substantial aerial advantage with minimal customer effort by moving these products to a 200 millimeter 0.18 micron platform.

Looking at the fourth quarter, we expect to achieve sequential revenue growth in the range of $61 million to $65 million, the midpoint of which represents a sequential improvement of 12%, 14% year-over-year and projects a 24% improvement for the full year 2007 as compared to 2006.

They should be compared against the foundry industry that has a weighted average growth of less than a few percent.

Our approach to gain share and produce factory volume from large fabless companies, to also provide a strong revenue baseline from IDM transfer projects, and to capture share of high margin specialty is being effectively enacted as demonstrated by a growth rate that has outperformed the industry in 2006 where we have 100% growth against a weighted average of about 22%, 23% for the industry, and is projected to do so in 2007, where we would guide Q4, that would be about the 24%, 25% growth as compared to an industry of less than 2% growth.

Recent projections indicate that the foundry service market will double by 2011.

We are confident that we are in a very good growth industry and that we are driving the correct activities to maintain positive momentum within this growth and to be able to continue to outgrow the growth of this foundry industry.

Before Oren reviews our financial results, I would like to mention that Tower was recently included in the 2007 Deloitte Israeli Technology Fast 50, which recognizes the 50 fastest growing technology companies in Israel, based on their five year revenue growth.

Between 2002 and 2006, Tower revenues grew from approximately $51 million to $187 million, representing a five year growth rate of 262%.

With that, I will turn the call over to Oren.

Thank you, Russell, and hello everyone.

Before I begin, I would like to note that the financial tables in the earnings release include financial information that may be considered non-GAAP financial measure under Regulation G and related reporting requirements that is required by the Securities and Exchange Commission as they apply to our Company.

For the third quarter ended September 30, 2007, we reported revenues of $56.6 million, an increase of 10% when compared to the same period one year ago.

For the first nine months of 2007, total sales were $169.2 million, representing 28% year-over-year growth when compared to the first nine months of 2006.

On a non-GAAP basis, we reported operating income of $35 million for the nine months of 2007, representing 27% growth when compared to operating income of $27 million in the nine months of 2006.

In addition, on a non-GAAP basis, we reported in the third quarter of 2007 gross profit of $20.5 million, representing 36% gross margin, an improvement as compared to 34% gross margin in the second quarter of 2007.

In addition, we reported $11.6 million of operating profit, representing 20% operating margin in the third quarter of 2007, same as in the previous quarter.

Cash flow from operations was again positive for the fourth consecutive quarter, totaling $4 million.

EBITDA was positive for the eighth consecutive quarter, totaling $12 million in the third quarter of '07 and $35 million for the nine months ended September 2007.

Total operating expenses for the quarter was $11.1 million, representing 20% of revenues, an improvement as compared to 22% of revenue in the third quarter of 2006.

Turning to the balance sheet, we finished the quarter with $43 million in cash compared to $21 million in the end of June 2007 and $41 million in the end of December 2006.

Our current ratio, which is our current assets divided by our current liabilities as of the end of the third quarter of 2007, was 2.01 versus 1.30 at the end of June '07 and versus 1.36 at the end of December 2006.

And now, I will discuss sales by major customers.

During the first nine months of 2007, we continued to expand our customer base.

We have total of over 50 customers to whom we shipped the wafers, out of which 10 customers that exceeded 1000 wafers per month at least once throughout the period.

Our leading and largest customer in 2007 continues to be SanDisk, to whom we shipped 0.18 and 0.13 micron wafers.

Our major other customers were as follows.

In Fab 1, Vishay Siliconix, ON Semiconductor and NXP, and in Fab 2, Zoran Corporation, Macronix International, including its affiliates Magic Pixel and Modiotek, SiTel, Atheros Communications and SuperPix.

Analyzing sales by region, we increased our sales to the Far East and Europe.

Third quarter revenues from U.S.

customers represented 69% compared to 79% in the second quarter of 2007.

Israel and Europe still increased to 17% of revenue compared to 12% in the second quarter of '07, and revenue to the Far East increased to 14% in Q3 '07 compared to 9% in Q2 '07.

Given the total guidance for the fourth quarter which Russell gave, crossing for the first time the $60 million on a quarterly basis, we will be able to present between $230 million to $234 million of annual sales in 2007, a 23% to 25% year-over-year annual sales growth, which comes on top of the 99% sales growth we experienced in 2007.

Now, we would be happy to take your questions.

Operator?

Thank you, sir.

(OPERATOR INSTRUCTIONS).

The first question is from Ramesh Misra of Collins Stewart.

Please go ahead, sir.

Good evening, Russell and Oren.

My first question is in regards to your latest IDM agreement.

I wanted to get a sense of what technologies are -- would be covered in the technology transfer, and also some details in regards to the timeline.

And also following up on that, I presume the new equipment that you have acquired, it sounds like it will be starting upon the 0.13 micron technology that you already have and at some point transitioning it to, say, pushing up it over to the technology from this new IDM.

Good evening, Ramesh, and thanks for your questions.

Good questions.

So, to begin with, the technology node that will be transferred, is 0.13 micron flow.

More than that, we have not disclosed nor do we have permission to disclose.

So, we did receive certainly permission from the customer to mention that we had won the deal to talk about the foundries of what the wafers per month would be.

But, as far as describing the flow or the applications, that would most likely identify them or their end user, both of which we will not do.

So, I am sorry to not being able to give you more granularities on that question, but really cannot do so.

As far as the timing, I mentioned it in my few words that I have said, that we will be performing the transfer itself throughout 2008.

Our expectation is that we would start to ship production at either the very end of '08 or the beginning of 2009 and ramp the volume production throughout 2009.

As far as the equipment itself, you are correct; the equipment that we did purchase to go to above the 30K has been 0.13 micron compatible equipment, the back end is all copper equipment.

The front end is, according to our 0.13 flow, some of which can also be used for 0.18.

But, that equipment will be started up incrementally at 0.13 and there were really two reasons for needing to get that at this point.

We had presently really much demand for 0.13 than we can ship.

So, as we start to develop the capacity, it will not be sold into the IDM that we won this new contract on, it will be being sold into other customers that have demand for really multiple thousands of wafers beyond what we can produce right now.

So, our plans are to accelerate the installation and start-up of these tools, we would believe that the 6,000 will fully qualified, so obviously installed and qualified within the next three quarters, and that would incrementally show increases of capacity in the end of Q1, Q2 and then, being completed in Q3.

Did I answer your question there, Ramesh?

Yes, pretty much so.

Did you say you had permission to talk about the wafers per month kind of volumes from this new IDM?

We released that - the range will be between 5,000 to 8,000 wafers per month.

That will be the initial range of that we would be dealing with and it would last for many years.

Great.

So, that triggers to my next question.

So, it looks likes this incremental capacity that you are adding on right now, you already have at least visibility from some of your customers to fully utilize that, and once this contract from the -- this new IDM kicks in, it looks like you might be running short of capacity again.

True.

Which is a good problem to have --

A very good problem to have, yes.

Now, I think what we had stated and I really want to reiterate that, the model that we used in buying these tools was a very good model for Tower, a very good model for our investors, as the incremental depreciation versus the incremental cash, while the incremental cash is a factor of four higher than the incremental depreciation.

So, it's a very good model, it has a very short duration of payback for the entire acquisition and we would continue only over time the buy level we are pursuing now would probably get better.

But, the initial transfer basically, as we talk about it, right now our 0.13 capacity is really being used at very close to 100% utilization.

To do this transfer, we needed some free capacity as well because you can't develop a flow without free capacity.

So, the capacity will be being used in twofold.

We will have, as it comes on, we have the demand for it to be shipping revenue, but by having some added capacity, we will also be able to do the development, because it does take time for people to be working on recipes, and when someone's working on recipe and a tool, you certainly don't want to commit production to it.

Right, okay.

Shifting focus a little bit on to Fab 1, it clearly sounds like you are still having an impact from your last big IDM contract.

Do you see that the impact of that completely concluding by Q4 or do you -- or is the potential still a little bit of remnant of that, in fact, going maybe even Q1?

I am sorry, I don't think, in fact, I am quite sure that we have never given any details about which customers are down within Fab 1.

We have said that -- well, whether we said it or not, I will say that the reduction that we have in Fab 1 is not due to us having lost market share nor is it due to our customers having lost market share.

It is due to some seasonality or some decrease of demand from some of our end customers at present.

So, that part we see coming back as any cyclicality does come back over time.

But that isn't what we are actually doing, we are not sitting back and waiting for that to come back, and we are driving different projects.

We are actually pursuing several IDM transfers itself into Fab 1 presently and we have certain other activities that we are doing such as what we mentioned with ViTi, moving the surveillance cameras into Fab 1 for the technology offering that we have there.

So, Fab 1 is not running at 90 plus utilization at this point.

That's 100% the case, and we are focused on bringing it back up.

We will see it moving upwards toward the end of Q4, we think that will have a reasonable utilization in it.

And we are looking at Q1, Q2 to stabilize it back at the high level.

Okay.

So, despite reduced utilization at Fab 1, on a GAAP basis, is Fab 1 still at or above break even?

Yes, it is still positive net profit.

Okay, great.

Okay, I will hop off for a bit and let others get in as well.

Thank you, Ramesh, good questions.

Sure, thanks.

Thank you.

(OPERATOR INSTRUCTIONS).

There are no further questions at this time.

Mr.

Ellwanger, would you like to make your concluding statements?

I was actually thinking of calling on some people for questions.

No, I will make a concluding statement.

Firstly, thank you for participating in the conference call.

We really are excited to be able to guide for the quarterly sales that will cross the $60 million mark for the first time.

Mr.

Ellwanger, we have another question from Ramesh.

Good.

Please go ahead.

Sorry, Russell, since I wasn't interrupting anybody else.

In regards to your memory customers, or your largest customer in Fab 2 at this point, can you talk about seasonal -- usually, Q1 and Q2 tend to be seasonally softer, at least in the consumer sector.

And I wanted to get your sense on the visibility of business in Fab 2 going beyond Q4, I know that it's difficult job for guidance two quarters out, but perhaps you might be having some visibility, especially in the 0.13 micron.

So, if you can say anything on, that would be very helpful.

So, again, very specifically, I would not comment on the seasonality of any given customer's orders, and that's really up to them to be releasing in their own conference calls if they wish.

With regard to our present demand, that's extremely strong, stronger than what we can be producing, and we do not see at this point a reduction in Q1.

To look at Q2 and Q3, that deals with longer term customer forecast and they, at this point, also look very strong for us.

So, I don't see from any given customer or grouping of customers, any type of reduction in Q1, Q2 at this point.

Okay.

So, if you are running in a capacity constrained mode at this point, does future revenue growth purely come on as additional capacity comes online?

Partially, the revenue growth will come from additional capacity, that's 100% correct, especially in the 0.13.

It will come on as we gain more share, or not more share, but as we go to higher utilization in Fab 1.

And at present, we have the capability at this point to do 24,000 wafer starts in Fab 2.

We are not doing 24,000 wafer starts, we have been running the Fab at extremely high utilization throughout the past quarters during the ramp.

At this point, we have reduced the wafer starts consciously in order to work on some other fab metrics and will be bringing back the wafer starts up within the second half of November, December time frame to driving again up to the 90 plus utilization on starts.

So, our numbers for Q4 do not demonstrate the full utilization of Fab 2 as per the present 24,000 wafers.

Okay.

So, it would be -- I can conclude from that that Q1 and Q2 does indeed have the potential of growing above Q4 levels, provided the demand persists.

Yes, definitely.

Okay, all right.

That's it, thanks very much, Russell and Oren.

Thank you.

So, as I was saying, we are -- well, are there any more questions, operator?

That's the only one.

Okay.

So, again, thank you for participating.

As mentioned, Q4 guidance is something that we are excited over, the ability to break the $60 million, to achieving mid-range guidance, to surpass a $250 million annual run rate.

And I think that that would be a very nice milestone for us, especially considering that we started a little over two years ago with an $80 million annual run rate.

There's some very nice activities within the Company, and the Q4 again being more than 3X in the quarterly sales level than when Oren and I got together in mid-2005.

Well, thank you for listening, thank you for your support.

And any additional questions, please feel free to contact Noit, or Oren, or myself.

Thank you very much.

Thank you.

This concludes Tower Semiconductor's third quarter 2007 results conference call.

Thank you for your participation.

You may go ahead and disconnect.