高塔半導體 (TSEM) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Tower Semiconductor First Quarter 2009 Results Conference Call.

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

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

(Operator Instructions).

As a reminder, this conference is being recorded May 14, 2009.

Joining us today are Mr.

Russell Ellwanger, Tower's CEO, and Mr.

Oren Shirazi, CFO.

I'd like to turn the conference over to Noit Levi, Director of Investor Relations and Public Communications.

Ms.

Levi, please go ahead.

Thank you, and welcome to Tower Semiconductor's Financial Results Conference Call for the first quarter of 2009.

Russell will begin with remarks about the quarter's highlights, followed by Oren, with an analysis for our first 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 Form 20-F, F-4, F-3 and 6-K, filed with the Securities and Exchange Commission, as well as filing with the Israeli Securities authorities.

They are also available on our website.

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.

Welcome and thank you very much for joining us today.

As we are all very aware, the economic environment continued to impact the semiconductor industry during the first quarter.

Our revenue for that period was $58.1 million, which was slightly above the mid-point of our guidance range.

This represents a quarter-over-quarter decrease of 25%, which outperformed the industry when comparing to the weighted average of a 41% revenue decline for the top four foundries worldwide.

We attribute this to the growth of our high-value specialty platforms which are more influenced to model the market trends.

For example, we recorded record revenue for our medical and dental sensors in this past quarter and achieved a 10% increase in our average selling price in Tower's Fab1 and Fab2.

The $58.1 million revenue represents a slight increase from revenue of $57.6 million in the year ago period.

The fact that we were able to grow revenue year-over-year highlights the timeliness of our acquisition of Jazz Technologies.

Even if we compare pro-forma, the four largest foundries in the world experienced a weighted revenue decline of approximately 60% compared to the first quarter last year against the Tower/Jazz pro-forma of 46% decline.

Most notably, when looking at our financials, despite this pro-forma year-over-year revenue decline of 46%, we were able to improve the bottom-line by approximately $2 million.

This is a testament to the synergies inherent in the merger, as well as our aggressive cost reduction efforts.

Additionally, despite a 25% sequential revenue decline, we are able to slightly improve our net income on a non-GAAP basis, when compared to the fourth quarter of 2008.

As stated in our press release, we over-achieved the announced post-merger Tower/Jazz $60 million cost reduction plans, with an approximate $80 million of annual cost run-rate reductions, as evidenced by maintaining $4 million non-GAAP net profit, despite $19 million quarter-over-quarter decrease in revenue.

As a credit to the Tower executives, in mid-Q1, I held a meeting with a group of about 30 Tower's senior management.

We spoke candidly of our business situation and discussed the choice of further reduction in force or salary reduction.

To my pleasure and to their credit, a unanimous decision was reached for a 20% across all employee salary reductions, graduating a fashion to have no or minimal impact to minimal-wage and no-wage employees respectively.

Since the beginning of Q2, we've implemented a program in Israel for 20% salary reduction where the first $1,000 of salary is untouched.

Hence, operators remain in full wage.

Senior management realizes a nearly 20% cut, no exceptions.

We all decided it was critical to maintain core capabilities to capture additional market share and to introduce the salary reduction in order to do so in an affordable fashion.

As I continue, I will speak the some of the activities we were engaged in to innovate ourselves out of the recession.

We have indulged -- we have included and continue to pursue green initiatives within our cost reduction program.

Both in Israel and in California, we have greatly improved efficiency by reducing the consumption of water, compressed air and electricity through the use of advanced controllers and a continued focus on process efficiency.

In addition, both sites are now in advanced stages of installing solar system.

This is expected to further reduce electricity consumption by up to 15%.

We continue to evaluate the entire organization for opportunities to further reduce cost and optimize our operating model.

Although cost cutting is important, and especially so in this environment, our main focus has been and remain profitable top-line growth.

This is only achieved by providing value proposition for one's present and potential future customers.

With regard to our existing customer base, we have remained intently focused on customer relationship and satisfaction.

Every employee at every level of the organization knows who their customers are, and continually strive to increase customer satisfaction and to leverage additional opportunities.

Almost all of our key customers who get formal supplier feedback, ranked us as most top-tier in terms of technology, quality, engineering, customer service and operational excellence.

This is evident by Skyworks formally rewarding us the supplier of the year award for 2008.

We continued to leverage our expanded process portfolio and the cross-selling opportunities related to the merger to-date have successfully engaged us in 14 different projects that are directly related to the cross-selling between the two company's customer bases and represents opportunities that would not have existed absent to the merger.

We believe that we have laid the ground work for a number of additional and significant opportunities in the near future and expect the number of cross-selling projects to increase significantly as we continue to work to understand and then to meet the business needs of our now combined customer base.

As mentioned earlier, our medical imaging business experienced the highest revenue in its history and we expect continued growth within this market.

We would see substantial increase in activity in the dental x-ray market as numerous new products for intra-oral dental, as well as other dental applications have started ramping to mass production with several customers on our unique 0.18-Micron platform.

We have also experienced increased demand within our high-end medical space.

In addition, our partnership with CMT for the development of medical x-ray panels remains on track following the acquisition of CMT by Thales.

In fact, we expect this acquisition will only accelerate and strengthen the development activities and accelerate the timeline towards full productization.

During the quarter, we continue to focus on expanding our presence in Asia and hosted two technology conferences in Japan in order to demonstrate our broader process portfolio following the merger.

We have appointed a country manager in Korea to expand our presence and grow our opportunities in that market.

As a result of this focus, Cesign, our Korean customer recently collected Jazz's power management technology to develop and manufacture of Class-D amplifier targeted at the consumer electronics market.

In total, we have achieved 6 design wins in the Korean market recently, with two in power management, three in our RF Silicon Germanium and one in RFID.

We have also identified 10 additional Power Management Design opportunities that we are currently pursuing.

Jazz's Silicon Germanium Technology continues to provide time-to-market advantage for new wireless protocols and standards, even as CMOS furthers integration for more mature handset ICs.

One example is the application of silicon germanium in an evolving base station markets, but now includes the evolution of Micro-, Pico and Femtocells with associated smaller coverage areas, higher data rates, and associated integrated circuit volume potentials than traditional macro-cell base station.

This quarter we announced that Lime Microsystems has selected our 0.18-Micron silicon germanium process to develop a leading-edge flexible wireless IC to address this market covering WCDMA, WiMAX and LTE standards.

Our Femtocell market is expected to experience strong growth in the next several years from $434 million (Company corrected after the conference call) in 2009 to $9 billion by 2014, providing a new growth opportunity for silicon germanium technologies.

We continue to evolve our silicon-radio-platform targeted at enabling integrated solutions rather than using discrete gallium arsenide components in cell phone and Wi-Fi front-end-modules.

This quarter we delivered prototype silicon for WiMAX power amplifiers built on our silicon germanium process and sampled antenna switch IP intended for 802.11a and built on our unique Silicon-on-Insulator technology.

In 2009 we expect continued growth in this area, as more content is integrated in silicon and away from the more expensive gallium arsenide platform.

Looking at MEMs, Tower Israel has focused on mass production in MEMs applications within Israel and Europe.

Tower provides clear advantages to customers in these areas due to geographic proximity, ability to provide integrated MEMs and CMOS Solution and our high level of support for MEMs design and compliment the engineering through the Israeli MEMs House combined with Jazz's MEMs expertise.

As a result, we are engaged in a number of significant projects in this area.

Jazz continues to demonstrate its leadership in this area.

We are working closely with one of our MEMs customers, WiSpry, to finalize the manufacturing process and product qualification.

During this past quarter, WiSpry secured a new round of venture financing, successfully completed follow-on performance milestones with their lead mobile handset customer.

Additionally, we are currently working with another customer on development of an innovative DLP (digital projector) -- Pico-projector, designed for low power portable application.

Tower is also a preferred candidate to develop the ASIC driver.

We believe that this opportunity has the potential to produce tens of millions of revenue over the next years if successful.

However, this project continues to increase the probability of multi-million dollar MEMs wafer revenue for Tower beginning in the second half of this year into 2010.

We also continue to make strong commitments with the U.S.

Aerospace and Defense industry within our Newport Beach, California manufacturing facility.

Recently we filed a Special Security Agreement or SSA proposal with the Department of Defense intended to mitigate foreign influence and control in an effort to re-instate Jazz as a "trusted foundry."

Trusted Foundry accreditation will expand the current aerospace and defense market share for Jazz, which today primarily involve the fabrication of ITAR designs.

Within the current market, we experienced a strong design win momentum in the first quarter of 2009, and for the year expect modest growth as design win momentum is balanced by reduced spending through supply of existing parts into the field.

In summary, I believe that the second quarter will show modest improvement as the overall economy begins stabilizing.

As a result, we expect revenue to be in the range between $57 million and $61 million for the second quarter.

I believe that we have taken the appropriate steps to reduce expenses and capitalize on the efficiencies and synergies of the Jazz acquisitions, while positioning the Company for future growth.

And although our growth opportunities will be modulated by the global economic environment, we're also expecting several customers with high volume programs to ramp in the second half of the year that are not directly tied to an overall economic recovery.

Additionally, we see substantial increase in our customers second half forecast.

Combining the customer optimism with the production release of new projects, we have very good reason to be optimistic for growth.

However, we have and will remain cautious on our spend.

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

Thanks, Russell and hello everyone.

First, I would like to announce that the first quarter 2009 financial results have been prepared in accordance with U.S.

GAAP and the financial tables in today's earning release include financial information that may be considered non-GAAP financial measures under Reg G and related reporting requirements as established by the Securities and Exchange Commission as they apply to our Company.

Namely, we also presented financial data which is reconciled as indicated by the footnotes below the tables on a non-GAAP basis after deducting; A, depreciation and amortization; B, compensation expenses in respect to options grants; and C, write-off [in process] R&D.

Non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, GAAP financial measures.

The table also contains the comparable GAAP financial measures to the non-GAAP financial measures, as well as reconciliation between the non-GAAP financial measures and the most comparable GAAP financial measures.

Further, the non-GAAP financial information presented herein should not be considered in isolation from or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.

As applied below, the pro-forma consolidated operational indicators results is an aggregation of Tower's and Jazz's operational results for the period before the merger date, which was September 19, 2008.

Following the merger with Jazz, the amounts presented in our financial reports and in today's release, include Jazz's results commencing September 19, 2008.

The balance sheet as of March 31, 2009 and December 31, 2008 includes Jazz's balances as of such dates.

Now turning to our results, as Russell mentioned, we reported first quarter revenue of $58.1 million.

Although this represents a 25% decrease in revenue as compared to the previous quarter, we outperformed the top four foundries in the industry, which experienced a weighted average revenue decline of 41% over the same period.

Calculated in accordance with GAAP, net loss for the first quarter was $27.6 million narrowed by $2.0 million as compared to the first quarter of 2008 on approximately the same revenue level.

EBITDA for the first quarter of 2009 was positive for the 14th consecutive quarter.

Cash flow was positive for the 10th consecutive quarter.

Looking at our results on a non-GAAP basis, we achieved $4.4 million in net profit for the first quarter of '09, which was a slight improvement from the previous quarter, despite a $19 million reduction in revenue.

This was achieved primarily due to our cost reduction activities and the realization of synergies related to the merger with Jazz.

When compared to the pro-forma consolidated net loss of the first quarter of 2008, which is an aggregation of Tower and Jazz operational results, net loss for the first quarter of '09 improved by $6 million year-over-year, despite a $50 million decrease in pro-forma revenues, indicating a $56 million run-rate reduction in quarterly expenses, which shows a further evidence of the success of our cost reduction activities and the synergies realized fundamentally.

On a non-GAAP basis, our gross profit for the first quarter was $12 million and our net profit on a non-GAAP basis was $4.4 million.

Non-GAAP gross profit margin improved to 21% in the first quarter of '09 from 20% in the fourth quarter of '08, and non-GAAP net profit margin improved to 8% in the first quarter from 5% in the previous quarter.

These non-GAAP growth and net margins are another indicator of the improvement to our cost structures and greater efficiencies, which compensated in full of the reduction in revenues which resulted mainly from the worldwide economic slowdown.

Total GAAP operating expenses for the first quarter were $11 million, which represented a $4 million reduction when compared to $15 million in the prior quarter.

Now, turning to our balance sheet.

We ended the first quarter with $40 million in cash, which represents the highest cash balance we have ever had in the last five quarters.

During the quarter, we received $20 million cash investment from Israel Corp., as part of our 2008 restructuring agreements with our lenders.

Our current ratio is positive at 1.5 as compared to 1.2 at December 31, 2008 and 1.2 at March 31, 2008.

Shareholders' equity is a positive $101 million as of March 31, 2009, which is a significant improvement as compared to $17 million as of March 2008.

We continue to aggressively pursue the $45 million in grants from the Israeli government through the investment center, which was committed, promised and never received and we hope that with the recent establishment of a new government in Israel that the grants will ultimately be paid to us as promised.

Looking at our bonds, we made full payments due for principal and interest earned by the bondholders of Jazz and Tower on or before their due dates, and are in full compliance with all the financial covenants of the indentured.

The net principal payment on the bonds is not due until the end of 2011.

In regards to our customers, the merger with Jazz has resulted in a doubling of our worldwide customer base, with increasing cross-selling opportunities and substantial cost-saving synergies.

And we continued to expand our customer base.

During the first quarter of 2009, we continued to focus on our specialty technologies and increased specialty revenue to 74% as compared to 69% in the previous quarter.

We will now open the call for question and answer session.

Operator?

Thank you.

(Operator Instructions).

There are no questions.

Mr.

Ellwanger, would you like to make your concluding statement?

Yes.

Firstly, again, thank you for your time, your interest in our Company.

We honestly and candidly continually look into ourselves, try to define if we are who we believe we are, continually look at our customers, have an excellent Board that is driving many activities around that, seeing if we are putting out that in our products and our services, that are in line with our customer base.

And then I think the biggest thing is, we are doing all in our power to have the courage to change according to what that introspection and what's we believe we should be --

Mr.

Ellwanger, there is a question, would you like to take it?

Yes, I'd like to finish my statement first and then I'll take the question.

No problem.

And I'd appreciate not being interrupted the next time.

So, we are really doing what we can to align with what the market needs are.

We've recently made some difficult decisions for our Company and moving away from some customers that were maybe high revenue, but not producing very good margin for the Company.

Within the numbers, we've been able to augment out with other customers.

But I think if they find someone who's being honest with them, so to be willing to walk away from several tens and millions of revenues, if it's not giving any value to the shareholder.

And we're continuing to evolve ourselves to drive that which gives value.

The Jazz acquisition I think was truly an excellent, excellent step in the Company's growth and many other things that we are looking at on that same vein.

I'll come back and finish my statement in a minute.

But please, I'll be very happy to take the question.

Thank you.

The next question is from John Rolfe of Argant Capital.

Please go ahead.

Hi, good morning or good afternoon, gentleman.

A quick question for you.

Russell, you had mentioned that in the back half of this year, you had -- or you expect to have some significant volume ramp from a few customers, and that volume ramp is not really a macro dependant.

Can you give me any sense for sort of what an annualized run rate does that -- that's on non-macro dependent growth might be from these processes?

John, to say that it's not macro environment dependent.

And this is why we'll be a very -- well, John, maybe I'll give you the answer, but one of the activities is actually a volume commitment agreement with a customer to transfer IDM type agreement where we have a volume commitment for them, the volume commitment from us.

And that's why it's not environment dependent because if's contracts agreed.

In the other side, to say that it's not environment dependent, it's really only because there are new applications coming in to design that have been qualified or we've been told that's been qualified from the end users.

Well, it's a growth of market share of the people into those that have relatively high market share within those specific sectors.

If that answers your question, I really don't want to give exact numbers as I do not have approval from, specifically the IDM that we are working with -- [don't] even mentioned their name on an IDM transfer.

Did that answer your question at least qualitatively?

Well, I guess within the context of what you can disclose, that's helpful.

Okay, thanks very much and nice job in a difficult environment.

Thank you very much.

The next question is from George Burmann of GunnAllen Financial.

Please go ahead.

Good morning, gentlemen.

Thanks for taking my question.

Please.

The question is two-fold.

Number one, if we assume that the worldwide economy is coming back on track and orders are coming in, without any major capital investments since you have a little depreciation charges every quarter anyhow.

What kind of revenue could the Company in its current forms sustain?

We can easily be back at our previous run rate, that on a pro forma basis was almost -- yeah, somewhere in the area of about 100 million a quarter, could be a bit higher depending on the split of the products.

Okay.

But without doing any additional capital expenditure, the Company could be on 400 million annual run rate.

Which is almost twice of what you are currently doing?

Yes.

Okay and then I have a question to the capital structure of the Company.

You had mentioned in the last conference call that you were expecting a payment promise from, I guess the Israeli government or Israeli bank of $40 million, has that been received yet?

I related to that in my script that $45 million grant of a -- pending grants that the Israeli government owe us, regards to that our commitment and promises and the objects from us and there is a new government in Israel.

So, we expect that with the new -- with the coming on both of new government, the bureaucratically obstacle will be removed and we will be able to get this $45 million, which is in commitments for our grant for investment in CapEx which we did in the past.

And that is a grant, so it wouldn't add to your liabilities, correct?

Yes, it's not a liability, its grant, no liability.

We already did what we had to do which we've invested in capital.

Okay.

Then a last question on your capital structure, you have a funny structure there with a non-interest thing, non-payback loans from the government and I'm showing on your financials $226 million I guess in long-term loans from banks and then $201 million in debentures.

And I think there are also some convertible debentures out on the old Jazz Company?

Yes.

Where would those be?

Where are the bonds that were of Jazz?

Yes.

They are in this line.

I mean the $226 million line of advance loan.

This is the allowance from mainly the (inaudible), okay, which -- and the $201 million line of debenture includes the 128 bonds that Jazz issued and are converted into Tower's share.

In 2011, yeah?

Yes, they are converted at any given moment, I mean at any given the moment (inaudible) converted into our shares until there restoration, which is December -- Q4, 2011.

Okay.

Any one that does not comes out by Q4 2011 that they are going to convert.

Have you considered repurchasing those at a discount to par?

Did we approach them, you're asking?

No.

If you just go in and repurchase them and retire those?

This is not something that we did today.

Jazz -- before the merger, Jazz did it and did some private transaction of buying back Jazz bonds.

Jazz bonds initially were $160 million and it was dealt to $128 million before the merger date, before September '08.

Till September '08, we did not do any subjectivity.

Okay.

And the $226 million in bank loans then -- these are the loans that are essentially almost like an equity investment, where you don't have to pay them back and you don't pay any interest on those, right?

No, no.

These are through bank loans.

These are still bank loans.

From a -- 200 is from the Israeli bank, which are carrying level of 2% to 2.5%, and 20 million from this amount is from Wachovia Bank, which is (inaudible), also traded at LIBOR plus two and a half years.

Okay.

And then the 128 million of convertibles are in the $201 million?

Yes.

And just I think you are correcting what you said before, you meant to say that we are not paying interest, this is correct?

For the time being we are not paying interest.

It's correct, but from Q3 '09 this is commencing -- again, it's LIBOR plus two and a half or may be this is what you meant when you said, we are not paying interest.

Yes.

Yes.

And there is another position, other long-term liability, 45.8 million.

Yes.

What does that consist of?

Okay.

Well, this is -- about a half of it is actually -- it's the liabilities for employees, for severance fees.

So in a situation where an employee is leaving the Company, so he is entitled to severance fees.

But against this amount, there are funds which are deposited.

But under U.S.

GAAP you present in the liability side the liability for the payment and on the asset side, if you look at the (inaudible) investment, is just $28 million, half of this amount is also there as funds for this severance fees.

So basically speaking, if there is no any excellent situation and companies continues to be running -- there is no major departure of employee, this liability actually does not mean anything cash wise for the future needs, but this is an amount which is -- this is a liability which is provided for the case, but all the employees will need to get the severance fees.

Okay, then I've got one last question.

You own a percentage, I think to the Jazz acquisition, 10% interest in a big Chinese foundry?

Yes.

Is that numerated under the property and equipment, [$128 million]?

No, this is under the line long-term investment.

So I mentioned that half of the amount is funds designated for employees, for the severance and the other half about $16 million of this book value that [currently] we are presenting our 10% holding in HHNEC.

This is an affiliated entity.

Is that something that you look to maybe cash [add-ons] or utilize anytime soon?

So I have a Board seat on HHNEC and from being in the Board, I obviously will not disclose things about the Company, but it is a very strong good running Company.

As part of the equity agreement that Jazz has had with HHNEC.

There was initially a process transfer and a manufacturing agreement.

If we were to do anything going future, we would most likely want to strengthen relationship there, not cash out of the position we have.

Okay.

So it sounds like, it's worth a lot more than the $16 million that it's carrying at?

I believe that it is.

The Company which is selling more than 300 million a year and so, is a very good Company.

Right.

However, currently you're not utilizing any of their manufacturing capabilities there.

That would only come in to play with larger volume contracts, correct?

Not 100% correct.

We use some of their manufacturing capabilities at the latter part of 2008.

Okay.

Well, it seems like you're going in the right way.

Congratulations and we'll be looking forward to the next conference call.

Thank you very, very much.

I appreciate it.

Thank you.

There are no further questions at this time.

Mr.

Ellwanger, would you like to continue with your concluding statement.

Sure.

Okay.

So, again what I was saying before in very quick statement, I believe that we are a very, very different Company than we were four years ago, different than two years ago, different than a year ago, and I trust and plan that we'll be a different Company a year from now.

We'd love to invite all of you to take part at least in the attendance of a conference that we just announced that will be held at our Newport Beach facility; it's called the Analog -- 2009 Analog-Intensive Mixed-Signal Circuits, Applications, and Technology Conference, and the date will be November 5th.

So I think it would be very, very interesting and we'd love for you to be there.

There will be multiple Jazz/Tower customers, potential customers, and I think you can get a very good feel for who we are, what we are doing, and the value that we supply to this market.

Well, if you want to put that on your calendars, again it's a little bit off, so you got time to plan for it, but we'd love for you to be there.

Again, my really sincere thanks for interest in the Company, and I'm very excited.

I think, this is my summary, a final statement.

The merger has gone very, very well.

I've been involved in my career in many, many mergers, acquisitions, and although nothing is flawless, I'll tell that this is as close to one it can be.

The existing management team from Jazz, the management team from Tower; are an integrated force that truly care about the growth of the business and I don't think we could have anything greater than that.

So, thank you very much for your time.

Thank you.

This concludes the Tower Semiconductor first quarter 2009 results conference call.

Thank you for your participation.

You may go ahead and disconnect.