高塔半導體 (TSEM) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Tower Semiconductor Third 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 November 9, 2009.

Joining us 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 Public Communications.

Mrs.

Levi, please go ahead.

Thank you, and welcome to Tower Semiconductor's financial results conference call for the third quarter of 2009.

Joining us today are Mr.

Russell Ellwanger, Tower's CEO, and Mr.

Oren Shirazi, Tower's CEO.

Russell will open the call, followed by Oren with a discussion of our results in the third quarter 2009.

This will be followed by Russell with a discussion on the performance of the business during the first quarter.

After management's prepared remarks, we will open the call up to 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, S-4, S-3 and 6-K, filed with the Securities and Exchange Commission, as well as filings with the Israeli securities authorities; they are also available on our website.

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

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

Russell, please go ahead.

Thank you, Noit.

Welcome, everyone, and thank you very much for joining us today.

Our third quarter marks the full year since our successful merger with Jazz Technologies.

The merger has propelled us to the position of leading global specialty foundry, enabling us to execute on many new and significant opportunities, which we will further discuss during today's call.

Culminating a year since the merger, last week we launched our new name, TowerJazz, as well as a new logo and branding.

This change signifies that together we are now fully integrated, and our combined strength has created one company at least twice as strong, as is evidenced to our customers, shareholders and employees.

As last year proves, our merger was a resounding success.

We believe that the benefits garnered were key enablers for the 30% plus sequential revenue growth we achieved this quarter, which was at the top end of our expectations.

All this demonstrates that we used the downturn wisely and correctly primed ourselves for growth as the recovery gained its footing.

As I'll discuss later in today's call, TowerJazz is well on the way in forging its new path as the top specialty foundry in the world.

Now, we are a strong and exceptionally lean company, with business platforms primed for continued long-term and profitable growth.

I'll now hand the call over to Oren, our CFO, who will review the third quarter results in detail, as well as provide guidance of continued strong growth for the fourth quarter.

I will then summarize our activities in four of our business sectors, and refer to our vision statement as part of our new branding.

Oren, please go ahead.

Thank you, Russell, and hello, everyone.

The third quarter was a successful quarter for Tower on multiple fronts, as evidenced by our achievement of all-time record EBITDA, all-time record revenue, significant improvement in margins and other financial indices I will review.

Over the past year, we have been highly focused on strengthening our balance sheet and lowering our debt levels, and we end the third quarter with a strong balance sheet, with a current ratio of 1.67, no principal payments for any debt vehicle for the upcoming two years and the cash on hand balance of $52 million.

Further, our balance sheet includes a 10% holding in HHNEC, a Chinese foundry which is an affiliate of the Japanese NEC, which we present under GAAP at $17 million.

We believe this has a much greater fair value than the value at which it is currently recorded in our balance sheet.

In addition, customer demand has increased significantly, and coupled with excellent [third] performance, it's allowed us to an all-time record EBITDA and revenue while maintaining a positive cash flow, which has continued over the past12 consecutive quarters, contributing to our strengthened balance sheet.

Finally, we continue to aggressively pursue the $45 million in grants promised and owed to us by the Israeli government through the Investment Center, but yet to be received.

Looking into our results in greater detail, we achieved all-time record EBITDA for the third quarter of 2009, with $15 million, representing 740% increase against similar revenue of Q4'09 -- of Q4 '08, which was the first quarter post-merger.

We also had an all-time record revenue for the third quarter with $79.6 million, toward the top end of our previously provided and increased guidance range.

This represents an increase of 31% over the previous quarter results and 36% over last year's third quarter results.

We achieved a record of 109 design wins in the quarter, 31% up quarter-over-quarter, which we expect will materialize into revenue commencing the first half of 2010.

In terms of guidance, we expect fourth quarter revenues to jump to between $90 million to $94 million, a midrange growth of 16% quarter-over-quarter and 19% year-over-year.

Our strong guidance is built on the basis of many new customer engagements, as well as multiple new projects that are already in our funnel.

We have seen a substantial increase in the level of orders from many of our customers, and we are also commencing the mass production of a number of new products.

During the third quarter, Jazz achieved GAAP net profit of $7.8 million, which is its highest level since its inception in 2002.

Our consolidated GAAP net loss for the third quarter was $30, including financing expenses of $17 million, resulting mainly from the significant increase in market and fair value of our tradable securities, which are accounted for as mark-to-market under GAAP.

Excluding these financing expenses, we had a GAAP net loss of $14 million and a non-GAAP net profit of $11 million.

Looking at our results on a non-GAAP basis, gross profit was $26 million in the quarter, representing 32% gross margin and 65% growth over the previous quarter.

Comparing to the fourth quarter of 2008, the first quarter post merger, non-GAAP gross margin increased by 20% to 32% on a similar revenue level.

Non-GAAP operating profit grew by 272% over the previous quarter to $13 million and by 645% as compared to the fourth quarter of 2008, again, based on a similar revenue level.

This represents an operating margin of 16% in the current quarter, compared with 2% in the fourth quarter of 2008 and 6% in prior quarter.

Non-GAAP net profit for the third quarter of 2009 was $11 million, representing a 14% net margin and a 109% growth as compared to the prior quarter.

All of these improvements in gross operating EBITDA and net margin are the outcome of the successful merger with Jazz, the full implementation of the cost-reduction plan with an annual run rate of $80 million, improved sales activity, excellent [sales] performance, the cross-sales project and winning projects with higher-margin products.

Looking at our operational expenses as a percentage of revenues is an additional proof to the continuous improvement in our margins.

Our R&D expenses in Q3 '09 were 8% of revenue, as compared to 10% in previous quarters, and our marketing and sales and general and administrative expenses dropped to 10% of revenue, as opposed to 12% of revenue in Q2 '09.

We see many new opportunities due to our increased business focus in the specialized segments.

This has resulted in us being the single reporting foundry that, based on fourth quarter guidance issued by all the others, we'll exit 2009 with year-over-year revenue growth as compared to 2008.

Guiding 16% growth, in the midrange of our Q4 guidance, we focus to have 15% year-over-year revenue increase in 2009, as compared with 2008.

As you can see, we are very confident with regard to the coming quarter, and we are now in the best position we have ever been in in enabling us to take advantage and capitalize on the opportunities coming our way.

I would like to now transfer the call back to Russell Ellwanger, our CEO.

Russell?

Thank you, Oren, and great job.

We began the quarter by announcing that we were chosen by Intersil to be their technology partner to develop their next generation power management platform.

Our power offering consists of a scalable platform with foundry-lowest RDS on, and is continued to be the best in the foundry industry today.

In addition to that, our Y-Flash zero mask adder non-volatile memory is unparalleled in the industry in terms of size, performance, flexibility and cost.

The comparative commercially available solution necessitates an addition 11 photo mask, at a total customer cost of about $30 per mask, hence an additional $300 to $350 per manufactured silicon wafer.

Our organically developed IP block is essential for low-cost manufacturing of digital power where the digital control is integrated into the analog chip.

The scalable and modular power management platform has driven a large amount of customer traction in the past months.

Gartner describes the power management device sector as the fastest-growth segment of any analog IC category.

The milestone agreement we signed with Intersil has the potential to be by far the largest in our company's history, providing for substantial and continuous revenue growth over the long term.

The fact that Intersil, a proven leader in power management, has chosen us as their partner and placed their trust in our technology is a very strong testimony of the quality and value add which we bring.

Our bipolar CMOS-DMOS process, combined with their power management design and process capabilities, will address the requirements of multiple Intersil product families, including digital power, PWM controllers and PMICs for broad markets, including consumer, computing, communications, industrial and automotive.

During the quarter, we also announced co-development of a 700-volt power platform together with GrandTek, positioning us as a leader in the rapidly emerging market of next-generation industrial LED lighting and large-panel consumer LCDs.

We also saw significant success in Korea in the quarter, with ten new customer design wins, and we see continued momentum for our advanced BiCMOS-DMOS power processes.

In particular, we were selected as preferred foundry by C&S Technology for their power automotive devices.

Korea is a very fast-growing market for power, with significant potential.

Over the next quarters, I expect to be able to announce additional design wins to further demonstrate our technical leadership in this field.

In terms of our RF applications business, we see renewed strength and growth in this sector.

Our solutions target new markets, including digital TV tuners, millimeter wave, high-performance analog and front-end modules and mobile applications, such cell phones and wireless LAN.

Our silicon-germanium and specialized RF CMOS processes offers unique advantages to our customers, enabling extremely low noise, coupled with best-in-class lower power consumption, with high performance.

Our design enablement capabilities have been strongly acknowledged by our customers as a major factor in ensuring first-time success, and hence enabling them to be fast to market, which in turn enables them great market share growth.

Our RF device platform, coupled with the design environment enablement, is the reason this business is growing, with numerous new design wins.

We estimate the specific market to be about $1.4 billion in 2012, of which about $560 million is applicable to us.

We target to capture significant share of this $560 million.

For CMOS imaging, our medical device and imaging business is focused on chips for professional high-end studio and still-frame cameras and medical devices, ranging from the world's largest five by six-inch CMOS stitch field X-ray sensors to the world's smallest cameras for endoscopic procedures.

This sector is characterized by higher margins and the longevity of the product cycle, two particularly positive attributes for long-term growth and performance.

We recently launched an off-the-shelf high-resolution chip for the machine vision sensor market together with CMOSIS, a developer of high-end CMOS image sensors for professional imaging applications.

Tower and CMOSIS are well positioned to win a significant share of the future industrial and professional CMOS image sensor markets, as next-generation CMV2000 sensors could also be used for automotive and security applications.

Based upon our image sensor platform, we are also entering into biochips, with a very exciting engagement, with a very exciting engagement with a revolutionary and unique application for a very high-growth market.

In 2012, the overall market that we are targeting is $1.2 billion, of which $420 million is relevant to us.

As with the RF market, we target to gain significant share of this $420 million.

Our IDM transfer business is booming with customer demand increasing and new engagements in both Newport Beach and Migdal Haemek.

Our growth in the four above mentioned business sectors is evidenced in having closed Q3 with 109 total design wins, a record for the Company.

This is a 31% increase over the Q2 number of 83, which itself was a record at that time.

Q3 design wins are forecasted to contribute multiple tens of millions of dollars to the corporate revenue in 2010, ramping to full volumes in 2011, 2012.

These wins are equally distributed over the several business groups, with 46 wins to be manufactured in Newport Beach and 63 to be manufactured in Migdal Haemek.

Such a monotonic increase in design wins at this magnitude shows the value that we are creating for our customers and the trust that they put in the TowerJazz brand to make them successful.

Last week, we held a well-attended supplier day and technology conference at our Newport Beach facility.

At the technology conference, we launched a new company brand, which is TowerJazz, and introduced our vision statement, which is to be the world leader in specialty foundry solutions, as measured by our customers, employees and investors.

Our revenue and design win growth is a good customer vector, demonstrating that we are on track to realize this vision.

In respect to employees, I am most proud to announce that our annual turnover rate of the top 80% of the employees by ranking is 2.6%, and of the top 20% of employees by ranking is 1.5%.

Employees know exactly what is happening in the Company and vote with their feet.

To achieve such low turnover percentage numbers, especially for the top 20% population, who are openly and highly sought after, demonstrates our employees' belief and confidence in the Company.

We take pride in the knowledge, skills and attitude of our employees, and this is exactly that which is driving our customer success.

To touch on the last part of the vision statement, to be the world leader in specialty foundry solutions as measured by our customers, our employees and our investors, we are focused to deliver continuous top and bottom-line performance to our investors.

The 8X increase in EBITDA against Q4 '08, the first quarter post-merger, which is of similar revenue, is a fact of increasing the bottom line through efficiencies.

As Oren had stated, the Q4 midrange guidance is a double-digit growth of 16%, or 92 midrange, which is substantially better than the foundry Q4 guided weighted average of 2%.

This is demonstrative of a successful move to increase the top-line performance well beyond market trends.

In considering our fourth quarter guidance, we should close the year at about $290 million, as was mentioned by Oren, representing a 15% growth against 2008, during an extremely difficult and challenging worldwide economic situation, during which period we also increased our average selling price by over 25%.

As we look forward into 2010, and in evaluating our customer funnel in view of the high degree of design wins which we achieved this past year and forecast to still achieve, we target our growth in 2010 to be at least twice that of the 2009 to 2008 growth, and target as well to achieve corporate GAAP net profit the second half of 2010.

And now, before we move on to questions, I'd like to hand over to Nati, TowerJazz Vice President, Chief Legal Officer and corporate secretary for some general statements and the legal preamble.

Nati, go ahead, please.

Hello, everyone.

Now I would like to add the general statement and legal preamble to our results, in regards to statements made and to be made during this call.

Please note that the third quarter 2009 financial results have been prepared in accordance with US GAAP, and the financial tables in today's earnings release include financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as established by the Securities and Exchange Commission as they apply to our company.

Namely, this release also presented financial data, which is reconciled as indicated by the footnotes below the tables, on a non-GAAP basis, after deducting depreciation and amortization, compensation expenses in respect to option grants, write-off of in-process research and development and finance expenses met other than interest paid, such that non-GAAP financial expenses net include only interest paid during the reported period.

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

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

Further, the non-GAAP financial information presented in here should not be considered in isolation 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, and is not necessarily consistent to the non-GAAP data presented in previous filings.

The pro forma consolidated operational indicators and results is an aggregation of Tower and Jazz's operational results for periods 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 September 30, 2009, and December 31, 2008, include Jazz's balances as of such dates.

As applied on this call, the term earnings before interest, tax, depreciation and amortization, EBITDA, consists of loss according to US GAAP, excluding interest and financing expenses met, tax, depreciation and amortization and stock-based compensation expense.

EBITDA is not a required GAAP financial measures and may not be comparable to a similarly titled measure employed by other companies.

EBITDA should not be considered in isolation 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.

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

Operator?

Thank you.

(Operator Instructions)

The first question is from Yaniv Rahimi of Ramco.

Please go ahead.

Hello, good afternoon, and good morning for everybody.

First, congratulations for the result.

Thank you.

UMC announced today that their October sales were down from September, showing signs of weakness in technology demand.

Now, my question is, with respect to the guidance you gave, which is much happier, what is the level of visibility, or I would say confidence, you have for the quarter to come?

Very strong.

The visibility is very high at this point and the confidence that we'll ship to the plan is very strong.

Good enough for me.

Thank you.

Thank you.

The next question is from [George Bermann] of GunnAllen Financial.

Please go ahead.

Good morning, gentlemen.

Congratulations.

It looks like you're hitting the ball out of the park.

Thank you very much.

I've got a quick question on -- I don't see any average shares outstanding.

How should we look at the share count at the moment?

You've raised some money recently through some private placements.

Yes, the average share count that they attribute to the EPS calculation is 175 million.

So if you ask about EPS, this is $0.18.

$0.18 for the nine months?

$0.18, one, eight, for the three-month period for the quarter.

For the nine months, this is $0.55.

Okay.

Next question, reconcile your long-term debt for me, some of which I understand from previous calls is non-interest bearing, non-repayable, sort of equity from Israeli investment banks or Israeli government?

So we have -- it's not debt.

It's capital notes.

You're referring to capital notes from Israeli banks and Israeli corporations.

This is really not a debt; this is equity vehicle, which is not repayable.

Like you said, not redeemable, not carry interest, not linked to anything -- this is not a debt.

If you ask about the debt, so we have $200 million from the two leading Israeli banks.

This is not due before September '11, and in September 2011, it starts to be due in eight quarterly installments, until the middle of 2013.

Apart from that, in the Jazz level, we have a Wells Fargo credit line up to $55 million, of which we draw down $27 million.

This is a three-year revolving credit line (inaudible) very strong.

Okay.

How about the Jazz convertible notes?

Yes, the Jazz convertible notes are $120 million of face value, and they are due in December 2011.

So, all in all, if you look at all the debt of Tower and Jazz -- the bonds and banks, there is nothing which its principal is due before the end of 2011, apart from paying interest.

The $416 million that you carry in long-term debt, how much of that is capital notes?

Nothing.

The capital notes are in the equity.

Okay.

Sir, does that answer your question?

Yes, thank you.

Thank you.

Thank you.

The next question is from Eran Jacobi of Leader Capital Markets.

Please go ahead.

Hi, Russell, and Oren.

Congrats on the excellent quarter, and especially on the guidance for the near future.

Thank you.

My question is -- it seems that you are successfully managing and reducing the working capital needs.

So my question is, how should we look at it in the future, since you're in a stage of an aggressive growth?

Yes, so -- it's Oren.

Basically, you're correct.

If you look at Q3 results, so the EBITDA was $15 million positive, the cash from operations was -- one could expect that would be instead of -- it will be $15 million less the interest we paid.

The interest we paid in Q3 is about $3 million, so one could expect it will be $12 million, but the cash from operations is $7 million lower, and this is because of the funding the ramp, meaning in Q3 we purchased inventory to fund this growth and we will enjoy from that in Q4 and Q1 '10 from the collections from customers, all these increasing sales.

So, basically, to your question, I don't think you should expect any burning of cash for sure, but not any burden from that, because today are opposite, on Q4 and in Q1 '10, we will enjoy the higher collection and you should expect cash results to be pretty similar to the EBITDA, less the interest, which is significant numbers, very positive numbers.

Okay, and what about inventories?

So it includes also the inventories.

Inventories, you can see in the balance sheet, we reduced them from $40 million, beginning of the year, now they are at $28 million, so 40% lower, and we don't expect to increase it at all, because we really are now ordering what we need, and we have a huge demand.

We don't expect to increase those levels.

We've also entered into different service agreements, at least with our largest supplier -- equipment supplier, and that agreement entails that they actually control and hold the inventory.

Excellent.

Thank you.

(Operator Instructions)

There are no further questions at this time.

Mr.

Ellwanger, would you like to make your concluding statement?

Yes.

Thank you.

So we have emerged from this downturn as a new company, TowerJazz, with a stronger balance sheet and overall stronger financials.

Our customer funnel is strong, active and continually growing.

According to our guidance, we will leave 2009 with 15% year-over-year growth, singly bucking the industry trend.

And we targeted growth of double that, of at least 30%, for 2010 over 2009.

We truly thank you for your interest and support, and look very forward to updating you on our progress throughout this coming year.

Thank you very, very much.

Thank you.

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

Thank you for your participation.

You may go ahead and disconnect.