高塔半導體 (TSEM) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Tower Semiconductor First Quarter 2021 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, May 12, 2021.

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

I would now like to turn the call over to Ms. Noit Levy, Senior Vice President of Investor Relations and Corporate Communications. Ms. Levy, please go ahead.

Thank you, and welcome to Tower Semiconductor Financial Results Conference Call for the First Quarter of 2021. 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, F-4, F-3 and 6-K filed with the Securities and Exchange Commission as well as filings with the Israeli Securities Authority. They are also available on our website. Tower assumes no obligation to update any such forward-looking statements.

Please note that the first quarter of 2021 financial results have been prepared in accordance with U.S. GAAP. The financial tables and data in today's earnings release and in this earnings call also include certain adjusted financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as established with the Securities and Exchange Commission. The financial tables include a full explanation of these measures and the reconciliation of these non-GAAP measures to the GAAP financial measures.

Now I'd like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.

Thank you, Noit. Welcome, everyone. Thank you for joining our call.

We entered the year with strong customer demand and increasing forecast across all our business units and technology platforms. Our revenue for the first quarter of the year was $347 million, exceeding the midpoint of our guidance, and representing year-over-year 21% organic growth and 16% total growth.

As we stated in the previous quarter call, we expect revenue growth throughout the year and are giving a mid-range guidance for the second quarter of 2021 of $360 million, the highest quarterly revenue in the company's history. This midrange guidance represents year-over-year organic growth of 26% or 16% total growth.

Driven by a significant shift towards 5G-able handsets with the associated increase in 5G content and our market share gains, the first quarter realized the highest RFSOI revenue in our history, with planned further increases for the second quarter.

Our silicon germanium RF infrastructure business continues to grow in the datacom side with very strong demand for 100-gigabit per second transceivers sold primarily for hyperscale data centers, which itself is a strong growth market.

Our silicon germanium telecom-driven 10-gigabit and 25-gigabit per second transceivers used in 5G wireless infrastructure build-out was strongest during 2020, has slowed some in early 2021, with customer expectations for renewed growth later in '21 into 2022.

Total silicon germanium demand is solid with expected year-over-year growth.

Our foundry power IC business is experiencing surging demand with strength in industrial, consumer and automotive segments. In addition to benefiting from a very favorable market cycle, we're uniquely positioned to benefit from growth in electric vehicles with well-established customer base and battery management. Additional new technologies have been developed such as the integrated, very high-voltage capacitor galvanic isolation process announced this past quarter, enabling isolated gate drivers for silicon carbide and gallium nitride automotive power stages, among others.

Our power discrete business is rebounding, with forecasted growth over the coming quarters expected to fully utilize the dedicated discrete capacity at our manufacturing facilities.

Our image sensor business is realizing significant growth throughout the year, driven by both market growth and market share growth in industrial sensors with full recovery of the medical dental markets and incremental new business in 300-millimeter large sensor medical. We expect record yearly revenues in imaging.

First quarter 2021 utilization levels were as follows: Migdal Haemek, Israel Fab 1, our 6-inch in factory, was at 70% utilization. As of today, we've seen increased level of utilization to 80%.

Fab 2 was at 80%, presently at 85%.

Newport Beach, California Fab 3 was at 75% utilization as we continue to adjust for increased silicon germanium mix.

Our San Antonio Factory Fab 9 was at about 70% utilization.

Looking at our TPSCo fabs in Japan, utilization for the 8-inch foundry business was at about 70% rate, being non photo bottleneck limited, which is being addressed in the capacity expansion plan we announced this past quarter.

Our 12-inch foundry business was at about 90% rate, similar level to the previous quarter, but with number of layers being increased following the 2020 capacity expansion.

To summarize, with a strong first quarter as a base, we are thrilled with the business and operational capabilities, enabling a second quarter midrange guidance to be a company-record revenue. Our comprehensive foundry platforms are replete with advanced analog technology differentiation, which is the source of our customer partnerships with the analog industry leaders. We're excited with the prospect of continued leadership expansion throughout the year.

With that, I'd like to turn the call over to our CFO, Oren Shirazi. Oren, please.

Hello, everyone. We released our first quarter 2021 results today, demonstrating a remarkable 16% year-over-year revenue increase, resulting in 98% operating profit increase and 66% net profit increase; and provided a mid-range revenue guidance of $360 million for the second quarter of 2021, which is an all-time record revenue for the company.

In addition, to address our customers' demand exceeding our capacity and to increase our revenue in the mid and long term, we executed our previously announced capacity expansion plan for our 8-inch and 12-inch fabs and issued $150 million purchase orders for manufacturing equipment and facilities, which would result in capacity increase commencing in the second half of this year, targeting full qualification during the first quarter next year.

I will now move to our first quarter P&L highlights and then discuss our balance sheet and cash flow financial statements.

Revenue for the first quarter of 2021 was $347 million, $47 million higher year-over-year, reflecting 16% year-over-year revenue increase.

Looking at our organic revenue, which is defined as total revenue excluding revenue from Nuvoton in Japan, previously Panasonic Semiconductor, and revenue from Maxim in our San Antonio fab, revenue in the first quarter of 2021 reflects 21% year-over-year increase.

Gross and operating profit for the first quarter of 2021 were $70 million and $32 million, respectively. This gross profit is $17 million higher or 33% higher year-over-year. And this operating profit is $16 million higher or 98% higher year-over-year.

Net profit for the first quarter of 2021 was $28 million or $0.26 basic and diluted earnings per share. This net profit is $11 million higher or 66% higher year-over-year.

Looking at the balance sheet, we demonstrated again a strong and stable financial position. A few points to note: Short-term and long-term debt in the balance sheet decreased from $390 million as of December 31, 2020, to $343 million as of March 31, 2021, mostly due to $29 million debt repayment made during this quarter, primarily comprised of scheduled principal payment on account of bond Series G.

In relation to our debt and corporate rating in May 2021, Standard & Poor's Maalot, an Israeli rating company that is fully owned by S&P Global Rating, completed its annual rating review of -- for the company and affirmed a corporate credit rating and bond Series G credit rating of AA- including a stable horizon.

Shareholders' equity reached a record of $1.48 billion.

Deferred revenue and customers' advances balance under current liabilities and long-term liabilities in the balance sheet have increased by $10.8 million and $8.5 million, respectively, reflecting enhanced receipts from customers that have to receive more capacity to address their exceeding demand.

Current asset ratio, defined as current assets divided by short-term liabilities, is strong at a value of 4x.

Our cap table consists of 108 million outstanding ordinary shares and an additional 2 million ESOP-related shares, resulting in a fully diluted share count of 110 million.

And the last note on our cash flow report. In the first quarter of 2021, cash flow generated from operations was $87 million. Investments in fixed assets, mainly for manufacturing equipment was $49 million net. And we repaid $29 million of our debt during the first quarter of 2021.

And now I wish to turn the call back to the operator.

(Operator Instructions) The first question is from Rajvindra Gill of Needham & Company.

Yes, and congratulations on the good results. Question, Russell, on the utilization rate. Thank you for kind of providing that breakdown. Just wondering, given the surge in demand that you're seeing across the different end markets, I was just wondering why these utilization rates wouldn't be closer to kind of 100%. If you could provide any color there.

And then, Oren, in terms of the gross margin kind of trajectory as we go throughout the year, I know in the past you had mentioned that the normal kind of 50% fall-through on the gross profit might occur later on in the year because you're increasing CapEx related to the capacity that could affect the margins. So just wanted to get a sense of how to think about the margin, the gross profit fall-through as we progress throughout the year, as the revenue continues to grow sequentially.

Yes, Raj. Good question on the utilization, I'm actually glad that you asked it. I had thought we had established this, but maybe apparently not well enough.

Our target utilization is 85%. We do not take overrides. For us, a factory could really never run at 100%. Cycle times would almost go infinitely long. So our target is 85%. We can run up to 90% for periods of time. But we do not take a factor against it. For example, at Tower, it's impossible for us to ever talk about higher than 100% utilization. So we really look at it as total photo layers that can possibly be run, and then we have a target number that allows us to have good cycle times, which is the 85%. Again, for short periods, one can always get a little bit higher and be upwards of 88% or 90%. But for our models, the 90% would never be sustainable. So the utilization rates are actually not bad compared to what our target is, and the target is 85%. Oren?

Yes. Thank you for the question. Yes, indeed, what we mentioned in February release still holds in terms of the margin, and I'll repeat that. So what we said is that surely from the ramp-up that we see now, we expect a record all-time revenue for Q2. We expect to enjoy a lot, increased ramp in margins from the second half of this year. And what we mentioned last time that Q1, Q2 margin fall-through, like you define it, will be less than the model because, I mean, still, the margins will grow in dollars. But in terms of percentage, will be a little bit lower because Q1 and Q2, we are first facing increased amount of headcount and some spare parts. Headcount in order to hire the employees that we need to support that ramp, technicians and others and operators, to qualify them. And also spare parts and maintenance in order to qualify the new machines that arrive. So of course, once they will come into play in full steam, like was mentioned before, during H2 and, for sure, in full force in Q1, until that time that we will enjoy the full upside revenue, fall-through for Q1, as you see, it's pretty much a reasonable increase compared to Q4. So we still have some more costs that are not yet attributed to more revenues because those more revenues, you'll see them later in the year. And you already see that in our Q2 guidance.

So basically, Q1, Q2 will show growth in the dollar margin, in the dollar profit, but not as the 50% incremental model. But from Q3, we should see the full fruits of that.

Okay. Very good. That's helpful. And just for my follow-up, Russell, given the severe capacity constraints that the industry is experiencing, particularly on mature legacy nodes, wondering -- and concerns that the supply constraints are going to continue into next year. Wondering how you're looking at the overall cycle from your vantage point, how you're kind of managing capacity. Any thoughts on the broader cycle would be helpful.

So clearly, I am not a market analyst. But we deal with looking at customer demand, customer forecast and we typically only invest in CapEx and capacity expansion when we have customers very committed to be using the expansion. There's obviously nothing worse than increasing capacity than having it sit idle, then the revenue margin fall through that Oren talks about doesn't occur. So we're very confident that the $150 million that we're investing for capital expansion will be fully utilized as the capacity comes online. Some of it is really off of commitments that customers have made to use the capacity. And some of it is just off of very strong relationship and a belief in forecast and the trust that they will hold to the forecast that they're giving.

But I would say that at present, we're very confident that all of what we're buying and increasing will certainly be fully utilized in 2022. Certainly, it's maybe a little bit hard. But we're very committed and confident of the demand cycle that we have continuing.

As I stated, in many areas, our growth is certainly outpacing the industry growth. So a favorable cycle is good for everybody. The old expression when the tide goes up, all ships go up, that's very, very true. But the fact that we're outpacing, I think our guidance for growth Q2 over Q1 against others that have guided already is probably on the very high end for quarter-over-quarter growth. And we really expect growth throughout the year.

So the fact of having market share increases, which I think is pretty obvious that we're having, outpaces cyclicality and shows demand increases.

The next question is from Richard Shannon of Craig-Hallum.

Well, great. Russell, Oren, your last comments about showing share gains. I suspect that was a broad statement, but let me ask it specific to RFSOI. You said you had a record quarter in the first quarter and are growing here. To what degree are you seeing the results here this year coming from share gains versus market growth? Obviously, 5G is a very good market here. But to what degree does share gains also add to it?

It's a little bit hard for me to quantify that. I'm quite convinced that there are share gains though, because if you look at the guidances of some major mobile players, they are flat to down Q1 to Q2, and we're stating that we're going up Q1 to Q2. So that is strongly attributed to share gain.

Now why does that become a little bit difficult for me to quantify? Some of the growth is obviously attributed to the movement from 3G or 4G into 5G, that if you're going from 4G to 5G, you're looking to 30% to 40% increase in content. From 3G to 5G, it's higher. So the revenue growth that we see is attributed to both, it's share gain as new customers gain share and it's content increase. So it's very hard for me to quantify from one quarter to the next.

But I'm quite confident that we're gaining share because some of the customers that we're dealing with are having very, very big revenue growth, which is bigger than the market growth itself, the overall market growth. So the -- but there is a content increase as well on the shift to 5G. And the amount of 5G that's being used presently is substantially higher. I think it went from somewhere, what, about -- from what analysts say, from 250 million units of 5G in 2020 to this year at expected 500 million units plus/minus. So that convolutes the statement.

But I would certainly say that the customers that we're growing with are either gaining share themselves or growing in 5G.

Okay. And Russell, to my question on the last conference call, you answered you thought your share in RFSOI was somewhere in the 20s. Where do you think that can go? I mean, is this something where you think you get into the 30s over the next couple of years? Any way you'd either qualify or quantify that answer would be great.

Our expectation is well into that, we're in the 30s. I don't know that I would be able to quantify that as I'm not necessarily giving a long-term forecast. But if I were to look at the demand that's being placed in the customer growth expectations, certainly, I think the 30s is very realistic.

Okay. That's helpful. One last question for me, I'll jump out the line here. We've seen some pricing of raw materials, whether they are substrates or other things that are going up here. When asked in the past here about the tightness you've seen from a capacity point of view, you said you wouldn't necessarily -- you wouldn't generally raise prices here. But are you seeing raw material prices rising to you? And are you able to pass those along to your customers in any manner?

Everybody has price increases from time to time. We're not seeing any substantial increase in raw materials. Certainly, there is increased cost in some infrastructure, power is going up. But the point of ASP increases, we are -- we have with -- almost across the board, we have ASP increases ourselves. And some of the ASP increases really deals with just very strong customer relationships. And they're understanding that to increase capacity, we have to make sure that there's an ROI on it. So we have a good cooperation with customers. And I think that the Q3, Q4 will see higher ASPs. I don't think, I know we will, from the base of customers that we're serving.

The next question is from Mark Lipacis of Jefferies.

Great. I had a few. The first one on the -- there was an increase in the financing and other expense line item in the income statement. Can you just review what was the driver of that? And how should we think about modeling that line item going forward?

Thank you, Mark, for the question. Yes, you shouldn't model it going forward. It was a onetime nonrecurring item which was mostly attributed to a journal entry associated with the yen denominated asset that was impacted in Q1 by a movement of the Japanese yen against the dollar that moved by coincidence between December 31 and March 31 from 102 to 110. There is no cash flow impact of that and there was no economic exposure related to that. Hence, we didn't do any hedging for that because this is just a GAAP balance sheet item, that the changes of it impacting the P&L, but there is no cash flow or economic exposure here. So basically, this is not expected to recur because we made changes during Q2 already to this JPY asset that the terms of this JPY asset that will result in that there will be no finance income even in the P&L for what was. So it should be actually no.

Got you, Oren. That's very helpful. That's very helpful. And the second question I had, Russell, maybe for you. Some semiconductor device makers are talking about getting longer lead time orders from their customers, which is, I think, often normal at this part of the cycle. But some are talking about again, making those orders noncancelable. How do you think about this idea of having noncancelable orders on your books? And maybe if you could put that in the context of your earlier comment that you don't like to add capacity unless your customers are committed. What is that -- could you maybe describe what does that mean that they're committed? Because I understand adding capacity can take a long time. And that suggests that there's a longer visibility into those orders for that capacity that's going to get built in the future. And then I have one last follow-up after that.

Mark, so actually -- it's Oren. Actually, in all our terms with our customers, it's a noncancelable PO, meaning they cannot can sell the purchase orders even today. It's already that way for years. And it was very rare occasions that customers really ask to cancel and very rare. They do have a right some time in some of the -- for some of the customers for some of the purchase order to ask to hold a certain wafer, a certain wafer that are in the line to hold it for a few days, not more than usually 30 days or 90 days and then continue the work. But to cancel a PO or to cancel a commitment, this is not even an option that is given. And it's acceptable for us, at least with our customers, and history shows, I mean, I'm here 22 years in different functions, and so maybe less than a handful of request, not request -- less than a handful of cases where we agreed to, like you say, cancel a PO or something like that. I mean, it does not happen.

And as far as long-term commitments, there are several mechanisms that we have used and continue to use on long-term commitments. One is prepayment that only goes back against a certain amount of wafers over certain periods of time. Others are contracts that ensure a minimal amount of what the customer must buy and a maximum amount of what we must supply. And then it comes a third part, and that's really just our trust with certain customers on their word of what they're going to be buying and that they will buy those amounts.

Got you. That's very helpful. And then last question, if I may. I understand that you're adding capacity in your higher-margin products. For the existing capacity that you had, is there like an ability to shift that to higher-margin products? And can you, Russell, just describe what -- you talked about potentially getting higher prices. Can you just describe how the pricing process works? Is this something that happens annually and if you happen to catch it, the timing on an up cycle then you're in an advantaged position over -- or if you're in a down cycle, you're talking about pricing and you're -- it kind of sets you up for a different scenario -- profitability scenario for the next 12 months? Can you just review how that process works? And then that's all I had.

So I can talk about our philosophy and how we work it. And we have a certain run rate with any given customer with a pricing that we've given them. For those run-rates, we don't increase prices. When there's a request from customers for increasing the run-rate, independent of the platform, and there's a competition for that incremental capacity, we'll agree with customers for a raised price in order to give incremental increase.

Obviously, if you see revenue going up, as it is this year and as we forecast it to continue through the year, there's incremental capacity that's being used, and that incremental capacity is really at a premium.

Other customers, just in order to ensure capacity over time, will agree to higher prices. That's good for them because margin dollars are margin dollars. To maximize margin percent and reduce margin dollars by not being able to get increased capacity doesn't make sense. I mean, it's the dollars that you're dealing with. And it's from both sides. It's the same with us.

So it works in both ways. Hopefully, that answered your question.

The next question is from Cody Acree of Benchmark.

Just a couple of quick ones. The lead times, Russell, are you -- have you seen any extension in your lead times, delivery lead times?

Certainly, if you were to look at the middle of 2020, when everything was really down for a variety of reasons, cycle time when you're at very low utilization is phenomenal. If you -- that's what you're talking about, I think, is our cycle time, right?

Yes, it is. Yes, it is.

So yes, our cycle times have extended a bit. That's normal as you're going up in utilization. I don't think that we're out of the ballpark on cycle times, but the higher the utilization is, the higher cycle times become.

Very good. I guess as you look at the capacity that's coming on, maybe for Oren, the expense of the capacity or the carrying cost of the capacity to your cost of goods sold. I would think that as that production capacity goes into revenue, it starts to generate revenue that, that's when you would transfer the costs into your income statement into cost of goods sold. And therefore, as it starts generating revenue, you're starting to see those margins decline or margin pressure. But Oren, it sounds like are you accounting for that, the carrying cost of the additional capacity differently?

No. That's true what you're saying, but you have to know that when you have additional cost, for example -- let's take example. In Q1, we had to hire more people in order to train them, operator technicians in order for them to be ready for the Q3, Q4 increased capacity, right? So when you hire those people and you pay them payroll in Q1, unfortunately for me as a CFO, I need to pay that payroll. So when you pay the payroll, you cannot capitalize it to the cost of the project or to the cost of the capital, and you cannot carry it forward and not recognize it in the P&L at the time you pay the payroll. It's not a capitalized item.

Same for spare parts. We need to buy more spare parts just in order to qualify the new machines. You cannot capitalize it to the cost of the machine according to GAAP.

So actually, what happens is before you start to enjoy those revenue, those increased revenue, you already suffered from the extra cost.

I see. I see. And Russell, lastly, on your discussion of share gains, everybody is scrambling right now for supply, almost regardless of where you are in the food chain. I know in the past, historically, you've kind of had a policy that you were not the second source. You were not kind of a buffer supply of your products to your customers for any given designs. Is that still the case? Or have customers been coming to you to help to fill the gap they might be getting from others? And if that's the case, how sticky do you think that share gain may be?

It's a very good question. Certainly, there's opportunities that we've been given because people have been put on allocation. However, before we would accept that, it's off of committed and guaranteed capacity usage from the people. So they would be committing to X amount of wafers per month over periods of time. So that's the first part of it.

But the bulk of what we're growing is existing customers that are growing in their markets. And hence, the share gain deals there. In the case of power management, we're really gaining a lot of new opportunities. Some of it's taking away customers from other suppliers for platforms that are superior. Some of it really was initiated because of customers that are now looking for other suppliers not for an over -- in our case, not that we would use it as an overflow supply, but it would be platforms that would be qualified and be used with us for their needs.

The very fact of being analog, it's not so easy to just be an overflow supply. The more specialized the device outputs are, the more difficult it is to just go to supplier B for 10% overflow, because the qualification to their customers of analog parts, it's quite extensive. So the -- it's not really something that's done. It could be done with the mixed-signal part. It could be done that's really much more digital or with pure digital parts or parts that have huge digital content. But it's very difficult for a customer to use us for overflow with the type of products that we supply. Once they're qualified, they're really -- whatever SKUs are being sold are pretty much our SKUs, no matter what.

Great. Russell, and then lastly, just any of this with your customers of wanting to guarantee capacity or at least make commitments to wafer demand, has there been any contribution of capital to -- for guaranteed capacity?

Yes.

Any color?

I'm sorry, please?

Any color?

I think you can see it on the financial statement. Oren?

Yes. If you look at the balance sheet, you'll see actually -- and by the way, I mentioned it in my script, in my prepared remarks, that we have $10 million and $8 million increase in the line called in the balance sheet deferred revenues and customer prepayment, which is -- and like I mentioned, customers that ask for additional capacity. So they paid upfront, which is not revenue, and this is why it's in the balance sheet and not in the P&L.

Mr. Ellwanger, would you like to make your concluding statement?

Certainly. Thank you. Once again, I really do thank all of you for your participation and interest in Tower. We're very excited about where we're at, extremely thrilled with the opportunities in front of us and expect to have a very good ride this year and next year and are very happy to have you along with us for the ride.

We are very welcoming to further interactions in many, many ways. We have multiple upcoming events. We'll host one-on-one meetings at the following conferences. On May 17, we have the 18th Annual Needham Virtual Technology Media Conference. On May 21, we're attending the Oppenheimer Israeli Annual Virtual Conference. On June 2, we're at the 18th Annual Craig-Hallum Institutional Investor Conference. And on June 8, we're at the Needham & Company's Fifth Annual Automotive Technology Day. So certainly, we would encourage all and any to sign up for those conferences and participate in the one-on-one sessions or three-on-one, five-on-one, whatever they turn out to be, sometimes 10-on-one, twenty-on-one. But seriously, we encourage your attendance there. But not just that, we're very open to having discussions at any time about what we're doing, how the market is moving and our position within it.

So just in closing, we're looking forward to a very good year and very happy to share the results and rewards with you. Thank you very, very much.

Thank you. This concludes the Tower Semiconductor first 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.