高塔半導體 (TSEM) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the TowerJazz fourth quarter and full-year 2013 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 February 27, 2014.

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

I would now like to turn the conference over to Ms. Noit Levi, Director of Investor Relations and Public Communications.

Ms. Levi, please go ahead.

Thank you, and welcome to TowerJazz's financial results conference call for the first quarter and full year 2013.

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.

TowerJazz assumes no obligation to update any such forward-looking statements.

Now I'd like to turn the call to our CFO, Mr. Oren Shirazi.

Oren, please go ahead.

Thank you, Noit, and welcome, everyone.

I will start by providing our P&L results highlights for the fourth quarter and fiscal year 2013 and then discuss our balance sheet.

Revenues for the quarter were $135 million, a 20% improvement as compared to the first quarter of 2013, an 8% improvement as compared to the second quarter of the year and a 2% improvement as compared to the third quarter this year.

It is important to mention that this growth is in contrast to other industry players who have reported an average of 8% to 10% sequential decrease in revenues.

Comparing to 2012, revenues were lower solely as a result of the winding down of the Micron committed volume agreement in our facility in Japan during 2013, as we had announced would happen.

However, our core business revenues and margins for the full year and for the fourth quarter of 2013 demonstrated organic growth of 6% and 25% respectively.

On a non-GAAP basis, gross profit and operating profit for the quarter were $46 million and $28 million, respectively, representing 34% and 21% margins.

This is significantly better than the $39 million and $21 million reported in the previous quarter, with margins of 30% and 16% respectively.

Net profit on a non-GAAP basis for the quarter was $19 million, or $0.40 per share, higher than the $12 million, or $0.20 per share, reported in the previous quarter.

Net profit margin increased from 9% in the previous quarter to 14% in the current quarter.

For the year, reported non-GAAP growth profit and operating profit of $163 million and $90 million, respectively, representing margins of 32% and 18%.

Non-GAAP net profit for the year was $56 million, or $1.41 per share.

Our EBITDA for the quarter was $27 million, as compared to $21 million in the previous quarter.

On a GAAP basis, the net loss for the quarter was $29.8 million, or $0.62 per share, versus $31.8 million, or $0.68 per share, in the previous quarter.

For the year, the GAAP net loss was $108 million versus $70 million last year.

In regards to our cash flow report, during the quarter, we generated $23 million of positive cash flow from operating activities, excluding interest.

We repaid $7 million of bond principal payment and $12 million in interest and invested $20 million in fixed assets.

For 2013 as a whole, we generated $75 million in positive operating cash flow from operating activities, excluding interest, and $40 million proceeds from the June 2013 rights offering, which were offset by $7 million of owned principal payment, $33 million in interest, and $77 million investment in fixed assets.

I will now go over the balance sheet analysis as of the end of 2013.

In December 2013, we signed definitive contract with Wells Fargo Capital Finance Bank, providing us with up to $70 million in credit line maturing December 2018 at an interest rate of between LIBOR plus 1.75% to LIBOR plus 2.25%.

To date, we only drew down $19 million towards such $70 million credit line.

Overall, our balance sheet financial ratios as of December 31, 2013, has improved.

Our net kind assets increased from $129 million at December 2012 to $150 million at December 2013.

Our current ratio, which was 1.8 times as of the end of 2012, now stands at 2.1 ratio as of the end of 2013.

Our shareholders' equity was $141 million at the end of the year, and cash balance at the end of the year was $123 million.

As of yearend, our issued and outstanding ordinary share count was 48 million in ordinary shares, of which approximately $18 million, or 37%, were held by the Israel Corporation.

Israel Corporation has stated during 2013 that it is a long-term shareholder and supporter of the Company, and during 2013 also exercised 100% of its right to invest $17 million in TowerJazz rights offering, demonstrating its belief in our business.

Israel Corp also converted during the year all its capital notes into shares and have to date not traded or sold any of it.

The number of capital notes outstanding is only 8 million as of the year end, held by our two lending Israeli banks, a reduction of 67% in the number of the capital notes from 26% as of December 2012.

In summary, we continued this quarter to increase our revenue, which drew quarter over quarter throughout all of 2013.

We continue to improve our margins, strengthen our balance sheet with the Wells Fargo $70 million revolving credit line, and continue to progress in the two strategic transactions in regards to India projects and Panasonic joint venture, on which Russell will elaborate in more details.

And now I wish to turn the call to our CEO, Mr. Russell Ellwanger.

Thank you, Oren.

And thank you all for attending the call.

During this year, we achieved approximately 450 new design wins and over 16,000 new masks entered our factories, representing a year-over-year increase in masks to the factories of 25%.

The photo masks released to the factory is the last formal step in the design development cycle before the start of product manufacturing.

The 25% year over year demonstrates effectiveness in realizing the customer projects and the sales revenue funnel and provides a strong positive indication with regard to our revenue and utilization performance for this present year and the upcoming years.

I'll spend a little time talking to the joint venture agreement we signed with Panasonic, which was announced on December 20, 2013.

This was among the most important and strategic events in TowerJazz history.

It will enhance our leadership and I believe will create immediate value that will continue to grow over the mid- and long-term.

The JV will provide us with high capacity, as well as multiple world-leading analog platforms of the highest quality, together with advanced 300-millimeter capability and technology nodes.

The JV is expected to close in April 2014.

This JV will be highly accretive from day one and is expected to provide us with a baseline of $400 million annualized Panasonic-based business, on top of which there is substantial open capacity for external foundry customers and subsequent incremental revenue.

Panasonic has committed to acquire its products from the JV with a volume agreement of at least five years.

We will hold 51% of the JV, Panasonic 49%.

For our stake, we will pay Panasonic in ordinary Tower shares, valued at approximately $8 million, based on our average share price in March 2014, with Panasonic then being a minority shareholder of TowerJazz.

Within the scope of the JV, Panasonic will transfer all of its semiconductor manufacturing processes and equipment of its three Hokuriku factories in Japan to the joint venture.

The joint venture will continue the production of Panasonic's own semiconductor processes, but now as Panasonic's foundry supplier, and then together we will expand operations by leveraging our customers and businesses to capture out-of-group sales.

On the technology side, the joint venture provides us some new cutting-edge capabilities.

The JV adds multiple additional specialty flows, including Panasonic's world-class, high-definition, front-side illumination, low dark current, CMOS Image Sensor technology, and high-voltage SOI-based power management technologies.

Panasonic's high-definition FSI is a world-leading CMOS Image Sensor benchmark technology for high quantum efficiency.

It is a unique technology that enables the use of front side illumination, even for small pixels, against the current industry trend of using expensive and less efficient backside illumination.

Panasonic's dark current performance, CMOS Image Sensor technology is known to be of the best in the industry, not only due to the average very low dark currents, even at elevated temperatures, but also with extremely small tails of high dark current pixels known as bright pixels.

As a result, Panasonic's technology allows excellent images at low-light conditions.

Already we have begun engagements with multiple, first-tier, brand-recognized, high-end camera-makers for applications our internal technologies could not serve prior to this joint venture.

The production of high-voltage silicon-on-insulator, SOI, technology from Panasonic immediately extends our Bipolar-CMOS-DMOS, or BCD offering, from 80 volts to 190 volts, enabling our entry into new display driver, industrial, and medical markets, which were previously not accessible to us.

I want to stress that this partnership with Panasonic brings together two leaders, Panasonic, an acknowledged analog components and systems leader, and TowerJazz, a recognized analog foundry leader, and creates a company that will serve and grow the analog foundry space as no existing single foundry company can.

Upon the closing of this transaction, which as I mentioned is expected to be in April this year, we will have four factories in Japan.

This will give us room and opportunity to rationalize and lower some costs in our Japanese business, which may include fab consolidation between our Nishiwaki facility and the joint ventures facilities.

We are currently evaluating the options and potential ventures for the Nishiwaki facility.

As soon as the decision is made, we will share this with the market.

A second very significant event was that, according to the Indian government announcement, our consortium won the tender to establish a fab in India.

Together with our partners, a leading Indian infrastructure company, JP, and a worldwide technology leader, IBM, we would set up a 300-millimeter semiconductor wafer fabrication facility, including building and operating it, while supporting a capacity of 40,000 wafers per month, with technology nodes ranging from 90-nanometer down to 28-nanometer.

According to the Indian government announcement, our consortium should receive a letter of intent by the end of March this year and a final agreement is expected to be signed by August 2014.

This represents a major opportunity for us, enabling us to have greenfield foundry capability in the highly important and growing Indian market that has a strong emerging semiconductor sector.

Once the project begins, it will provide us with a major revenue stream, first during the portion of fab build-up and, secondly, once the fab is operating.

Now to discuss the performance and developments within our various business units.

Revenues from our CMOS Image Sensor business unit grew by approximately 20% as compared to 2012.

We expect it to grow substantially in the coming two years and beyond.

Design wins of CMOS Image Sensors over the past two years have totaled 75 different products.

As you know, this business unit targets the markets of high-end photography, cinematography, and broadcasting segments, as well as medical and dental X-ray sensors, high-end industrial, [high-frame rate] sensors, automotive and security sensors, and 3-D sensors for gesture control applications.

The high-end video market is in a worldwide growth phase, which we are enjoying.

Our market share in the high-end photography and broadcasting segment is now close to 50%.

The two leading cinematography camera suppliers, and one of the market leaders in broadcasting segment, are making their sensors exclusively with us.

The dental X-ray market, we are the market-leading supplier with over 70% market share and intra-oral dental sensors.

We are growing substantially in the extra-oral market, with two new major suppliers that are wrapping to volume production this year.

The industrial sensor market, growing at a 30% CAGR, is also an important sector for us, where we are delivering high volumes for several of our European customers.

Last year, we announced a large deal with a market leader for a consumer 3-D gesture control sensor.

We expect this to move into volume production during 2014 with a major app in 2015 and 2016.

As I mentioned earlier, the new exciting joint venture with Panasonic opens an outstanding growth path for our CIS business unit, with Panasonic's 12-inch 65-nanometer CIS technology.

We plan to use this facility to penetrate new markets, such as high-end DSLR for professional photography and high-end security cameras.

Panasonic's extremely high-quality process, including their outstanding high-definition FSI, combined with our stitching technology is very appealing, and we are in active discussions with customers about high-volume, high-margin opportunities.

Our RF and high-precision analog business unit is performing strongly, and we expect it to grow at a CAGR of 60% from 2013 through 2015.

The strong growth is predominantly driven by gains in two markets, front-end modules for mobile platforms, such as cell phones and tablets, as well as wired or optical high-speed communication links for data centers and network infrastructure.

In the area of mobile front-end modules, we are experiencing strong adoption of our industry-leading RF SOI technology and have received over 92 parts taped out from 16 customers since the start of 2013.

Revenue growth has followed this tape-out activity, having come from only a small contribution in the first half of 2013 to approximately 5 million per quarter revenue run rate currently and is expected to contribute a total of over $40 million in 2014 and significantly more in 2015.

To expand our content and mobile platforms beyond RF SOI, we are currently sampling silicon germanium power amplifiers to the same customer base.

Silicon germanium power amplifiers are expected to begin production in 2014, with a strong ramp in 2015, adding growth opportunities beyond that of RF SOI alone.

Finally, in the area of front-end modules, last year we announced partnerships with Cavendish Kinetics for RF MEMS to improve mobile phone reception and with Nujira for envelope tracking to reduce mobile phone power consumption.

Both of these activities are progressing well and are expected to contribute wafer revenue in 2014 with stronger growth in 2015.

In the area of high-speed communications, we've begun gaining design wins for optical fiber front-end devices with our latest generation silicon-germanium technology with over 40 products from multiple customers taped out in 2013 on this technology alone.

This segment of our business is lower volume than the mobile segment, but remains higher margin as we deliver a unique value with an industry-leading process technology, and hence, ASPs remain as much as twice as high for this mobile segment.

In our power management business unit, the growth potential from our 0.18-micron BCD technology serving power management, audio, and display driver products for consumer and enterprise markets, as well as our 700-volt technology, serving commercial LED lighting and motor driver markets.

We expect this business unit to grow at a CAGR of about 60% from 2013 to 2015.

Our 0.18-micron BCD technology has best-in-class features, which resulted in over 40 design wins in Q4 2013 alone.

Our growth in this segment is driven by the shift from IDM domination to a consistently increasing share going to our fab-less and fab-lite customers.

With our 700-volt technology, we have been ramping production for LED lighting and have now delivered design kits to lead customers on a next-generation 700-volt eight-inch technology.

This platform saw very strong adoption in Korea and China in 2013.

According to customers' forecast, this platform should create annualized revenue of $30 million in the short term, up from $2 million in 2013.

In terms of the TOPS business unit, we continued our joint development programs with our existing customers for next-generation products.

IDM transfer revenues increased by approximately 40% in 2013 over 2012.

We recently won two projects from two additional tier one customers, and prototyping has started at our facilities.

We expect to manufacture thousands of wafers per month for each of those customers by the end of this year.

We have also begun transferring the flows of one such customer into the Panasonic joint venture.

In terms of other developments, in 2013, we announced a large contract to build full-flow infrared sensors that will include significant investment by our customer in equipment and process development in our Newport Beach facility.

This project is progressing on or ahead of schedule and has the potential for substantial wafer revenue in 2015 in a market that we previously did not serve.

We see the infrared detector market as a very high-growth area, as they are adopted on consumer platforms, such as next-generation mobile phones and gaming devices.

So to summarize, we entered 2014 in a very strong position.

Having realized substantial core business growth, which we now expect to see propagate throughout all of 2014.

The Panasonic JV on top of this, with its direct revenue and associated ability to consolidate, and, hence, potential step function improvement in bottom line performance, provides [devout momentum] for 2014 and the following years.

In parallel, according to the Indian government releases, the India fabs should also add incremental value.

With that, I'd like to hand the call over to Noit.

Thank you, Russell.

Before we open up the call to the Q&A session, I would like now to add a general and legal statement to our results in regards to statements made and to be made during this call.

Please note that the fourth quarter and full-year 2013 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 table on a non-GAAP basis after deducting depreciation and amortization, compensation expenses in respect to options grants, and finance expenses net, other than interest accrued, such as non-GAAP financial expenses net, includes only interest accrued during the reported period.

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 the reconciliation between the non-GAAP financial measures and the most comparable GAAP financial measures.

EBITDA as presented is defined in our quarterly financial release.

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

EBITDA and the non-GAAP financial information presented herein should not be considered in isolation or as a substitute for operating income, net income, or loss, cash flow provided by operating, investing and financing activities, fair share data, or other income or cash flow statements data prepared in accordance with GAAP, and is not necessarily consistent with the non-GAAP data presented in previous filings.

I would like now to turn the call over to our operator.

Operator?

Thank you.

(Operator Instructions).

The first question is from Jay Srivatsa of Chardan Capital Markets.

Please go ahead.

Yes, thanks for taking my question.

Russell, in the press release, you've stated that you expect to get to $900 million in revenue run rate by Q2 and then surpass $1 billion while getting -- while becoming GAAP profitable.

Can you give some timelines on when do you expect to get to $1 billion in revenue run rate and when you hope to be GAAP profitable in fiscal '14?

So the surpassing $900 million we said is our target for Q2, and that's as a function of the closing of the Panasonic joint venture, which is progressing extremely well.

We forecast in addition very nice growth, as I mentioned, the 25% organic growth, Q4 2013 over Q4 2012, and within our plan this year, we should be -- well, we are seeing it within our plan that we're going to realize a lot of that on a continuous basis.

So we would target to get upwards to the billion-dollar run rate in Q4.

Will we hit it in Q4?

Will we hit it in Q1?

You know, that's -- I'm not sure.

But I think we'll be fairly close to hitting it in Q4, if we don't.

The same thing with the GAAP net profit.

You know, I can't honestly commit at this point that we'll have GAAP net profit in Q4, but I can certainly state that we'll see a significant shift in the GAAP results over Q2, Q3 and Q4.

And, you know, we're targeting again the GAAP net profit at the earliest point, but not just as a one-time event, but as a sustainable model.

All right.

Oren, in terms of gross margins, you had a nice upside in Q4.

But as you look at the Panasonic business coming in, what do you expect the margin profile to look like?

So it's a good question, because obviously when Panasonic gives us a five-year committed contract for such a big amount, of course, this is covering the fixed cost, but shouldn't be like the best margins ever, so it's a good question.

However, we believe that in order to actually accomplish what Russell said and becoming this huge amount of revenue, so our internal incremental growth of the [co-business] will be such good margins that together with the Panasonic lowest margins we'll actually leave the margins result -- end result average -- weighted average result like it is today, so to maintain those margins.

So, Jay, I think in line with what Oren answered and further answer to your question, the Panasonic agreement is a very, very good agreement that for the most part covers -- comes close to covering fixed cost of the facilities.

What that means, then, is that as a joint venture, every incremental dollar that you bring in is coming in at very high margin.

The sector that I had talked about the most in the call was the high-end image sensor sector, focusing that on 300 millimeters, which is itself a very high-margin sector.

So if you look at a high-margin sector coming into facilities that have some of the costs already taken care of, then you can see that maybe the initial few quarters of the JV, although the revenue is accretive and there is EBITDA that's accretive -- it's not at the highest EBITDA percentage.

But the base that that allows with probably, you know, a huge amount of capacity that's available to grow very nice margin on top of the base, it's -- it's really eye-opening and an outstanding model.

Okay, understood.

In terms of the Indian opportunity, looks like it's seems to be progressing pretty well here.

When do you expect to -- for it to close?

And when do you expect your first revenue contribution from that project?

Is it fiscal 2014 event?

Or is it more likely in 2015?

So on the government website of a few weeks ago, they announced that the cabinet had decided that we were going to receive -- our consortium was going to receive an LOI in March timeframe, and they said that the total closure was targeted for August.

More than that, I can't say.

And, you know, when we talk about the Panasonic joint venture, the closing of that -- again, though surprises can come up in most anything -- but you have two partners that have developed a very strong relationship that have a communication partner that you're dealing with, you have similar views, you have similar desires, similar goals, and you're really working with each other with addresses that you know.

Hence, when we say we're very confident about the closing of the joint venture in the April timeframe, that's something we can say with a lot of surety.

On the India, Jay, it's hard for me to state exactly when it will close.

I can only say from what the government released.

But beyond that, I couldn't say.

If it goes by that schedule, and it does close in August, then I would think that we would start to see substantial revenues in 2015.

And that revenue we would see is very high-margin revenue.

Okay.

And then last question from me.

In terms of the Nishiwaki fab, when you acquired that, the intention was that you were going to transfer some of your process flows to it and use that capacity.

But it looks like from your comments you're now thinking of divesting it or -- or shutting it down.

Can you expand on what happened and what prompted you to look at it that way?

I don't believe we said anything about shutting it down.

We're evaluating various options.

Certainly, one has to take in consideration how much capacity do you have and what is the fixed cost of that capacity, which is the considerations we're looking at right now.

As far as the facility itself, it's been an excellent facility, and it's done a very nice job for us, with very capable engineers.

We have transferred flows into it.

We've transferred our own -- we've transferred customer flows there.

So -- but that's really all that we can say at this point.

Thank you.

The next question is from [Ziv Gil] of [Ramone Investment Funds].

Please go ahead.

Hi, all.

I have a continued question on the fab -- Nishiwaki fab.

I'm trying to understand the flexibility here.

Assuming fab four has low utilization rates, can you actually shift processes and flows to the Panasonic?

And if so, what is required to enable you to do that financially and process-wise?

And what would cause you to do that?

I understand -- I'm not sure you want to say a lot, but if you can just, you know, try to give us some color on this?

Sure.

From the power management flows that are being run in Nishiwaki, those were transferred from Migdal Haemek.

So from day one, the dual sourcing of those flows was available.

To transfer a customer from Nishiwaki to Migdal Haemek is not a burden at all.

There's minimal, if any cost involved, and the flow is already qualified, so that itself is not an issue.

We have some TOPS business that we've done in Nishiwaki, to where we've taken customer flows and have qualified those or in the process of qualifying them in Nishiwaki.

That takes a little bit more work and a little bit more energy to transfer that elsewhere.

But for the most part, the tool sets between Nishiwaki and the Panasonic Tanami factory are very similar.

And after having acquired the Nishiwaki facility, the tool sets between Nishiwaki and Migdal Haemek are certainly compatible.

Does that answer your question?

Partly, but I understand.

Thank you.

Okay.

The next question is from George Berman of JP Turner.

Please go ahead.

Good morning, gentlemen.

Thank you for taking my call.

Always our pleasure.

I've got a quick question.

Your Company's valuation has finally started to rise a little bit.

You did a rights offering that entailed with the customers receiving some warrants.

When are those warrants exercisable?

And how much additional capital would you raise if all of them were exercised?

Yes, so what we issued, it was a year ago, it's up -- it's warrant -- it's $5 million warrant at 7.33%, so the total amount that the Company can get from that is almost $40 million.

If it's exercised, it's exercisable for a period of three years, so usually people tend to hold them and do the election is to convert in the end, but everybody can actually exercise them any minute, if you want.

So if I wanted to, I could exercise them now?

Yes, it's possible, only for cash consideration, okay?

So it's not possible at cash-less or anything.

It's really cash investment in the company at $7.33.

If somebody that holds the warrants want to appear.

And that would obviously be a welcome cash infusion for your future growth objectives, correct?

Correct.

That would be a welcome cash infusion for further growth initiatives you have.

Yes.

Yes.

Okay?

Next, a question.

The large capacity now coming online with Panasonic, how are you situated in filling the burgeoning capacity or demands of the Chinese market?

We've actually had a very, very strong growth in China.

It's at this point not a huge portion of our business.

But I'd have to go back to the exact numbers.

I think we had a revenue growth of more than 2X this year, meaning in 2013, of the Chinese business.

Where we're seeing the biggest traction right now in China deals with 700-volt for commercial lighting drivers, LED lights.

And that is being done within our facilities in Israel.

So it's going pretty nicely.

But although we have activities focused in China, the biggest areas of our engagements there, again, deal with the high-voltage power management, the 700-volt, and also with the front-end module that had mentioned.

So we had mentioned, I think, the exact number, maybe it eludes me, but over 90 new parts that came in for SOI switch in 2013.

There's a nice number of those that are in the China market.

Okay.

Then one more quick question.

On the Panasonic deal, you stated in your press release that the only payment would be X amount of shares of Tower Semiconductor issued at a price prevailing sometime in March when the deal closes.

Is that still the fact?

Yes, sir.

So you basically add up all this capacity without any cash outlay?

Yes, sir.

That is a brilliant move.

Thanks very much.

Look forward to your future results.

Thank you.

There are no further questions at this time.

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

Yes, certainly.

Really, as always, we very much thank our customers for their trust in us as a long-term partner, the type of business that we run, the specialty analog.

A good portion of our customers use us as a sole source, and that does take faith, confidence, and real partnership, so, really, thanks very much to customers.

We're very, very thankful for the investors that believe in us, stay with us, and we think that at this point we are really at the most exciting time in our recent history and see us being on a bottom-line basis, as well as top-line, a very, very different company by the end of 2014.

So, thank you very much.

Thank you.

This concludes the TowerJazz fourth quarter 2013 results conference call.

Thank you for your participation.

You may go ahead and disconnect.