Yahoo Finance Tower Semiconductor Ltd. (NASDAQ:TSEM) Q1 2024 Earnings Call Transcript
Tower Semiconductor Ltd. (NASDAQ:TSEM) Q1 2024 Earnings Call Transcript May 9, 2024
Tower Semiconductor Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Tower Semiconductor First Quarter 2024 Financial Results Conference call. All participants are currently 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 9, 2024. Joining us today are Mr. Russell Ellwanger, Tower CEO; Mr. Oren Shirazi, CFO. I would like to turn the conference call over to Ms. Noit Levy, Senior Vice President of Investor Relations and Corporate Communications. Ms. Levy, please go ahead.
Noit Levy: Thank you. And welcome to Tower financial results conference call for the first quarter of 2024. Before we begin, I would like to remind you that some statements made during this call maybe forward-looking and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected. These uncertainties and risk factors are fully disclosed in our Forms 20-F and 6-K, 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 2024 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. We have a supporting slide deck that complements today’s conference call. This presentation is accessible on our company’s website and is also integrated in today’s webcast for your convenience. Now, I’d like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.
Russell Ellwanger: Welcome, everyone. Thank you for joining our first quarter of 2024 earnings conference call. I have been looking forward to this opportunity to discuss our performance and positive outlook. Revenue for the first quarter was in the upper half of our guidance at $327 million. We delivered a net profit of $45 million, representing a net margin of 14%. For the remainder of 2024, our target is to achieve quarter-over-quarter revenue and margin increases. Our guidance for the second quarter is for revenue to be $350 million, plus-minus 5%. I’ll now provide a breakdown of Q1 revenue per major technology group. For reference, please see Slide 3. I’ll refer to the business momentum we see for each group and highlight significant achievements.
RF Mobile, predominantly RF SOI, represented 37% of revenue in the first quarter of 2024, a strong increase against the 2023 run rate. We continue to experience strong demand from RF SOI customers. Our 300-millimeter RF SOI capacity at Uozu is fully utilized. We are addressing excess demand by transitioning some production to Agrate, where we are currently working through final steps of production qualification towards production ramp, which remains on track with the planned schedule. This transition and capacity expansion will extend through 2024 into 2025 to meet the forecasted growth in customer demand. Wrapping up the new facility in Agrate will bring, as previously communicated, some expected reduction to margins in the short-term due to added depreciation and startup costs, but will be offset and become accretive with the ship volumes we expect to achieve within the first half of 2025.
This is enabled by an accelerated corridor for profitability through having partnered with ST. We continue developments in 200-millimeter and 300-millimeter RF SOI technologies, setting industry benchmarks in efficiency and power handling, having customer-demonstrated sub-60 femtosecond Ron-Coff, enhancing battery life and signal receptions in handsets. Please see Slide 4. The increasing RF content in 5G handsets drives market growth, and our technological advancements have captured increased market share. This momentum is expected to be strong throughout all of 2024 and expected to be so for 2025 as well. RF Infrastructure business represented 14% of revenue this quarter, an increase from 10% in the fourth quarter of 2023. During the past quarter, we experienced strong performance in our RF Infrastructure business where we provide optical transceiver components such as Silicon Germanium and Silicon Photonics for AI infrastructure, data centers and datacom markets.
This performance is a testament to our strategic initiatives and technological advancements in this sector. The growth was attributed to several factors, expanded market opportunities driven by substantial investments in AI, the introduction of new products for higher data rates spurred by AI developments and the unexpected rapid adoption of Silicon Photonics for 800G with an increased interest in lower latency and lower power architectures like linear pluggable optics, LPO. Additionally, we’ve seen a recovery in legacy product orders after the previous quarters of inventory adjustments. Our achievements in Silicon Photonics were marked by a technology award from Coherent and a partnership with InnoLight, the top two worldwide optical integrators.
We’re advancing in 400G and 800G products, and pioneering with select customers on 200G per lane technologies for future 1.6 T systems. Including InnoLight and Coherent, the top two, we have active Silicon Photonics programs with six of the top 10 optical integrators. Validating these achievements, the Optical Fiber Conference, March 25 to 29 in San Diego, felt much more like a family reunion than a conference. It’s gratifying to see our vision of creating an open Silicon Photonics Foundry coming to fruition. Beyond datacom, our engagement with automotive leaders in frequency-modulated continuous wave based LiDAR and other sensors, including SiPho-based positioning gyros with Anello, confirm the broad-based need and usage for advanced photonics.
Please see Slide 5. Please note, we have over 50 SiPho customers, most of which in active silicon phases. Silicon Photonics currently represents 5% of our revenue, greatly accelerated by the adoption of AI, with momentum that is extremely strong and promises to be long lasting. In the Silicon Germanium segment, we are experiencing renewed demand, thanks to new high data rate products, active cable and LPO technologies. LPO is enhancing the Silicon Germanium market by integrating equalizers in receivers and transmitters, eliminating the need for the DSP in the pluggable module, hence reducing costs, power consumption and latency, all crucial for AI and data center applications. Please see Slide 6. Momentum is strong through the year and expected to be so beyond as well.
Sensors and Displays represented 15% of the total revenue in Q1. We continue with all development and manufacturing activities as detailed last quarter. Please see Slide 7 for a review. We expect a notable increase in imaging revenue from Q1 to Q2, and to maintain that strong level throughout the year. Power IC business, excluding Power Discrete, represented 10% in the first quarter of our corporate revenue. Present POs show substantial increase in Q2 revenue, with further increases throughout the year. We view Q1 as the low point in revenue for our Power business and expect long-term growth thereafter. We are progressing with power management platforms qualification in Albuquerque, under our capacity agreement with Intel, with on-target initial silicon results.
We anticipate starting customer prototyping in the second half of 2024, leading to qualification and production ramp start in 2025. Please see Slide 8, showing our power offerings over a large voltage range. Power Discrete business was 14% of revenue and expected to be stable at this revenue level throughout 2024. Mixed Digital CMOS business was 8% of revenue and about 2% was miscellaneous for this period. Our fab utilizations for the quarter, Fab 1, which as announced will be operationally consolidated into Fab 2, was about 65%. Fab 2 8-inch was about 75%. Fab 3 8-inch at about 45%, presently at a very high ramp. Fab 5 8-inch was about 40%, impacted by the earthquake in Japan and is presently ramping. Fab 7 12-inch was about 75% due to earthquake impact and since recovery from the earthquake, it has been fully loaded, which to remind per our model is 85% utilization.
Fab 9 8-inch was about 60%, related to the worldwide decreased demand for power management. With that, I’ll turn the call to our CFO, Mr. Oren Shirazi. Oren, please?
Oren Shirazi: Hello, everyone. Earlier today, we released our first quarter financial results. For the first quarter of 2024, we reported revenue of $327 million, gross profit of $73 million and net profit of $45 million, reflecting 14% net profit margins. I will now begin a more detailed review of our results, first analyzing the P&L highlights, followed by our balance sheet. Revenue for the first quarter of 2024 was $327 million in the upper range of our guidance, compared to $352 million in the fourth quarter of 2023. Gross profit and operating profit for Q1 were $73 million and $34 million, respectively, aligned to our financial model, compared to $84 million and $45 million, respectively, in the prior quarter. Net profit was $45 million, reflecting 14% net profit margins or $0.40 diluted earnings per share, compared to net profit of $54 million, reflecting 15% net margins or $0.48 diluted per share in the prior quarter.
Moving to balance sheet and future CapEx and cash plans. As of end of Q1 2024, our balance sheet assets totaled $2.98 billion, compared to $2.58 billion in the same period last year, primarily comprised of $1.18 billion of fixed assets mostly machinery and equipment and $1.74 billion of current assets. Last week, we were very happy to receive an updated corporate credit rating from Standard & Poor’s. Following their annual review, our rating has been reaffirmed at ilAA, including a stable outlook for the company. This reflects the robustness of our financial position and underscores our ongoing commitment to maintaining a strong financial foundation. Current assets ratio, reflecting the multiple by which current assets are larger than short-term liabilities, is very strong at 5.4x.
Shareholder’s equity reached a total of $2.5 billion at the end of Q1, further increasing from $2.4 billion at the end of December 2030 -- 2023 and from $2.0 billion as of the end of March 2023. Our strong financial position enables us to plan the following investments in strategic opportunities that are aligned to our vision. Approximately $500 million of total aggregate cash was allocated to make investments in equipment and other CapEx items required for the 12-inch factory in Agrate, Italy, following the previously announced ST Micro Partnership Agreement signed in 2021. We have already invested $340 million to-date, while $160 million are to be paid from Q2 2024 to the end of 2025. In addition, as previously announced, we will invest up to $300 million in the coming two and a half years to buy equipment and other CapEx items that we will own in Intel Fab in New Mexico, enabling us to ramp up Fab capacity and capabilities for our customers.
These payments will commence in Q2 2024. In addition, we expect our maintenance CapEx baseline level to remain as previously announced at about $200 million per annum. And lastly, we expect to invest additional cash to acquire more capability CapEx tools and other assets to expand our technology offerings, including increasing our 5G and SiPho capacity and technological offerings, to enhance our flexibility and support our customers from our various sides, as well as change our product mix to a richer mix from a margins perspective. In summary, the above investments are aligned to our business strategy, as well as financial model as previously presented by the company this past November. In the model, we outline a revenue target of $2.66 billion per annum that could be achieved by loading our existing facilities at 85% utilization, which would result in $500 million annual net profit.
Now, I’d like to turn this call back to our CEO, Mr. Ellwanger.
Russell Ellwanger: Thank you, Oren. We’d like to go ahead at this point with whatever questions you might have, at which time, at the end of which I will come in and give some summary and conclusion statements. Please?
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