TowerJazz Long-Term Story Remains Intact
Ken Nagy, CFA
TowerJazz (TSEM) is a pure-play semiconductor wafer foundry with two IC plants in Israel and one in California, that manufacture SiGe, MEMS, RF, embedded flash-based memory, analog/mixed-signal, and CMOS image-sensor devices. TSEM has solidified itself in the specialty semiconductor area. Tower’s designs are typically more complex than the manufacture of standard technology. This has the effect of drawing industry leading customers to the firm and makes it harder for them to leave for the competition.
The firm will announce third quarter earnings on November 15, 2011. TowerJazz forecasts revenues of $173 to $183 million in the third quarter of 2011, representing a mid range growth of 32 percent year-over-year and 27 percent growth quarter-over-quarter.
Recall that on August 4, 2011 TowerJazz reported results for the second quarter of 2011 ended June 2011. Revenue came in at $139.7 million, at the mid-range of estimates of between $136 million and $142 million. Revenue increased 15.8% sequentially and 11.2% year-over-year and represented the highest quarterly revenue in company history.
The firm is now enjoying a substantial ramp in volume productions that were signed in the 2008-2009 time frame. In general the time frame from design win to volume production is a two year process. Design wins per quarter were approximately 50 per quarter in 2008, 75 per quarter in 2009, and 110 per quarter in 2010. The firm received a triple digit number of design wins in the past quarter, which will likely benefit the firm in 2012 and beyond.
On June 5, 2011 TowerJazz announced that it completed its previously announced acquisition of Micron Technology’s fabrication facility in Nishiwaki City, Hyogo, Japan. The acquisitions will nearly double TowerJazz’s current internal manufacturing capacity, increasing production by 60,000 wafers per month. The deal should also strengthen the company's presence in the Asia-Pacific region as it is likely IDM’s in the area would want a partner close by. We feel the deal will help margins eventually, but perhaps not until 2013. 19.7 million shares for increasing your revenues by 80% is dilution we can live with. The first two years will operate with a cost plus model, which will allow the facility to be 80% utilized while the firm builds up a clientele. We feel this is a positive as new facilities can be a drain until the firm fills excess capacity.
Perhaps the recent disconnect in the shares performance versus its operating results lies in the fact that the firm has capital notes and equity options that if converted could increase the number of shares outstanding to 500-550 million shares. The notes along with some other equity options may be a medium term headwind for the firm, yet they were given at a time when the firm was questionable as a going concern and was hemorrhaging cash. What once saved the firm now may be holding it back. The notes can be negotiated or bought out, but that seems to be a longer-term issue for the firm to tackle. Our opinion is the firm is focused on getting to the $1 billion annual sales mark and will then turn its attention to improving the balance sheet.
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