Market Share Gains Insulate Against Industry Weakness (TSEM)

Market Share Gains Insulate Against Industry Weakness

Ken Nagy, CFA

On November 15, 2011, Tower Semiconductor Ltd. (TSEM), a global specialty foundry leader, reported financial results for its fiscal 2011 third quarter and nine months, ended September 30, 2011.

A solid third quarter by the Company resulted in quarterly revenues increasing by over 26 percent or $36.405 million sequentially to $176.112 million, which compares to revenues of $139.707 million for the three months ended June 30, 2011.

The third quarter revenue level puts TowerJazz at a run rate of approximately $700 million per year. Along the same lines it should further be noted that the Company is targeting achieving an annualized quarterly run rate of $800 million in the second half of 2012.

The Company’s third quarter 2011 GAAP net income increased 5.5 percent or $96,000 sequentially to $1.839 million from $1.743 million during the second quarter of 2011. This included $9 million gain, net from the sale of the Company’s holdings of HHSL in China, which was offset by lower gross margin and a $3.053 million sequential increase in total operating expenses.

Still, TowerJazz realized close to 100 design wins during the third quarter as well as began shipping qualified products for a three year supply deal to its new customer Micron Technology. Additionally, it was the first full quarter post-acquisition of the Nishiwaki factory.

In June 2011, the Company acquired Micron Technology's 60,000 wafer-per-month plant in Nishiwaki, Japan, for $140 million. The addition of the Nishiwaki plant will give TowerJazz the capacity to produce 1.7 million wafers per year by year end, doubling the Company’s capacity level from the end 2010. Furthermore, TowerJazz is currently examining ways to increase the Nishiwaki capacity by 200,000 wafers per year which would bring the total capacity to 1.9 million wafers per year manufacturing capability.

Based on a weighted average number of basic common shares of 317.1 million, GAAP basic net income per share resulted in net income of $0.01 per basic share during the third quarter of fiscal 2011. This compared to basic net income per share of $0.01 on a weighted average number of basic shares of 295.9 million during the three months ended June 30, 2011.

Non-GAAP net income for the third quarter of 2011 decreased sequentially by $267,000 to $45.753 million and non-GAAP earnings per basic share for the third quarter of 2011 were $0.14 compared to $0.16 for the three months ended June 30, 2011.

For the nine months ended September 30, 2011, year over year revenues improved by nearly 17 percent or $62.297 million to $436.439 million from $374.142 million for the comparable nine months of 2010.

GAAP Net loss for the nine months improved by $41.834 million year over year to a net loss of $1.829 million for the nine months ended September 30, 2011. This compares to a net loss of $43.663 million for the comparable nine months of 2010.

Based on a weighted average number of basic common shares of 296.609 million, GAAP basic net loss per share resulted in a net loss of $0.01 per basic share during the nine months ended September 30, 2011. This compared to basic net loss per share of $0.19 on a weighted average number of basic shares of 228.041 million during the nine months ended September 30, 2010.

On a non-GAAP basis, net income for the nine months ended September 30, 2011 increased year over year by 21.3 percent to $122.154 million while non-GAAP earnings per basic share for the first nine months of 2011 dropped to $0.41 per basic share compared to $0.44 per basic share for the nine months ended September 30, 2010.

TowerJazz’s balance sheet continued to improve with cash, short-term deposits and designated deposits increasing by $30.278 million sequentially to $178.194 million and working capital improving by $27.873 million to $77.409 million for the period ended September 30, 2011.

Additionally, management announced guidance for its fiscal 2011 fourth quarter.

Management anticipates fiscal 2011 fourth quarter revenues to be in the range of $170 million to $180 million.

The recently updated guidance would be a 30 percent year over year growth in revenues at the midpoint of the projected range for the quarter and would imply a 20 percent year over year growth in fiscal 2011 revenues over revenues from fiscal 2010 at the midpoint of the projected range.

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