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TSEM: 2020 Should Show Orders Rebounding and Increased Capacity Where its Needed

By Lisa Thompson

NASDAQ:TSEM

READ THE FULL TSEM RESEARCH REPORT

Q3 came in right at the midpoint of guidance and Q4 looks to be almost identical with Q3. As predicted, margins increased sequentially as revenues grew. Business and profits should rebound for TowerJazz (NASDAQ:TSEM) starting in Q1 2020 as two major growth issues begin to be resolved.

The first being addressed is the need for more capacity in 300mm. It is investing $100 million in the 300mm TPSCo fab in Uozu, Japan. This will add capacity for its highly differentiated 300mm RF SOI, 65nm BCD Power Management, and CMOS imagers, both smallest pixel global shutter industrial imagers as well as high quantum efficiency stack imagers for facial recognition and high-end photography platforms, all of whom are exhibiting demand outstripping current capacity starting in Q1. Equipment that is now being ordered will ultimately be installed in the first half of 2020 and the capacity increase will be fully available by the end of the first half of Q2. The company estimates that at full utilization this capacity could provide $70 million in annual revenues and leave the company with a total revenue capacity of $1.65 billion.

Another growth inhibitor has been the weak market for data center. While customers have seen orders pick up, they still have three to five months of inventory to burn off before TowerJazz starts to see orders for components for new inventory. In addition to an inventory resolution, the newer higher throughput products (100GBPS) will require larger and more expensive components lifting TowerJazz revenues. This phenomenon will also play out in 5G deployments in both handsets and infrastructure.

2020 will also see the anniversarying of the March Panasonic agreement that lowered 2019 revenues, aiding year over year growth comparisons next year.

TowerJazz reported Q3 2019 revenues of $312 million versus $312 million in Q2 and $323 million a year ago (down 3%). New terms in TowerJazz’s agreement with Panasonic went into effect March 31, 2019, reducing revenues paid by Panasonic to the joint venture of approximately $20 million dollars per quarter. Excluding the revenues from both Panasonic and Maxim, revenues grew 11% year over year. The company has the exact same guidance for Q4 as it had for Q3-- a revenue range of $296 million to $328 million, which has a midpoint of $312 million, flat sequentially, and down year over year.

Gross margin for the third quarter was 18.7% versus 22.5% a year ago and the 17.4% four-year low reported in Q2 2019.

GAAP net income was $22.2 million versus $33.7 million last year, while non-GAAP net income was $26.5 million versus $38.0 million.

Diluted GAAP EPS was $0.21 per share versus $0.34 last year. Adjusted non-GAAP EPS declined to $0.25 versus $0.37 a year ago. Average diluted shares for the quarter were 107.6 million up from 102.1 million last year, due to the conversion of the Jazz bonds.

EBITDA for the third quarter of 2019 was $75.1 million compared to $89.1 million a year ago and up sequentially from $70.1 million in Q2 2019.

Balance Sheet and Capacity

The company has cash, short-term deposits, and marketable securities of $723 million compared to $699 million last quarter while decreasing debt by $1.6 million to $319 million. The company plans to invest $100 million in capacity expansion in Japan. Its quick ratio is high at 3.7xs and it has $821 million in working capital. The company has been stockpiling cash to pay for both capacity expansion, as well as to acquire companies that contribute complementary products or technology.

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