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TSEM: Increased Capacity is Yielding Record Sales at Tower Semiconductor

By Lisa Thompson

NASDAQ:TSEM

READ THE FULL TSEM RESEARCH REPORT

Tower Semiconductor (NASDAQ:TSEM) is hitting its stride as it ramps capacity to serve the worldwide increased demand for chips. While it does not benefit as much from shortages as digital chip providers due to the variation among analog chips it is certainly benefiting from overflow orders. Compounding its success is the high growth markets it serves. It announced it had hit record quarterly revenues for RF-SOI chips that go into mobile handsets and expects to set another record in Q2. 5G is driving the growth as 5G handsets have 30% more content than 4G and is showing a rapid market shift. The company also believes it is gaining market share when it looks to reports on its competitors and their forward guidance.

Its silicon germanium RF infrastructure business continues to see strong orders for 100GB transceivers for data centers, while the infrastructure market that buys 10GB and 25GB transceivers has seen some slowing with expectations of picking up in the second half. Power ICs are also strong with and are well positioned in EVs where it has an established base in battery management. Power discretes rebounded and are reaching the upper limit of capacity usage while image sensors, which had had weak order in dental and medical markets due to shutdowns, are back and the company is projecting a record year for imaging.

Tower continues to add capacity and will reap that addition in the second half of 2021. It is now suffering the expenses as it adds staff and machinery before it is able to increase production, which is suppressing margins. This year it will spend an additional $150 million to increase its capacity in both 200mm and 300mm in fabs in the US, Israel and Japan. Cap ex spending for this effort will start in Q2 2021 and continue through Q1 2022.

Q1 2021 Results

Q1 revenues came in near expectations at $347.2 million, versus $300.2 million a year ago, up 16%. It was also up sequentially from $345.2 million in Q4 2020. Organic (i.e. excluding revenues generated by the Nuvoton Japan JV and Maxim) growth was up 26% year over year. Guidance for Q2 revenues was $360 million ± 5%, with quarterly sequential improvement expected throughout the year. This guidance points to Q2 year over year growth of 16.1% and a 3.7% sequential improvement. Within that 16.1% there is expected to be 26% year over year organic growth.

Q1 2021 gross margin increased to 20.1% from 17.5% a year ago and 20.2% in Q4 2020. Gross margin dollars increased $17.3 million, or 33%. Operating expenses increased $1.2 million year over year, and were up $1.1 million sequentially. The operating margin improved to 9.4% from 5.5% year over year. On a dollar basis it increased 98%. Other income was an expense of $7.8 million compared to $2.1 million a year ago. In that number the company made a one-time journal entry balance sheet adjustment on the value of an asset based on the change in the price of the yen versus dollar. Since then the company changed terms so that would not happen in the future.

Pretax profit was $24.6 million versus $14.3 million a year ago. The company had a tax reversal of $5.9 million in the quarter versus paying $1.7 million last year (11.9%). For the remaining three quarters the tax rate is expected to be higher than in 2020 as incremental sales are mostly coming from Japan and Newport Beach, California where the taxes range from 20% to 30%. Last year the company paid a 6.0% tax rate.

GAAP net income was $28.3 million versus $17.0 million last year, while non-GAAP net income was $33.7 million versus $21.9 million, up 54%.

Diluted GAAP EPS was $0.26 per share versus $0.16 last year. Adjusted non-GAAP EPS increased to $0.31 versus $0.20 a year ago (up 28%). Average diluted shares for the quarter were 109.5 million, up from 108.1 million last year. EBITDA for the first quarter of 2021 was $94.5 million compared to $72.8 million a year ago but sequentially down from $95.9 million in Q4 2020.

Balance Sheet and Capacity

The company has cash, short-term deposits, and marketable securities of $710 million compared to $711 million last quarter while decreasing debt by $47.3 million to $343 million. Its quick ratio is high at 3.3s and it has $826 million in working capital. The company had been stockpiling cash to pay for both capacity expansion, as well as acquiring companies that contribute complementary products or technology. Operating cash flow this quarter was $84 million and free cash flow was $34 million.

In 2020, the company invested a total of $100 million in capacity expansion in Japan, plus another $20 million for QT9 capacity (TSEM’s new 200-millimeter RF SOI technology). In Q1 2021, it spent $49.4 million on investments in cap ex. It now has embarked on a new plan to increase capacity and will spend $150 million starting in Q3 2021. The remaining three quarters cap ex spending is expected to be: Q2 $45-49 million, Q3 $75-79 million, Q4 $75-79 million, and Q1 2022 $75-79 million.

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