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TSEM: Management Sees Signs of Second Half Improvement

Zacks Small Cap Research

By Lisa Thompson



TowerJazz (TSEM) reported Q1 2019 revenues of $310 million versus $313 million a year ago (down 1%), exactly in the midpoint of its guidance range. The industry is still suffering from the over-ordering in advance of tariffs, and current macroeconomic uncertainties that are driving tighter inventory management. The company guided to a revenue range of $291 million to $321 million for Q2 2019, which has a midpoint of $306 million. New terms in TowerJazz’s agreement with Panasonic went into effect after March 31, 2019. These terms reduce the amount of revenues paid by Panasonic to the joint venture and we expect that to amount to be approximately $20 million dollars per quarter starting in this quarter. The company however believes that these new terms, while reducing revenues, should produce similar net income for TowerJazz.

Gross margin for the first quarter was 20.4% versus 21.2% a year ago and 22.7% in Q4 2018.

Operating expenses increased $1.5 million year over year mostly due to a $900,000 increase in R&D. The operating margin declined to 9% from 10% year over year. On a dollar basis it was down 14%.

Other expense was a gain of $725,000 compared to expenses of $3.8 million last year and $2.3 million in Q4. During the quarter TowerJazz repaid another $3.1 million in debt.

GAAP net income was $26.3 million versus $26.1 million last year, while non- GAAP net income was $31.7 million versus $31.1 million.

Diluted GAAP EPS was $0.25 per share versus $0.26 last year. Adjusted non-GAAP EPS declined to $0.30 versus $0.31 a year ago. Average diluted shares for the quarter were 107.0 million up 101.1 million last year, due to the conversion of the Jazz bonds.

EBITDA for the fourth quarter of 2018 was $79 million compared to $93 million in Q4 and $84 million a year ago.

Balance Sheet and Capacity

The company has cash, short-term deposits, and marketable securities of $673 million compared to $641 million last quarter as it increased debt by $41 million to $309 million versus $267 million last quarter. The company is stockpiling cash to increase future capacity internally as well as possibly through acquisition. Customers are adopting 300mm at a pace that TSEM expects that by this quarter or the third quarter of 2019 it may need to make a decision as to how to add additional capacity by in order to meet 2020 and 2021 demand.

We are expecting down revenues and earnings until at least 2020 at which point 5G and a number of other new technologies and product generations will begin to ramp. TowerJazz is also well positioned geographically as it has fabs in Israel, Japan, and the US should customers begin to seek suppliers outside tariffed countries.

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