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TSEM: Q4 2018 Earnings Results

By Lisa Thompson

NASDAQ:TSEM

READ THE FULL TSEM RESEARCH REPORT

TowerJazz (TSEM) reported results in line with guidance, which showed continued weakness in wireless handsets and expectations for that business to be flat with 2018 in 2019. However investors are increasingly looking forward to 2020 when the company should benefit greatly from the roll out of 5G both in handsets and infrastructure. Until then, due to the Panasonic agreement restructuring, investors may have to live with down revenues through out 2019.

Q4 2018 Earnings Results

TowerJazz reported Q4 revenues of $334 million versus $358 million a year ago (down 7%.) This was near the lower end of its revised Q4 revenue guidance of $340 million plus or minus 5% ($323 million-$357 million.) Management says that business has been affected by current macroeconomic uncertainties that are driving tighter inventory management. The RF business was hard hit in the wireless sector while infrastructure continues to grow.

The company guided to a midpoint revenue range of $310 million plus or minus 5% for Q1 2019. New terms in TowerJazz’s agreement with Panasonic are expected to go into effect after March 31, 2019. These terms will 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 Q2 2019. The company however believes that these new terms, while reducing revenues, should produce the same net income for TowerJazz from reduced taxes and the elimination of dividend payments to Panasonic. In 2017 TowerJazz paid Panasonic a $4.4 million dividend.

Gross margin for the fourth quarter was 22.7% versus 25.0% a year ago and 22.5% in Q3 2018. Gross margin is expected to improve with sequential sales increases, as higher margin SiG capacity increases, and higher margin 300mm product ramps.

R&D costs for the quarter were flat with last year and M, G&A was $514,000 higher than last year and $1.2 million higher sequentially. The operating margin declined three percentage points year over year. On a dollar basis it was down 26%.

Financing expense was $3.9 million compared to $2.3 million last year and $2.3 million in Q3. During the quarter TowerJazz repaid another $2.9 million in debt.

After getting a tax rebate of $183,000 and a return of $1.6 million in losses for minority interest, GAAP net income was $38 million versus $147 million, while non- GAAP net income was $44 million versus $60 million. In last year’s numbers there were sizable one-time items comprised of $82 million benefit from an income tax benefit resulting from an Israeli deferred tax asset realization following a valuation allowance release. And $13 million due to an income tax benefit related to the U.S. 2017 tax reform.

Diluted GAAP EPS was $0.36 per share versus $1.40 last year. Adjusted non-GAAP EPS declined to $0.41 versus $0.58 a year ago. Average diluted shares for the quarter were 105.6 million down 1% from last year and now stand 105.0 million shares.

EBITDA for the fourth quarter of 2018 was $93 million compared to $89 million in Q3 and $107 million a year ago.

Balance Sheet and Capacity

The company has cash, short-term deposits, and marketable securities of $641 million compared to $607 million last quarter as it reduced debt by $26 million to $267 million versus $293 million last quarter.

Its quick ratio is high at 4.0xs and it has $784 million in working capital. 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 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.

The company has a goal to reach $3.5 billion in revenues. It believes that it can grow organically to $2.3 billion to $2.5 billion with all its current and planned initiatives including the Takoma project, a new 8-inch semiconductor fab in Nanjing, China. The rest is expected to come from acquisitions. The Chinese government has taken major ownership of the project in China and TowerJazz has just gotten its first milestone payment of $10 million for services within the project scope.

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