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TSEM: Tower Semiconductor Grows 21% in Q1 as Acquisition By Intel Remains on Track

By Lisa Thompson

NASDAQ:TSEM

READ THE FULL TSEM RESEARCH REPORT

Tower Semiconductor (NASDAQ:TSEM) reported revenues and earnings above expectations in Q1 2022 of $421 million versus $347 million in Q1 2021. The company is no longer providing guidance nor hosting earnings calls. This was year over year growth of 21%. It was also up again sequentially as it has been since Q1 2020. Organic revenue for the first quarter of 2022, (defined as total revenue excluding revenues from Nuvoton in the Japanese fabs and from Maxim in the San Antonio fab,) grew by 29% year over year. We believe sales continue to be constrained by capacity availability and that capacity continues to increase. In Q3 we expect the Japanese operations to be reorganized and this could dampen growth slightly in the last two quarters of the year.

Q1 2022 gross margin increased to 24.8% from 20.1% a year ago and 20.2% in Q4 2021. Gross margin dollars increased $35 million, or 50% showing incremental sales are at higher margins and the industry can continue to increase prices due to limited availability. Operating expenses increased $4.2 million year over year, and were down $2.7 million sequentially. The operating margin improved to 15% from 9.4% last year. On a dollar basis it was up 94%. Other income was an expense of $2.1 million compared to $7.8 million a year ago.

Pretax profit was $60.9 million versus $24.6 million a year ago. Taxes were $5.2 million in the quarter compared $5.9 million last year. GAAP net income was $54.0 million versus $28.3 million last year, while non-GAAP net income was $60.3 million versus $33.7 million, up 79%.

Diluted GAAP EPS was $0.49 per share versus $0.26 last year. Adjusted non-GAAP diluted EPS increased to $0.55 versus $0.31 a year ago (up 59%). Average diluted shares for the quarter were 110.5 million, up from 110.0 million last year. EBITDA for the first quarter of 2022 was $134 million compared to $94.5 million a year ago and sequentially up from $129.9 million in Q4 2021.

Balance Sheet and Capacity

On March 31st the company had cash, short-term deposits, and marketable securities of $791 million compared to $765 million last quarter while decreasing debt by $31 million to $269 million. Its quick ratio is high at 3.1s and it has $933 million in working capital. Operating cash flow was $127 million and free cash flow was $46 million after spending $81 million in cap ex in the quarter.

Recap of Tower Acquisition by Intel

On February 15th Intel announced it plans to buy Tower Semiconductor for $53 per share in cash. Using its fully diluted share count this equals an enterprise value of $5.4 billion, or 3.6 times Tower’s revenues for 2021. The deal is expected to be accretive to Intel upon close. This acquisition will aid Intel’s foundry strategy and give it capacity and expertise to pursue its expansion plans particularly in the US where Tower already has fabs in California and Texas. With Intel’s cash it can expand its fabs with far greater ease and speed as it has the demand to fill them. While Intel analysts whine about Tower’s margins, they do not realize that incremental revenues carry margins over 50%. Nor are they taking into account the licensing arrangement with the Japanese fabs, which was structured to reduce taxes and increase overall profitability at the expense of gross margins. The deal is expected to take a year (nine months left) to close as the companies get the regulatory approvals from various countries.

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