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TSEM: TowerJazz Makes Decision to Invest $100 Million to Expand Its TPSCo Uozu Fab

By Lisa Thompson

NASDAQ:TSEM

READ THE FULL TSEM RESEARCH REPORT

After pondering its options and scouring for acquisitions, TowerJazz (TSEM) has finally reached a decision on its next capacity expansion plan. It has decided to invest $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. The company pointed out that in the second quarter the Uozu fab experienced increased capacity utilization of 33 points. Equipment that will start to be ordered in 2019, will ultimately be installed in the first half of 2020.

Q2 2019 Margins Were at Four Year Low, But Sequential Improvement is Expected

TowerJazz reported Q2 2019 revenues of $306 million versus $310 million in Q1 and $345 million a year ago (down 9%). Of that decline, $22 million came from Panasonic whose current deal allows them to pay lower revenues to TowerJazz than before. The company guided to a revenue range of $296 million to $328 million for Q3 2019, which has a midpoint of $312 million, showing sequential improvement, although down year over year. 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. The company is hopeful that these new terms, while reducing revenues, might produce less of a hit on 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. The company continues to suffer from an industry-wide slump particularly in data center sales and as of yet has not seen a rebound. 2020 should benefit from a pick up as well as increased capacity for high demand products.

Gross margin for the first quarter was 17.4% versus 23.4% a year ago and 20.4% in Q1 2019. It has not been this low since Q1 2015 and given we expect sequential sales improvement, we also expect expanding margins. This could be a margin trough for the company and be an excellent entry point for investors.

GAAP net income was $20.9 million versus $37.7 million last year, while non-GAAP net income was $25.3 million versus $42.1 million. Diluted GAAP EPS was $0.20 per share versus $0.37 last year. Adjusted non-GAAP EPS declined to $0.24 versus $0.42 a year ago. Average diluted shares for the quarter were 107.1 million up from 101.1 million last year, due to the conversion of the Jazz bonds. EBITDA for the second quarter of 2019 was $70.1 million compared to $95.5 million a year ago.

While we are reducing non-GAAP EPS estimates for 2019 to $1.00 from $1.04, we are keeping estimates and our price target the same for 2020 as we expect an industry rebound by then.

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