TSEM: TowerJazz Reports a Record Year and Looks Forward to 300mm Ramp in 2018

By Lisa Thompson

NASDAQ:TSEM

TowerJazz (TSEM) reported its fourth quarter with revenues of $357.6 million, up 5% from a year ago and in line with expectations. This quarter concludes Tower’s most profitable and successful year ever. However, this success was clouded by Q1 guidance and the fourth quarter results. This is the fourth reported quarter of decelerating revenue growth and guidance for Q1 2018 at a midpoint of $325 million continues that streak. Revenue growth should reaccelerate in the second half of the year primarily because of the company’s Japanese fab’s ramp of 300mm production, a process that has taken two to three years to achieve. Two one-time tax charges, one from Israel, and the other the US, which combined added $95 million in gains to Q4 results, complicated the earnings report. Pealing off these gains, TSEM reported adjusted non-GAAP EPS year over year growth to $0.58 versus $0.54 a year ago and $0.60 in Q3 2017.

Gross margin for the fourth quarter was 25.0% versus $25.8% a year ago and flat with Q3 2017. Gross margin is expected to improve throughout 2018, as high margin SiG capacity should double and higher margin 300mm product ramps in the second half.

R&D costs for the quarter were $2.1 million higher than last year and M, G&A increased $293,000. These increased costs caused operating margin to decline 1% year over year.

There was an increase of $5 million of other expenses resulting in pretax earnings of $47.4 million versus $53.2 million. The company benefited from a one-time tax reversal of $95 million resulting in reported taxes returned in the quarter of $101.2 million resulting in a diluted GAAP EPS profit of $1.40 per share. Adjusting for this one-time paper gain, adjusted non-GAAP EPS was $0.58. The diluted share count increased 3.1%.

2017 Year Overview

For the full year, revenues increased 11% to $1.37 billion while gross margin improved to 25.5% from 23.4%. The company grew overall revenues 11% in 2017 but stated that subtracting out revenues from Panasonic and Maxim, the remainder grew 23%. This means we can calculate that Panasonic and Maxim contributed $615 million in 2017 revenues, down 1.2% year over year, while the rest of the revenues grew from $628 million in 2016 to $772 million in 2017. If these two growth rates were to be the same in 2018 as 2017, the company could reach $1,558 million in revenues in 2018.

Through operating leverage and product mix, operating profit improved 25.6% year over year to $220 million. Non-GAAP net income increased 30.6%. Adjusted non-GAAP EPS was reported at $2.21 versus $1.80, up 23% with diluted shares increasing 4.6%.
EBITDA reached a record $425 million versus $367 million a year ago.

Q1 2018 Expectations

The company guided to a midpoint revenue range of $325 million plus or minus 5%, which is down 10% sequentially entirely due to industry seasonality. Investors, however, are not used to this seasonality showing up at TSEM as revenues in Q1 2017 were only down 3.0% sequentially and in Q1 2016 they were up 9.2% due to the acquisition of Maxim in that quarter. The company believes last year’s Q4 to Q1 decline was abnormally small because “certain areas that it was involved in then were seeing some surges and market demand outside of seasonality, and it was growing in market share in certain areas that allowed it to curtail seasonality.”

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