TSEM: Growth Should Return to TowerJazz in Q2

By Lisa Thompson

NASDAQ:TSEM

READ THE FULL TSEM RESEARCH REPORT

TowerJazz’s (NASDAQ:TSEM) Q4 revenues came in below the midpoint of guidance, but within the guidance range, disappointing some. If one were to find a reason it would be due to less discrete business that might have been obtained, which in general has lower visibility. Q1 guidance for revenues was $300 million plus or minus 5%, and was near street expectations. This guidance takes into account a few million less in revenues due to the extended Chinese New Year holiday which kept some production at customers’ locations closed for extra days as well as the reduction revenues from Panasonic due to the renegotiated contract which started in March 31, 2019. After Q1, contract terms will be apples to apples and make revenue growth easier.

Revenues for Q4 were $306 million down $28 million or 8.4%. Of that decline, revenues from Panasonic and Maxim combined were down $36 million; $23 million of it was due to renegotiated terms with Panasonic. Revenues from everyone else grew $8 million. So, even with out the renegotiation (presumably from the decline in market prices for products bought), sales to Panasonic and Maxim declined $13 million and the quarter would have been down year over year. Going forward we know Maxim has declining commitments in its contract and it will be buying less in 2020 and beyond.

GAAP net income was $20.7 million versus $38.1 million last year, while non-GAAP net income was $24.2 million versus $43.6 million.

Diluted GAAP EPS was $0.19 per share versus $0.37 last year. Adjusted non-GAAP EPS declined to $0.22 versus $0.41 a year ago. Average diluted shares for the quarter were 108.0 million, up from 105.8 last year.

EBITDA for the fourth quarter of 2019 was $74.6 million compared to $92.7 million a year ago and down sequentially from $75.3 million in Q3 2019.

Balance Sheet and Capacity

The company has cash, short-term deposits, and marketable securities of $747 million compared to $723 million last quarter while decreasing debt by $7.7 million to $312 million. Its quick ratio is high at 3.5xs and it has $835 million in working capital. The company has been stockpiling cash to pay for both capacity expansion, as well as acquiring companies that contribute complementary products or technology. This year’s planned capacity expansion should be funded out of operating cash flow, leaving current balances the same.

The company plans to invest $100 million in capacity expansion in Japan, plus another $20 million for QT9 capacity (TSEM’s new 200-millimeter RF SOI technology). As a result, cap ex will be higher than usual in 2020. Plans are to spend the typical $42-44 million per quarter, plus the extra $100 million spent entirely in the first three quarters, plus $20 million for QT9 (spent equally in Q3 and Q4.) Thus total cap ex for the year should be approximately $290 million. This incremental spending could possibly put the company into negative free cash flow territory. Equipment is expected to be installed in the first half of 2020 and the capacity increase should be fully available by the end of the first half of Q2. The company estimates that at full utilization this capacity could provide $70 million in annual revenues and leave the company with a total revenue capacity of $1.65 billion.

2020

In 2020, only Q1 will be affected by the contract renegotiation, making overall growth more attainable. The 2020 revenue forecast assumes flat Panasonic revenues after taking out $23 million for contract renegotiation in Q1, Maxim declines of $9 million (also by design in its contract), and growth of 12% for the rest of the business (“low double digits.”) This adds to a total of $1.3 billion or 5% growth from 2019. This could result in EPS of $1.20 this year and with similar revenue growth, $1.50 next.

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