Semiconductor foundry capacity is currently in short supply worldwide due to strong demand and Tower Semiconductor (NASDAQ:TSEM) is benefiting from this shortage. It has been able to fill some of its excess capacity in Q4 and is also getting higher prices for what it can fulfill. In order to take on more business, the company announced it will spend an additional $150 million to increase its capacity in both 200mm and 300mm in fabs in the US, Israel and Japan. While its fabs are not at the theoretical ideal of 85% utilization, product mix causes bottlenecks that must be alleviated by different equipment and processes. Cap ex spending for this effort will start in Q2 2021 and continue through Q1 2022.
Our fully diluted non-GAAP EPS estimate for 2021 for TSEM is now $1.31 and our 2022 EPS estimate is $1.50. We believe the stock deserves a PE of at least 28.8xs in line with its peers. Applying that to 2021 estimate of $1.31 gives us a stock price of $37.73 per share. We expect that the stock will begin to move up as the company has returned to revenue growth due to demand in end markets specifically smartphones
Tower reported a highly successful 2020 year despite the headwinds of a pandemic, declining handset sales, and a cyber hacking event. With all that, revenues still grew 3%, operating income grew 5%, and adjusted EPS only fell 7%. More importantly, EBITDA grew 10.2%. The company is well positioned for 2021 and sees flat to up demand across all its product lines going forward. While investment is needed for capacity, that investment will deliver a favorable ROI.
Table 1. Revenue Breakdown By Product Line
Q4 2020 Results
Q4 revenues came in above expectations at $345.2 million, up 13% year over year. Organic (i.e. excluding revenues generated by the Nuvoton Japan JV and Maxim) growth was up 17% year over year and 20% quarter over quarter. Guidance for Q1 revenues was $345 million ± 5%, with quarterly sequential improvement throughout the year. This guidance points to Q1 year over year growth of 15% and sequentially flat.
In Q3 the company had a cybersecurity breach and shut down all of its Israeli and US IT systems, which stopped all activities in those locations for a week. Tower missed between 8-12 days of new wafer starts and a few weeks of full fab activity levels during the third quarter. This is affected Q4 sales and they could have been even higher.
Q4 2020 gross margin increased to 20.2% from 17.9% a year ago and 17.2% in Q3 2020. Gross margin dollars increased $14.8 million or 27%. Operating expenses increased $296,000 year over year, and were up $1.9 million sequentially. The operating margin improved to 9.7% from 6.2% year over year. On a dollar basis it increased 16.0%. Other income was an expense of $1.5 million compared to a gain of $3.1 million a year ago.
Pretax profit was $31.9 million versus $22.0 million a year ago. The company paid $1.8 million in taxes (5.7%) in the quarter versus paying $2.4 million last year (10.7%). The tax rate is expected to go up in 2021 as incremental sales are mostly coming from Japan and Newport Beach, California where the taxes range from 20% to 30%.
GAAP net income was $31.0 million versus $20.7 million last year, while non-GAAP net income was $36.6 million versus $24.2 million.
Diluted GAAP EPS was $0.28 per share versus $0.19 last year. Adjusted non-GAAP EPS increased to $0.34 versus $0.22 a year ago (up 27%). Average diluted shares for the quarter were 109.0 million, up from 108.0 million last year. EBITDA for the fourth quarter of 2020 was $95.9 million compared to $74.6 million a year ago and up sequentially from $79.2 million in Q3 2020.
Balance Sheet and Capacity
The company has cash, short-term deposits, and marketable securities of $711 million compared to $705 million last quarter while increasing total debt by $74.2 million to $390 million. Its quick ratio is high at 3.3s and it has $830 million in working capital. The company had been stockpiling cash to pay for both capacity expansion, as well as acquiring companies that contribute complementary products or technology. Operating cash flow this quarter was $73 million and free cash flow was $9 million.
In 2020, the company invested a total of $100 million in capacity expansion in Japan, plus another $20 million for QT9 capacity (TSEM’s new 200-millimeter RF SOI technology). In Q4 2020, it spent $64 million on investments in cap ex. It now has embarked on a new plan to increase capacity and will spend $150 million starting in Q3 2021. The four quarters cap ex spending is expected to be: Q1 $45-49 million, Q2 $45-49 million, Q3 $75-79 million, Q4 $75-79 million, and Q1 2022 $75-79 million.
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