TSEM: Tower Semiconductor Will Benefit as 5G Finally Takes Off

By Lisa Thompson

NASDAQ:TSEM

READ THE FULL TSEM RESEARCH REPORT

Tower Semiconductor (NASDAQ:TSEM) has long been considered a 5G play due to its high proportion of revenues from 5G handsets, infrastructure products and data centers in which to hold all that new data to be generated. Of course we have been hearing this is the year of 5G for some time and it hasn’t happened yet. First there were technical obstacles and fiber constraints, and then the world got hit with a pandemic that slowed down infrastructure built out and demand. 2021 may finally be the year it all starts to take off. ResearchAndMarkets said global handset sales declined in 2019 1.6% to 2.1 billion units. IDC is forecasting the worldwide smartphone market will decline 9.5% to 1.24 billion units in 2020, from the 1.37 billion in 2019. From there it expects shipments will move back up to 1.49 billion units in 2024, or a CAGR of 4.7%. Not only will the market return to growth, but there is an expected doubling in the demand for 5G handsets. QUALCOMM predicts 500 million 5G handsets could be sold in 2021 versus the 250 million sold in 2020. Tower benefits two ways from this shift in its sales of RF SOI. In addition to unit growth, it provides 30-50% more content to a 5G handset than a 4G, increasing its revenues further. In addition, 5G infrastructure demand is picking up and there is even life in data center orders. Tower expects to grow faster than these markets as it captures market share and provides more content per unit. It expects organic growth in 2021 to be better than this year.

As a result of an improved outlook for sales in Q4 we are raising estimates to $340 million and adjusted non-GAAP EPS of $0.29 for the quarter and $1,261 million and $0.89 EPS for the year. Next year we have moved up revenues to a conservative 7% growth as the 5G market finally starts to ramp. 2021 revenues are estimated at $1.35 billion and adjusted non-GAAP EPS of $1.16.

Q3 2020 Results

Q3 revenues came in slightly above expectations at $310.2 million, down 0.6% year over year. Guidance for Q4 revenues was $340 million ± 5%, above street estimates. This guidance points to Q4 year over year growth of 11% and sequential growth of 10%, but organic (i.e. excluding revenues generated by the Panasonic JV and Maxim) growth of 14% year over year and 17% quarter over quarter. During the quarter the company had a cybersecurity breach and as a result Tower shut down all of its Israeli and US IT systems, which stopped all activities in those locations. In less than a week, all the factories were back operating. There was no damage to the functional quality of the work in progress, and it and its customer data were protected. Because of this shut down, 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 affecting Q4 sales that could have been even higher than the current guidance. In the 2020 year, only Q1 was affected by the contract renegotiation with Panasonic, making overall growth more attainable. The 2020 revenue forecast assumes flat Panasonic revenues after taking out $23 million for contract renegotiation in Q1 and Maxim declines of $9 million (also by design in its contract.)

GAAP net income was $15.2 million versus $22.2 million last year, while non-GAAP net income was $19.1 million versus $26.5 million.

Diluted GAAP EPS was $0.14 per share versus $0.21 last year. Adjusted non-GAAP EPS decreased to $0.18 versus $0.25 a year ago. Average diluted shares for the quarter were 108.5 million, up from 107.6 million last year. EBITDA for the second quarter of 2020 was $79.2 million compared to $75.3 million a year ago and down sequentially from $81.6 million in Q2 2020.

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