What kind of wafer foundry company is TowerJazz?

Source: The content comes from the official account "Semiconductor Weathervane" (Founder Securities), author: Luo Yiyang, Chen Hang, thank you.

Recently, due to rumors of domestic cooperation, everyone has become more familiar with the wafer foundry company TowerJazz. But how much do you know about them?

The financial report shows that the company's revenue in fiscal year 2019 was US$1.23 billion, compared with US$1.3 billion in 2018, mainly due to a decrease of US$111 million in non-organic revenue (due to the Panasonic contract renewal announced in March 2019), but was offset by a year-on-year increase in organic revenue of US$41 million (organic revenue refers to revenue excluding Panasonic and Maxim's San Antonio foundry), resulting in a final organic revenue growth of 5%.

Operating profit and gross profit were $230 and $87 million, respectively, compared to $293 and $155 million in 2018. EBITDA was $299 million, compared to $362 million in 2018.

Net income was $90 million and diluted EPS was $0.84, compared to $136 million and $1.32, respectively, in 2018. The decrease in profit was mainly due to the decrease in non-organic income mentioned above.

Operating cash flow was $291 million, net fixed investment was $172 million, and free cash flow was $119 million.

Q4 revenue was $306 million, compared to $334 million in the same period of 2018, reflecting a $36 million decrease in non-organic revenue (primarily due to the Panasonic contract renewal announced in March 2019), which was offset by an $8 million year-over-year increase in organic revenue (excluding revenue from Panasonic's TPSCo foundry and Maxim's San Antonio foundry), ultimately resulting in a 4% increase in organic revenue.

Gross profit and operating profit in Q4 were US$55 million and US$19 million, respectively, compared to US$58 million and US$23 million in Q3 and US$76 million and US$40 million in the same period of 2018. EBITDA was US$75 million, compared to US$75 million in the previous period and US$93 million in Q4 of 2018.

Q4 net profit was US$21 million, and diluted EPS was US$0.19. The net profit and diluted EPS in the previous quarter were US$22 million and US$0.21, respectively, and the net profit and diluted EPS in Q4 of 2018 were US$38 million and US$0.36, respectively. The year-on-year decrease in profit was mainly due to the decrease in non-organic income mentioned above.

Q4 operating cash flow was $72 million, net fixed asset investment was $44 million, and free cash flow was $28 million.

Revenue for the first quarter of 2020 is expected to be around $300 million with a fluctuation of 5%. The company expects the coronavirus to have an impact of approximately $3-5 million on Q1 revenue, which has been reflected in the guidance.

Customer forecasts and current orders indicate that overall growth momentum will continue throughout 2020, so results will improve year-on-year in the second half of 2020. Low double-digit organic growth is expected in 2020, driven by higher capacity utilization, including the addition of newer 200mm technology platforms and products, short- to medium-term growth in 300mm customer demand from organic capacity increases, and capacity growth from acquisitions.

Infrastructure is mainly RF optics, with revenue of $136 million. The wireless market is mainly RF SOI, SiGe power amplifiers, SiGe LNA and RFC quality controllers for mobile, with revenue of $263 million. The automotive market has revenue of $129 million. The industrial market is mainly image sensors, with revenue of $61 million. Aerospace and defense revenue is $51 million, and high-end camera revenue is $50 million. Medical $47 million. The consumer market includes computing, power management, home appliances, and general accessories and security cameras, with revenue of $120 million, and additional power devices revenue of $262 million. Mixed signal products have revenue of $115 million.

Revenue by technology focuses on the revenue of three major companies.

Seamless connectivity mainly refers to the RF infrastructure and RF signals of mobile platforms, accounting for 31% of the company's revenue. Green Everything energy efficiency is achieved by power management ICs and power discrete devices, accounting for 38% of the company's revenue. Interactive intelligent systems related to sensor products account for about 16% of the company's revenue.

The rest of the business (about 15% of the company's revenue) serves various mixed-signal applications. Products in this group include MCUs, ASICs, RFID tags, logic standard cells, and certain specialty CMOS embedded memories. These products serve computing, industrial, consumer, automotive end markets, and aerospace and defense.

RFSOI for mobile devices grew strongly in 2019, with revenue increasing by more than 40% year-on-year, driven by 300mm technology. The 200mm technology platform grew 24% year-on-year in the second half of 2019.

In 2019, the company launched a new 200mm RF SOI technology platform, QT9, to serve 5G. The company has won multiple product designs with this technology. The company will invest $20 million to promote the mass production of this technology platform, which will promote the growth of the 300mm RF SOI platform.

The silicon germanium optics business for data centers experienced inventory correction, so silicon germanium revenue fell by about 8% year -on-year. However, orders are recovering, especially 5G infrastructure orders. Revenue is expected to increase by more than 20% in the second half of 2020 compared with the first half.

In 2019, the company won new product designs from optical 5G customers for its latest H5 platform, targeting 200Gb per second and higher, which is expected to come online in the next few years.

In terms of silicon photonics, mass production products for data center connections have been delivered to customers in 2019. The company will work with customers to develop next-generation silicon photonics products. The growth momentum of this platform comes from the speed conversion from 100 Gb per second to 400 Gb per second, with power cost and performance advantages. In silicon photonics production, more than 30 active customers are at different stages, of which more than 20 have been developed for various applications, some of which are very novel and have received great market response.

In 2019, the power IC business achieved an organic growth of 19%. This was mainly driven by automotive battery management and the highly differentiated 65nm BCD platform on 300mm. The company released a new 180nm 40V non-SOI device for the 200mm BCD platform, which can support the highest voltage within the 180nm standard for the non-SOI BCD foundry process. It has strong market potential and is in negotiation with customers.

The growth of RF business in 2020 and beyond will mainly come from 5G and infrastructure, and orders for silicon germanium used to deploy 5G have increased.

The optical SiGe data center market will drive shipments in the second half of 2020 as inventory corrections are expected to recover. The SiGe data center business is expected to grow this year as Internet data transmission speeds increase. In addition, the automotive market business is also a growth point, and we are currently discussing LIDAR technology with customers.

In the Power IC business, the 65nm 300mm BCD platform will become a growth point in 2020 and beyond. In 2019, battery management for electric vehicles became a major growth point for automotive revenue. With the electrification of automobiles and the deployment of technology, automotive revenue is expected to grow further.

Although organic revenue from industrial sensors fell 20% year-on-year in 2019 due to the trade war, it was offset by the growth of the X-ray medical sensor market and the high-end visible camera market. This growth will continue in 2020, and the industrial sensor market will pick up. The business is expected to maintain a double-digit growth rate.

In 2019, the company released a 300 mm back-illuminated hybrid bonding stacking method, which allows BSI sensors to be connected to pixel-level CMOS logic and analog wafers, and has received good customer feedback. Mass production is expected in 2022.

In addition, the company has collaborated with an optical fingerprint sensor provider to develop OLED and LCD sensors at the 8-micron technology node using high-performance CIS technology and 200mm wafer fabs. The products are expected to be available in the second half of the year and to be mass-produced in 2021 and beyond.

The core of TOPS' business is the discrete device market, which was weak, especially in the second half of 2019. Currently, customers are forecasting increased demand. The company is expanding customer engagement and expects this segment to increase in 2020.

The company will develop advanced nanowire RGN microdisplays and, secondly, expand its partnership with advanced TMR sensor providers. It is expected that MEMS microphones will be mass-produced in the second half of the year.

At Migdal Haemek, fab 1 was operating at approximately 70%, an increase from the previous quarter. Fab 2 was operating at 70%. The Newsport Beach, California, fab was operating at 50%, and fab 9 in San Antonio was operating at 55%.

At Japan's TPSCO wafer fab, according to the agreement, the 8-inch fab utilization rate accounts for 55% of its foundry capacity. The 4-inch fab capacity utilization rate is 70%, which has increased month-on-month. It is expected to increase next month.

Q&A：

Q: Does the future double-digit organic revenue growth exclude Maxim and Panasonic? What is the scale of their business in 2019?

A: Organic revenue is maintained at a low double-digit growth. The scale is about $1.23 billion. The contract with Panasonic must be signed in March. The revenue for a single quarter is about $70-85 million, and multiplying it by four is the business scale of Panasonic for the whole year. Maxim is currently unknown. The company's production capacity revenue when it acquired the San Antonio factory was $150 million, but it can only achieve 45-50%. The scale is about $70 million.

Q: Can you talk about your customers' capacity utilization? Is there too much capacity in the current market environment?

A: Except for TOPS Group, most customers seek foundry services. TOPS Group is an IDM model.

TOPS Group saw an overall decline in discrete device demand in 2019. After years of growth, there was a large inventory correction. I think China's 200mm capacity is very good at the moment. There is not much 300mm capacity.

Q: The silicon germanium business is climbing, but how is the end market? And I think the revenue expectations for Q4 and 1Q20 are still a few million dollars lower than expected.

A: The Q1 revenue guidance is not lower than expected. The TOPS business has increased significantly in Q1 2020. The orders for silicon germanium declined in the first half of 2019, which directly affected the second half of the year. However, with 5G, shipments will increase in the future.

Q: What is the future trend of your gross profit margin?

A: The cost structure and revenue structure in 2019 are both good. In the future, revenue will maintain a low double-digit growth. The gross profit will be about 50%-55%.

Q: What will be the revenue of your business with Panasonic and Maxim?

A: In Q1, both will probably see a decrease of US$20-24 million.

Q: Can you talk about the capacity expansion from long-term mergers and acquisitions?

A: A big concern is the growth of 300mm capacity. I have also said many times that business and capacity growth in China are very important, and this has always been the direction of the company.

Q: What impact will the coronavirus have from a customer perspective?

A: At present, there is no big decline forecast and order cancellation. The impact of the virus on Q1 is between 3-5 million US dollars. But the impact will not last long.

Q: You, Skyworks, and Qorvo are all doing well in RF. Due to the trade war, Chinese customers may look for vendors outside the United States. Can you tell me about RF vendors outside the United States? I think your SiGe business has revenue of about $30-35 million per quarter. Can you tell me more about 2020?

A: Revenue in the first half of 2020 will be similar, but H2 is expected to grow by 20% compared to H1. Growth is also expected in 2021.

Q: Besides automotive radar and mobile RF, what other applications does silicon germanium have?

A: Mainly radar. RF is more important in fiber optic connections and base station equipment in data centers. 5G deployment has an impact on both SiGe and LNA.

As for the trade war, our customers are diverse, both in the U.S. and abroad. If a Chinese customer wants to leave an American supplier, we won't necessarily lose that business.

Q: Please talk about your competitive advantages in the SiGe optical market and your advantages in 200mm and 400mm.

A: We have a strong advantage in silicon photonics. The H5 platform mentioned earlier is already in negotiation with customers. 200Gb/s, 400Gb/s and support for photonic chips are all advantages.

Q: What are your advantages in silicon photonics? Many companies are already paying attention to this area. What is your position?

A: We have a good advantage here. As I mentioned before, we already have 20 customers developing silicon photonics.

Q: Can you tell us about your future capital expenditure plan? Currently, it is $40-45 million per quarter.

A: It is about the same as before. It is about 42-44 million US dollars of regular expenses per quarter, plus the 100 million US dollars investment in Uozu in July and the 200 million US dollars mentioned before.

Q: Can you tell us about your joint venture in Nanjing?

A: We are not a financier, we are a technology provider. The construction has been completed. I don’t think it is a joint venture, it is a technology project. However, so far, there has been no progress in replacing the previous company (the owner company of the project).

Q: So there will be no additional capacity in this area?

A: No. This is not the capacity we need. This deal is different.

Q: The United States is trying to prevent TSMC from selling chips to Huawei. What impact will this have on your 5G deployment?

A: We do not sell products directly to Huawei, and Huawei is not our direct customer. Huawei's current situation does not have any negative impact on us.

Q: So this won't interfere with deployment?

A: No

English minutes address: https://seekingalpha.com/article/4325063-tower-semiconductor-ltd-tsem-ceo-russell-ellwanger-on-q4-2019-results-earnings-call