Tower reports record year but tepid guidance

Russell Ellwanger Photo: PR
Russell Ellwanger Photo: PR

The company's revenue rose 5.1% to $358 million in the first quarter.

Chip manufacturer Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE: TSEM) (marketed as Tower-Jazz) is reporting a record year in 2017. Together with the company's 2017 results, however, which outstripped the analysts' profit forecasts, Tower Semiconductor's guidance for the first quarter of 2018 is disappointing. At the same time, Tower Semiconductor emphasizes that despite the first quarter, the company's business will grow in 2018.

"We have had an amazing year that was not only a record year, but a year of records," Tower Semiconductor CEO Russell Ellwanger said, referring to the fact that the company set new records in sales, gross and operating profit, EBITDA, net profit, and cash flow. Tower Semiconductor's first quarter revenue totaled $358 million, 5.1% more than in the corresponding quarter in 2016 and in line with the analysts' forecasts. Revenue on the year was up 11% to $1.39 billion.

Two tax benefits had a positive impact on Tower Semiconductor's profit: one in Israel and one in the US. The company's accounting net profit in the fourth quarter was $147 million, compared with $48.3 million in the corresponding quarter in 2016. . A deferred tax asset in the balance sheet contributed $82 million to the company's net profit, and a $13 million tax benefit from the US tax reform added $13 million.

Tower Semiconductor CFO and senior VP finance Oren Shirazi explains that following the recently enacted US legislation, the tax rate on all of the company's profits from activity in the US (Jazz San Antonio) will henceforth be 21% instead of 35%, and Tower Semiconductor will benefit from this later, and meanwhile has recognized a $13 million decrease in its deferred tax liability.

As for the tax benefit in Israel, Shirazi says that it involves a deferred tax asset, and in a profitable year, the company should recognize this asset in its reports. Excluding accounting items, including the tax benefits, Tower Semiconductor's fourth quarter profit was $59.9 dollars, $0.58 per share - $0.04 per share more than the analysts predicted. Profit for 2017 as a whole was $226 million, 28.8% more than in 2016, amounting to $2.21 per share.

According to Ellwanger, all of Tower Semiconductor's fields of business grew organically by over 25% in 2017, except for RF, which grew 10%. These trends are projected to persist this year, but the company is not providing separate guidance for each sector. Tower Semiconductor foresees large-scale demand in SiGE, which is used in advanced communications technology and increases production capacity in this field.

Tower Semiconductor's guidance for cash flow in the first quarter is rather disappointing: $325 million in revenue, compared with $330 million in the first quarter of 2017 and the analysts' forecast of $347 million. "The entire industry is seasonal in the quarter, and we are following the industry-wide pattern," Ellwanger says. He points out that TSMC, the largest company in the industry, projected a 10% drop in its guidance. Do investors have reason for concern? "I see no reason for worry. Our business is strong, and we expect growth later this year. The analysts' forecasts were made before other companies provided their guidance for the quarter. In our industry, a lot of purchases are made towards the Christian holiday season and the Chinese New Year, and sometimes customers who did not sell everything are stuck with inventory, and the result is a seasonal fall in orders," Ellwanger explained.

Tower Semiconductor generated $356 million from current activity in 2017, and had $560 million in cash and short-term investments at the end of the year. Asked what the company is planning to do with the money, Ellwanger did not rule out a large-scale acquisition or a number of acquisitions amounting to hundreds of millions of dollars. In addition, he said that Tower Semiconductor was buying equipment for a plant in the US in a deal amounting to tens of millions of dollars. "We're looking at several things in mergers and acquisitions," Ellwanger remarked. "In the short and medium term, we're focusing on increasing production capacity on the site in China, but we're looking at acquisitions that could enlarge the markets we're aiming at, meaning companies in the markets where we have no presence, but where there are similar customers, so that we can increase their revenue quickly with the help of our customers. We're looking for a company with technology tangential to ours. At the same time, what interests us is the entire market, and multiples are relatively high at the moment. It is important for an acquisition to contribute to our profits."

Published by Globes [online], Israel Business News - www.globes-online.com - on February 22, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Russell Ellwanger Photo: PR
Russell Ellwanger Photo: PR
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