Tower slumps on disappointing Q1 results

Russell Ellwanger Photo: PR

The company failed to meet the analysts' forecasts and barely reached its own guidance.

Israeli chip company Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE: TSEM) today disappointed the market with poorer than expected results for the first quarter of the year. Consequently, the company's share price fell 13% on the Tel Aviv Stock exchange today.

Tower Semiconductor's $313 million in revenue in the first quarter, 5.3% less than in the first quarter of 2017, was substantially lower than the analysts' $325 million forecast. Tower Semiconductor itself provided guidance of $325 million in revenue for the first quarter, plus or minus 5%, so the company was within its own guidance, although much closer to its lower limit.

Tower Semiconductor's first quarter net profit of $26.1 million was also less than in the corresponding quarter last year, while non-GAAP net profit, excluding various accounting items, amounted to $31.1 million, $0.31 per share, compared with $49.9 million in the first quarter of 2017. Profit per share was $0.11 less than forecast by the analysts.

Looking ahead, Tower Semiconductor projects improvement in the second quarter, with revenue guidance of $335 million (plus or minus 5%). The midpoint of Tower Semiconductor's guidance is 3% less than its revenue in the second quarter of 2017. The analysts' prediction for the second quarter was also higher - $344 million.

Tower Semiconductor's free cash flow in the first quarter was $35 million, down from $41.8 million in the corresponding quarter last year. The company finished the first quarter with $590 million in cash and investments. Tower Semiconductor's market cap is $2.7 billion, following a 23% decline in its share price since reaching its peak early this year.

Tower Semiconductor CEO Russell Ellwanger is still optimistic, despite his company's disappointing quarter. He says that Tower Semiconductor will achieve quarter-on-quarter growth each quarter this year, and that organic growth in the fourth quarter will be 25% in comparison with the first quarter of the year. "This is an indication that we're doing the right things. The situation is good. We have a very strong balance sheet, and S&P upgraded our rating," he notes. According to Ellwanger, Tower Semiconductor is currently involved in several "very exciting activities at a game-changing level for the industry," has a number of achievements to its credit, and has begun activities with large players in these areas, which will lead to growth in the medium and long term.

"Globes": Will 2018 still be a year of growth?

Ellwanger: "The first quarter started poorly. We're still seeing organic growth, but lower than 10% - it's in medium single digits."

What explains the weakness?

"Our customers have become more conservative. The situation in the mobile market is known to be bad, but it's hard to say why and where it's going. We serve the mobile market in our RF sector, which accounts for a quarter of our business, so it's having an effect on us. Beyond that, we have more business in serving the mobile market, for example power management, some of which is for mobile. Keep in mind that there's also seasonality. There was a very strong year, our customers had indications of high demand from their customers, no one wanted to miss out on Christmas and Chinese New Year's sales, so we accumulated inventory. When purchases are too high, there's seasonality in the first quarter."

What were the strong parts of the first quarter?

"Demand was very strong in the optical sector, data center, and cloud computing. We're now stepping up our capacity at the site in Newport for this purpose. Demand was also good in camera sensors. We manufacture the sensors for all sorts of cameras: studio, industrial, and so forth, and demand was good."

What is new in mergers and acquisitions? You said in the past that you were looking for acquisitions, and you have a lot of money in the bank.

"We're always active in mergers and acquisitions, and we're very active in it now."

Is there a chance that you will announce an acquisition in the near future?

"Yes, but I can't make a commitment to it."

Your share price has fallen 23% from its peak.

"If we look at the market right now, going back a year, the share prices of most of our customers are about 20-25% below the peak. It's not a bad market. There are a great many external factors, such as concern about a trade war and other worries. Are we being traded where we need to be? I can't answer that."

All in all, are you optimistic?

"Yes. From a bad spot, we have reached a place at Tower Semiconductor where we have a lot of capabilities, a lot of opportunities, and a lot of desire, and we have enough money, and that enables us to bolster the range of options open to us in a lot of ways."

Published by Globes [online], Israel business news - www.globes-online.com - on May 7, 2018

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

Russell Ellwanger Photo: PR
Russell Ellwanger Photo: PR
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