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TowerJazz (TSEM) Q2 Earnings on Target; Company Guides Up on Q3 Revenues

08/07/2017
By Lisa Thompson

NASDAQ:TSEM

TowerJazz reported another record quarter in terms of revenue and profitability and guided up on Q3 revenues but the stock fell as the company nears its capacity limitations anticipated next year even sooner. Investors are well aware that the company needs to have meaningful new capacity put online next year and the company’s unexpected growth so far this year has moved that deadline forward. For the first half of 2017 the company grew revenues 16%, far in excess of the single digit growth anticipated at the start of the year. This quarter TSEM’s revenues reflected organic growth, ex-TPSCo and Maxim, of 26%. As this success trickles into earnings models, revenues estimates start to bump up to physical capacity constraints, rather than demand. The operation has a run rate capacity of $1.6B, which is a $400 million quarter. Investors await an announcement as to the costs and benefits of a solution by year-end.

TowerJazz reported Q2 2017 revenues of $345 million versus last year’s $305 million, up 13% and $330 million in Q1 2017. This was in line with guidance. The company gave midpoint guidance of $355 million in revenue for Q3 2017, pointing to revenue growth of 9%. This is $7 million higher than we had forecast, but indications are that some of this increase is from pulling some Q4 revenues forward.

Gross margins continue to improve with capacity utilization and product mix. Gross margin for the quarter was 26.4% versus 23.8% last year and 25.7% in Q1 2017. Importantly the sequentially additional $15 million in sales generated $6.3 million in gross margin dollars or 42%. This 42% is expected to trend higher with higher sales and by 2018, be aided by product mix. By then there will be sales of 12-inch product that can yield over 60% gross margin, moving the average up sequentially throughout the year.

While revenues grew 13%, gross margin grew 25% and operating income grew 26% to 17% of sales. Operating leverage from Tower’s fixed cost structure should continue to propel earnings growth ahead of revenue growth going forward, until of course the company takes some major action to add to capacity.

Fully diluted GAAP EPS was $0.49 versus $0.40 a year ago. Adjusted Non-GAAP EPS was $0.52 versus $0.40, up 25%. Adjusted EBITDA was $108 million versus $87 million a year ago. At today’s price, this is an enterprise value to EBITDA run rate of 6.2 times. 

2017 Forecast


Giving the company’s revenue guidance for Q3, we are tweeking our revenue forecast for the year from $1.378 billion to $1.385 billion. We are now looking for non-GAAP EPS of $1.91 versus our previous $1.89 due to the two-cent beat this quarter.

Capacity Utilization and Plans

The company continues to accumulate cash and now has net cash of $131 million versus a negative $48 million a year ago. Its quick ratio is high at 2.6xs and it has $553 million in working capital. The company is no doubt stockpiling cash for potential acquisitions of fabs or other ventures to increase capacity. By Q3 or Q4, TowerJazz will have to make a decision how to increase capacity. It needs to have something in hand by the end of the year to meet 2018 capacity needs. If it were to build a fab, we believe it is having discussions with a municipality in China that would fund the project while Tower provides the equipment and expertise. Alternatively it could seek out a fab for sale from an owner that would still guarantee to use some production capacity much like Panasonic or Maxim did. There is some hope that industry consolidation in the client base could create some opportunity. A third possibility is an acquisition of an undervalued asset where TowerJazz’s ownership could add value and provide it entry to new markets. 

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