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TSEM: Seasonality and Mobile Weakness Hits Q1

By Lisa Thompson


After years of quarterly revenue growth, seasonality mobile phone weakness hit TowerJazz (NASDAQ:TSEM) causing it to report a down first quarter. Revenues were $313 million, down 5% from a year ago and at the low end of expectations. The company guided to a midpoint revenue range of $325 million plus or minus 5% for this quarter. The company believes last year’s Q4 to Q1 decline was abnormally small because “certain areas that it was involved in then were seeing some surges and market demand outside of seasonality, and it was growing in market share in certain areas that allowed it to curtail seasonality.” TSEM also pointed to weakness in sales to customers who sell to smartphone makers.

Revenue growth is expected to improve in the second half of the year primarily because of the company’s Japanese fab’s ramp of 300mm production, a process that has taken two to three years to achieve.

TSEM reported adjusted non-GAAP EPS year over year growth to $0.31 versus $0.50 a year ago, down 48% year over year, and compared with $0.58 in Q4 2017. Adjusted EBITDA was $84 million versus $105 million, down only 17%.

Gross margin for the first quarter was 21.2% versus $25.7% a year ago and 25.0% in Q4 2017. The growth margin contraction was actually less that the incremental sales margin model would have predicted. Gross margin is expected to improve throughout 2018 as sales increase and as high margin SiG capacity increases and higher margin 300mm product ramps in the second half.

R&D costs for the quarter were $2.5 million higher than last year and M,G&A decreased $243,000. These increased costs combined with lower gross margin caused operating margin to decline six percentage points year over year. On a dollar basis it was down 40%.

After taking out a million for taxes and $1.1 million for minority income, GAAP net income was $26 million versus $46 million, while non-GAAP net income was $31 million versus $52 million.

Diluted GAAP EPS was a profit of $0.26 per share versus $0.45 last year. Adjusted non-GAAP EPS was $0.31 versus $0.50 a year ago. The diluted share count decreased 3.6%, while the all in share count increased 0.4%.

2018 Guidance

Management expects revenues in Q2 to be at $325 million plus or minus 5%. The midpoint would be down 3% from last year. The other guidance the company gave is that it expects Q4 to show at least 25% organic growth over Q1, not including revenue from Maxim or Panasonic. If we assume those two were $120 million of Q1 revenues, this points to a floor of $361 million versus $358 in Q4 2017. Management also indicated it expects Q4 2018 to have higher revenues than Q4 2017, which fits with that number. The company is now targeting single digit organic growth for the year.


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