Tower Semiconductor Ltd. (TSEM) Earnings Call Transcript

Extremely accurate.

Yes. Are there other verticals, end markets that you're focused on, where you're potentially -- where you're looking to gain share?

So one of the big areas driving our growth right now, what we had guided when we went into the year or set as a target and what we reiterated with our Q1 release is that we see a notable quarter-over-quarter growth throughout the year. And I'm not sure that there's so many semis that are seeing that. An area of very big tailwind for us is that of RF SOI with mobile platforms for front-end module. If you look at that, it's probably a derivative of 2 things. Firstly, you have a continued adoption of 5G with the increased content of 5G although the background market itself still doesn't appear to be overly strong. So one would have to assume that we're growing market share with new customers that we brought on as well as that our existing customers themselves are growing market share. The vertical that we see there, that's very important for us is that we are running presently at 100% capacity, 100% utilization for the RF SOI. I think as a result of good planning, but maybe also a bit fortuitous. We entered into a partnership several years back with ST to where we took on a portion of their factory in Agrate, Italy. That is in final stages of qualification and should be ramping in RF SOI in Q3 and Q4. So the growth that we see and the demand that now is at the limit of what we can ship, we'll continue to be able to be met by capacity that we're bringing online in Agrate and under a model that I think is a very, very interesting model. It's a greenfield-type model, if you will, in that it's a new facility, but it's a model that for both Tower and ST is a very interesting one in that it would be very hard to have a greenfield activity where with the first 3, 4 quarters of a production ramp, you would expect it to be net profit accretive. But here because a lot of the cost and the utilization levels are shared between 2 companies, we believe that come the second quarter of 2025, according to what we see on forecast and the volume of what we'll be shipping then will be EPS accretive. And so it's a model that twofold. Number one, allows us to grow in revenue in meeting customers' needs in this market that remains very strong, at least for us, and there's a content enriching market as well as the fact that the model of capacity that we've grown is a very smart model that allows a greenfield type activity to certainly have much better financials than a greenfield type activity. But that's only wonderful. We're also seeing extreme benefit and growth in our activities in power management. So we're very close to being acquired a few years ago by Intel in February of '22. We signed a DA with them. There were a series of customers who are very interested in our 65-nanometer BCD power platform, but our capacity at the time was somewhat restricted. Under the auspices of the Intel manufacturing footprint, we were able to work with them and a specific end customer that many of them were beating was very happy to be working with us on that platform that was an advanced platform due to the fact of now having the capacity to meet their long-term needs. At the onset of this deal with Intel, we work to have at arm's length capacity agreement, capacity corridor, ultimately, in the Albuquerque, New Mexico facility of Intel. We signed that deal. It was done. The acquisition did not go through. We never ultimately got Chinese regulatory approval, but the capacity is there, and it's a very high-end capability in 65-nanometer BCD that right now is having customer prototype starting to go through Q3, Q4, and we should be having our first production ramp in the second half of 2025. And that deal that we did with Intel is a capacity corridor of 22,000 wafer per month. That has a potential to go into other deals, but that deal itself gives us a very strong capacity. So when you talk about the verticals, if we look at what we're doing with the RF SOI in Agrate, what we're doing with the power management in Albuquerque as well as what we're doing with silicon photonics, both in 200-millimeter and 300-millimeter and the silicon germanium in both 200-millimeter and 300-millimeter. We have right now a capacity footprint that will allow $1 billion of growth and more or less according to our long-term model, a doubling of our net profit to $500 million off of capacity that has already been established or is being established but has already been agreed to.

Yes. Any impact from the recent earthquakes on capacity and utilization, specifically in Japan?

Yes. So the earthquake was an incredible New Year's present that happened exactly on the 1st. Fortunately, and the foremost, we did not suffer any harm to human life, which was a very, very big thing. We had 2 factories that are fairly close to the epicenter of the earthquake and also due to very good Japanese-based building regulations neither factory suffered any material damage. There was damage in both factories, in particular, in "furnaces" and it took a little bit of time to get that back up and running. So on a utilization standpoint, both factories suffered somewhat in utilization in the first quarter, and in particular, in the first 3 weeks of January. By the fourth week of January, beginning of February, both factories were up and running as if there had been no impact other than the fact that the work in progress became nonlinear. So it took a period of time to get the factories running as per the amount of moves that they would normally do. But as stated, the 300-millimeter RF SOI is running at full demand. So for the entire quarter, the utilization of the 300-millimeter factory, given the 3-plus weeks of lower utilization or no utilization for several weeks, was it 75%? Our model is 85%. And the Tonami 8-inch factory also had an impact on utilization, but is ramping right now very strong in utilization. But from the earthquake, a short answer, there is no impact whatsoever at this point. There was some small impact during January that I think has been taken up at this point.

Great. Outside of earthquakes what do you see as some of the biggest threats to your business today?

I don't know. I think threat is something maybe overstated. The biggest impetus of any business is to make sure that you keep your key employees excited and motivated that you have an organization that rewards excellence. And within that, that the best people are given the best tools and the support to be successful. I think as long as you maintain an environment that promotes, that inspires excellence, there's not many competitive threats that really can hurt you. If we were to look at specific businesses, we have a fairly good discrete business that we've had for many years. This is a business that it's not a foundry flow that we ourselves own. It's a customer flow that we transferred into the company, and we manufacture for those specific customers. Press release relationships are Infineon and Vishay and there's others as well. That is probably one area that I would say we do not differentiate on directly because it's not our technology. We, in many instances, did co-developments in our factories for next generations, which was a good thing for us. But probably in the area of discretes, which are very low layer count power devices as far as geographic threat, probably China would be the biggest threat for that because of the ability for them to not necessarily be lower cost but have a much lower cost margin model than we would want to be having here. And maybe it'd have government subsidies that are more than 15%.

Fair. Fair. I did promise I was going to leave some time for questions from the audience. Maybe I'll open it up and see if there are any at this point of time. Otherwise, I have a couple more that I can run through. Okay. It doesn't sound like there are a ton of questions. So maybe it will be helpful to kind of hear your thoughts on essentially -- we talked about AI a little bit, and we talked about how AI is kind of drive -- has the potential and is currently driving growth right across the industry. How do you see -- what are your thoughts on like the current state and the future state of the industry? And how do you see the next few years unfolding?

So I think in many segments, the overall semi industry is still a bit weak. Certainly, in power, it's a bit weak. If you were to look at the real blue-chip U.S. IDMs, I think none of them are giving a very rosy story about revenue from power management. But that will rebound with anything within this industry, especially something of power that there's hard to find a device application that doesn't require some degree of power management, be it from discretes or be it from PMICs itself. So that being, I think, right now, the weakest segment, it will certainly recover. As we go forward and look at everything that's being driven within AI and you started with AI, I don't think that, that can be discounted right now. From a social moral standpoint, it's a very, very different story if it's the right direction for a country to take or not. But whether it is or it isn't, the train has well left the station. So it is there. Within all of the speed that's required with AI, both if you're looking at EDGE devices, which ultimately a lot of AI will be done on, you have to look at battery consumption and hence battery conservation, that's all power management. If you look at what's happening in data centers, the burden on the power grid of a nation already is so taxed by data center to be able to have very good power management within that and continuing a power management benefit on reductions, it becomes something that will continue to be very, very critical. So although I think many people and not incorrectly, focus on GPU development in 3-nanometer, 2-nanometer, sub 2-nanometer digital road map, and you look at sub-5 nanometer just for the switches, what's going on within the data center, all of that is critical but the role of analog within the space becomes even more critical. And power consumption, the ability to keep it reduced, so that energy stays under control. If you look at electrification of cars, power management there becomes unbelievably critical -- the battery management and the ability to continue to benefit in that direction. So the power management road map will stay very, very real for a long period of time. The need for advancement is definitely there. If you look at high speed, what we do with everything with optical transceivers, I believe that it is the most critical thing, if anything, you're dealing with AI. And as stated, again, the silicon photonics for both cost and form factor becomes, I think, intrinsic to the success of AI. So over the next years, the semiconductor will remain unbelievably strong, must be strong. At whatever specific day power management or this business or that business rebound may be less significant than the fact that it must rebound. Data center itself must become stronger. The ability of doing a lot of AI with EDGE computing becomes needed, essential will happen. So that's the relevance that I see for an analog company such as Tower only accelerates quite drastically. For us, the important thing is to make sure that we stay relevant on customer relationships, driving next-generation road maps, understanding specifically from lead customers, what the figures of merits are that they need, driving to make it done and doing very smart deals that allow investors to enjoy our capacity growth. What we did in Agrate, what we did with Intel, I think were very smart deals for investors. There's other activities happening now. There are certain countries that are very desirous to get involved in semiconductor that are offering very, very large incentives. And I'm not saying that we would or we wouldn't be involved here. But if you look at India right now between the Central Government and the State Government, they're offering 75% incentive. That's a pretty amazing thing. If you're going to go ahead and build an 80,000 wafer per month analog factory for a cost of $10 billion to be able to start off with a $7.5 billion grant probably a reasonable place to start. So there's many things going on in the area right now that we need to focus on to make sure that we stay not just relevant but become more relevant as time goes on. As stated, we have right now at hand, $1 billion of revenue that we can be using against a $1.5 billion run rate. So we have a good 40% growth that we can have within the next 3, 4 years, but to make sure that we have additional capacity that will be online after that, that takes activities within the next couple of years to make sure that that's at hand. And capacity that's filled with very advanced technologies that's, I think, the name of success in what we do. So if that answered your question?

It did. It did and more. Appreciate -- no, it was great. It was fantastic. No, those were all the questions I had, Russell, for you today. I really appreciate you taking the time to be here and appreciate everyone for sitting in on the session as well. And if you have any other questions, I'm sure you can find Russell on his way out. But I appreciate it. Thank you so much.

Thank you. Appreciate it.