Zacks Small Cap Research – TSEM: Tower Projects Sequential Revenue Improvement Throughout the Year Despite Industry Doldrums – Technologist

By Lisa Thompson

NASDAQ:TSEM

READ THE FULL TSEM RESEARCH REPORT

Tower’s (NASDAQ:TSEM) quarterly revenue again declined in Q1 2024 as expected but the company expects quarterly sequential improvement throughout 2024 as 300mm capacity comes on line and certain products see increasing demand. We could see revenue growth return by Q3 2024. TSEM now trades at an enterprise value of $2.8 billion, or 2.0 times EV to estimated sales for 2024 versus its peers who trade at 4.3 times. Even at the low end at 2.4 times sales, Tower’s market cap would be $4.5 billion or $40.23 per share.

The company highlighted its success in Silicon Photonics which contributed 5% of revenues in Q1 2024. This new business is experiencing high demand and interest for use in 800g pluggables used in data centers and spurred by the demands of AI. While still early days, Tower is talking to all the major players in the optical market, many of which are already customers for other products. It expects even more success as the market moves to 1.6T speeds where photonics will be the only game in town.

The company continues to see weakness in automotive which was 10% of revenues ($32.7 million) in the quarter compared to 12% ($42.2 million) in Q4 2023.

Fab utilization is still weak and below 2019 and 2020 levels but improving. There is a gap in our table below as the company did not report numbers right before and during the acquisition attempt by Intel. During Q1 2024 the company began to move some production from its 40-year-old Fab 1 to Fab 2 to consolidate production and reduce expenses. It is also shutting down some lines no longer needed and possibly selling off the equipment. Fab 1 itself is leased from the government and not owned. In addition, it started shipping small amounts of product from its new Agate fab which will continue to ramp for the next two years. It has not reported utilization. All its capacity there is already spoken for 2024 and 2025. Also, on January 1st there was an earthquake in Japan that disrupted production and caused damage to some products and equipment. All is back to normal now and the fab is back to a fully loaded utilization of 85%.

Q1 2024 Results

Revenues in Q1 2024 were $327 versus $356 million in Q1 2023 and were down 8% year over year. Revenues declined sequentially as expected due to the softness in demand from customers almost across the board. The company guided to a sequentially up Q2 2024 of $350 million plus or minus 5% near flat with last year.

Q1 2024 gross margin decreased to 22.2% from 26.9% a year ago and 24.0% in Q4 2023. Gross margin dollars decreased by $23 million, or 24%. Operating expenses without last year’s one-time charges were up $661,000. The operating margin declined to 10.2%. Other income was $4.0 million compared to $7.0 million in last year’s quarter. The company expects it to fluctuate between $4 million and $7 million per quarter.

Pretax profit was $38.0 million versus $64.8 million a year ago without the one-time gains. Taxes were a reversal of $5.1 million in the quarter compared to payment of $15.0 million last year, or a tax rate of -13.4% due to an over-accrual in previous quarters. The company still expects a more normalized rate near 14% for the year. GAAP net income was $44.6 million versus $71.4 million last year, while non-GAAP net income was an estimated $51.8 million versus $62.0 million a year ago, down 16%.

Diluted GAAP EPS was $0.40 per share versus $0.65 last year. Adjusted non-GAAP diluted EPS decreased to $0.46 versus $0.60 a year ago. Average diluted shares for the quarter were 111.6 million, up from 111.1 million last year. EBITDA for the fourth quarter of 2023 was $101 million compared to $121 million a year ago and down sequentially from $117 million in Q4 2023.

Balance Sheet

On March 31st, the company had cash, short-term deposits, and marketable securities of $1.24 billion or $11.21 in cash per share. We estimate it is earning between 5% and 5.5% on about $800 million of that amount. Total debt decreased by $22 million to $209 million from the last quarter. It is only paying 2% interest on about $200,000 of that debt. Its quick ratio decreased to 4.5xs and it has $1.4 billion in working capital. Operating cash flow was similar to last quarter at $108 million. Free cash flow was $11 million after spending a net $98 million on cap ex in the quarter. Cap ex expenditures are expected to be between $100 million and $150 million per quarter going forward for the next four quarters as the company continues to build out Agrate and New Mexico. While it typically spends $180-$200 million per year, it will spend a total of $350 million on Agrate, and $300 million for New Mexico. This heavy spending is expected to put the company in negative free cash flow territory for the next year or so.

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