Tower Semiconductor Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Tower Semiconductor First Quarter 2024 Financial Results Conference Call. All participants are currently in a listen only mode. Following management's prepared statements, instructions will be given for the question and answer session. As a reminder, this conference is being recorded May 9, 2024.

Operator

Joining us today are Mr. Russell Ellwanger, Tower's CEO Mr. Oren Shirazi, CFO. I would like to turn the conference call over to Ms. Noit Levi, Senior Vice President of Investor Relations and Corporate Communications.

Operator

Ms. Levi, please go ahead.

Speaker 1

Thank you, and welcome to Tara Financial Results Conference Call for the Q1 of 2024. Before we begin, I would like to remind you that some statements made during this call may be forward looking and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected. These uncertainties and risk factors are fully disclosed in our Forms 20F and 6 ks filed with the Securities and Exchange Commission as well as filings with the Israeli Securities Authority. They are also available on our website. Tower assumes no obligation to update any such forward looking statements.

Speaker 1

Please note that the Q1 of 2024 financial results have been prepared in accordance with U. S. GAAP. The financial tables and data in today's earnings release and in this earnings call also include certain adjusted financial information that may be considered non GAAP financial measures under Regulation G and related reporting requirements as established with the Securities and Exchange Commission. The financial tables include a full explanation of these measures and the reconciliation of these non GAAP measures to the GAAP financial measures.

Speaker 1

We have a supporting slide deck complements today's conference call. This presentation is accessible on our company's website and is also integrated in today's webcast for your convenience. Now I'd like to turn the call to our CEO, Mr. Russell Ehlinger. Russell, please go ahead.

Speaker 2

Welcome, everyone. Thank you for joining our Q1 2024 earnings conference call. I have been looking forward to this opportunity to discuss our performance and positive outlook. Revenue for the Q1 was in the upper half of our guidance at $327,000,000 We delivered a net profit of $45,000,000 representing a net margin of 14%. For the remainder of 2024, our target is to achieve quarter over quarter revenue and margin increases.

Speaker 2

Our guidance for the Q2 is for revenue to be $350,000,000 plusminus 5%. I'll now provide a breakdown of Q1 revenue per major technology group. For reference, please see Slide 3. I'll refer to the business momentum we see for each group and highlight significant achievements. RF mobile predominantly RFSOI represented 37% of revenue in the Q1 of 2024, a strong increase against the 2023 run rate.

Speaker 2

We continue to experience strong demand from RFSOI customers. Our 300 millimeter RFSOI capacity at Wozu is fully utilized. We are addressing excess demand by transitioning some production to Agrate, where we are currently working through final steps of production qualification towards production ramp, which remains on track with the planned schedule. This transition and capacity will extend through 2024 into 2025 to meet the forecasted growth in customer demand. Ramping up the new facility in Negrati will bring as previously communicated some expected reduction to margins in the short term due to added depreciation and start up costs at low utilization, but will be offset and become accretive with the ship volumes we expect to achieve within the first half of twenty twenty five.

Speaker 2

This is enabled by an accelerated corridor for profitability through having partnered with ST. We continue developments in 200 millimeter and 300 millimeter RFSOI technologies, setting industry benchmarks in efficiency and power handling, having customer demonstrated sub-sixty femtosecond R on C enhancing battery life and signal receptions and handsets. Please see Slide 4. The increasing RF content in 5 gs handsets drives market growth and our technological advancements have captured increased market share. This momentum is expected to be strong throughout all of 2024 and expected to be so for 2025 as well.

Speaker 2

RF Infrastructure business represented 14% of revenue this quarter, an increase from 10% in the Q4 of 2023. During the past quarter, we experienced strong performance in our RF Infrastructure business, where we provide optical transceiver components such as silicon germanium and silicon photonics for AI infrastructure, data centers and datacom markets. This performance is a testament to our strategic initiatives and technological advancements in this sector. The growth was attributed to several factors: expanded market opportunities driven by substantial investments in AI the introduction of new products for higher data rates spurred by AI developments and the unexpected rapid adoption of silicon photonics for 800 gs with an increased interest in lower latency and lower power architectures like linear pluggable optics LPO. Additionally, we've seen a recovery in legacy product orders after the previous quarters of inventory adjustments.

Speaker 2

Our achievements in solid Photonics were marked by a technology award from Coherent and a partnership with Innalight, the top 2 worldwide optical integrators. We are advancing in 400 gs and 800 gs products and pioneering with select customers on 200 gs per lane technologies for future 1.6T system. Including Innalight and Coherent, the top 2, we have active silicon photonics programs with 6 of the top 10 optical integrators. Validating these achievements, the Optical Fiber Conference March 25 through 29 in San Diego felt much more like a family reunion than a conference. It's gratifying to see our vision of creating an open silicon photonics foundry coming to fruition.

Speaker 2

Beyond Datacom, our engagement with automotive leaders in frequency modulated continuous wave based please see Slide 5. Please note, we have over 50 SIFO customers, most of which in active silicon phases. Silicon Photonics currently represents 5% of our revenue, greatly accelerated by the adoption of AI with momentum that is extremely strong and promises to be long lasting. In the silicon germanium segment, we are experiencing renewed demand, thanks to new high data rate products, active cables and LPO technologies. LPO is enhancing the silicon germanium market by integrating equalizers and receivers and transmitters, eliminating the need for the DSP in the pluggable module, hence reducing costs, power consumption and latency, all crucial for AI and data center application.

Speaker 2

Please see Slide 6. Momentum is strong through the year and expected to be so beyond as well. Sensors and displays represented 15% of the total revenue in Q1. We continue with all development and manufacturing activities as detailed last quarter. Please see Slide 7 for a review.

Speaker 2

We expect a notable increase in imaging revenue from Q1 to Q2 and to maintain that strong level throughout the year. Power IC business, excluding Power Discrete, represented 10% in the Q1 of our corporate revenues. Present POs show substantial increase in Q2 revenue with further increases throughout the year. We view Q1 as the low point in revenue for our Power business and expect long term growth thereafter. We are progressing with Power Management Platforms qualification in Albuquerque under our capacity agreement with Intel with on target initial silicon results.

Speaker 2

We anticipate starting customer prototyping in the second half of twenty twenty four, leading to qualification and production ramp start in 2025. See Slide 8 showing our power offerings over a large voltage range. Power Discrete business was 14% of revenue and expected to be stable at this revenue level throughout 2024. Mixed Signal CMOS business was 8% of revenue and about 2% was miscellaneous for this period. Our fab utilizations for the quarter: Fab 1, which as announced will be operationally consolidated into Fab 2, was about 65%.

Speaker 2

Fab 2 8 inches was about 75%, Fab 3 8 inches at about 45%, presently at a very high ramp. Fab 5 8 inches was about 40% impacted by the earthquake in Japan and is presently ramping. Fab 7 12 inches was about 75% due to earthquake impact. And since recovery from the earthquake, it has been fully loaded, which to remind per our model is 85% utilization. Fab 9, 8 inches was about 60% related to the worldwide decreased demand for power management.

Speaker 2

With that, I'll turn the call to our CFO, Mr. Oren Shirazi. Oren, please.

Speaker 3

Hello, everyone. Earlier today, we released our Q1 financial results. For the Q1 of 2024, we reported revenue of $327,000,000 gross profit of $73,000,000 and net profit of $45,000,000 reflecting 14% net profit margins. I will now begin a more detailed review of our results, first analyzing the P and L highlights followed by our balance sheet. Revenue for the Q1 of 2024 was $327,000,000 in the upper range of our guidance compared to $352,000,000 in the Q4 of 2023.

Speaker 3

Gross profit and operating profit for Q1 were $73,000,000 $34,000,000 respectively, aligned to our financial model compared to $84,000,000 $45,000,000 respectively in the prior quarter. Net profit was $45,000,000 reflecting 14% net profit margins or 0 point $4,000,000 reflecting 15 percent net margins or $0.48 diluted per share in the prior quarter. Moving to balance sheet and future CapEx and cash plan. As of end of Q1, twenty twenty four, our balance sheet assets totaled $2,980,000,000 compared to $2,580,000,000 in the same period last year, primarily comprised of $1,180,000,000 of fixed assets, mostly machinery and equipment and $1,740,000,000 of current assets. Last week, we were very happy to receive an updated corporate credit rating from Standard and Poor's.

Speaker 3

Following their annual review, our rating has been reaffirmed at ILAA including a stable outlook for the company. This reflects the robustness of our financial position and underscores our ongoing commitment to maintaining a strong financial foundation. Current asset ratio, reflecting the multiple by which current assets are larger than short term liabilities is very strong at 5.4x. Shareholders' equity reached a total of $2,500,000,000 at the end of Q1, further increasing from $2,400,000,000 at the end of December 2023 and from $2,000,000,000 as of the end of March 2020. Our strong financial position enables us to plan the following investments in strategic opportunities that are aligned to our vision.

Speaker 3

Approximately $500,000,000 of total aggregate cash was allocated to make investments in equipment and other CapEx items required for the 12 inches factory in Agrate, Italy following the previously announced STMicro Partnership agreement signed in 2021. We have already invested $340,000,000 to date, while $160,000,000 are to be paid from Q2 2024 to the end of 2025. In addition, as previously announced, we will invest up to $300,000,000 in the coming 2.5 years to buy equipment and other CapEx items that we will own in Intel's fab in New Mexico, enabling us to ramp up fab capacity and capabilities for our customers. These payments will commence in Q2, twenty twenty four. In addition, we expect our maintenance CapEx baseline level to remain as previously announced at about $200,000,000 per annum.

Speaker 3

And lastly, we expect to invest additional cash to acquire more capability CapEx tools and other assets to expand our technology offering including increasing our 5 gs and SIFO capacity and technological offering to enhance our flexibility and support our customers from our various sites as well as change our product mix to a richer mix from margin perspective. In summary, the above investments are aligned to our business strategy as well as financial model as previously presented by the company this past November. In the model, we outlined a revenue target of $2,660,000,000 per annum that could be achieved by loading our existing facilities at 85% utilization, which would result in $500,000,000 annual net profit. Now I'd like to turn this call back to our CEO, Mr. Erwin Gerd.

Speaker 2

Thank you, Oren. We'd like to go ahead at this point with whatever questions you might have, at which time at the end of which I will come in and give some summary and concluding statements. Please.

Operator

Thank you. The first question is from Kodiak Cree of Benchmark. Please go ahead.

Speaker 1

Hey, Cody.

Speaker 4

Hey, guys. Thanks for taking my questions and congrats on the progress. Oren, if I can maybe start real quickly on a point of clarification or further color on your CapEx expectations. You've mentioned increasing your, I guess, your maintenance level, but increasing some of your core CapEx on your fabs to, what would you say, further expand some of your leadership products and shift your mix to those areas. Can you just add some specification to what you're expecting to spend?

Speaker 3

Yes. We did not mention, I mean, I mentioned the $500,000,000 grant of which we are left with €160,000,000 to pay for Q2 until the end of 2025 plus Intel's 11x 300,000,000 that will start to be paid this quarter and the maintenance CapEx $200,000,000 a year. In regards to the additional machines that we want to buy for SiGe and SiPho and other, we are still evaluating now the plans. We didn't yet come up with final numbers. It will be in the order of many, many tens of 1,000,000, but of course we have the cash to support it from our balance sheet.

Speaker 4

Okay. And any swaps at what that might do to your $2,660,000,000 of revenue potential support?

Speaker 3

No, this is already included, meaning when we presented the model in November with the $2,660,000,000 revenue, all these CapEx that I'm saying here are already included, the fact that we don't yet know exactly how much they will cost and didn't finalize the plan, it's still our multi year plan that reached the $2,660,000,000 include revenue from those machines that will improve the and this is already built into the model. It's not an addition.

Speaker 4

Okay. Very good. Thank you for that clarification. And Russell, I guess with for you, your comments in your prepared remarks and in the press release were very encouraging. You talked about gaining some visibility from customer forecasts.

Speaker 4

Has that also translated to improving customer orders or is that more of a longer term outlook?

Speaker 2

Good question. The orders that we have is very much related into the optimistic forecast we have for this year of quarter over quarter growth. What I was referring to was inputs from customers, forecast from customers specific around data center that would show that the inventory has been burnt off in the legacy data center in addition to the orders that we're getting, for acceleration of 800 gs. So and then we've also begun to start seeing some increases both in POs and in forecast for Power Management. But Power Management, as I stated Q1, we see it as having been the low in our business if I look really very closely at our plan for 2024.

Speaker 2

But the power management, specifically automotive, is still, I think, burning off inventory, but with signs right now that there will be new buys. But the overall power management market I think is still weak. If we look at our own numbers for 2024 versus 23, it is deficient to the 23 total. But the growth that we have within our plans is really dependent on POs and pretty vetted forecasts, Not what I'm talking about the trend of the market itself recovering.

Speaker 4

So Okay. And Russell, thank you. I'm sorry.

Speaker 2

I'm sorry, Cody. Should the market recover within some short term, which I don't know, that would be accretive to the targets that we have right now. But it's not that clear. What I stated was really signs of recovery.

Speaker 4

Okay. And specifically in Power Management, just to be clear, you are still seeing inventory excesses pressure that market, but you are expecting Q2 to be a

Speaker 5

low point for that market?

Speaker 2

No. Q1 already passed was a low point.

Speaker 4

Q1, sorry.

Speaker 2

Yes. We have substantial increase in power management from Q1 to Q2, which you might see reflected in the increased guidance. But and then we would see also growth in Power Management throughout the year, but not having recovered to highs of previous years.

Speaker 4

Okay. That's very helpful. Thank you very much. I guess if you could handicap your end market, either order rates or forecast visibility improvements, where do you think you're going to get the best growth recovery from through the second half?

Speaker 2

The growth is very strongly related to data center, a lot with AI, I think, and then also with RFSOI. Those are the 2 bigger growth markets. As well against the Q1 baseline is 300 millimeter power management.

Speaker 4

Thank you very much Russell for that. I guess just on the AI business, I think I've asked this in the past, but maybe we can revisit it. Just have you had a chance to parse out your business that is AI levered, whether that be on the data center piece of business or even as we're looking at AI shifting more toward consumer and devices as such as smartphones. Can you talk about your overall AI leverage?

Speaker 2

I think the bulk of it right now is pluggables going into data center. I don't think there's an awful lot going into a mobile phone at this point, if any. But certainly, the movement within the pluggable to move away from discrete indium phosphide detector modulator to monolithic SIFO with an integrated modulator and silicon detector then the passives within the guide being part of the pluggable, that's where we see the growth right now.

Speaker 4

Okay, great. Thank you for that Russell. Are you I guess just two quick ones. Are you seeing any impact in March or June from the end of life pull ins from the Fab 1 shutdown?

Speaker 2

Not material. If we were to look at Fab 1, I would say probably the revenue levels in Fab 1 are higher for the year because of end of life than they would be otherwise. And that's why we decided to consolidate certain flows into Fab 2 and to end of life those that were really by customer demand going to be end of life in general. But it's not an appreciable increase against previous year run rates. If anything, it brings it back almost to previous year run rates.

Speaker 4

Okay. Thank you for that. And then lastly, just any impact on pricing, wafer pricing as the business is recovering as you're looking at the rest of the year?

Speaker 6

Long term.

Speaker 2

I'm not exactly sure what you mean by recovery. We've not had a decrease in pricing. We're not seeing huge increases in pricing. But what we do have always is the newer the platform, the higher the prices for the platform. So I expect as with most years that our ASP will this year maybe especially will probably increase if we look at for all of the silicon layers that were sold versus the silicon layers last year because of a much richer mix with silicon photonics, which is a new platform that has a different price point on a price per layer than other platforms and probably is the highest price per layer that we offer.

Speaker 4

Okay, great. Thank you guys. I really appreciate all the color.

Speaker 2

Appreciate your questions. Thank you.

Operator

The next question is from Richard Shannon of Craig Hallum. Please go ahead.

Speaker 2

Hey, Richard.

Speaker 5

Russell, hi. How are you?

Speaker 2

Very good. Thank you. Yourself? Excellent.

Speaker 7

I can't complain. It's a nice spring day here. Thanks for asking.

Speaker 2

I'm sorry.

Speaker 7

I didn't hear you. Right.

Speaker 2

It got a little jumbled, Richard.

Speaker 7

Sorry, I lost my headset. So I'm doing the speakerphone. Hopefully, this is good enough.

Speaker 2

Now it's better. Okay.

Speaker 6

Okay.

Speaker 5

Let's see here a couple

Speaker 7

of questions here. You mentioned in RFSOI that you're gaining share. Maybe you can kind of discuss this a little bit here. I think you've talked about having a subset of the customer base out there. Are you gaining new customers?

Speaker 7

Are you getting more share from them? And any way to think about the magnitude of the increase you're expecting to see in kind of the next generation?

Speaker 2

We certainly have new customers that had been supplied by other foundries prior to us serving them now. So there I am quite convinced that we're gaining share. We also have existing customers whose demand last year was much lower than it is presently. So nominally, they've gained share and potentially gain share against people that maybe weren't using us. As far as giving a specific quantitative measurement at this point as to how many points of share we've gained, I wouldn't feel very comfortable to give that as I've not really seen the overall numbers for RFSOI.

Speaker 2

But as the reports get out talking about the amount of modules having been sold and the amount of SOI wafers having been sold. When that data is available, I'll be happy to make comments on it. But I really don't know what the overall market is at this point.

Speaker 7

Okay. Fair enough for those comments. Let's jump over to silicon photonics. Did I hear you correctly that this was 5% of sales in the Q1?

Speaker 2

Yes, sir.

Speaker 7

Excellent number here, obviously, in the early stages of growth here. I guess a few questions around this here. Do you have any sense of what kind of share silicon photonics has an 800 gig generation and any thought process about how that changes? I assume it increases as you go to 1.6.

Speaker 2

A qualitative feel, certainly. At the 800 gig, it's basically a 4x200, right? So the cost of doing the discrete detectors and as compared to doing the monolithic SIFO become substantial as well as the form factor.

Speaker 3

If you

Speaker 2

go to the 1.6 T, it's an 8x200, in which case form factor becomes very critical as well as cost. So how much SIFO is right now at 800 gs? I don't know. I really don't. That's where I think our biggest cut in is, and I believe that the bulk of all the 5% of the corporate revenue of Q1 was into 800 gs.

Speaker 2

What percentage that is? I don't think that it's the major percentage of 800 gs at this point. But 800 gs itself is surprisingly quickly being adopted. According to reports of 2 years ago, the very little 800 gs now. And I think 800 gs is probably 40%, 50% of the market at this point.

Speaker 2

But and 1.6 gs is probably already going to be cutting in at the end of 'twenty four, certainly in 2025. But I couldn't tell you exactly at 800 what the, SIFO percent of sales will be. But I think at 1.60 it will be very substantial.

Speaker 7

Okay. That sounds great here. And you also called out in silicon photonics having 6 of the top 10 pluggable module suppliers as customers here. I guess two questions around this. I just thought that's what

Speaker 2

I said. I said is SIFO engagements. There might be more that are customers, but not with SIFO. What I talked about specifically was 6 of the 10 top players that we were engaged with SIFO and not that all 10 are engaged with SIFO themselves, but 6 of the top 10 were engaged with SIFO. I didn't say how many are our customers specifically.

Speaker 2

But at least 6 of 10 are our customers, maybe more are our customers

Speaker 3

outside of SIFO.

Speaker 7

Okay. And I guess to that point here, do you see the potential for seeing that number increase here as you go to 1.6?

Speaker 2

Yes, sir.

Speaker 7

Okay. Excellent. Great to hear.

Speaker 2

I actually think it's already increased.

Speaker 7

Okay. Great. I was just

Speaker 2

I didn't say it. Whereas to say 6 was a sure bet.

Speaker 7

Okay. Fair enough. Wonderful. I guess a quick question here as we think about your overall revenue profile with 300 millimeter versus 200. You talked about I think even today here about expecting some increase in 300 millimeter power management.

Speaker 7

I know you're trying to to drive 300 millimeter into more of your product lines here. So can we give a general sense of where you sit in terms of revenue exposure 300 millimeter? And then how does that progress over the next 1 to 2

Speaker 6

years?

Speaker 2

Right now, it's a bit over 20% of our revenue. And it is obviously if you look at the fact that the capacity that we're growing is in Grotte, that's 300 millimeter and in Albuquerque, that's 300 millimeter, it will be substantially higher. So a good portion of our plan of the $2,600,000,000 is 300 millimeter growth. So I would say that by the target of the $2,600,000,000 the majority of our business will be 300 millimeter.

Speaker 7

Okay, excellent. Last question for me, I'll jump out of line, Russell. I want to get your sense here of thinking about the revenues for the year. I think you've characterized this call as in last call, we're going to see sequential growth throughout the rest of the year. I guess two questions to that end.

Speaker 7

How do we think about the growth profile in the next two quarters of the year kind of qualitatively? Would you expect the Q3 to be similar or higher sequential growth? And then as we've seen in your normal patterns in the past, the Q4 tends to be more flattish or at least a lot lower growth than the 3rd. Is that still a revenue profile that we should count on?

Speaker 2

Well, I'm not sure I want to commit to that question. But what I said at the previous call was that there would be notable growth in the quarters. I still feel that we'll have notable growth in the quarters. Will it be a continuum of a 7% or an 8% or a 9%. I'm not committing to that.

Speaker 2

But I do believe that Q2 to Q3 will be a notable growth. Okay.

Speaker 7

Maybe I'll ask the question slightly different way, which is to ask you a question I asked you on the last call, which is you expect to grow this year. I think you said you'd be disappointed if you did not. Is that still your expectation?

Speaker 2

I'd still be disappointed if we don't.

Speaker 7

Okay. That is all my questions. I'll jump in the line.

Speaker 2

Thank you, Richard. Appreciate you. Thank you.

Operator

The next question is from Nnedi Hosseini of SIG. Please go ahead.

Speaker 6

Yes. Thanks for taking my question and a couple of follow ups from Mauryan. Russell, if silicon photonics is about the 5% of your revenue in Q1, how should we think about the contribution, either the percentage of revenue or sequential growth by Q4 of this year? And I understand I'm not asking for the year end guide, but I just want to see how these new wins and new markets are helping you with the overall revenue trajectory?

Speaker 2

The level of revenue of Q1, we would see it in Q4 being higher, but the level of revenue for the company will be higher in Q4 as well. So I don't think that photonics. But staying at the 4.5% to 5.5% level would be a higher silicon photonics revenue baseline for that 4.5% to 5% contribution, if that answers your question.

Speaker 6

Yes, absolutely. And then is there like a kind of synergy between silicon photonics and silicon germanium? And is that what's enabling you to be that basically you're the first one with silicon photonics revenue. Is that is silicon germanium enabling you to do that?

Speaker 2

Certainly, there's it's both at this point going into the pluggable. So it's more or less the same ecosystem of customers and end customers. Also within the SIFO platform that we have, we're doing a germanium modulator. So we have experience with SiGe to be And then specifically, I'm not trying to sound overly arrogant, but I think that our RF technology team is pretty much the best in the world. So it's all within the frame of what they serve and what they know.

Speaker 2

And the advancements that we're continuing on the platform, looking at new modulator materials, etcetera, I think that that will keep us in a very strong leadership position and it's based on having incredibly capable people.

Speaker 7

President of the

Speaker 2

company, Marco Racanelli is an RF expert. The person running these activities at Prisler is I think the best of the best. So really having his whole team, I mean, I could give you several handfuls of people that I'd be fearful of them getting recruited. So, but they're really excellent, excellent people. And that's but it is it's related to our silicon germanium, but as well it's related to the capabilities of the people that are doing silicon germanium and know that RF space so well.

Speaker 6

Okay.

Speaker 2

And I won't play this. We have extremely good customers that are very good partners within that. We've done several press releases with Anelo in the past. The CEO of Anelo, Mario Panichia has been an amazing partner that in general has been very helpful for us. So the customer base that we have and the way we work with our customers are also tremendous enablers in technical advancement.

Speaker 6

Just on that note, given how sophisticated the analog design is and the characterization of silicon, Even if competition catches up, these wins are sticky. I shouldn't be concerned with any pricing pressure like into next year because competition is catching up. You could be a single source for some time. Is that the right way of thinking about these new wins?

Speaker 2

If it's the right way, it's the way I'd like to look at it. I think it's predominantly correct. It's very sticky. And pricing pressure, you always have to work with your customers very closely on prices that allow them to win as well. Pricing pressure, if you have a good customer, it's not that you're being leveraged against A, B or C competitor.

Speaker 2

It's that you're working together to make sure that they're successful in the market. So pricing pressure, I see it honestly in many cases as being a partner to help each other be successful and win. But the way that one mitigates any pricing pressure is by having technological advancements to where you're either decreasing form factor and hence increasing the amount of devices per silicon aerial unit or you're increasing performance to where the value becomes higher of the silicon that you're selling. So but the pricing pressure, I'm not I don't think that that's such a big problem. The fact of having a sole supplier relationship is really where we try to work with all of our customers that's off of having a partnership and trust.

Speaker 6

And in that context, combined the silicon photonics germanium and combined with the shaking and RFSOI, are these going to be margin accretive or margin neutral? Hopefully, it's not margin dilutive.

Speaker 2

The silicon photonics is definitely margin accretive and silicon germanium has always been at the upper end of our margin spectrum in general.

Speaker 6

And RFSOI?

Speaker 2

RFSOI itself is very, very good margin. What dilutes RFSOI margin to some extent is that the SOI substrate itself is very expensive. So RFSOI has a very good revenue contribution, but the margin that you get on the RFSOI is really off of the silicon that you're processing. You're not doing a big uplift on the substrate and the substrate is expensive. So if you look at the total margin of an RFSOI wafer, it's not the highest margin that we sell.

Speaker 2

If you look at the margin per layer of silicon manufacturing, it's very, very good.

Speaker 6

Got it. And then lastly, OpEx of $33,500,000 for Q1.

Speaker 2

I couldn't hear the beginning of the question, if you could repeat it.

Speaker 6

I'm shifting to OpEx. You did $33,500,000 for Q1. How should we model this for the rest of the year?

Speaker 3

Our OpEx are pretty much flat. I mean despite the revenue increase that Russell is talking about, we do not expect to increase those OpEx because they are fixed cost. So I think current level is the level that will stay.

Speaker 6

So just the model kind of flattish going forward? Yes. Okay. Got it. Thank you.

Speaker 2

Thank you for the questions.

Operator

The next question is from Leah Thompson of Zacks Investment Research. Please go ahead. Hi, Leah.

Speaker 8

Hi, there. I do have a couple of questions for you. I was wondering, could you talk a little bit about the electronic vehicle market of how your products go into that and what you're seeing as to what's going on there?

Speaker 2

I'm sorry, I really couldn't make out the question. Could you answer it again or question it again, please?

Speaker 8

Sure. Could you talk a little bit about the the electronic vehicle market and what you're seeing for your products there?

Speaker 2

Sure. Thank you. So the biggest market that we serve and have served within the EV is the battery management, which was right now is not as strong as it had been as the overall automotive is not. But that is an area that we serve. We have a new platform, which is a reserve platform that is gaining a lot of traction for designs for battery management.

Speaker 2

I think the first protos on that will be happening in the 4th and Q1 Q4 of this year and Q1 of 2025 according to recent customer interactions that I had had. So the biggest area on the EV that we have is within battery management. Within automotive in general, we have a variety of other activities that we do. We have now that had been press released over the years, we do radar, silicon germanium based radar. That was with Denso Toyota.

Speaker 2

We have a variety of activities with some automatic door openings, dimming mirrors, certain amount of activities with cameras. And right now, a lot of activities, be it with electric vehicle or not, dealing with LiDAR. I think I mentioned that in the script with the I know that I did, dealing with silicon photonics for FMCW based lidar, which has not gone into mass manufacturing yet, but promises to really be that which will take over on autonomous driving for LiDAR market. So those are the major activities that we have with automotive and specific with electric vehicles. Now there's many other products that we serve within automotive as well that comes from having purchased the Maxim facility where the bulk of the long term contract we have is serving automotive.

Speaker 2

That's very captive within Maxim and the specific applications that are served within there, I really shouldn't get into because that's Maxim's business and not mine. But we serve Maxim on a contract, the whole ADI at this point and that's predominantly automotive.

Speaker 8

So are you seeing demand up, down or sideways?

Speaker 2

I said initially that the automotive demand is weak right now, and I reiterate that for battery management that it's also down right now.

Speaker 8

Okay. And then a question for Orem. Could you explain what happened with the taxes this quarter? And whether we should still expect it to be about 14% for the full year?

Speaker 3

Yes. The model should be that you should expect, I mean, all in effective rate whatever you want. The Israeli operations create 7.5%, our taxable at 7.5%, U. S. At 20%, the Jafan at 30%.

Speaker 3

So you can assume 14% or whatever for this from Q2 and beyond. For this quarter, as you see, there was a one time benefit, which is the best for your question. Instead of having an expenses, we have a benefit from some accrual historical accrual reduction. But of course, this cannot be the baseline assumption for the future that we'll have tax benefit when we have pre tax income like in this quarter. So for the future, the assumptions will remain the same.

Speaker 8

And then just to ask you about the interest and other at $4,000,000 that was significantly lower than I was guesstimating just based on interest income. So what do we think about that going forward?

Speaker 3

So usually it's between $4,000,000 to $7,000,000 per quarter. Last quarter we had a one time benefit there in that line from usually in this line, it's not only interest, it's also gains from some sale of machinery or other specific transactions in that line and gains from exchange rate. So this line is not something that is like the OpEx, which I could answer before that it's a amount. Usually it's between 4% to 7% and obviously Q4, 2023 last quarter, I mean previous quarter was exceptionally good, but you see that it's coming back to this level of 4% to 7%.

Speaker 8

Okay. I think did you have you had kind of a big exchange rate hit there, didn't you, this quarter went into the cash flow?

Speaker 3

Not exchange rate hit, no.

Speaker 8

No, that wasn't it? Okay. Exchange

Speaker 3

rate is we have cylinder hedging transaction that hedge against any material change in the exchange rate. And actually the exchange rate this quarter, the Israel exchange rate and the Japanese exchange rate didn't make any impact. If at all, it was a little bit positive. So there was no significance of any material or anything.

Speaker 8

Okay, great. Thank you. That's all my questions.

Speaker 2

Thank you.

Operator

The next question is from David Duley of Steelhead Securities. Please go ahead.

Speaker 5

Congratulations on nice execution.

Speaker 2

Thank you, David.

Speaker 5

Sure. I just had a couple of questions. I guess more housekeeping. Oren, you gave us a bunch of CapEx numbers, but they seem to kind of be over a multiyear period. I was wondering if you could give us your best guess as to what CapEx is going to be in 2024?

Speaker 3

So I mean it's pretty straightforward from what I said. I mean $200,000,000 a year maintenance CapEx. So it's $50,000,000 a quarter plus we said $160,000,000 is remained this year and next year. You can assume about $30,000,000 $40,000,000 a quarter for Agra and you saw it in Q1 that the CapEx is $98,000,000 which means that on top of the 50,000,000 baseline there was probably $40,000,000 to $50,000,000 for agate. So you can assume this will be also for the next quarter.

Speaker 5

So 40 or 50 a quarter for agape?

Speaker 3

Yes. Yes.

Speaker 5

Okay.

Speaker 3

Now for Intel fab 11x, I don't want to speak about it. It's also related to Intel business CapEx that we buy from them and they buy from vendors and sell to us. And I don't want to enter into the number. I just said that it's a $300,000,000 that will start this quarter Q2 2024 for the coming 2.5 years. If you want you can divide the $300,000,000 by 10 quarters which is 2.5 years and reached $30,000,000 but everybody can make his assumption.

Speaker 3

I don't want to enter into specific number. And that's all.

Speaker 6

And then you are going

Speaker 5

to spend some more on SIFO and SICI, right?

Speaker 3

Yes. SIFO 5 gs capability tools, I said it's multiple dozens of multiple tails of 1,000,000 of dollars this year if you average it over a few quarters. It's obviously a quarter of that, but it's not will not be material amounts this year, because we are now ordering those tools for capability and most of the payments will not be this year.

Speaker 6

So that sounds like

Speaker 5

it adds up to somewhere like around $125,000,000 a quarter CapEx?

Speaker 3

It could be. We don't give guidance for that. It's a reasonable calculation. Okay. Not something which is linear.

Speaker 3

Just along

Speaker 5

the same lines, I'm looking at your cash flow statement in your press release. The depreciation expense was down like $6,000,000 quarter over quarter. First of all, why was the depreciation down so much with you ramping up CapEx? And then if you could help us understand what that depreciation number is going to do on a quarterly basis for the balance of the year, I'd appreciate it.

Speaker 3

Yes. Depreciation, as you can see in the you're looking at the appendix to the cash flow. It's a $60,000,000 average per quarter. So a year ago it was $62,000,000 quarter ago it was $65,000,000 Now it's $60,000,000 So it's pretty much the same numbers. The fact that it is was down is not attributed to new CapEx of course that you are justifiably pointing out that it's going up.

Speaker 3

It's a result of tools that finished their depreciation 15 years ago.

Speaker 5

So From 15 years ago.

Speaker 3

Yes. So I didn't say 15 years ago.

Speaker 2

From 15 years ago.

Speaker 3

I think it. Yes. So So we did see It's probably tools that were purchased in 2,009 and finished the depreciation, but that's the that's $60,000,000 is the baseline. And you're right that you should add to that whatever amount of new CapEx that should be now depreciated. It will not change a lot.

Speaker 5

But what do you think that will be for the balance of the year? Because it's kind of important for your gross margin. So

Speaker 3

Yes. So I don't think it will go up much above the $60,000,000 maybe $65,000,000 maximum because one reason is that as I mentioned both I mean the Intel CapEx for Feb 11 CapEx this is will not be starting to be depreciated this year, right, until it will start production. And the other tools until will start to be in play also it's not that we are paying and immediately start depreciation. 1st you're paying. Unfortunately, you get the tools after a few quarters until it's qualified and then depreciation usually sometimes a year delay.

Speaker 3

There will be an impact from the aggressive tools that will start depreciation, right? And Rafael referred to that as one of the reasons for headwinds. So I would assume 65% new level.

Speaker 6

Okay. And then just final question for me. And

Speaker 5

it has a lot to do with these depreciation questions is going forward, you're ramping up your CapEx and obviously depreciation is going to be going up. And during that timeframe, I'm kind of wondering what you think the drop rate of the business is going to be. You've always given us a target drop rate, but that's not when you're spending $125,000,000 a quarter in CapEx. So I'm kind of wondering when we're at these elevated CapEx levels, what the drop rate to gross margins is you expect with revenue growth through the balance of the year? Thank you.

Speaker 3

So we believe strongly in our financial model that we published in November and it already included baked into that all those CapEx of Agrate for sure, 11x for sure and also the original capability tools. And the margins are outlined there very clear. I mean that we expect to be $500,000,000 at 2.66%. So it's almost 20% net profit margin and you have the growth and the operating. So Well, I don't

Speaker 5

I can't see that right now. So what could you just please articulate what you think the gross margins drop rate is going to be this year?

Speaker 3

This year, we didn't give guidance for this year.

Speaker 5

Okay. So longer term you think the drop rate is going to be what again?

Speaker 3

According exactly to the slide which is publicly filed with the financial model.

Speaker 5

Yes. I can't see the slides right now Oren that's why I'm just asking.

Speaker 2

We don't have it in front of us either, but we'll pick it up.

Speaker 6

Okay.

Speaker 2

One second.

Speaker 6

All right. That's great. Thank you.

Speaker 3

So the financial model clearly states, I'm just reading the publicly filed document that the gross profit supposed to go up from 3.47 percent baseline that was in the end of last year to 7.40 percent a year gross profit out of $266,000,000 which is 32% incremental margin. Operating profit to go from less than $200,000,000 to 5 a year, which is 30% incremental and net profit from 200 to 500 which is a 2.4x growth, which is 24

Operator

There are no further questions at this time. Mr. Ellwanger, would you like to make your concluding statement?

Speaker 2

I would indeed. Thank you. So to summarize, as we move through the year, remain focused on and confident about continuous growth, driven by the performance of several of our differentiated technologies being critical to present market needs and that having partnered with market leader customers who really coming. We greatly appreciate your continued support and confidence in our vision. Our team is eager, fully prepared to continue to capitalize on opportunities, targeting substantial value for our customers and shareholders.

Speaker 2

As far as activities going on within the next month to 2 and conferences where we really hope that we'll have opportunity to see you. On May 20 21, we'll participate in the 52nd Annual JPMorgan Global Technology, Media and Communication Conference in Boston. On May 26, we'll participate in the 25th Annual Israeli Open Armor Conference in Tel Aviv. And on May 29 and 30, we will be attending the 52nd Annual TT Callon Technology Media and Telecom Conference in New York. Explaining where we're at, where we're going and why we're confident where we will be.

Speaker 2

So thank you very much again and have a wonderful day and following week. Bye bye.

Operator

Thank you. This concludes the Tower Semiconductor conference call. Thank you for your participation. You may go ahead and disconnect.

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Earnings Conference Call
Tower Semiconductor Q1 2024
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