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Ladies and gentlemen, thank you for standing-by. Welcome to the Tower Semiconductor First Quarter 2021 Results Conference Call. All participants are currently present in listen-only mode. Following management’s formal prepared statements instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, May 12, 2021.
Joining us today are Mr. Russell Ellwanger, Tower's CEO; and Mr. Oren Shirazi, CFO.
I would now like to turn the call over to Ms. Noit Levy, Senior Vice President of Investor Relations and Corporate Communications. Ms. Levy, please go ahead.
Thank you and welcome to Tower Semiconductor financial results conference call for the first quarter of 2021. 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 20-F, F-4, F-3 and 6-K 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. Please note that the first quarter of 2021 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 requirement is established with the Securities and Exchange Commission. The financial tables include the full explanation of these measures and the reconciliation of these non-GAAP measures to the GAAP financial measures.
Now, I'd like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.
Thank you, Noit. Welcome everyone. Thank you for joining our call. We entered the year with strong cluster demand and increasing forecasts across all our business units and technology platforms. Our revenue for the first quarter of the year was $347 million exceeding the midpoint of our guidance and representing year-over-year 21% organic growth and 16% total growth. As we stated in the previous quarter call, we expect revenue growth throughout the year and are giving a midrange guidance for the second quarter of 2021 of $360 million, the highest quarterly revenue in the company's history. This midrange guidance represents year-over-year organic growth of 26% or 16% total growth.
Driven by a significant shift towards 5G-enabled handsets with the associated increase in 5G content and our market share gains. The first quarter realized the highest RFSOI revenue in our history with plan further increases for the second quarter.
Our silicon germanium RF infrastructure business continues to grow in the data comp side, with very strong demand for 100 gigabit per second transceivers sold primarily for hyperscale data centers, which itself is a strong growth market. Our silicon germanium, telecom driven 10 gigabit and 25 gigabit per second transceivers used in 5G wireless infrastructure build-out was strongest during 2020 has flowed some in early 2021 with customer expectations for a new growth later in ‘21 into 2022. Total silicon germanium demand is solid with expected year-over-year growth.
Our foundry power IC business is experiencing surging demand with strength in industrial, consumer and automotive segments. In addition to benefiting from a very favorable market cycle, we're uniquely positioned to benefit from growth in electric vehicles with well established customer base in battery management. Additional new technologies have been developed such as the integrated, very high voltage capacitor Galvanic isolation process announced this past quarter, enabling isolated gate drivers for silicon carbide and gallium nitride automotive power stages among others.
Our power discrete business is rebounding with forecasted growth over the coming quarter is expected to fully utilize the dedicated discrete capacity on our manufacturing facilities. Our image sensor business is realizing significant growth throughout the year driven by both market growth and market share growth in industrial sensors with full recovery of the medical-dental markets and incremental new business and 300 millimeter large sensor medical. We expect record yearly revenues in imaging.
First Quarter 2021 utilization levels were as follows. Migdal Haemek Israel Fab 1 our 6-inch factory was at 70% utilization. As of today we see an increased level of utilization to 80%. Fab 2 was at 80% presently at 85%. Newport Beach, California Fab 3 was at 75% utilization as we can continue to adjust for increased silicon germanium mix. Our San Antonio factory Fab 9 was at about 70% utilization.
Looking at our TPSCo fabs in Japan utilization for an 8-inch foundry business was at about 70% rate being non-photo bottleneck limited, which is being addressed and the capacity expansion plan we announced this past quarter. Our 12-inch foundry business was at about 90% rate similar level to the previous quarter, but with a number of layers being increased following the 2020 capacity expansion.
To summarize with a strong first quarter as a base, we are thrilled with the business and operational capabilities, enabling a second quarter midrange guidance to be a company record revenue. Our comprehensive foundry platforms are replete with advanced analogue technology differentiation, which is the source of our customer partnerships with the analogue industry leaders. We are excited with the prospect of continued leadership expansion throughout the year.
With that, I'd like to turn the call over to our CFO, Oren Shirazi. Oren, please.
Hello, everyone. We released our first quarter 2021 results today demonstrating our remarkable 16% year-over-year revenue increase resulting in 98% operating profit increase and 66% net profit increased and provided a midrange revenue guidance of $360 million for the second quarter of 2021, which is an all time record revenue for the company. In addition to address our customers’ demand exceeding our capacity and to increase our revenue in the mid and long-term, we executed our previously announced capacity expansion plan for our 8-inch and 12-inch fabs and issued $150 million purchase orders for manufacturing, equipment and facilities which should result in capacity increase commencing the second half of this year targeting full qualification during the first quarter next year.
I will now move to our first quarter P&L highlights and then discuss our balance sheet and cash flow financial statements. Revenue for the first quarter of 2021 was $347 million, $47 million higher year-over-year reflecting 16% year-over-year revenue increase. Looking at our organic revenue, which is defined as total revenue excluding revenue for Nuvoton Japan, previously Panasonic semiconductor and revenue for Maxim in our San Antonio fab revenue in the first quarter of 2021 reflects 21% year-over-year increase.
Gross and operating profits for the first quarter of 2021 were $70 million and $32 million respectively. This gross profit is $17 million higher or 33% higher year-over-year. And this operating profit is $16 million higher or 98% higher year-over-year. Net profit for the first quarter of 2021 was $28 million or $0.26 basic and diluted earnings per share. This net profit is $11 million higher or 66% higher year-over-year.
Looking at the balance sheet, we demonstrated again a strong stable financial position, a few points to note short-term and long-term debt in the balance sheet decreased from $390 million as of December 31, 2020 to $343 million as of March 31, 2021, mostly due to $29 million debt repayment made during this quarter, primarily comprised of schedules principle of payment on account of bonds Series G.
In relate -- in relation to our debt and corporate rating in May 2021 Standard & Poor's Ma'alot, an Israeli rating company that is fully owned by S&P Global Rating completed its annual rating review of the -- for the company and affirmed a corporate credit rating bonds Series G credit rating of AA minus including a stable horizon,
Shareholders equity reached a record of $1.48 billion. Deferred revenue and customers advances balance under current liabilities and long-term liabilities in the balance sheet have increased by $10.8 million and $8.5 million respectively, reflecting enhanced received from customers that have to receive more capacity to address their exceeding demand.
Current assets ratio defined as current assets divided by short-term liabilities is strong at a value of 4x. Our cash table consists of $108 million outstanding ordinary shares and an additional $2 million ease of related shares resulting in a fully diluted share count of $110 million.
And the last note on our cash flow report, in the first quarter of 2021, cash flow generated from operations of $87 million. Investments in fixed assets mainly for manufacturing equipment was $49 million net. And we repaid $29 million of our debt during the first quarter of 2021.
And now I wish to turn the call back to the operator.
Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions]. Your questions will be polled in the order they are received. Please stand-by while we poll for your question.
The first question is from Rajvindra Gill of Needham & Company. Please go ahead.
Yes, thank you and congratulations on the good results. Question Russell on the utilization rates, thank you for kind of providing that breakdown. I'm just wondering given the surging demand that you're seeing across the different end markets, I was just wondering why the utilization rates wouldn't be closer to kind of 100% if you could provide any color there. And then Oren in terms of the gross margin kind of trajectory as we go throughout the year. I know in the past, you had mentioned that the normal kind of 50% fall through on the gross profit it might occur later on in the year because you're increasing CapEx related to the capacity that could affect the margins. If you just want to get a sense of how to think about the margin, the gross profit fall through as we progress throughout the year as the revenue continues to grow sequentially? Thank you.
Yes, Raj. A good question on the utilization. I'm actually glad that you asked it. I had thought we had established this but maybe apparently not well enough. Our target utilization is 85% we do not take overrides for us a factory could really never run at 100% cycle times would almost go infinitely long. So our target is 85%. We can run up to 90% for periods of time. But we do not take a factor against it. For example, at tower, it's impossible for us to ever talk about higher than 100% utilization.
So we really look at it as total photo layers that can possibly be run. And then we have a target number that allows us to have good cycle times, which is the 85%. Again, for short periods, one can always get a little bit higher and be upwards of 88% or 90%. But for our models the 90% would never be sustainable. So the utilization rates are actually not bad compared to what our target is. And the target is 85%. Oren?
Yes. Thank you for the question. Yeah, indeed what we mentioned in February release still holds in terms of the margin and I'll repeat that. So what we said is that surely from the ramp up that we see now we -- and record the all time revenue for Q2.
We expect to enjoy a lot increased ramp in margins from the second half of this year. And what we mentioned last time that Q1, Q2 margin for fall through you define it will be less than the model because I mean, still the margins will grow there in total. But in terms of percentage will be a little bit lower because Q1 and Q2, we are still facing increased amount of headcount and some spare parts, headcount in order to hire the employees that we need to support that ramp technicians and other and operators to qualify them.
And also spare parts and maintenance in order to qualify the new machines that arrived. So of course, once they will come into play in full esteem like Russ mentioned before during H2 and for sure in full force in Q1 until that time that we will enjoy the full upside revenue fall through for Q1 as you'll see, it's pretty much reasonable increase compared to Q4.
So we still have some more costs that are not attributed to more revenues, because those more revenues, you'll see them later in the year. And you'll already see that in our Q2 guidance. So basically, Q1, Q2 will show a growth in the dollar margin in the dollar profits, but not as the 50% incremental model but from Q3, we should see the full fruits of that.
Okay, very good. That's helpful. And just for my follow up. Russell, given the severe capacity constraints that the industry is experiencing particularly on mature legacy nodes, wondering concerns that the supply constraints are going to continue into next year, wondering how you're looking at the overall cycle from your advantage point, how you're kind of managing capacity, any thoughts on the broader cycle would be helpful? Thank you.
So clearly, I am not a market analyst. But we deal with looking at customer demand, customer forecast. And we typically only invest in CapEx and capacity expansion, when we have customers very committed to be using the expansion. There's obviously nothing worse than increasing capacity and then having it sit idle, then the revenue margin fall through that Oren talks about doesn't occur.
So we're very confident that the $150 million that we're investing for capital expansion will be fully utilized as the capacity comes online. Some of it is really off of on commitments that customers have made to us the capacity and some of it is just off a very strong relationship and a belief in forecast and the trust that they will hold to the forecast that they're giving. But I would say that at present, we're very confident that all of what we're buying and increasing will certainly be fully utilized in 2022, certainly is maybe a little bit hard. But we're very committed and confident of the demand cycle that we have continuing.
As I stated, in many areas, our growth is certainly outpacing the industry growth. So a favorable cycle is good for everybody. The old expression when the tide goes up or ships go up that's very, very true. But the fact that we're outpacing, I think our guidance for growth Q2 over Q1 against others that have guided already is probably on the very high end for quarter-over-quarter growth. And we really expect growth throughout the year. So the fact of having market share increases, which I think is pretty obvious that we're having outpaces cyclicality and shows demand increases.
Thank you for that.
The next question is from Cody-- Richard Shannon of Craig-Hallum. Please go ahead.
Great. Russell and Oren, thanks for taking my questions here. Your last comments about showing share gains. I suspect that was a broad statement. But let me ask it specific to RFSOI you said you had a record quarter in the first quarter and you are growing here. To what degree are you seeing the results here this year coming from share gains versus market growth. Obviously, 5G is very -- a very good market here. But to what's agreed to share gains also add to it?
It's a little bit hard for me to quantify that. I'm quite convinced that there are share gains, though, because if you look at the guidances of some major mobile players, they are flat to down Q1 to Q2. And we're stating that we're going up Q1 to Q2. So that is strongly attributed to share gain. Now, why does that become a little bit difficult for me to quantify some of the growth is obviously attributed to the movement from 3G or 4G into 5G that if you're going from 4G to 5G, you're looking to 34 – 30% to 40% increase in content from 3G to 5G it's higher.
So the revenue growth is that we see is attributed to both its share gain, as new customers gain share and its content increase. So it's very hard for me to quantify from one quarter to the next. But I'm quite confident that we're gaining share, because some of the customers that we're dealing with are having very, very big revenue growth, which is bigger than the market growth itself the overall market growth. So the -- but there is a content increase as well, on the shift to 5G. And the amount of 5G that's being used presently is substantially higher. I think it went from somewhere what about from what analysts say from 250 million units of 5G in 2020 to this year, it is expected 500 million units plus minus. So I can’t believe the statement. But I would certainly say that the customers that we're growing with are either gaining share themselves or growing in 5G.
Okay. And Russell, to my question on the last conference call you answered you thought you're sharing [indiscernible] so as somewhere in the 20s. Where do you think that can go? I mean is this something where you think you get into the 30s over the next couple of years? Any way you'd either qualify or quantify that answer would be great? Thanks.
Our expectation is well into that we're in the 30s. I don't know that I would be able to quantify that, as you know, I'm not necessarily giving long-term forecasts. But if I were to look at the demand that's being placed in the customer growth expectations certainly I think the 30 is very realistic.
Okay, that's helpful. One last question for me, I'll jump online here. We've seen some pricing of raw materials whether they are substrates or other things that are going up here, when asked in the past year about the tightness you've seen from capacity point of view you said you wouldn't necessarily you wouldn't generally raise prices here, but are you seeing raw material prices rising to you? And are you able to pass those along to your customers in any manner?
Everybody has price increases from time-to-time, we're not seeing any substantial increase in raw materials. Certainly, there is increased costs and some infrastructure power is going up. But the point of ASP increases we are -- we have with almost across the board we have ASP increases ourselves. And some of the ASP increases really deals with just very strong customer relationships. And their understanding that to increase capacity, we have to make sure that there's an ROI on it. So we have a good cooperation with customers. And I think that the Q3, Q4 we will see higher ASPs, I don't think I know very well from the base of customers that we're serving.
Okay, that's fair enough. Thanks all. That's all for me.
The next question is from Mark Lipacis of Jefferies. Please go ahead.
Hi, great. Thanks for taking my questions. I had a few. The first one on the -- there is an increase in the financing and other expense line item in the income statement. Can you just review what was the driver of that? And how should we think about modeling that line item going forward?
Hi, thank you, Mark for the question. Yeah, you shouldn't model it going forward, it was a one-time a non-recurring item, which was mostly attributed to a journal entry associated with the yen, with a yen denominated asset that was impacted in Q1 by a movement of the Japanese yen against the dollar that moved by coincidence between December 31 and March 31 from 102 to 110. There is no cash flow impact of that and there was no economic exposure related to that.
And so we didn't do any hedging for that, because this is just a gap balance sheet item, that the changes of it impacting the P&L, but there is no cash flow or economic exposure here. So basically, this is not expected to recover, because we made changes during Q2 already, to this JPY asset that the terms of this JPY asset that will result in that there will be no finance, income, even in the P&L for what was. So it should be actually ignored.
That's very helpful. That's very helpful. And the second question I had Russell maybe for you as some comp -- some semiconductor device makers are talking about getting longer lead time orders from their customers, which is, I think, often normal at this part of the cycle. And but some are talking about again making those orders non-cancelable.
How do you think about this idea of having non-cancelled orders on your books? And maybe if you could put that in the context of your earlier comment that you don't like to add capacity unless your customers are committed? What is that -- can you -- could you maybe describe what does that mean that they're committed, because I understand adding capacity can take a long time. And that suggests that there's a longer visibility into that -- into those orders for that capacity that's going to get built in the future? And then I had one last follow up after that. Thank you.
All right, Mark. So actually, its Oren. Actually in all our dealings with our customers. It's a non-cancelable PO, meaning they cannot cancel their purchase order even today, it's already that way for years. And it was very rare occasions that customers really asked to cancel. And very rare, they do have a ride sometime in some of the -- for some of the customers, for some of the purchase order to ask to hold a certain [indiscernible] a certain way feel that are in the line to hold it for a few days not more than usually 30 days or 90 days and then continue the work. But to cancel a PO or to cancel commitment, this is not even an option that is given
And it's acceptable for us, at least with our customers. And history shows, I mean, I'm here 22 years in different functions and so maybe less than a handful of requests -- not requests -- less than a handful of cases where we agreed to like you say cancel a PO or something like that. I mean, it does not happen.
And as far as long-term commitments, there's several mechanisms that we have used and continue to use on long-term commitments. One is pre-payment that only goes back against a certain amount of wafers over certain periods of time. Others are contracts that ensure a minimal amount of what the customers buy and a maximum amount of what we must supply. And then comes a third part and that's really just our trust with certain customers on their word of what they're going to be buying and that’s they will buy those amounts.
It's very helpful. And then last question if I may. I understand that you are adding capacity and there is a higher margin products for the existing capacity that you had? Is, is there like an ability to shift that to higher margin of products? And can you Russell just describe what you talked about potentially getting higher prices, can you just describe how that the pricing process works is it something that happens annually and if you, you happen to catch it, the timing on an upcycled, and you're in a advantaged position or if you're in a down cycle, you're talking about pricing, and you're -- it's – it’s kind of sets you up for a different scenario profitability scenario for the next 12 more months and can you just review how that process works. And then that's all I had. Thank you very much.
So I can talk about our philosophy and how we work it and we have a certain run rate with any given customer with a pricing that we've given them. For those run rates, we don't increase prices, when there's a request from customers for increasing the run rate independent of the platform. And there's a competition for that incremental capacity will agree with customers for a raises price in order to give incremental increase.
Obviously, if you see revenue going up, as it is this year and as we forecasted to continue through the year, there's incremental capacity that's being used and that incremental capacity is really at a premium. Other customers just in order to ensure capacity over time, will agree to higher prices, that's good for them, because margin dollars are margin dollars to maximize margin percent and reduce margin dollars by not being able to get increased capacity doesn't make sense. I mean, that's the dollars that you're dealing with. And it's from both sides. It's the same with us. So it works in both ways. Hopefully, that answered your question.
Very helpful. Thank you, Russell.
The next question is from Cody Acree of Benchmark. Please go ahead.
Hi, Cody.
Hi, guys. Thanks for taking my questions. Just a couple quick ones, the lead times Russell, are you -- have you seen any extension in your lead times, delivery lead times?
Certainly, if you were to look at the middle of 2020 when everything was really down for a variety of reasons from cycle time when you're at very low utilization is phenomenal. If that's what you're talking about, I think is our cycle time, right?
Yeah, it is. Yeah, it is.
So -- yeah, our cycle times have extended a bit. That's normal as you're going up in utilizations. I don't think that were out of the ballpark on cycle times. But the higher the utilization is, the higher cycle times become.
Very good. I guess as you look at the cash that's coming on maybe for Oren, the expense of the capacity or the carrying cost of the capacity to your cost of goods sold, I would think that as that production capacity goes into revenue starts to generate revenue that that's when you would transfer the costs into your income statement into cost of goods sold. And therefore, as it starts generating revenue, you're starting to see those margins decline or margin pressure, but or it sounds like are you accounting for that the carrying cost of the additional capacity differently?
No, that's true what you're saying. But you have to know that when you have additional cost for example, let's take example in Q1 we had to hire more people in order to train them operators technicians in order for them to be ready for the Q3, Q4 increased capacity, right. So when you hire those people and you pay them payroll in Q1, unfortunately for me as a CFO, I need to pay that payroll. So when you pay the payroll, you cannot capitalize it to the cost of the project or to the cost of the capital and you cannot carry it forward and not recognize it in the P&L at the time you pay the payroll, it's not a capitalized the item. Same for rest spare parts there, we need to buy more spare parts, just in order to qualify them new machines, you cannot capitalize it to the cost of the machine according to gap. So actually, what happens is before you'll start to enjoy those revenue, those input revenue, you already start up on the extra costs.
I see. I see. Thank you for that. And Russell. Lastly, on your discussion of share gains. Everybody is scrambling right now for supply almost regardless of where you are in the food chain. I know in the past, historically, you've kind of had a policy that you were not the second source, you will not kind of buffer supply of your products to your customers for any given designs. Is that still the case? Or have customers been coming to you to help to fill the gap they might be getting from others? And if that's the case, how sticky do you think that share gain maybe?
That's a very good question. Certainly, there's opportunities that we've been given, because people have been put on allocation. However, before we would accept that it's off committed and guaranteed capacity usage from the people. So they would be committing to ex-amount of wafers per month over periods of time. So that's the first part of it. But the bulk of what we're growing is existing customers that are growing in their markets. And hence the share gain deals there. In the case of power management, we're really gaining a lot of new opportunities some of that taking away customers from other suppliers for platforms that are superior, some of that really was initiated because of customers that are now looking for other suppliers not for an over -- in our case not that we would use it as an overflow supply.
But it would be platforms that would be qualified and be used with us for their needs. The very fact of being analogue, it's not so easy to just be an overflow supply, the more specialized the device outputs are, the more difficult it is to just go to supplier B for 10% overflow, because the qualification to their customers of analogue parts is it's quite extensive.
So the -- it's not really something that's done, it could be done with a mixed signal part. It could be done -- that's really much more digital or with pure digital parts or parts that have huge digital content. But it's very difficult for a customer to use us for overflow with the type of products that we supply. Once they're qualified they're really whatever skews are being sold are pretty much our skews no matter what.
Great, thank you for that Russell. And then lastly, just any of this with your customers of wanting to guarantee capacity or at least make commitments to wafer demand. Has there been any contribution of capital to for guaranteed capacity?
Yes.
Any color?
Sorry, please.
Any color?
I think you can see it on the financial statement. Oren?
Yeah, if you look at the balance sheet, you'll see actually and by the way I mentioned it in my script in my prepared remarks that we have $10 million and $8 million increase in the line called -- in the balance sheet default revenues and customer pre-payment. Which is and like I mentioned customers that asked for additional capacity. So they paid upfront, which is not revenue. And this is why it's in the balance sheet and not in the P&L.
Right.
Yeah.
Thank you.
You are very welcome. Thank you.
Mr. Ellwanger, would you like to make your concluding statement?
Certainly, thank you. Once again, I really do thank all of you for your participation and interest in Tower. We're very excited about where we're at extremely thrilled with the opportunities in front of us and expect to have a very good ride this year and next year and very happy to have you along with us for the ride.
We are very welcoming to further interactions in many, many ways. We have multiple upcoming events. We will host one on one meetings at the following conferences. On May 17, we have the 18th Annual Needham Virtual Technology Media Conference. On May 21, we are attending the Oppenheimer Israeli Annual Virtual Conference. On June 2, we're at the 18th Annual Craig-Hallum Institutional Investor Conference. And on June 8, we're at the Needham & Company’s 5th Annual Automotive Technology Day.
So certainly, we were encourage all in any to sign up for those conferences and participate in the one on one sessions or three on one, five on one, whatever they turn out to be sometimes 10 on one, 20 on one. But seriously, we encourage our attendance there. But not just that, we're very open to having discussions at any time about what we're doing, how the markets moving and our position within it. So just in closing, we're looking forward to a very good year and very happy to share the results and rewards with you. Thank you very, very much.
Thank you. This concludes the Tower Semiconductor first 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.