TSEM: Tower Continues to Grow as it Adds Capacity to Meet Increasing Demand

By Lisa Thompson

NASDAQ:TSEM

READ THE FULL TSEM RESEARCH REPORT

Tower Semiconductor TSEM reported better than expected revenues and earnings in Q2 2021 and its sales are currently gated by its ability to fill orders. It guided higher for Q3 and it expects Q4 to beat Q3 both in revenues and profits. Every single one of its business segments showed year over year growth in the quarter. As a result we are raising 2021 and 2022 estimates. For 2021 we are looking for $1.49 billion in revenues, up 18%, with a non-GAAP EPS of $1.63. For 2022 we have a conservative $1.6 billion and $1.63 per share. As the company adds capacity, sales should proportionately increase.

The largest segment of the company by revenue (25% in Q2) is Mobile RF, which go into smartphones. This segment is driven by the move to 5G that provides the company with higher ASPs, which translate to higher gross margins. Management said 5G handset shipments are expected to double in 2022 to about 550 million handsets out of a total market of about 1.3 billion. The RF infrastructure business (12%) maintains a high run rate due to data center. Power IC (15%) is benefiting from a strong market cycle and automotive battery management. Even power discretes (16%) has recovered led by automotive applications. Imaging (15%) has recovered as people return to the dentist and get delayed treatments and entertainment content goes back into production. The industrial market segment is showing steep growth in all of its segments. TSEM will also be a beneficiary from the technology switch for display and TVs to mini-LEDs.

Q2 revenues came in at $362.1 million beating expectations and the mid-range of guidance. This compared with $310.1 million a year ago, up 17%. It was also up sequentially as it has been since Q1 2020. Organic (i.e. excluding revenues generated by the Nuvoton Japan JV and Maxim) growth was again up 26% year over year as it was in Q1. Mid-range guidance for Q3 revenues was $385 million, with quarterly sequential improvement expected throughout the year. This guidance points to Q3 year over year growth of 26% and a 3.7% sequential improvement. Within that 26%, there is expected to be 38% year over year organic growth accelerating from the 26% last quarter.

Q2 2021 gross margin increased to 20.4% from 18.6% a year ago and 20.1% in Q1 2021. Gross margin dollars increased $16.1 million, or 28%. Operating expenses increased $3.7 million year over year, and were up $2.4 million sequentially. The operating margin improved to 9.4% from 7.1% last year. On a dollar basis it increased 54%. Other income was an expense of $484,000 compared to income of $1.8 million a year ago.

Pretax profit was $33.5 million versus $24.0 million a year ago. Taxes were $2.2 million (6.6%) in the quarter compared $2.4 million (10.1%) last year. For the remaining two quarters the tax rate is expected to be higher than in 2020 as incremental sales are mostly coming from Japan and Newport Beach, California where the taxes range from 20% to 30%. Last year the company paid a 6.0% tax rate.

GAAP net income was $30.9 million versus $19.1 million last year, while non-GAAP net income was $37.3 million versus $23.4 million, up 60%.

Diluted GAAP EPS was $0.29 per share versus $0.18 last year. Adjusted non-GAAP diluted EPS increased to $0.34 versus $0.22 a year ago (up 28%). Average diluted shares for the quarter were 109.6 million, up from 108.3 million last year. EBITDA for the second quarter of 2021 was $98.9 million compared to $81.6 million a year ago and sequentially up from $94.9 million in Q1 2021.

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