Tower Semiconductor Ltd.

Good day, and thank you for standing by. Welcome to the TOWER Semiconductor Fourth Quarter and Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you need to press star 1 1 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw a question, please press star 1 1 again. Please be advised that today's conference has been recorded. I would now like to hand the conference over to our speaker today, Noit Levy, SVP, Investor Relations. Please go ahead.

Thank you and welcome to Tower Financial Results Conference Call for the fourth quarter and fiscal year 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 6K, 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 fourth quarter and fiscal year 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 table includes a full explanation of these measures and the reconciliation of these non-GAAP measures to the GAAP financial measures. We have a supporting slide deck that complements today's conference call. The presentation is accessible on our company's website and is also integrated into today's webcast for your convenience. Now I'd like to turn the call to our CEO, Mr. Russell Elwanger. Russell, please go ahead.

Hello, everyone. Thank you for joining our call today. During today's call, we'll provide our financial highlights for the fourth quarter and the fiscal year of 2024, reviewing strategic developments of the year, and outlining our vision for the future, including steps we are taking to ensure sustained growth, now having entered into 2025. Please find the 2024 financial details in the supporting slide deck. At the onset, and looking back at 2024, I take this opportunity to express gratitude to our employees for their dedication and hard work, to our customers and supplier partners for their collaboration, and to our shareholders for their continued trust and support. Together, we have built a strong company, enabling us to capitalize on the great opportunities that lie before us. We concluded 2024 with an annual revenue of $1.44 billion, a net profit of $208 million, and a fourth quarter revenue of $387 million, representing an in-year Q1 to Q4 revenue growth of 18% and fourth quarter to fourth quarter year over year growth of 10%. We guide the first quarter of 2025 to be a midpoint of $385 million plus minus 5%, which midpoint represents about 10% first quarter year over year growth. We target year over year growth for 2025 with sequential quarter over quarter revenue increases within the year. with an acceleration in the second half of the year as our capacity and investment continue to progress through customer qualifications with the ensuing production shipments. We will now present the 2024 revenue breakdown for our major technology platforms and the expected trend for 2025. Later in the call, we will provide summaries of the technical advancements achieved in 2024, which continue at this time, in order to not just maintain, but to grow these specific market shares. The revenue breakdown by technology and by end market application is shown in slides five and six respectively. RF infrastructure revenue was about $241 million, or 17% of our corporate revenue in 2024. In 2025, we target strong growth in the RF infrastructure revenue, quite significant, as this is on top of a near doubling in 2024 over 2023, with a more than tripling of SIFO revenues in 2024 to $105 million for that year. RF mobile revenue was approximately $418 million, 29% of our corporate revenue in 2024. After achieving strong growth in the segment in 2024 over 2023, we anticipate some decrease in RF mobile in 2025, mainly as a result in the present Android market as forecasted by our customers. However, within this context, we target growth in our more advanced 300 millimeter platform, signifying market share wins for us and our customers, promising continued growth as the market recovers. Power management and discrete revenue was about $426 million, or 36% of our corporate revenue in 2024, broken down evenly between IC and discrete revenue. Based on the current customer forecast, we target growth for the power management business unit in 2025 with the highest growth for advanced 300 millimeter platforms. Due to the impact of having discontinued FAB1 larger margin, I'm sorry, lower margin, legacy 150 millimeter activities, discrete business is expected to decrease in 2025 versus 2024. Sensor display revenue was about $221 million or 15% of our corporate revenue in 2024. Based on the current customer forecast, we target 2025 moderate growth for this business unit. Mixed signal and CMOS revenue was about $105 million or 7% of corporate revenue in 2024, targeted with moderate growth in 2025. Now we'll provide additional color for a major business platform. RF infrastructure. RF infrastructure was our fastest growing segment in 2024, riding on the mega trend of scale up and scale out of cloud computing and AI clusters. Even before the announcement of the Stargate program by the US president last month, several hyperscalers had committed to significant investments, driving strong demand for electronic and optical components that require advanced silicon germanium and silicon photonics technology. To that effect, our silicon germanium platform has seen rapid growth throughout 2024 and is forecasted to continue so in 2025. We take pride in being the founder of choice to leaders in this industry, building components such as CDRs, drivers, and TIAs for optical transceivers and pluggables, and retimers for active cables. While we have recently received a reduced forecast for active copper cable silicon germanium components, we have at the same time received upside orders for silicon germanium optical transceiver components, and as such, we see continued growth in silicon germanium without interruption. To support all customer growth in 2025 and beyond, we are bringing up our high-demand silicon germanium platform in both our San Antonio and Big Dolphemic factories, while adding incremental tooling to Newport Beach factories as part of our announced $350 million investment in capacity. In addition, we have released 300-millimeter silicon germanium PDKs in our WOZO Japan factories and have a lead customer already in product design. 300mm tools will add additional silicon germinating capacity at larger wafer form factors. Our silicon photonics platform continues to gain strong market share at 400G to 800G and is now in volume production at 1.6T. We are working closely with our partners including six out of top ten leading optical transceiver module makers in the world, of which the top two, mainly in the light and coherent, press released our multi-generation co-development partnerships. We highly value these customer partnerships, yielding continuous, world-leading, best-in-class technological advancements. To support the strong growth, we are bringing up our SIFO platform in our San Antonio factory, and have also released a full PDK for a 300 millimeter WOZO factory. 300 millimeter enables our SIFO customers to more easily address the future potential needs of CPO architecture that combine advanced SIFO technology with 2.5D integration of optical and electrical components. The added capacities mentioned for SIGI and SIFO are in various stages of customer qualification, with expected shipments and result in high value incremental revenues in Q3 and Q4 of this year. Finally, we continue to work with our customers to bring to market next generation 400 gigabit per lane technology targeting the upcoming 3.2T standard. To note, we have already demonstrated with a lead customer bandwidth consistent with the 400 gigabit per lane speed requirements needed for the 3.2 standard. We see further application of our leading CyG and SIFO technologies outside of the optical transceiver markets. For example, we announced our partnership with Renaissance in the emerging SATCOM market, where phased array ICs for terrestrial disk antennas built using CyG technology promise strong growth with the proliferation of satellite-based internet services. With SIFO, we are working with several customers in emerging areas of automotive, LIDAR, photonic space gyrometers, and photonic quantum computing. In our RF mobile market, despite some headwinds with weaker customer forecasts in 25 versus 24, particularly for Android-based devices, we see a strong positive trend towards higher end 300 millimeter RF SOI technologies, which not only offer improved performance to address higher performance markets, but also die shrinkage, allowing both tower and the customer to maximize margin. In addition to existing markets, we continue to invest in new technologies such as the triple play process announced with Broadcom for Wi-Fi 7, which offers industry leading integration of a power amplifier, low noise amplifier and switch onto the same die in the single die form factor to support high end Wi-Fi functionality hence a much smaller footprint than previously possible. Looking at our power management business, during 2024, we executed the transfer of our flagship advanced 65 nanometer BCD platform to Albuquerque to take advantage of the large capacity available to us as part of the previously announced agreement with Intel. In the fourth quarter, we delivered successful prototypes to lead customers, and based on the success, have received our first production PO, a major milestone achieved ahead of plan. We have extreme customer interest in these flows, well beyond what could be supplied in Mozu, Japan. Additionally, in Q4, we announced the release of our next generation 300mm power management platform, which promises as much as 60% lower conduction losses versus prior platforms, critical for power management ICs, used within lithium-ion battery-operated products, such as smartphones, tablets, wearables, a large and growing market, presently at about $6 billion. Turning to sensors and displays, there are several trends shaping this market that have given and continue to give impetus to our priorities and investments, among which industrial sensors are transitioning to 300-millimeter platforms enabling denser logics, smaller form factors, and higher resolution pixels. We demonstrated 100 megapixel and 300 megapixel high-speed global shutter stack sensors with 2.47 micron charge domain pixels. Medical and dental sensors, some 200 millimeter CMOS products are shifting to lower cost exo-platforms, while high-performance applications, mammography and extra dental x-ray, drive demand for 200 and 300 millimeter stitch seam off. Hence, our development activities in medical and dental are focused on next generation CT detectors, 200 millimeter extraoral x-ray, and 300 millimeter x-ray, including having released a 300 millimeter more cost-effective layer reduced lean flow PDK, enabling our customers to battle on price as well as with performance. OLED on silicon is a significant large incremental business growth opportunity for CMOS backplane for high resolution micro OLED displays known as OLED on silicon for AR, VR, and XR applications. Our expertise and long performance history and large format imagers position us as a leader. First OLED on silicon prototypes are targeted to ship second half of this year featuring unique ultra-low leakage transistors combined with high K capacitors. Looking at utilization, we are strategically repurposing certain capacities across multiple FADs to further enhance our CyG and CyFO capabilities. While this may result in lower overall utilization rate in the near term, there's a crucial step towards aligning our production with the evolving needs of our customers. By focusing on these advanced process technologies, we are positioning the company for sustainable long-term growth, ensuring we meet increasing demands. This initiative optimizes our production portfolio and underscores our commitment to innovation and fast execution to maintain market leadership in a rapidly evolving industry. In the fourth quarter, FabOne operated at 70% utilization with all activities now fully consolidated into FAB2. FAB2 and FAB9, where we are driving CyG and SYFL capacity activities, operate at approximately 55% utilization. FAB3 was at 70% utilization, FAB5 at 60%, and FAB7 300 millimeter at 90% founder utilization, with the highest process layers to date. Non-CAPEX projects are ongoing in FAB 7 to maximize shipments from FAB exchanges and with the agreement with NTCJ utilizing some of their capacity. To summarize, in 2024, we've shown our commitment to innovation, excellence, and growth. We've made significant progress and built a strong foundation for the future. Looking ahead, our investments and focused efforts are already delivering positive results, positioning us to target year-over-year growth with sequential quarter-over-quarter growth in the year. We are actively engaged in seizing new opportunities to grow our served markets and provide continued leadership. Thank you for your continued trust and support. We look forward to sharing with you our achievements throughout what will be an exceptional year ahead. With that, I turn the call to our CFO, Oren Shirazi. Oren?

Hello, everyone. Earlier today, we released our financial results for the fourth quarter and for the full year, and also released our balance sheets. For the fourth quarter of 2024, we reported revenue of $387 million, a 10% increase over the same quarter of the previous year, thereby achieving the target we provided one year ago, demonstrating quarter-over-quarter revenue growth for each quarter in 2024 against the previous 2024 quarter. This resulted in an 18% revenue increase from Q1 24 to Q4 24. For Q1 25, we got $358 million revenue plus minus 5%, which represents 10% year-over-year revenue increase. Gross profit for the fourth quarter of 24 was $87 million. higher as compared to $84 million in the fourth quarter of the previous year, despite being impacted by the headwinds resulting from added fixed costs and depreciation that the company took on for the first time following the commencement of operations in the Agrate 12-inch FEB facility that the company and STMicro share in Italy. Operating profit for the fourth quarter of 24 was $46 million compared to $45 million in the fourth quarter of the prior year. Net profit for the fourth quarter of 24 was $55 million or $0.49 basic and diluted earnings per share. Net profit for the fourth quarter of the prior year was $54 million or $0.49 basic and $0.48 diluted earnings per share. For the full year 2024, Revenue was $1.44 billion, gross profit was $339 million, operating profit was $191 million, and net profit was $208 million, or $1.87 basic and $1.85 diluted earnings per share. Tax expenses recorded in our P&L for full year 24 and for the fourth quarter of 24 were at a low all-in tax rate of 5% and 4%, respectively, much lower than our long-term financial model, mainly due to tax benefits recorded during 24 following a statute of limitations expiration and other tax-related benefits which impacted 2024. However, Please note that for the long-term model planning needs, one should continue to assume 15% will be our all-in effective tax rate as previously communicated. For the full year 2023, revenue was $1.42 billion, gross profit was $354 million, and operating profit was $547 million. This high operating profit included $314 million net from the Intel Mergel merger contract termination, and $33 million of net restructuring income from the reorganization and restructure of our Japan operations. Net profit for the full year 2023 was $518 million, or $4.70 basic and $4.66 diluted annex per share, and included $290 million net income from Intel, due to the merger contract termination and $11 million net of restructuring income. Moving to the balance sheet and future CAPEX and cash plans, as of the end of December 2024, our balance sheet assets totaled $3.1 billion as compared to $2.9 billion at the end of 2023, primarily comprised of $1.3 billion in fixed assets net of depreciation, predominantly comprised of FEV equipment, and $1.8 billion of current assets. The current assets ratio, reflecting the multiple by which current assets are larger than the short-term liabilities, is very strong at about 6x. Additionally, shareholders' equity reached a record of $2.64 billion at the end of December 2024. Our strong financial position enables us to plan the following investments in strategic opportunities that support our corporate vision. One, we have committed to invest up to $300 million to acquire equipment and other CapEx that Tower will own in Intel's new Mexico FEB facility, enabling us to ramp up FEB capacity and capabilities for our customers. About 15% of this amount has already been paid, and the remaining 85% of these capex amounts are forecasted to be paid in installments during the upcoming two years. Two, in addition, $500 million of total cash has been allocated to make investments in equipment that Tower is to own in the 12-inch FEB in Agrate, Italy, following the previously announced STMicro partnership. To date, we have already invested 80% of this amount placed purchased orders for all the equipment and other capex required, and the remaining amounts are expected to be paid in the upcoming year. In addition, we are executing a $350 million investment plan to expand CIFO and CIGI capacity and capabilities for the qualification and ramp-up of those technologies in our 8-inch and 12-inch facilities in Israel, Texas, and Japan to serve our growing customer demand. Payments towards this CAPEX investment plan are expected to be made in installments during the upcoming two years. Lastly, I want to note that all above investments, including the SIFO and SIGI CAPEX investments, are included in the business strategy and financial model previously presented by the company and are required steps to achieve it. In this model, we outlined a revenue target of $2.66 billion per annum that could be achieved by fully loading our existing facilities, including the above-mentioned SIFO and SIGI CAPEX investments, and our newly built and to-be-built capacity at the AGRATE and New Mexico facilities, which revenue level could result in $560 million of annual operating profit and $500 million of annual net profit. Now, I'd like to turn the call back to the operator. Operator?

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad and wait for a name to be announced. To withdraw a question, please press star one one again. Please stand by, we'll compile the Q and A row studies. We'll take a few moments. And now we're going to take our first question. And it comes from the line of Cody Acree from the benchmark company LLC. Your line is open, please ask your question.

Thank you guys for taking my questions and congrats on the progress. Excuse me. Maybe if we could start, Russell, with your thoughts about the mobile market, your comments there. If you can maybe help to size your expectation for contraction. And then just you mentioned Android. You didn't specifically talk about your Apple customers. and just comments recently from Skyworks that they'd lost about a quarter of their dollar content. I wonder if that had any impact or if that was factored into your thinking as well.

No, specifically for what we believe that we're supplying into Apple, we don't see any reduction. As far as serving into Android predominantly we have customers that are serving multiple markets within Asia and their forecasts are down it's not wildly down and as stated we have within 300 millimeter portion of it we do see growth this year for high-end activities what we see is some of the 200 millimeter having been reduced. If you're asking for, you know, to what degree it would be reduced, I don't like giving a yearly guidance, but it's not overly substantial. It would be somewhere probably in the upper teens that I would say we would have a reduction in the RF mobile business.

All right. Thank you for that, Russell. And then maybe, Oren, if you could talk about the incremental margin, just the contraction that you saw this quarter, if you can maybe help to frame how much of that was the Agrate ramp, and then what is that impact for the rest of the year?

Yeah, thank you. For the rest of the year, we don't expect any additional headwinds because, like we explained previously, from this new baseline that we presented in Q4-24, we expect the incremental model to work according to the past with the 50% incremental margin because all the headwinds were already included in this report. If you ask how much, so you see that if you compare Q4-24 to Q3-24, you see an increase of $16 million in the revenue. which by the 50% incremental model should have resulted in an additional $8 million gross margin. However, there is a minus six. So the difference between plus eight and minus six, most of that is attributed to Agate Headwinds.

All right. Thank you very much.

Thank you. Now we're going to take our next question. And the question comes to the line of Mahwish Mahbub from SIG. Your line is open. Please ask a question.

This is Bastien filling in for Mehdi Hosseini. Hi. So, Russell and Oren, thank you for taking my question. The guide of Q1 of $358 million implies revenue down by single digit sequentially, which is in line with seasonality but still growing year on year. I would assume that your RF infrastructure grows above seasonality while discrete business should be impacted by discontinuation of the Fab 1. Could you elaborate on which segment do you expect to be above or below seasonality? And my follow-up is you started the production ramp on the 1.6 terabyte at several lead customers. Could you give us an update on the timing of revenue and when should we expect material contribution to revenue? Is it still on track for material production? contribution in the second half of 25?

Thank you.

It's already a reasonable amount of revenue in the fourth quarter. I don't have at this point a strong visibility in the specific POs that will be receiving second, third quarter for second half shipments. So I can't really predict what the mix will be. I have a much greater granularity on overall forecast. As far as your first question on what segments are stronger seasonally than the Q4 to Q1 seasonality, certainly if we were to look at it, you would have the CyG, the Cypho, And yeah, I would say also the mixed signal and the power as far as the entireties of them. They're staying about at the same. CIS is actually a little bit stronger where we're seeing the biggest seasonality is within the mobile.

Got it. Very helpful. Thanks.

Thank you. Now we're going to take our next question. And the question comes to the line of Richard Shannon from Craig Cullum Capital Group, LLC. Your line is open. Please ask a question.

Hey, Richard.

Russell, hi. How are you? Good, thanks. Excellent. Thank you. Thanks for letting me ask a couple questions here. Maybe on kind of RF infrastructure, I guess probably a multi-part question here. I want to try to maybe pin you down. Pin you down isn't the right terminology. Get a little bit more specificity on your thought process for growth in the RF infrastructure business this year. As one proxy, one of your customers talked about this last week here about seeing what seems like an acceleration and their data center-related business. I know it doesn't have a complete overlap with you, but I think since you're a supplier to them, it seems like a good proxy. So maybe if you can kind of talk about whether you're seeing growth this year anywhere near what you saw last year, which is obviously very strong. And then maybe as a follow-on to that specifically, you talked about silicon photonics in the context of share gains when you get to 400 and 800 gig. Maybe if you could just provide more specificity on that, please.

I don't think I said share gains in 400 and 800 gig. In general, there's certainly a share gain in that SIFO really didn't exist very strong at all at 100 gig. So if you were to look at 400 and 800, that's where SIFO first came into the play. And it was put in there, although there was some back-feeded at 100 gig as well. I suppose a corollary there is that SIFO has equal benefits for 100 gig as it does at 400-800, meaning the ability to have very high scale by not having to have discrete indium phosphide components versus having a SIFO component with germanium and silicon. But the fact that not until 400, 800, did SIFO really come into the market? That's why you would say that if you were to say share of optical transceivers, obviously it only started to grow at that level. There was some thoughts and internal playing around that if, for example, large learning model software would be driving a step back in data center speeds, which I don't believe. But if it did, probably SIFO, now that it's proven, would have big growth in 100 gig as well. So I don't, but if I understood your question specifically, SIFO really only started to gain market at 400, but as well it came into and backfilled into 100. But the biggest use of it is 400 and 800, and then going into 1.6T. But it's not intrinsic that it has no benefit at 100. It has the same benefits there as well. I don't know if that answered your question, Richard.

You know, a follow-up on that, I clearly made some incorrect notes when I heard that, so let me follow up on that one. Let me touch on RF mobile here. Obviously delineated the dynamic here between the iOS and Android ecosystem. Maybe you can also delineate it in terms of wafer size here. Sounds like we're going to see a fairly strong shift, particularly with the Agrate capacity coming online this year. How do we see your exit rate of this RF SOI capacity towards 300 when you exit this year?

When I exit 2025? Yes, please.

One second. Let me look at the numbers so I don't give you any wrong information.