Ladies and gentlemen, thank you for standing by. Welcome to the Tower Semiconductor Third Quarter 2023 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. [Operator Instructions] As a reminder, this conference is being recorded, November 13, 2023. Joining us today are Mr. Russell Ellwanger, Tower's CEO; and Mr. Oren Shirazi, CFO. I would now like to turn the conference 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's financial results conference call for the third quarter of 2023. 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 Form 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 also available on our website. Tower assumes no obligation to update any such forward-looking statements. Please note that the third quarter of 2023 financial results have been prepared in accordance with US 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 as established with the Securities and Exchange Commission. The financial tables include full explanation of these measures and the reconciliation of these non-GAAP measures to the GAAP financial measures. In today's call, we have a supporting slide deck that complements our conference call. This presentation is accessible on our company's website and is also integrated into the webcast for your convenience. Now, I'd like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.

Welcome, everyone, and thank you for joining our call today. Being the first financials release call we are holding since November 2021, we will include in today's call a longer-term financial model stating the reasons for and the margins resulting from the new capacity agreements that we have announced in the past years. An important aspect of our growth strategy is manufacturing efficiency and scale. Increasing capacity in an accretive cost-efficient manner is a competitive edge. First, looking at this past quarter, our revenue for the third quarter was $358 million, down year-over-year, reflective of challenging market conditions. At this revenue level, Fab utilizations were Fab 1 6-inch, about 55%; Fab 2 8-inch, about 75%; Fab 3 8-inch, about 40%, due primarily to the weakness in data centers; Fab 5 8-inch, at about 60%; Fab 7 12-inch, about 60%; and Fab 9 8-inch, about 65%. As you can see, with the present utilization levels, we have the ability to quickly ramp up manufacturing to capitalize on a market rebound. A positive point demonstrating our operational efficiency, at these lower utilization levels, excluding the accretive impact of one-time items, we had substantial operating profit. Currently, we are seeing a return in several areas to rational customer inventory levels and are beginning to experience some upsides relative to customer forecasts as end-market opportunities present themselves. We have yet to see customers increase their forecasts, although certainly in the RF segment, inventory levels have reached or fallen below the previous steady state. We remain proactive with our customers, providing operational flexibility, as even small changes to end markets, if one has the ability to act quickly, could have a disproportionately positive impact on near-term results. For the fourth quarter of 2023, we expect revenue of $350 million, plus or minus 5%. We are…

Thank you, Russell. We released today our quarterly results reporting revenues of $358 million, gross profit of $87 million, and net profit of $342 million, which net profit included $290 million of net profit impact associated with the merger contract termination fee received from Intel. I will start my review by analyzing the P&L highlights, followed by our balance sheet and a presentation of our long-term financial model. Revenue for the quarter ended in September 2023 with $358 million compared to $357 million in the prior quarter, and gross profit for the quarter ended in September 2023 with $87 million, similar to the growth profit in the prior quarter. Operating profit and net profit for the quarter included the net impact of merger contract termination fee we received from Intel in the amount of $314 million net of associated costs. This amount is included in operating profit. The net profit impact after tax is $290 million based on a 7.5% preferred income tax rate that applies to us in Israel. Including the termination fees, operating profit for the quarter was $362 million as compared to $51 million in the prior quarter, and net profit was $342 million, or $3.10 basic earnings per share, compared to net profit of $51 million, or $0.46 per share of basic earnings in the prior quarter. Our balance sheet, as of the end of September, totaled $2.8 billion, primarily comprised of $1.1 billion of fixed assets, mostly machinery and equipment, and $1.7 billion of current assets, 72% of which were cash deposits and marketable securities. Current assets ratio, reflecting the multiple by which current assets are larger than short-term liabilities, is very strong by a multiple of 6.7x as compared to 4.8x in the prior quarter. Shareholder’s equity increased by 17% quarter-over-quarter and by 24%…

Thank you, Oren. Truly very exciting. To close, I'll speak to the situation in Israel. October 7th was an act of pure evil, a direct and purpose attack on civilians by Hamas using the tools of murder, rape, and mutilation, the same tools used by Putin in Ukraine that had been employed by other depraved despots throughout history. In this present instance, under Hamas leaders who lived a life of billionaires, harbored and shielded safely in foreign nations, carrying nothing for any God-given human values, no value for life at all, certainly not for Israelis, but also not for their own people who they use as pawns. Since this time, I've been extremely moved by the outpouring of warm thoughts and prayers for Tower and our employees in Israel, by many customers, shareholders, suppliers, and as well as from employees in other geographic regions. A special thank you to a customer who accompanied this well-wishing with a sizable donation towards the extra support Tower is providing for our employees, for either the employee themselves or the employee's spouse in serving their country to defend the principles they believe in, similar to the support Tower has offered to our employees in Ukraine. Thank you all. My heartfelt thanks to our employees worldwide, and specific at this time to our employees in Israel, to those sacrificing comfort and possibly life to serve their country, and to those in the factories, Jewish, Muslim, Druze, and Christian, taking additional burdens on themselves, having enabled that we have not missed a single customer commit and doing all in their power to ensure that we will not miss any in the future. We have robust business continuity procedures in place in the company, including multi-site qualification of major process flows, and a very strong external expert advised and audited IT safeguard systems. I have always appreciated and valued Tower’s corporate culture. In times such as these, one of the few upsides and positive emotions is seeing the unswerving dedication of our employees and the loyal support of our customers, shareholders, and suppliers. Thank you. Operator?

Thank you. [Operator Instructions] The first question is from Cody Acree of Benchmark. Please go ahead.

Yeah, thank you guys for taking my questions, and best of luck with everything going on in Israel.

Thank you.

And Russell, if we could start with the utilization trends, the flat down in all of your locales. I think that's right, yeah. And so, is that indicative of the magnitude of the revenue contribution from those end markets directly? And then if you could also provide some discussion of your revenue concentration per facility, knowing that you've got specific facilities that are going to be more broadly utilized among your revenue categories.

Cody, you're really mumbling right now. I can't make out what you're saying at the moment. Could you restate your last few sentences?

Yeah, I guess what I'm trying to focus on is your revenue capacity per facility, knowing that you've got some facilities that are more dedicated to one of your revenue segments versus others. And then just what you contribute the declining utilization rates across the board that were flat to down this last two quarters?

Yeah, I don't mean this tongue in cheek, but certainly I attribute it to less market demand. I mean, that's the 100% focus of utilization. I think you had asked if it's indicative of revenue. Obviously, the revenue is very much in line with what utilization levels are. So the market is weak. The markets that we serve isn't very strong at the moment, although we are seeing rebounding and we've been able to, as I stated, see increases in the, specifically, demand for switches and amplifiers, tuners within -- that go into front-end modules. But in general, obviously, utilization is very indicative of market, and our revenue is tied to the utilization. And I gave a revenue forecast that's predominantly flat for Q4, which shows that by customer forecast, as I clearly stated, we have not yet seen big upside. We have, however, seen in some end markets increases in orders that we'll be able to realize within Q1 and beyond. And specifically, I mentioned Silicon Photonics. The concentration, and I think I -- well, I know I said it in the script, Fab 3 Newport Beach is predominantly doing the Silicon Germanium activities, the most advanced platform for Silicon Germanium are in Newport Beach, and data center is weak at the moment. So that, I think, is the color that you're asking for. In Japan, 200mm factory in Migdal Haemek, in both we have a good amount of BCD, and in the Migdal Haemek 200mm factory we also do a lot of RF-SOI. In San Antonio, we do a lot of Discrete, and a good amount of Power activities serving automotive.

Thank you Russ for that, it was very helpful. Oren, can you just walk through your timing of your outlays for the STMicro and the Intel properties? I know you've given more details on the Italian spending patterns, but just wondering what your plans are for the Intel fabs?

Yeah, Italy, like you said, I outlined it that we already paid $250 million out of the $500 million, and the reminder, you may expect it in the coming one and a half year. You can maybe, if you want in the model, to amortize it linearly. On Intel, we still don't have specific details of that because we just announced it two months ago, so we are now forming the CapEx equipment list. Following that, we will exactly calculate the exact timing of the spend of the investment of the $300 million, but obviously it should be done in the coming two, two and a half years.

And Oren, I guess I asked this on the last conference call, but I'm going to hit it from a different angle maybe. Your supply relationship with STMicro and Intel, they're just based on a set wafer price to you assuming different technologies provide a different wafer cost. But I assume that there is some discounted contribution or discounted price that's factored in with your contribution of hardware and technology to those fabs. I guess how is that process going to work? And do you expect that to be very accretive to gross margins, to both wafers and also [revenues]?

Yeah, Cody, thank you. So I think this is exactly why because of these types of questions we presented -- I presented the long-term financial model. It really show you in the right column of the financial model that the incremental margins are baked in everything. All in, is a 32% gross margin, 30% operational margin. Now, of course, this is better than the current gross and operating margins that we have. And this is lower than the 50% incremental margin that we always discussed about organic growth. So this gives you the answer that while this is a very nice incremental contribution, it is not an organic because it's not from our existing space. Now, we cannot disclose the exact cost per wafer that we pay to Intel or to ST partnership because this is under, of course, confidentiality. But you see that in the financial model, these are the results. This is the incremental is mostly because of Intel and -- not Intel, because of the capacity corridor and as Agrate fab, as well as other growth in the company.

All right, thanks. Thank you very much, very helpful.

Thank you, Cody.

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

Well, great. Thanks, Russell and Oren, for taking my questions. I did want to preface them with two quick things here. Thanks for the investor presentation, I got some of the detail. It's very helpful to see it that way. And also, if you want to congratulate the promotions here in particular, having got to know Marco over the years, I think it's a very appropriate promotion, so congratulations on that.

Thank you.

With that said here, a few questions that come to mind. I guess I'll ask a bottoms up, your questions on the data center market here, where you're seeing a bit of weakness. And I think if I heard your comments correctly, not necessarily seeing upside here, improving directly, even though we hear from a lot of participants in this market about some great deal of strength here. Maybe you can help us understand, is there some inventory still left to be burned here? And then do you have any visibility into when that ramps? And do you expect that to be more of a ratable ramp or something more -- I don't know if I want to use the word spiky or not, but certainly seeing some of those dynamics in the market. I wonder if we should expect that over time?

Thank you for the question. I did state that we are seeing inventory levels having burned off quite substantially, and they have, and in particular in the RF space, and particularly with data center, to where our customers and their customer is down now to levels at or before the market, if you would say, went weak. Every time that we've experienced the data center market coming back, it is a very steep function when it comes back. It's a step function. Will that be the case now? I don't know. That's hard for me to predict. We do believe it will come back, and we'll be back within the next quarters, and we're well prepared to take care of that growth. Now, part of the reason that we're very optimistic about data center is really our partnerships with the leaders into not just what we have served in the past, but into those technologies that are serving the future. I mentioned a very strong ramp being forecasted by customers within Silicon Photonics, and additionally, that analyst reports that are fairly recent seem to be very far off on the adoption of 800G, and 800G driving many activities that were not in 100G. So we see that as very, very positive. I stated, and I cannot overstate the importance of the partnership that we have with InnoLight on driving very state-of-the-art solutions with our Silicon Photonics platforms. So we're pretty bullish on that. If you look at the other activities that we spoke about with, for example, the linear portable optics, we have many things coming into play right now that are technological upsides that have the benefit of the innovation of cost reduction. And those get implemented relatively quickly. If one's doing a new build-out of a 400G or an 800G, and you have the ability to reduce cost in so doing, that is implemented very fast. So that's part of the reason that we would see and believe that the rebound will be extremely strong because of new technologies where we have really a very strong partnership with leaders. So exactly how steep that ramp will be, I cannot say. Will the ramp come? It appears from inventory levels presently it will come, and it should come fairly shortly, exactly when, I don't know. But I did state we have not yet seen the increase in purchase orders, but we're very prepared, other than in Silicon Photonics, but we're very prepared to capitalize on it when it comes. Hopefully that answers your question, Richard. I really don't have more colors to add to that.

That was very helpful. We appreciate your position and visibility, so thanks for portraying that one. I guess this question may be for Russell or Oren here, but I think some of the big questions we get, and I think you've had posed to you many times in the past year, that I think are especially important given we're going through an inventory cycle in parts of your markets as well as the typical calendar seasonality that you experience. So I guess the big question we're getting is, how do we think about your first quarter seasonality? You typically don't give guidance more than a quarter out, but are you seeing anything that would suggest it's going to be meaningfully different than normal, which I think is kind of a little bit down sequentially in the first quarter?

You are correct. We don't give guidance longer term than one quarter. I honestly think that Q1 seasonality is an impact that everyone faces each year. There's been a few years where we've been able to capitalize against it by having entered into a new strong market with offerings, but I think the industry itself expects a Q1 seasonality. I don't think that this year will be different as far as what the industry will be experiencing.

Okay, fair enough, that's helpful. One more question.

I'm sorry, because you asked about data center. Data center is data center, and that is where it's at. But I had mentioned specifically one other area, it's not data center specifically, but it is the phased array that is used for satellite, and that is a very, very big market that has come about that we're very active in and got a strong design win with a first-year provider. So we see that in addition to a data center rebound as a strong tailwind for what we're doing with Silicon Germanium. And it's not data center itself, but it really is somewhat tied into the same application space.

Okay, thanks for the additional detail, Russell. So I'm going to ask one more question, and I will jump back into the queue here. But kind of big picture, you had some really interesting comments across a number of markets. Obviously, silicon photonics, power, display, sensors, and I probably missed some here. When you think about over, say, I don't know, take a time frame, like say two years, are any of these going to be much more powerful to your revenue contributions than any others, or are they all kind of within the same area? How would you characterize them or even rank them?

What we're doing with advanced 300mm, 65nm BCD, and a very advanced and aggressive roadmap on our BCD platform, as I stated, the major catalyst for what we're doing in the New Mexico factory, I think that that was -- probably will be the biggest incremental growth in the company.

Okay, perfect. Thank you.

The next question is from Natalia Winkler of Jeffries. Please go ahead.

Hi. Thank you for taking my question. I have a couple. One is on the Silicon Photonics. Russell, could you please speak about the market share dynamics that you guys are seeing in Silicon Photonics? Obviously, you’ve been -- your market share in Silicon Germanium has been the leading. I'm just curious if you're seeing similar or any different competitive dynamics in Silicon Photonics?

It's a very good question and one that I don't have the greatest answer for you because the Silicon Photonics market is not as mature as far as its establishment as is the Silicon Germanium. We're certainly in with the leaders there. I think what we do with SiPho is very strong. I couldn't give you an exact market share number at this moment. I expect that we will have a substantial if not the major market share of SiPho as the ramps occur, as the 800G and beyond really start moving quickly. But I could not tell you right now what our exact market share is. I really couldn't. I know that we're very well positioned, but it's a little bit difficult to know. I think that at the moment, the major market share belongs to an IDM.

Understood, thank you. That's very helpful. And then if I may, and just kind of, if we're thinking about the long-term model, how should we think about the mix within that long-term model? And I guess another way to put it is if we're thinking about the capacity additions that you guys are doing in Agrate and Intel, are there any kind of Silicon Germanium additional capacity that's coming online, or is that largely kind of focused on the non-Silicon Germanium, non-Silicon Photonics applications such as the CMOS and Analogs?

That's a very good question. The bulk of the reasons for driving the capacity increases in Agrate is the RF-SOI, and in the Fab 11X in New Mexico, it's for the BCD as I mentioned before. That's not to say that we're not doing activities to expand Silicon Photonics, both at 200mm and at 300mm, we are. But the biggest growth drivers right now and impetus for the Agrate as well as the New Mexico was RF-SOI and Power management and particularly 5 BCD and an extendable roadmap for that.

This is very helpful and if I may, just a quick follow-up on this. On the 300mm Silicon Photonics, is that something you guys are already shipping, or is that kind of part of the future roadmap?

We have shipped prototypes. So yes, we have shipped. And yes, it is part of the future roadmap.

Thank you.

So it's not something that doesn't exist now. We do have some prototypes that’s gone out.

Thank you.

This concludes the question-and-answer session. Mr. Ellwanger, would you like to make your concluding statement?

Yes, thank you. Firstly, again, really much appreciation to everyone that has given well-wishing during this period of war. Secondly, as far as the company, I don't believe we've ever been in a more exciting position than we are now. So much advancement in technology platforms, so much advancement in customer partnerships, we sit extremely confident that in areas where there has been market weakness, the market will return. And we will return with higher market shares than we had in the past. And that's how you outgrow the market. So we thank everybody. And my biggest appreciation, as stated, to our employees that still come to the factory and put everything they can to take up for the burdens of those that can't presently come to the factory here in Israel. So thank you very, very much.

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