Ladies and gentlemen, thank you for standing by. Welcome to the Tower Semiconductor Fourth Quarter and Full Year 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 February 14th, 2024. 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 Financial results conference call for the fourth quarter and full year of 2023. Before we begin, I would like to remind you that some statements made during this call maybe 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 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 such forward-looking statements. Please note that the fourth quarter and full year of 2023 financial results have been prepared in accordance with U.S. GAAP. The financial tables and data in today earnings release and in these 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 the full explanation of these measures and the reconciliation of these non-GAAP measures to the GAAP financial measures. Please note, we have a supporting slide deck that compliments today's conference call. This 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 Ellwanger. Russell, please go ahead.

Thank you, Noit. Welcome everybody. Thank you for joining our call today. During today's call, we'll discuss our financial results for the fourth quarter and the full year of 2023, and share our strategic direction and expected growth outlook for 2024. To begin, as is known, on January 1st of this year, there was an earthquake in Japan and a surrounding area to our facilities at Hokkaido. We are grateful that no employee suffered any physical harm through this event. Due to state-of-the-art building practices, we did not suffer facility structural damage. We did suffer tools damage and scrap of some percentage of work in progress at both factories as well as secession of operations. Our dedicated and most capable employees have recovered both factories to full operation with start levels currently to the level set in the annual plan. 2023 was marked by an industry-wide slowdown resulting in an annual revenue of $1.42 billion. As we transition into 2024, there are clearer indicators of market recovery. We are realizing renewed demand across several of our key market segments. We'll give more color on this as we continue the call. Revenue for the fourth quarter was $352 million at this revenue level Fab utilizations were Fab 1 6-inch was about 60%. Fab 2 8-inch was about 75%. Fab 3 remained at about 40%. Fab 5 8-inch was about 40%. Fab 7 12-inch was about 70%. Fab 9 8-inch was also about 70%. As a validation of our value-add products and next-generation customer-aligned roadmaps, we not only maintained our blended average selling price per layer, but saw an increase of about 4% in 2023 over 2022. This was not due to price increases, but rather due to value-add products resulting in a richer mix and there's a reason for maintaining good…

Hello everyone. We released today our total and annual financial results. For Q4 ‘23 we reported revenues of $352 million, gross profit of $84 million and net profit of $54 million. For the full year we reported revenues of $1.42 billion, gross profit of $354 million and net profit of $518 million, which included $290 million net profit impact of 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 CapEx plans. Revenue for Q4 was $352 million as compared to $358 million in the prior quarter, and gross profit for Q4 was $84 million as compared to $87 million in prior quarter. Operating profit for Q4 was $45 million and net profit was $54 million or $0.49 basic and $0.48 diluted earnings per share. Operating and net profit for the third quarter included the net impact of merger contract termination fee we received from Intel in the amount of $314 million net of associated cost included in operating profit, and an amount of $290 million net of tax included in net profit, based on a 7.5% preferred income tax rate as applicable to us in Israel. Including the termination fee operating profit for the third quarter was $362 million and net profit was $342 million or $3.10 basic, and $3.07 diluted earnings per share. For the full year revenue was $1.42 billion as compared to $1.68 billion in 2022, and gross profit was $354 million as compared to $466 million in ‘22. Operating profit for the full year was $547 million and included $314 million net from the Intel merger contract termination fee compared to operating profit of $312 million in ’22. Net profit for the full year was $518 million or $4.70 basic and…

Yes, maybe we would open up to questions and from there we can go ahead and I'll give a closing.

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

This is actually David Williams on for Cody this morning. Well thanks for all the great color, as usual, but wanted to dig in a bit on the impact on the revenue side and maybe even on the margins from the transition or the shutting down of that 6-inch and moving to 8-inch. Seems like there should be some nice margin tailwinds there, but also just kind of what that revenue impact could look like over the next couple of quarters as you port that over.

Yes. it'll not impact the margins at all. This Feb 1 because, anyway, that's the oldest Feb we had built 40 years ago in 1984. it was very nice, highly utilized. But in recent year or two, it's about at the breakeven point, so it did not really contribute to the margin. So, there will not be any deficiency to the margin. So, it'll be pretty much break even, the revenues we didn't disclose publicly, but it's immaterial really to the total amount and it's already baked into our financial model that's represented in previous time.

It seems like that might have been margin dilutive and you might get a tailwind from that and in addition to the economics of moving that from that 6-inch to the eight inch, is that fair to say?

It is, but over the next few quarters it actually -- we've been well aligned with customers and getting prepared for this and if anything, revenues will be higher through some pullins of end life activities. So, over the next two, three quarters, if anything it's going to be beneficial, not negative, but on a small level.

And then maybe just on the rebound that you're talking about, what is maybe can you point to that's giving you that confidence? Is it really the near-term order rates that are forecasting customers or are you getting better longer-term visibility of the customer demand?

That's a combination of both, had stated that we're targeting notable quarter-over-quarter growth throughout the year. If we look at our forecasts, on most all of the core businesses that we have, there's good strong double-digit growth in the year, but really driven off of the second half, not very much off of the first half with the exception right now, the RFSOI is very strong and as well we have certain mixed signal and power also going into mobile platforms that's very high at the moment. So, two areas of really increase in forecast had mentioned that I think fortuitous but based upon good planning, when we started the activity in Italy, the Agrate facility, we had by plan going to be shipping our first -- wafers in the fourth quarter of 2023. And that is right now an area where we really do need capacity and as the capacity is coming online, quarter over quarter, it's fully spoken for throughout this year and by forecast for the 2025 as well when it hits the full capacity of this ramp phase in the second quarter of 2025. So, in the area of the RFSOI and some other mobile applications, we have seen a very big pickup in orders in the area of Silicon Germanium and Silicon Photonics, we see very strong forecasts for which we've not yet received the pos, but really in Q2, Q3, Q4, and that's very real. If I look at -- year over year growth in Silicon Photonics by forecast is multiple hundreds of percent. And then our 300 mm power is also very strong growth year over year as well as the 300 mm mix signal, which is serving some of these mobile applications that I had said, if I look again at our…

No, very, very great color. Thanks. Thanks for that, Russell. And then maybe just one last one for Oren. Just kind of given the trough that we're seeing in revenue next quarter, how should we think about the gross margin and just given the mix and that revenue base there and all the moving pieces and I appreciate the help here and thank you.

Yeah, I believe you should, uh, assume that the baseline of Q4 actual which resulted in I believe 24% gross profit is the baseline and for Q1 and now since the revenue guidance is indicating about 25 million, 27 million lower revenue, so then you should apply the 50% incremental model whether we go up or down.

Great. Thanks again.

Thank you. Good question.

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

I'm actually going to follow up on the gross margin question. I appreciate the thoughts here, Oren as to how to think about the first quarter here. I think I heard from one of you two about some sort of impact here from the SC micro fab ramping up here. I'm wondering, what that effect might be because it doesn't seem like you're necessarily seeing it here in the first quarter. How do we think about that? And then as the lower margin products in Fab One roll off, does that give us any thought process for a higher feeling of gross margins in your model? I think I heard you say no, Oren, but I just want to make sure.

Yeah, I think my previous answer that to assume 50% incremental on the revenue increase or decrease is considering all that, meaning let's say if currently, the gross profit was whatever it was, $84 million and if one assumes 25 million revenue reduction, so it should be attributed to 50% of that gross profit. Instead of 84%, 50% of 24. So, it's $72 million. Yes, what Russell mentioned is true about the fact that we will start, since we start, like Russell said from scratch, the gut factory, it will -- until it'll reach the breakeven point, which Russell indicated in a year from now, may influence a little bit on the margins. We didn't specify the amount. It could be some lower margins, but it'll be offset by other activities and richer mix. So, I think it's already in the number that is specified before.

Okay. Fair enough. Thanks for that clarification, Oren. Russell, kind of going on your press release and your comments here on the call about notable growth after this first quarter here and you're clear on saying more in the second half here, trying to put numbers together and think about the total year. I think that the fair question to ask here is do you think you are going to grow your total revenues in ‘24 of to ‘23? It seems like it'd be right in that range, but just want to get a sense of how do we interpret notable?

I would expect that we grow our revenue ‘24 over ‘23. Yes.

Excellent. That's great to hear. Let's hear maybe a couple of questions in…

I'll actually be very disappointed if we don't.

Excellent. Well that's great to hear. Quick question on the data center area here. It sounds like you're seeing some pick up here, but want to get a sense of kind of exposure in some of the growth drivers. Here you talked about higher end datacom and 800G. I'm wondering if you could, there's any way that where you can quantify how much your business is 800G and then you have talked about today and in the past about linear pluggable optic LPO. Is that you think that's going to be a sizable part of the market down the road?

What I think is a necessarily that critical, yes, I believe that there's major advantages in it that should be implemented, how big it will get. I don't know. I think it could, and it does have benefits. It certainly would be beneficial for us in the offerings that we give, but I'm not a market analyst. I think, that's really more of a question for you than me, but it's -- from the technical benefit, yes, I think that there's strong benefit there. As far as what you said about data center, though, I did want to state what I have not yet seen other than in silicon photonics. We have not yet seen a big uptick in POs, we've seen an uptick in forecast, and there's a sometimes a difference between the two. But I'm confident in the forecast and that we'll be picking up in the second, third and fourth quarter as far as POs and ultimately shipments. For what we're doing in the -- with our customers and what's being done in the end customer. I was delightfully surprised in a executive meeting with a big integrator in the second half of ‘23 to hear how much of their present volume is going into 800G, and it was certainly much higher than the standard analyst reports were saying was 800G. That's I think very obviously driven by AI. So how much is now going at 800G? I would, again, that's an overall market analyst statement, not mine, but quite a bit of what we're shipping will be going into that, I believe most all of what we're doing in SiPho is added at the 800G and obviously targeting into 1.60.

Okay, that's helpful. Two quick questions. I will jump out of line. You've talked very positively about silicon photonics, and I think it's a very, I think it's a very small piece of your revenues within the company, much less in data center. How can we think about this over the next couple, few years? Big picture about how much this becomes part of your data center business. I don't know if you'd want to get a percentage of that business and how fast that can grow or just any context of this area that you seem very excited about.

So, I see by all of our own plans and by customer alignments, SiPho, will be a predominant portion of data center market and elsewhere as well. But data center definitely, and realize that we have both passive and active SFO. The activity that we have going on integrated laser is pretty exceptional and we are the only pure play foundry that has that. And those are very, very high dollar, high-value systems as well as what we're doing now with SiPho that, for example, we're shipping to InLight. But I wouldn't say that it's an insignificant amount of our revenue presently. If I look at what we're having in our forecast for ‘24, the SiPho revenue is not insignificant.

Well thanks for that clarification. Russell, my last question, I'll jump in the line here. Obviously have a very strong balance sheet here and I think you're probably going to be free cash flow positive to some degree this year. How do we think about your plan for the cash here as it continues to grow?

First, I don't forecast we will be positive for cash flow because, and we did not, and we were not also in Q4, in Q3 because of the big CapEx that we have for grata and also for Intel. Uh, they are exceeding our cash flow operation -- not for Intel, for the Albuquerque capacity for the Intel Fab -- our capacity, our cap tools, our equipment that will be in the Intel Fab in Albuquerque. So, this $300 million and the remaining of $200 million plus the other CapEx that we have run rate of every year of $200 million this exceeds the cash flow operation. So, it'll not be positive, but still it's good that we have the cash on the balance sheet so we can fund it all that. And like I mentioned in my prepared remarks is we still have to pay, we didn't pay it anything towards the $300 million for Fab 11, for Intel Fab 11 for our tools there. And we still have $200 million for gut and we have $200 million for maintenance. And in addition to that, like I mentioned, we are planning to invest to increase the capacity of -- in our various sites. So, we have flexibility.

The next question is from Lisa Thompson of ZACKS Investment Research. Please go ahead.

I just have a quick question a little bit about the finances, Oren. So, given your plans for this year, what would be the CapEx expenditure by quarter, and then given that and your nice $1.2 billion in cash, what should we expect for interest income?

Okay. Interest income, you can see in the balance sheet the cash amounts we have. You can assume that we on and on the other hand, we have $200 million loans. The loans are carrying 2%, our investments are currently, I mean, we enjoyed this year also from rates of between 6% to 7% interest on deposits and yields on multiple securities. So, we did really good. For, currently the interest rates are a little bit lower in the world, so instead of getting excellent 6.5% to 7% that we got last year maybe you should assume 5% or 5.5%. And of course, not on the entire cash amounts because some of that is for working capital required all the time. But for majority of our cash, we invested in deposits and up to and about $150 million in multiple security. So, I would assume 5.5% of that for CapEx. So, I actually said in the beginning we have a $200 million maintenance CapEx, the sustainable level. So, it's $50 million a quarter, right. On top of that, you should assume, I mean, I said $200 million remaining for Agrate that's in the coming one and a half yield. So, if you want, you can divide it by six to reach the quarterly CapEx for a Agrate fab. And for the fab 11x, the tools for that fab, I assume, the $300 million will be paid, in the coming two, two and a half years. So, everybody can make his assumptions overall for sure the CapEx should be more than $100 million per quarter, between 100 to 150.

Okay. Great. Thanks. And so just take that off the cash balance. No, because you're going to generate a little bit in operating income, right?

Yes, but like I answered before too, I believe Richa the cash flow operations is typically lower than $100 million to $150 million a quarter. Right?

Right, right. So definitely negative cash flow, obviously. All right, great. Thank you. That helps a lot. That's all my, that's my only question.

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

Thank you. Thank you for joining the call. Really is a very exciting time for the company. As stated in the press release itself, it is probably the best position Tower has ever been in, in its history, in all aspects, in our financial strength, in our technology offering, and in our operational capability. And that then all underpinned by the customer partnerships it's an amazing place to be. Look forward to tracking our progress over the year and reporting on it. In the upcoming short period on February 29th, Dr. Racanelli, our President will host one-on-one meetings at the Susquehanna Technology Conference in New York. On March 19th we'll be hosting an investor conference in Tel Aviv Stock Exchange at the Tasa building itself. Overall, appreciate your continued support and confidence. Our team is eagar and ready to seize opportunities ahead, and to drive value for our customers and stakeholders. Thank you and look forward to follow up conversation.

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