TowerJazz Ltd. (Nasdaq: TSEM; TASE: TSEM) is launching a strategic shift. Until now, the Migdal Ha'Emek-based specialty foundry has engaged in the design and production of processors for companies in the private sector; now it will also sell know-how and technology. Sources inform ''Globes'' that senior executives of TowerJazz shareholder Israel Corporation (TASE: ILCO) today returned to Israel from Asia where they signed a deal estimated at $130 million, under which TowerJazz will upgrade the production facility of a government company to boost its output.
TowerJazz will offer the Asian company a comprehensive production solution, from the upgrade of clean rooms and the construction of new ones, through equipment procurement, and the design of all merger, cooling, and computerization infrastructures. Later, TowerJazz will provide management, training, and maintenance services for the fab.
TowerJazz will report revenue from the project over six quarters. The company will apparently report the down payment on the contract in its financial statements for the fourth quarter of 2009. Most of the revenue will be reported during 2010. The sources added that work on the project has already begun, and that the Asian company has already placed an order with TowerJazz for the design of parts of the project.
Since the contract is for the sale of know-how and management services, TowerJazz will likely report higher gross profits compared with its average gross margin. The company's gross profit margin has been rising in recent quarters, and reached 32% of revenue for the third quarter.
The main innovation in the contract, besides its large size, is that until now, TowerJazz has manufactured processors and developed components with, or for, large private companies, such as LG Electronics Inc. (KSX: 66570) or Agilent Technologies Inc. (NYSE: A). Now TowerJazz is selling its accumulated know-how and experience in the building of fabs and in the upgrade and operation of them.
The contract is with a defense company, which wants its production and supply chain to remain domestic, so as not to depend on a foreign company in case a diplomatic dispute erupts between the countries. It cannot be ruled out that, in addition to the present contract, TowerJazz is negotiating other, similar deals.
TowerJazz currently owns three fabs: the fab in California of Jazz Semiconductor, which Tower Semiconductor acquired last year, and two fabs in Migdal Ha'Emek in Israel. Tower's Fab 1 was built in 1984 and Fab 2 was built in the early 2000s. TowerJazz also owns 10% of a Chinese fab, and it may sell this holding next year.
In response to the report, TowerJazz CEO Russell Ellwanger told "Globes", "Even though the first quarter is seasonally a weak quarter, we expect to report revenue growth in the first quarter of 2010."
In the wake of the present contract, TowerJazz may meet its 2010 profit target, and if it signs more contracts of this kind, it may even meet Ellwanger's ambitious target for the company.
Last week, TowerJazz submitted a draft prospectus with the US Securities and Exchange Commission (SEC) to raise capital. The SEC is expected to approve it in about six months time.
TowerJazz's share closed at $1 on Nasdaq on Friday, giving a market cap of $187 million. The share rose 1.3% on the TASE today to NIS 3.89.
Published by Globes [online], Israel business news - www.globes-online.com - on November 22, 2009
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