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| Tower of red ink | Published by: The Marker
www.themarker.com/eng
Shirley Yom Tov
09/08/2005
| It is hard to overcome the automatic association of Israeli chip maker Tower Semiconductors (Nasdaq:TSEM) to giant losses and sweeping layoffs.
There are grave doubts as to whether the company will ever return the multi-billion shekel investments made in it over the years.
Three months ago, Tower gained a new chief executive: Russell C. Ellwanger, 50, replaced Carmel Vernia. Ellwanger has his work cut out for him: he has to restore client faith in the company, and at home, the situation isn't pleasant. The 1,300 workers still remaining want to know how he can save their skins, and then there's that half-billion debt to Bank Leumi (TASE: LUMI ) and Bank Hapoalim (TASE: POLI ). Tower owes another $25 million to bondholders, and meanwhile its paper has achieved the dubious honor of junk status, with yields of 30%. Nor is the company's profit and loss statement a thing of joy, considering the company's $47 million loss for the second quarter of 2005.
Where can Ellwanger start? He has answers, but only to some of the questions. In a meeting with the press last week, he spoke at length, discussing new technologies and the excellent people available in Israel. He even prophesied positive Ebitda and cash flow along the line.
But he couldn't say how or when Tower might return its debts, or turn a genuine net profit.
Ellwanger has much experience in the chips industry; he's been around and done a lot of jobs at a lot of companies. In recent years he was at Applied Materials, which specializes in equipment for the silicon industry, and even ran Applied Materials' division in Rehovot, so he knows Israel as well.
Tower can be a good company
Ellwanger had been recruited by Eli Harari, the manager of Sandisk and a director at Tower. Sandisk, Macronics, Alliance and Qwicklogic had invested a combined $300 million in Tower's Fab 2 and had an interest in keeping the company afloat. The banks as said put in half a billion more.
Ellwanger relates that when offered the job, he already knew about Tower. He came to Israel, met with people, and saw that the company's operations were very good: its capacities seemed good in his eyes. He also has great faith in human resources and found excellent ones at Tower; "I believe Tower can be very successful," he concluded.
He means to learn Hebrew and although a Mormon, he's very Israeli in many ways, including in his wild style of driving. Happily married with four children, he's a boxing aficionado and still engages in athletics, he says.
But his pleasant mien and relaxing influence can't alleviate the concerns about Tower's future. "The company's financial situation is not good," he acknowledges; but the company's human resources are "fantastic", they're working on an extensive range of products, and Tower is well positioned in the marketplace, he says.
Meeting with clients around the world, he didn't hear bad things: they were concerned about the company's financial stability, but became less so after the arrangement was reached with debt-holders and the banks, Ellwanger relates.
Real improvement will take more than a quarter or two, he acknowledges: it will take time.
He wants Tower to become more customer-oriented and instituted structural changes. The chief executive used to assume direct responsibility for development, marketing and sales, which was cumbersome: now Tower will have a product manager reporting directly to the CEO.
He deflected questions about Tower's past, adding that he had not me with his predecessor, Carmel Vernia, who departed under a cloud of blame from The Israel Corporation (TASE: ILCO ), which controls the company. Vernia had returned the favor in spades. Ellwanger had met with Yoav Nissan-Cohen, one of the fathers of Fab 2. Ellwanger does not want to speculate on what went wrong: but he believes the company's structure contributed to its woes, and that will change.
So, when will Tower achieve positive ebitda and cash flow? In a year and a half, Ellwanger projects. And net profit? Tower isn't thinking in those terms, apparently. Certainly not yet.
How badly Tower did in the second quarter
Reuters: Second-quarter revenues were $19.2 million plus another $8 million from a previously announced technology-related agreement, down from $33.7 million in the second quarter of 2004.
The company had forecast revenues of $20 million to $22 million in the third quarter, having reported revenues of $35.1 million in the same quarter of 2004.
Tower said that during the second quarter, it started shipping wafers of 1.3 and 2.0 megapixel CMOS Image Sensors for mobile phones, using the 0.18-micron manufacturing capabilities of its new Fab 2 plant.
It added that during the period, it had a record number of customer product "tape outs", where it tests new chip designs.
"These tape-outs are expected to materialise into revenue growth in the coming quarters and indicate the increasing traction of the Fab 2 technology offering to its customers' products," Tower said in a statement.
Ellwanger also said that, while Tower has a strong customer pipeline, in the short term much depended on a few products of a few customers.
"The Fab 2 customer base hasn't been fully developed," he said.
Last week, Tower signed an agreement with its banks for up to $30 million in additional funding, while Tower agreed to raise a another $30 million.
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