Tower Semiconductor Ltd. (INTC) Earnings Call Transcript & Summary

Hello. Thank you for standing by, and welcome to the Intel Tower Business Update Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today. Tony Balow, Vice President of Investor Relations at Intel. Please go ahead.

Thank you, operator. Good morning and afternoon, everyone. Welcome to the conference call to discuss the announcement we made earlier today of Intel's proposed acquisition of Tower Semiconductor. A replay of today's audio cast will be available later today by visiting Intel's investor website, intc.com and Tower's investor website, towersemi.com. Joining me today are Pat Gelsinger, CEO of Intel; Dr. Randhir Thakur, Senior Vice President and President of Intel Foundry Services; and Russell Ellwanger, CEO of Tower Semiconductor. Each will present remarks on the strategic merits of the transaction and how this acquisition fits into the long-term plan that Intel announced last year. We will leave time for Q&A today, and we have time from more Q&A later this week during our investor meeting. Our discussion today will include forward-looking statements related to our outlook, expectations and beliefs. They are subject to a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Please review our press release announcement regarding the proposed transaction as well as our SEC filings with further details regarding these risks and uncertainties. With that, I'll turn it over to Pat.

Thank you, Tony. I'm excited to be here this morning with Randhir and Russell, the CEO of Tower Semiconductor and to discuss with you the proposed acquisition of Tower, which is a leading foundry supplier for specialty and analog semiconductor solutions. This is an important milestone today for us as we continue to execute on our IDM 2.0 strategy. And this acquisition announcement positions us to not only capitalize on the large and growing foundry opportunity but also help to accelerate our efforts to address the unprecedented demand for semiconductors and the need for a more balanced, resilient global supply chain. This is an important milestone in our journey as a company, a journey that began almost a year ago as we continue to make progress in restoring Intel's leadership position in our industry. I want to start by saying how thrilled I am to welcome Tower into the Intel family. This is a great day. I've been extremely impressed by the depth and breadth of the entire team, their deep customer relationships, service-oriented operating model. These are all critical elements that we need to gain and learn at Intel as we accelerate their capabilities. We're also going to combine to enable the scale and the synergies of the foundry offerings and advance our goal of becoming a major global provider of foundry services and capacity. Our technologies and capabilities at Intel are highly complementary. Our strength in leading-edge nodes, scale manufacturer, combined with Tower's leadership in specialty technology and a customer-first approach, a perfect match with each other. And this paves our way to unlock new opportunities for our customers and address more needs within the broader market. Last year, Intel established Intel Foundry Services or IFS, to help meet the growing global demand for semiconductor manufacturing capabilities. As you've heard me share before, I believe this era of global demand will persist driven by simply the digitization of everything accelerated by the 4 superpowers of technology, ubiquitous compute, pervasive connectivity, cloud to edge infrastructure and AI. Today, the foundry opportunity is about $100 billion, and it's expected to grow significantly by the end of this decade, and 3 segments represent most of the opportunity, mobile, compute and automotive, leading-edge technology, which combines technologies pioneered by Intel will comprise about 70% of that market in 2030. The market for mature and specialty technologies, this segment that Tower serves today will be approximately 30% of the addressable market. As both Randhir and Russell will highlight, we believe that together, we will be able to capitalize on this growing opportunity and better serve our customers in an even more meaningful way. Our vision for IFS is a bold one, to become one of the world's leading foundries. With Tower, we are accelerating our progress towards this vision. I'd now like to turn it over to Russell, CEO of Tower. Russell?

Thank you, Pat. It Is indeed exciting to be here on this very important day for Tower. This transaction is a huge testament of what Tower has achieved over our nearly 30-year history, building the leading specialty analog foundry with best-in-class technology offerings and manufacturing capabilities. This has resulted in the strong global company that we are today and our major presence in an impact on the semiconductor industry. We've been able to achieve robust profitable growth and build lasting value-based customer partnerships to the benefit of our employees, customers, partners and shareholders. This transaction is an important step forward for the benefit of all Tower's stakeholders and customers. Our vision is to provide the highest value analog semiconductor solutions as validated by our customers, employees, shareholders and partners. With the mission of being a trusted long-term partner with a positive and sustainable impact on the world through innovative analog technologies and manufacturing solutions. This transaction with Intel is fully aligned to both our vision and mission as well as our corporate value vectors of partnership impact, innovation and leadership with excellence, defined as efficiency, effectiveness and quality at the center of all that we do. We now will be even stronger. We will be able to provide a full suite of technology solutions over a complete gamut of technology nodes with a greatly expanded manufacturing footprint, achieving greater scale much more quickly than we could have attained independently. In turn, this will drive our ability to enhance our present customer relationships and as well enter into multiple additional growth opportunities, increasing the value for all parties. We are bringing with us, firstly, the widest range of specialty analog technologies, serving high-growth markets, such as advanced mobile and high-speed infrastructure communication, next-generation imaging and displays, automotive and environmentally needed state-of-the-art [ Tower ] efficiency solution with high-quality, flexible worldwide manufacturing capabilities. And to enable this, we bring highly devoted, talented, creative and skilled employees, many of whom are worldwide acknowledge experts with profound experience. We believe this will be an important addition to Intel, strongly benefiting its foundry strategy and activities. I believe success and fulfillment is a function of having both a great vision and incredible talent of high character. The 2 are deeply connected. The vision unifies and inspires employees and having the best and brightest talent enables the company to not only meet its vision, but to expand it. This has contributed significantly to Tower's achievements. I have been extremely impressed by Pat and by his vision for Intel. We are honored that he has chosen Tower to be an integral part of Intel not only to help enable but to expand its vision. I'd like now to turn the call over to Randhir Thakur, who leads IFS and will address how Tower complements Intel's Foundry Services. Randhir, over to you.

Thank you, Russell. I'm excited about this acquisition and the opportunity it will unlock for Intel. Tower has pioneered a unique foundry business model built on specialty technology, which, as Pat noted, is an excellent complement to our leading-edge offerings. Specialty technologies enable a wide variety of essential analog semiconductor solutions and extend the life of a process node, aligns capacity investment to serve customers for many years. This combination of leading edge and specialty technologies will position us as a truly global end-to-end foundry. When we launched IFS last March, our customers were overwhelmingly excited to work with us. One of the things that consistently asked me was to add specialty and mature nodes to our portfolio. With Tower, we can honor that request and more broadly serve key market segments. As mentioned, IFS is 3 target segments: mobile, compute and automotive. These industries collectively represent 85% of the market demand. Tower brings the specialty capabilities needed to offer comprehensive solutions for mobile and automotive customers. Let me give you some examples of the value our combined portfolio will offer to these segments. For our mobile customers, Intel and Tower bring complementary technologies together into a comprehensive solution. For example, Intel's leading-edge technology is well-suited for mobile SoC, system on a chip, due to its compelling low power performance, and Tower has strong presence in RF front end and power management capabilities. The automotive segment is experiencing technological disruptions and a reimagining of the semiconductor supply chain. With the rapid shift to autonomy and electrification, the demand for semiconductors is increasing significantly. By combining Intel's leading-edge capabilities, with Tower's battery management solutions and auto certified portfolio, for example, we can meet the needs of OEMs, who are looking for direct sourcing relationships and development partners. Tower's strong customer service culture fits well with our customer-centric approach. Tower's technologists have established deep relationships with their customers partnering to co-develop valuable solutions, leveraging key technologies such as RF power, silicon germanium sensors and displays. This is the trust-based foundry model that IFS is cultivating with our customer base. Additionally, Tower's broad IP portfolio and EDA partnerships provide a strong platform for design enablement, which is critical to the core development model. Tower has nearly 30 years of foundry experience and strong customer relationships will become even more powerful than joined with Intel's leading-edge technology and global scale. Today's announcement comes on the heels of key announcements we shared last week. We introduced a new $1 billion innovation fund in partnership with Intel Capital, which will support early-stage startups and established companies building disruptive technologies for the foundry ecosystem. And we launched the IFS Accelerator Ecosystem Alliance Program with 16 ecosystem partners to accelerate customer innovation and provide a seamless interface with Intel's technology. I am extremely pleased with our momentum and we are in the beginning stages of addressing a large market opportunity and are bringing the right technology and operational experience together. Our partnership with Tower will accelerate our scale as a customer-first technology innovator with the broadest range of IP, services and capacity in the market. Over to you, Pat.

Thank you, Russell. Thank you, Randhir. To summarize Intel's proposed acquisition of Tower positions us to not only capitalize on the large and rapidly growing foundry opportunity but also help our efforts to address unprecedented demand for semiconductors, a need for a more resilient, balanced global supply chain. It's yet another signal of our intent to deliver on our strategy and our plans that we have laid out, and we'll expand upon it in more detail at our upcoming investor meeting. Intel is on the move, and we're thrilled to have Tower join us on that journey. With that, let's go to Q&A. And operator, let's take our first question.

[Operator Instructions] Our first question comes from C.J. Muse with Evercore.

Yes. I guess, Pat, trying to really better understand the fit here, it's subscale asset. And if I go by the gross margins in the it would suggest that not getting paid for the specialty technology set that Tower is offering. So really trying to understand how this helps you and your IFS strategy, to be honest.

Yes. And I'd say it really is 2 words, scale and synergy. And with this, the technologies of Tower today, they have extraordinary interest from customers. I'll ask Russell to comment on that in a second, but simply don't have the scale to meet the market demand. And for us, we saw a tremendous synergy. And as we look at the ability to accelerate the build out of everything associated with foundry. Whether that's IP creation, customer service and support, necessary infrastructure requirements. We see the 30-year history of Tower is something that's going to overall drive an acceleration of that business. So simply put, scale and synergy. We see this as a great way to accelerate the vision that I laid out in March of last year. And let me just ask Russell to add a bit to that and how he sees this playing out as well.

Yes. Thank you, Pat. I fully agree. Manufacturing margins are very, very tied to manufacturing scale. How much capacity do you have to absorb fixed cost? Intel will add tremendous to Tower as far as manufacturing scale. As far as the products that we make, they are value-add products that are very well-received by our customers. The relationships are extremely strong. What we do with optical transceivers with silicon germanium, what we do with RF SOI for front-end modules, what we do within silicon germanium PAs, integrated switch LNAs, very, very demanded for extremely high-end communications, both infrastructure and mobile platforms itself. Next-generation imaging and display, very high-value products that get paid well for and margins tie into scale as was stated. The power management capabilities within the company, we've not been able to capitalize on because of limited scale. But battery management, which is extremely needed right now for electric vehicles, we have very strong presence in and I think, one-of-a-kind type technology. So with that, I think it's an amazing match that will benefit Tower's customers amazingly so, and I think will also benefit Intel's customers.

Our next question comes from John Pitzer with Credit Suisse.

Congratulations. Maybe just a follow-on to C.J.'s question. Just given the synergies and scale that you expect, how would you expect these assets, gross and operating margins, to trend over time? And if you could also put that into context, Randhir, as to how we should think about just the margin profile of IFS? Because as C.J. did mention, Tower is running well below peers right now on both gross and op, and so I'm curious as to how we think about the long-term target and the path to get there.

Yes. And we'll describe a little bit more of this at our investor meeting, which I hope to see you all at later this week. But in general, the way you should think about it is we see great opportunity with scale to drive up the margin profile, we will see the aggregate margin profile of the combination of the organic IFS business with Tower. And as I've said, we expect it to be in line with the leading edge foundry suppliers over time as we get to scale and as we build out the portfolio. That's the margin objective that we would have. Obviously, it's going to take us a couple of years to get there, but we're very comfortable that this becomes a competitive foundry, one that will be representative of the margin profile of the industry, and we do expect that these technologies with the synergy and scale that we're laying out will allow us to get there. Randhir, maybe you could just add a point.

Just wanted to add a couple of things. One, this will be accretive on close the acquisition. Secondly, as we build to our IDM 2.0 strategy, we really have different pieces that will come together, pieces for differentiation. And it -- as far as the Tower is concerned, very unique. And one that we can position and grow it through the synergies as well as through the capacity expansions.

Our next question comes from Daniel Nenni with SemiWiki.com.

I'm curious about the military aspect, the Jazz subsidiary, the former Rockwell fabs. Is that also a big part of the strategy here -- is leveraging the military Embedded Systems business?

So overall, we do expect that specialty technologies. And what we've already outlined with the RAMP-C program that you might be aware of that Intel has also won the contract to be the prime supplier of that, to build a commercial foundry for the military purposes and DoD. We believe this is a great opportunity for Intel to step into that space broadly, building a large-scale commercial foundry, but also meeting defense intelligence requirements as well. We do believe that the augmentation of that strategy with the specialty technologies that Tower brings to the table will be nicely complementary to that strategy. And I'll say I was in D.C. last week talking to many on this exact topic and there's a substantial enthusiasm and very good progress that's being achieved as part of the RAMP-C program that we've described to date. Randhir, anything that you would add?

We will talk more about it on Investor Day as well. But as Pat stated, we already are DoD Department of Defense is our customer for RAMP-C and it's -- we made the press release about $250 million. That is the first phase investment we got there. We are driving about 30 test chips with our customers and partners as a result. So given what is on the specialty side will -- especially on the mature nodes, will complement very nicely with what we are doing on the RAMP-C and commercial for the government.

Our next question comes from Raji Gill with Needham & Company.

And congratulations on the acquisition. Just a question in terms of regulatory challenges, if there are any. Russ, I was wondering if you can maybe discuss kind of what your exposure is to China in terms of percentage of revenue? And if you could kind of flesh that out a little bit more, that would be helpful.

Yes. Thank you. And we do expect and we suggested it's a year to closure, giving ourselves adequate time to go through the various regulatory processes and approval. We do expect that given the highly complementary nature of the Tower assets versus the Intel assets that they will be a very smooth process. But regulatory approvals do take some amount of time for that. We do expect that, that includes approvals across the various geographies, including China as well. Russell, if you want to add a little bit on the business of the global nature of the business of Tower.

Yes. We're well-represented geographically throughout the world. We have some very trusted customers, very good customer partners in China. And I see that we'll continue relationships. I believe we'll do everything that's needed to support regulatory approvals.

And just for my follow-up, here, I was wondering how you're thinking about the STMicro partnership that Tower entered into last year, where they'll have access to about 1/3 of the capacity from that fab in Italy that ST is bringing online. And I think this speaks to the broader picture of how much the specific plans to scale and to add capacity for Tower, both organically and through these partnerships.

Thank you. And we are excited about the relationship with STMicro. I've also personally spoke to their CEO on the topic, and we expect that we're going to lean into that relationship. We're excited about the position that Tower has built with them, and that position in Italy, we think, is nicely complementary with our European strategy as well. We're excited to see the breadth of the global assets the Tower has in U.S., Israel, Japan as well as in Italy with STMicro. Anything that you would add, Russell?

No, I just say amen to what Pat is said.

Our last question comes from Joe Moore with Morgan Stanley.

Great. It seems like a lot of the benefit of this deal is that you get a management team that's run a foundry business for the last couple of decades, Intel is relatively new to it. Can you talk about that in the context of what the structure of IFS will look like, how prominent Tower is going to be in terms of that and sort of how you think about policies and procedures with IFS that predated the acquisition versus how this might affect you going forward?

Yes. And while some of this is premature to talk about it too much detail, given the regulatory process, my expectation is that we will fully merge IFS and Tower into a single foundry business for Intel going forward. And part of the value and the synergy of the acquisition as the question suggest, is to fully benefit from that decades of experience that Tower brings and how to run a global foundry customer-centric business for our customers for the future. So overall, we'll lay out more of that integration strategy as we get to the time of deal closure. But this will become one foundry business that will be the full integration of IFS today with Tower today. . Thank you very much. And with that, I do want to thank everybody for joining us, particularly those on the West Coast at this very early hour. Thank you for your questions. And I am excited because we have a big Investor Day coming up on Thursday of this week, and I'm looking forward to seeing many of you in person, right, for that time that we have this week. Thank you very much for joining us today.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.