UPDATE 3-TowerJazz posts first quarterly profit in 10 years

Thu Nov 11, 2010 11:24am EST

* Q3 net profit $1.2 mln, first profit since Q4 2000

* Revenue up 69 percent to record $134.7 mln

* Sees Q4 revenue $133-$137 mln, below expected $138 mln

* CEO sees double-digit 2011 rev growth, eyes acquisitions * Shares down 6.8 percent

(Adds Nasdaq share reaction, analyst comment)

By Steven Scheer

JERUSALEM, Nov 11 (Reuters) - Israeli chipmaker TowerJazz (TSEM.TA) (TSEM.O) reported its first profitable quarter in a decade on Thursday and forecast continued strong growth in revenue and profits in 2011.

But despite moving into the black, the company's shares fell 6.8 percent to $1.50 in morning Nasdaq trade. Analysts said TowerJazz's fourth-quarter estimate fell short of expectations, while tech stocks across the board have been hit by a gloomy outlook from Cisco Systems (CSCO.O).

"On the face of it, they were great results for the third quarter," said Jay Srivatsa, head of equity research at Chardan Capital Markets. "But they missed their forward guidance."

Srivatsa still believes TowerJazz is a good stock to own after it cleaned up its balance sheet during the quarter and expects investors to buy on the dip.

The company has benefited from high demand for chips for X-rays, cameras and other consumer electronics and it believes a key growth driver will be in industrial power management.

Russell Ellwanger, TowerJazz's chief executive, said the trend of energy conservation in products such as LED and LCD TVs should boost the company's revenue by some $50 million next year and by at least $100 million in 2010.

"There's nearly infinite growth because it was close to nothing in 2009," he told Reuters.

TowerJazz (TSEM.O), a small player in a $20-billion-a-year chip industry, has carved out a niche as a specialty maker of image sensors used in medical and dental x-rays, mobile phone cameras and digital cameras as well as radio-frequency chips and embedded memory chips.

It competes with smaller specialty foundries as well as Taiwan Semiconductor Manufacturing Co (TSMC) (2330.TW) and supplies to companies which supply to Samsung Electronics (005930.KS) and LG Electronics Inc (066570.KS).

TowerJazz posted third-quarter net profit of $1.2 million compared with a net loss of $30 million a year earlier. Excluding one-time items, the company earned $36 million, up from $13 million. [ID:nBw107456a]

Including one-offs, it was the first profit since the fourth quarter of 2000. TowerJazz had targeted a return to profitability in the second half of 2010.

Revenue jumped 69 percent to $134.7 million.

The company, which counts Vishay Intertechnology (VSH.N) as one of its largest customers and partners, forecast fourth-quarter revenue of between $133 million and $137 million to bring revenue to above $500 million for all of 2010. Wall Street was looking for revenue of $138 million this quarter.

Ellwanger expects double-digit revenue growth in 2011 but there is no exact target yet. At the same time, an incremental EBITDA margin of 60 percent on any new revenue growth should be reached, he said.

He noted TowerJazz has a design win rate of 120 per quarter, although it takes about two years to reach manufacturing.

TowerJazz currently has a capacity of 900,000 wafers a year and floorspace for 1.2 million wafers.

"We are looking at an asset acquisition to boost capacity," Ellwanger said, noting the company was seeking factories with low utilisation so the cost would be lower.

Boosting capacity would cost $4 million per 1,000 wafers.

After buying U.S. chipmaker Jazz in 2008, Ellwanger said the company was weighing another purchase.

"It's possible we will try and buy in a new technology area," he said. "It makes sense to do an acquisition."

For much of this decade, Tower had large debts and was bleeding cash. It changed management five years ago and its business model.

"It took time ... At this point, we are creating a nice amount of cash and we have reasonable debt and a reasonable debt structure," Ellwanger said. (Editing by Jon Loades-Carter)

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