November 7, 2017 / 1:48 PM / in a year

UPDATE 1-Japan royalties help to drive profits higher for TowerJazz

* TowerJazz forecast gets muted reception

* Shares had risen by three quarters this year

* Boosted by revenue from partnerships (Adds comments from CEO, analyst, details, share reaction)

By Tova Cohen

TEL AVIV, Nov 7 (Reuters) - Royalty payments from a joint venture in Japan with Panasonic helped boost quarterly net profit at Israeli chip manufacturer TowerJazz but shares fell on Tuesday after the fourth-quarter revenue forecast failed to inspire.

TowerJazz, which specializes in analog chips used in cars, medical sensors and power management, reported third-quarter net profit of $55 million, up from $51 million a year earlier, as revenue rose 9 percent to $355 million.

It was forecast to earn $49 million on revenue of $355 million, according to Thomson Reuters I/B/E/S.

TowerJazz predicts fourth-quarter revenue will rise about 5 percent to $358 million, although it cautioned the figure could be in a range of 5 percent higher or lower than that.

“The fourth quarter of 2016 was an exceptional quarter so it’s difficult to say this is a slowdown in our growth rate,” Chief Executive Russell Ellwanger told Reuters.

“We can say that the market remains strong.”

The $358 million revenue estimate was in line with analysts’ forecasts but failed to provide fresh momentum to shares which have surged 74 percent this year on Nasdaq. The stock slipped 3 percent in afternoon trade in Tel Aviv.

“The shares were at a record high and since there was no surprise in the forecast beyond the consensus, investors took profits,” said one analyst in Tel Aviv.

Full-year revenue is expected to rise 11 percent to $1.39 billion.


Rather than building or buying factories at huge cost, TowerJazz’s strategy is to look for plants with idle capacity. It takes up that capacity while striking supply deals and offering other incentives such as a cut of profits and technical know-how.

When asked how TowerJazz could be affected by the $103 billion bid by its customer Broadcom for Qualcomm, Ellwanger said in the past such consolidation has opened up opportunities for the company.

As revenue at TowerJazz’s joint venture with Panasonic continues to grow, it reached a profitability level in the third quarter entailing royalty payments to both companies. TowerJazz said this, combined with improved revenue, accounted for the forecast-beating profit.

In its latest partnership deal, TowerJazz is linking up with Tacoma Semiconductor Technology to establish a plant in China. It will not invest any money but will provide technological expertise in exchange for half the annual capacity.

China is the company’s fastest growing region, Ellwanger said.

“There’s no question things are happening in China,” he said, noting the company received an $18 million cash payment from Tacoma in the quarter - boosting quarterly free cash flow to a record $62 million - though a definitive agreement has yet to be signed.

Ellwanger said he expects the signing of such an agreement by the first quarter of 2018, which would trigger more milestone payments. (Editing by Keith Weir)

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