"Tower Semiconductors (Nasdaq: TSEM) is like a hotel in a great location, where they built six stories, a swimming pool, a spa and gardens, but then they ran out of money before buying beds," quips Dov Moran.
A hotel without beds is doomed to lose money and it also has to bear interest payments on the loans it took to set up shop, explains the chairman of the semiconductors maker of Migdal Haemek, describing the history of Tower's Fab 2. Tower began building the beast seven years ago and is expected to finish construction at the end of 2008.
Moran is best known for creating and leading flash memory pioneer Msystems, which was sold to SanDisk Corporation at the end of 2006 for $1.55 billion. He accepted the demanding job of chairing Tower at the personal urging of his friend Eli Harary, president and CEO of SanDisk ("out of a sense of mission and Zionism", says Moran wryly).
He has no inhibitions about discussing the problems plaguing Tower over the last decade, how it began to claw its way back to business a year ago, and how its imported chief executive, Russel Ellwanger, is occupied entirely with the company's sheer survival. But unlike many a pessimist, Moran believes Tower has a future.
It is not as though he was bored with life. Four months ago Moran launched a startup and it's testimony to his reputation that it raised a stunning $20 million in its first financing round (SanDisk is one of its backers). Tower and InFone are the third stage of his career, which began with a long stint in the Israeli navy, then Msystems. He won't discuss InFone, though says his ambition is to create a company greater than Msystems, but lets the dogs loose about Tower. One of the few things known about the startup is that Moran took his former chief financial officer of Msystems, Ronit Maor, with him to the new company.
Seven years ago he was more skeptical and refused to allow Msystems to invest in Tower's flashy new fab. The four companies that did invest in Fab 2 were SanDisk, Alliance, Macronix and QuickLogic. Moran didn't like Tower's business plan.
"We understood back then that Tower would be short a huge amount, about $400 million, to build Fab 2," he explains his decision back in 2000. As little as a year ago, he relates, he had no faith in Tower whatsoever.
Yet now he's its chairman for the princely sum of $1 a year plus stock options. Why?
"Eli asked me to meet Russell," Moran explains. "I found a good man and I knew this company had thousands of employees depending on it for their livelihood, so I decided to help them.. Tower has potential and a future. I think I can help and it's worth donating my time."
Ellwanger is an odd duck in Israel. He's an American and a Mormon, who arrived to run Tower in 2005, leaving a job at Applied Materials. Harary recruited him to save Tower from collapse based on his vast experience in semiconductors. That year the market was growing briskly but Tower's sales shrank by 20% year over year to $102 million, while its losses shot up 47% to $203 million.
The former CEO, Carmel Vernia, had little choice but to resign (in shame or umbrage) after controlling shareholder Idan Ofer heaped scorn over him and his talents in interviews with the press. The hi-tech community read the papers open-mouthed in shock: it isn't every day that a company owner says things like that about his hiree.
Vernia then topped off his short stint at Tower by granting rebuttal interviews, in which he blasted Tower and its controlling shareholder The Israel Corporation (TASE: ILD) and hinted that it had been stupid to build Fab 2 in the first place. It was not a time of elegance for any of the parties.
Well, Ellwanger has been doing the job, as the company's figures for the last year show. He brought in new clients, entered long-term production contracts worth tens of millions of dollars and has pushed rapid expansion of Tower's chip production capacity. Tower's revenues shot up to $187 million in 2006, its profit margins improved and the company achieved Ebitda (earnings before interest, taxes, depreciation and amortization) of $27 million.
The company even became cash flow positive at year-end 2006 and for the first quarter of 2007, Tower reported 55% year over year growth to $56 million and a 17% drop in its net loss to $37 million.
Moran, you've chaired the company for six months. Can you say the hard times are history?
"When Russell arrived, he made a terrific effort to expand production capacity. Thanks to that effort, the company has increased capacity to 24,000 silicon wafers a month," says Moran. "But that's still half the capacity of the fab in its entirety." Tower is working hard to increase capacity further, and fast.
Building a semiconductors fab requires terrific investment. Just the cooling systems cost hundreds of millions of dollars, he explains, and what happened is that the company installed air conditioning systems throughout its entire production space - but had production machinery for only half that space. Following his hotel analogy, Moran explains, Tower opened a fab but used only one story of rooms.
Recent reports state that Tower's negotiating to buy $80 million worth of chipmaking equipment from AMD of the U.S., to increase Fab 2's capacity to 36,000 wafers a month. Ellwanger recently stated that if all goes well, Tower will have the gear installed in a year. Ellwanger believes it could double Ebitda and cash flow from operations, lifting net profit, in part because the equipment is being bought at an attractive price. Cash flow should run at quadruple the depreciation costs.
With processes like these taking place, Moran predicts, Tower could turn fully profitable.
One gets the impression that without Ellwanger, the company would have folded.
That's speculation that Moran refuses to entertain, but he does say, "Russell is a great guy who's working very hard. He not only made order in the fab but has a lot of contacts in the semiconductors industry. He's constantly pushing to expand the fab's capacity and understands the industry, which had not been the case before."
Meaning? "Vernia, who I highly esteem, did not understand the industry," Moran says bluntly, "and The Israel Corporation, which is the main and highly dominant and supportive shareholder, doesn't understand the global semiconductors industry either. This fab was being run without its leaders having any capacity to lead it. Russell's arrival changed the situation completely, no question about it."
What was wrong before he came?
"What was wrong was that they went ahead without resources," says Moran, who does understand the semiconductors industry.
"If you don't have the relevant financing, then you don't build. But to the credit of the company's founders, Yoav Nissan-Cohen and Rafi Levin, possibly if they had not gone ahead even without the money, today there'd be no Fab 2. Tower would have remained with its tiny Fab 1 that generates a few tens of millions of dollars a year and earns money on it, but it's area is going to die out."
They had vision, but no resources, which is why the company suffered, Moran explains.
Some say Israel can't sustain fabs.
Moran snorts: "Balderdash. Intel has a fab here and it's a fantastic one. Manpower is not the main cost of a fab, and also, Israel has technological understanding and amazing devotion by its people. We can beat any other country in the world in that. therefore, I really do believe that Tower's problem lay in its business plan, which was too optimistic and unrealistic."
Should Tower build another fab?
"Financially speaking, if Tower expands the capacity of its fab as it plans, then not only will revenues increase, but each dollar in revenues will translate into 65 cents per share in earnings. Also, much of the losses is due to depreciation costs, which will end, and when that happens Tower will be profitable and cash flow positive. It could accrue enough cash to build more fabs.
"I don't know if building another fab is the right move," he adds, noting that Tower could instead buy one located somewhere else. But even without grandiose investments, Tower has the potential to grow and turn into a very big company, he says. "That is my goal and I very much hope it will happen."
What is your view of the government's plan to raise the tax bite on company cars for workers?
Huh? Moran doesn't have a view on that. It doesn't register. This is a man with a mission, and a Zionist one too.
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