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Tower Semiconductor Ltd. (NASDAQ:TSEM)

Q4 2012 Earnings Call

February 14, 2013 10:00 am ET

Executives

Noit Levi – Director of Investor Relations and Public Communications

Russell Ellwanger – Chairman and Chief Executive Officer

Oren Shirazi – Vice President of Finance and Chief Financial Officer

Analysts

Andrew Uerkwitz – Oppenheimer & Company

Jay Srivatsa – Chardan Capital Markets

Phelps Hoyt – Principal Global Investors

Paul McWilliams – Next Inning Technology Research

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz Fourth Quarter 2012 Results Conference Call. All participants are currently present in a listen-only mode. Following management’s prepared statements, instructions will be given for the question-and answer-session. (Operator Instructions)

As a reminder, this conference is being recorded February 14, 2013. Joining us today are Mr. Russell Ellwanger, TowerJazz’s CEO; and Mr. Oren Shirazi, CFO.

I’d now like to turn the conference over to Ms. Noit Levi, Director of Investor Relations and Public Communications. Ms. Levi, please go ahead?

Noit Levi

Thank you, and welcome to TowerJazz financial results conference call for the fourth quarter and fiscal year 2012. Before we begin, I’d like to remind you that some statements made during this call may be forward-looking, and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected.

These uncertainties and risk factors are fully disclosed in our Forms 20-F, F-4, F-3 and 6-K, filed with the Securities and Exchange Commission, as well as filings with the Israeli Securities Authority. They are also available on our website. TowerJazz assumes no obligation to update any such forward-looking statements.

Now I’d like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead?

Russell Ellwanger

Thank you, Noit. Welcome to all of you to our fourth quarter and full-year 2012 results conference call. During today’s call, I’ll review our achievements during 2012, and some look ahead into 2013. Oren will then provide detailed summary for our fourth quarter and full-year 2012 financial results.

Our revenues in 2012 grew by 5% over 2011, maintaining our position as the number one specialty foundry. In the immediate, going into Q1, we see a reduction in revenue as per the planned decreases in the Micron volume agreement in Nishiwaki.

We see this as short-term. We bought the Nishiwaki factory due to the capacity requirements dictated by our multi-year customer demand plan. This demand is being realized and will be satisfied in the Nishiwaki factory, for example, the press released Vishay-Siliconix advanced technology transfer, an additional very large Asian based fabless existing customer transferring its highest volume flow to Nishiwaki and multiple new Japanese and Korean customer engagements. I’ll speak a bit later in more detail to the Nishiwaki factory.

Last week, we were honored to present one of the keynote speeches at the prestigious Nikkei World Semiconductor Summit in Tokyo along with the Micron CEO, Global Foundry’s CEO and a few other companies including TSMC. Japan is waking up and all are taking note. However, we are solely positioned with the domestic pure-play foundry offering.

I’ll share a portion of the message I shared there at this conference. After a brief introduction of our company, I began by speaking to three megatrends in the industry. These being, first, green energy; second, seamless connectivity; third, multifunction systems.

Megatrend one, green everything, energy efficiency. Economic development throughout the world, economic development in Third World nations, the total demand for energy is far greater than supply.

Battery technology is not at all advancing commensurate with the need; hence power management is needed to get a more life out of a brick, so to speak. To drive technology penetration the ratio of performance to price energy consumption unit must go up year-over-year.

So energy considerations become the primary decision factor in designing new systems. Everything in the future will require a power management for efficiency, portability and power density.

Megatrend two, wireless connectivity, seamless connectivity. Everything will be connected wirelessly. Wireless technology such as Wi-Fi, LTE, ZigBee, NFC and Bluetooth are becoming common place. Almost every device is now requiring wireless functionality not just to communicate with the net, but to communicate with other devices. High performance RF is required to enable high levels of seamless communication.

Megatrend number three, smart everything, multi-function embedded systems. Electronics has long not been solely for entertainment, but rather for critical applications where cellular causes unexpectable damage to humans, environment and assets.

Hence, systems must become smart, self-regulating and self-reliant. For a system to be smart, it must sense the stimulation and then make decision sometime ad hoc and learn from previous decisions, all this with minimal energy. To do this, we need the integration of high performance mixed-signal analog and sensor technology, and in many cases, many advances in MEMS to smart system integrations.

If we look at the market, it becomes a very, very interesting survey. If we take from 2009 to 2015, last three year actual, next three year forecasted, overall semiconductor, this is end unit sales, are at a rate of about 74% year-over-year growth. If you break that down, however, into the deep digital micro components has a growth of 66%, memory 65%, logic 52%. All of these below the overall semiconductor total average.

Where is the growth then? What is really happening? Where is the excitement? And excitement is always aligned with growth. It’s with analog mixed signal at 100%, discretes 102%, optical 106% and sensors and actuators at 148%.

These four areas are the areas that we serve. Analog mixed signal, discrete, optical and sensors. This is where we focus; this is where we believe that we will be continuing to add shareholder value. Over time, our chosen strategy, where we’re going after is the area of growth, it’s the area that we’re growing our market share.

If we look at these trends, green everything, wireless everything, smart everything, they are served through the high performance analog that we supply, the power management chips that we supply, the high-end RF in particular, the high-end silicon germanium platforms, our SOI Switch platforms, and for the sensors with our imaging capabilities and our activities into MEMS technology.

So we believe that our strategy is very, very aligned with the megatrends of the industry. The megatrends of the industry must be aligned with the growth segments of the industry and this is where we’re focused; this is our strategy, this is where we’re performing and gaining market share.

Next in the talk at the Nikkei Summit, I spoke specifically to something that is very, very culturally driven, culturally bound within Japan. It comes to quality and the basic focus of quality, Japanese quality, starts in discipline.

The world really should have taken note a few years ago with the big national disaster that they had with the tsunami. The note that should have been taken was how the Japanese people handled it.

In all of the cities and villages that were evacuated, there was not one reported event of looting, not one reported event of vandalism, in the temporary shelters people queued on line for food. Those that queued on line made way for the elderly to get to their food first. It is a society that has discipline.

In most of the world, a Japanese 5S program has been implemented. I won’t mention what the 5S-es are in Japanese, Seiri, Seiton, et cetera, et cetera, but what do they mean in the English equivalent? First, tidiness. Throw away all rubbish and unrelated materials in the workplace. Orderliness, put everything in proper place for a quick retrieval and storage. Cleanliness, clean the workplace, everyone should be a janitor. Standardization, standardize the way of maintaining cleanliness. Discipline, practice 5S daily, make it a way of life. This also means commitment.

Now, very interesting, in Japan, this is not taught when somebody enters industry, it begins in the kindergarten; it becomes part over generations of a cultural DNA. As a company, we are benefited immensely through this DNA of Japan quality.

[Rommy Dueck] a veteran in Israel, the Fab 1 manager in our factory in Migdal Haemek was the first site manager of Nishiwaki for the first year after the acquisition, came back about three, four months ago and brought over many of the practices that they had in Japan into our factories in Israel and driving them as well into our factory in Newport Beach.

The standardization, the way of maintaining cleanliness, the way of maintaining quality, the activities there, the kaizen, the kaizen is now programs we have throughout the company.

We’re proud to announce, very pleased to announce Rafi Mor, who had most recently been the site manager of the Newport Beach site, previous to that having been the Fab manager of Migdal Haemek Fab 2, has recently gone to Japan to become the TowerJazz Japan CEO.

What is the benefit of that? Again, more cross-cultural [colonization] bringing over the best of Israel, the best of what he learned from Newport Beach, bringing that into the Japan factory, and again learning the Japanese 5S system that is truly a way of life there and bringing that into our other factories.

Within the specific quality culture, it’s an amazing benefit for Japanese to be able to work with Japanese as this culture does become cultural DNA. For a Japanese IDM to transfer something into a factory, it’s easy to do it to a Japanese factory.

After the presentation, there was simultaneous translation during it, simultaneous translation after it. I was asked a question; it was a very good question; the first one though, actually they were all a bit, the first question, the executive said you have a good feel for our culture and you are correct, quality is intrinsic to all that we do.

But there is negative here, and that is change, change is very difficult to have in Japan. How do you implement change? So I explained that you must really first look at the history of this factory. Initially, it was set up as Kobe Steel/Texas Instruments joint venture, and then run solely by Texas Instruments. For the first 10 years, foreign owned by TI, so the ability to work with foreign companies with foreigners, but as well a great engineering capability of transferring inflows, staying on the updated flow and manufacturing them.

Then the TI memory was sold to Micron, Micron was the owner for the next 10 years, technologically advanced company very aggressive company. Again the ability of engineers to work worldwide, to work in 300 millimeter factories, very, very deep digital factories, but very importantly within Japan to transfer many, many flows and engineering capability to transfer, to do things, no change was needed in Japan as far as engineering capability. It is there through their history, became part of the DNA, and the ability to work with foreigners very, very easy, the English capability in the factory very high, after over 20 years of foreign ownership and interaction with English speakers.

But what is the change that was needed for the entire history of the factory; they didn’t have to create any business. They were a manufacturing arm, a technology development and transferring arm of a foreign owned entity.

Now, they’re a foundry and the ability and need for business culture is very, very clear, very critical. So at the conference, I was very pleased to announce a recent hiring of Mr. Keiichi Kawabata, most recently the President of the Novellus, Japan; prior to that growing up in Tokyo Electron into senior management positions, and Tokyo Electron, an amazing company in Japan, knowing how to do business, an equipment company that knows how to do business with Japanese companies, very high market share there.

So Kawabata is on, having again a different DNA, although Japanese, but a business DNA, and that was the change that we needed to do in the factory to bring up another side, not the technical capability, not the manufacturing capability that is excellent, but to bring in a leader for the business that is Japanese, but brings in a different business DNA.

By mentioning again the hiring of Kawabata, I do want to take a moment and recognize outstanding performance in operational integration and the driving of efficiencies. And in view of this, the Board and I recognized Ephie Koltin, the Executive VP of Operations, and have appointed as Chief Operating Officer.

We are now structured in the senior management with Oren Shirazi as Chief Financial Officer, Itzhak Edrei, President responsible for product, business units and sales, and Ephie Koltin, Chief Operating Officer, responsible for all fab operations and worldwide supply chain.

Moving on into the business aspects, in 2012, we had over 450 full mask set tape outs and 400 design wins, both being at record levels and strong indicators for further growth. These tape outs and wins are based upon differentiating offerings and customer service. I’ll name a few by summarizing some of the activities in our business units.

In our CMOS Image Sensor business unit, in 2012, the main focus areas were medical, dental and non-destructive test, x-ray image sensors, high-end industrial cameras, high-end photography and near-infrared sensors for 3D gesture control applications. We successfully completed the transfer of our CMOS Image Sensor technology from our Migdal Haemek facility to our U.S fab at Newport Beach.

We also released a process design kit for an advanced tighten pitch metallization to enhance high-end small pixel illumination. And have already won a major high volume top tier customer that will be using this technology. We’re looking forward to further developing this technology platform in 2013. We added 10 new CIS customers and more than 30 full mask set tape outs of new production in 2012. Of particular note, we won a potentially high volume top tier customer for gesture control near IR sensor application which we believe will move to volume production in 2013. In addition, we had two wins for high volume medical x-ray sensors, both are expected to ramp in 2013.

Finally, we shared in the excitement of two of our cinematography camera customers when they receive the Technology & Engineering Emmy Award for 2012, specifically for improvements to large format CMOS Image Sensor images for use in high definition broadcast video cameras. These awards evidence our ability to partner with leading providers and support leading edge performance developments.

In our RF and high precision analog business unit, 2012 was a strong year for innovation, particularly in high-performance millimeter-wave and wireless front end module product lines. As demonstrated in a ladder by having been awarded the Skyworks Supplier Innovation Award.

Within our millimeter-wave product line, we released design kits of our newest process, while delivering successful prototypes with several customers of our current generation process with the highest production performance silicon germanium device in the industry. Within our front end module product line, we’ve been supporting prototyping and preproduction activity and as well received over 25 customer full mask tape outs in our latest SOI switch process.

Also, we have released design kits and tape out initial customer designs on our most advanced silicon germanium power amplifier process that includes options for three silicon via copper and genex high resistivity substrates.

The focus for 2013 for the RF high precision analog business unit is to execute on a strong ramp with several of these new technologies, including our latest SOI process, as well as to continue to innovate in each of our targeted market segments.

In our power management business unit, 2012 was a solid year for market share gains and innovation for both our low voltage BCD and high voltage 700-volt product lines. 2012 was also the start of our 0.18-micron BCD process transfer from our Israeli factory to our Japanese factory to accommodate future growth and provide customers the ability to dual source on separate continent for risk mitigation.

In 2013, we will continue to ramp of new products, particularly in our high voltage 700-volt product line. We also plan to release a new lower RDS(on) version of this technology to help reduce customer size and begin a project to move this technology to one of our agent factories to accommodate further growth.

In our low voltage BCD product line, we intend to release a higher voltage fully isolated platform to address not only AMOLED drivers and more integrated power management ICs, but also higher value applications in medical and industrial markets. During 2012, we continued to expand our leadership in design enablement solutions. Our offerings include full design services, complete EDA reference flows and the richest and most accurate PDKs in the industry.

For each new technology, our PDKs were updated and released, and we provided considerable support to assist our customers in their implementations. Our design services team continues to develop successful designs for our customers, augmenting their capabilities for a fast time to market solutions. This past year we enhanced our IP portfolio and added over 50 new IPs.

Moving forward into 2013, we will focus on providing continuous support for worldwide customers, we will introduce a fully automated web-based tape out flow to reduce tape out cycle time and further enhance the non- Non-Volatile Memory IP offering.

To speak directly to the Nishiwaki factory, in September we had announced an inter technology agreement with Vishay-Siliconix. This being a multi-year agreement continuing till 2018 and representing the single highest revenue engagement that the company has ever entered. We have had a long-term and very successful relationship with Vishay-Siliconix going back now eight years. Based upon this new agreement, we will manufacture two Vishay-Siliconix product families at our Japanese facility as well as multiple Vishay-Siliconix product families at Fab 1 and Fab 2 in Israel and cooperate in a newly built Epitaxial Growth Center in Migdal Haemek, Israel.

Specific to the Vishay transfer to Nishiwaki, at the Nikkei Conference, I provided the following quote from Mr. Dieter Wunderlich, Executive Vice President and Chief Operating Officer of Vishay Intertechnology Incorporated. “I’m very pleased with the work done at a Nishiwaki fab, we’ve transferred our most advanced platforms to TowerJazz. Their technical performance has met all our criteria, while at the same time substantially accelerating our already aggressive schedule. Quite an achievement that the first transfer in-depth transfer from a large U.S based activity after the acquisition was not only done meeting all criteria, but done while accelerating an already aggressive schedule.” I also presented another quote from a Japanese company Citizen. “Our advanced micro display flow was developed at TowerJazz Japan. We’ve been very impressed by their technical and operational capability. They have not worked as a traditional supplier, but rather as a long-term and strategic partner.

During 2012, we kicked off significant projects in Nishiwaki with Japanese customers, Asia-Pacific customers as well as existing TowerJazz customers. Currently, we have 12 technology transfer and development projects running in parallel, including a leading Asian fabless company where they are transferring the largest volume flow and we received our first purchase order directly for automotive for effi-based power management flow with a very large Japanese integrated automotive parts manufacturer.

Projects are all in different stages of maturity, some just kicked off recently, some are in very advanced stages of qualification and will ramp into mass production by the end of the first quarter and throughout the year.

For these reasons, we are convinced that the Nishiwaki factory acquisition was business accretive. Firstly, by providing a very high incremental capacity at a low purchase price cost. Secondly, by enabling new customers that we otherwise might not have reached in this region. Thirdly, by being able to take benefit throughout the company of certain Japanese intrinsic quality, values and procedures, and last but certainly not least, by adding valuable experienced technical human capability to our employee base.

In December, we successfully hosted our first Technical Global Symposium in Tokyo. This was our symposium, TowerJazz, and we had 98 customers, potential customers attending, representing 74 companies. This is further evidence of the interest in Japan for a Japan-based pure-play foundry.

Moving from Japan to Korea, our LED lighting products are ramping strongly in Korea. We’re maintaining a good relationship there with three of the top six light LED manufacturers in the world. When it comes to LED lighting, as stated with the megatrend introduction, there is a strong need. China has put out full conversion of all public lighting moving to LED lighting; European countries have done the same; the movement LED lighting is not a question will the strong ramp happen, just a matter of how soon and we have everything in place to do that ramp quickly.

We also have made great progress in Korea in other aspects of our power management business. We continue to remain attentive to our Korean customers needs, providing many leading and reference designs for consumer, cellular, medical and automotive products that are being developed by Korean companies.

Our success in Korea has been augmented by the geographic proximity to the Nishiwaki fab, but is based upon a strong sales and technical support team in Korea itself. That being said, we’re pleased to announce promotion of Mr. Michael Song, the TowerJazz Vice President, and to TowerJazz Korea Country President. He and his team have done an outstanding job and we certainly wish them continued success.

Business continues to be robust in China. We have seen projections that expect over 50% of the total worldwide ICs will be consumed in China by 2015. This is reflected in our strong design win growth in China, which has almost doubled each quarter throughout 2012.

In India, if you remember last year we formed with a very strong consortium to bid for a project where we would build and operate a 300-millimeter wafer facility in India. We remain very excited with this business opportunity to expand our presence in the Indian market through this initiative by the Indian government. If we win, it will enable us to build long-term roadmap towards 300-millimeter wafer size analog technology and as well companionships indeed for micron technologies. And it will give us a major revenue stream during the portion of fab build up and fab operation.

We with our partners recalled a three days of meeting in Delhi with the Indian and Tower committee on January 15 through 17. I attended these meetings. We cannot commit to when or even if a final decision will be announced and if so, if we will be selected. However, we do remain confident in the strength of our consortium and our offering. Shortly after these meetings on January 22, Indian Cabinet Minister, Mr. Kapil Sibal gave the following statement to the press. “We have to setup a fab unit here this year, we’ll have a proposal very soon in our office, we will take it for cabinet approval.”

So looking into 2013, for the first quarter of 2013, we provided a revenue guidance of between $110 million to $120 million. As explained, this is a short-term reduction and within the plan of the Micron fab acquisition. We foresee growth throughout the year and based on record number of customer tape outs and design wins and strong traction with direct customer flow transfers, we’re confident in the ongoing growth and strength of the company.

In summary, in 2012, we made significant progress in many areas. However, as we look ahead, we’re very aware that we must improve on all fronts to maintain our position as the number one specialty foundry and to cement our place as the preferred supplier to all our customers.

Yesteryear’s performance is next year’s average performance, such is the way of our industry and our goal of pursuing excellence requires a much higher degree of yearly refinement than just maintaining good status. Our substantial industry outperformance over the past years is by virtue of our customers choosing to give us an ever increasing share of their business rather than our competition.

We will continue to set ever higher goals for ourselves as well as for our customers working with us to continue to outperform their expectations with our consistent and unwavering pursuit of excellence. To close today, we have much work to do as we move into 2013 and our springboard is a business potential currently the strongest ever in our company history. I continue to remain very excited with regard to our potential and our ability to fulfill it.

With that, I would like to hand the call over to our CFO, Oren Shirazi. Oren, please?

Oren Shirazi

Thank you, Russell, and hello, everyone. Reviewing our 2012 results from a financial point of view, we see some significant achievement as of the following: $164 million positive EBITDA for 2012, record revenue of $639 million for 2012, and EBITDA margin of 26% for the year.

Our end of year cash balance which has increased by $32 million during 2012. Our current ratios, our debt-to-EBITDA ratios and all other financial ratios improved when compared to the ratios at the start of the year.

We also improved our non-GAAP margins in 2012, with non-GAAP gross operating and net margins at 37%, 26% and 21%, respectively, for 2012 as compared to 36%, 25% and 20% in 2011. Non-GAAP gross operating and net profit increased to $233 million, $165 million and $131 million in 2012, respectively, as compared to $219 million, $155 million and $124 million in 2011.

These improvements demonstrate the success of the efficiency actions we undertook in 2012 across the board, but particularly in Japan reducing the workforce in our Nishiwaki factory and improving our cost per layer and cost per wafer. We achieved $164 million EBITDA in 2012 and the EBITDA margin was 26%, which is stronger than $155 million in 2011.

We ended the year with $133 million of cash balance as compared to $101 million at the start of the year. Achieving positive cash flow from operations for the year in the amount of $95 million, excluding $20 million one-time payment associated with the efficiency measures in Japan, including the reduction in force of 300 employees.

I like to move into a more detailed balance sheet analysis. We increased our current assets net of current liabilities from $36 million as of the end of last year to $129 million, with a net-debt-to-EBITDA ratio of 2.4x. The current ratio has improved from 1.2 times at the end of 2011 to 1.8 times at the end of 2012. We grew our shareholders’ equity to $220 million, up from $174 million at the end of last year.

Moving to detailed analysis of our cash flow report, showing the following main components, we generated the $32 million net increase in our cash balance. As stated, we generated positive cash flow from operations after interest payments, for the year in the amount of $95 million, excluding the $20 million one-time payment for the 300 employees reduction in force done in Japan.

We signed $50 million credit line with GE Bank in Japan, of which $14 million was utilized to date, carrying an interest rate which is the highest of either LIBOR plus 2.6% or TIBOR plus 2.6% from the GE contract signed in middle of this year.

We completed fund raising of approximately $105 million in 2012 for long-term bond issuance which bonds are due for payment in December 15, and December 16. Approximately $116 million were invested for CapEx net, and approximately $56 million of payments were done for debt principal payments mainly to bondholders for the timely redemption of their bond.

An accounting item affected our balance sheet experience the increase in shareholder equity and decreasing long-term debt, despite the bond issued during the year. The accounting literature for it is that in accordance with U.S. GAAP specifically rule ASC 470-20, formerly named as EITF 98-5 and EITF 00-27 have been official conversion feature named BCF exist for bonds series F, which has been measured in accordance with Fed GAAP at $110 million classified as an increase shareholders’ equity with a correspondence decrease in the carrying value of the debentures presented as long term liabilities.

The said amount will be accreted for the remaining life of the debentures to the non-cash financing expenses if not converted before end. Following the above BCF shareholders’ equity increased as compared to the prior year to the amount of $220 million. It is important to note that this has not impacted this year’s P&L report and has absolutely no cash impact on the company whatsoever and is not changing the fair value of our debt or shareholder equity.

Moving into the P&L analysis, as I mentioned revenue for the year was $639 million, a record high for us with $148 million during the fourth quarter as compared with $155 million in the prior year. On a non-GAAP basis for the full year 2012, we achieved improvement in the gross profit, operating profit and net profit. The full year non-GAAP gross profit was $233 million representing 37% gross margin higher than the $219 million or 36% gross margin reported in 2011.

Earlier this year, we took steps to increase the efficiency at our Japanese fab and bring the margin profile inline with what off the rest TowerJazz, and I can report that we’re already seeing the positive result.

Operating profit on a non-GAAP basis for 2012 was $165 million or 26% of revenues compared with $155 million last year representing 25% operating margin. For 2012, we reported a non-GAAP net income of $131 million representing 21% margins compared with $124 million in 2011. This represent earning per basic share of $6.08 for 2012 and on a fully diluted basis we reported earnings per share of $2.68. This is compared with basic earnings per share of $6.16 and fully diluted earnings per share of $2.60 for 2011.

The weighted average number of shares for diluted earnings per share for 2012 was $49 million and for 2011 was $47.6 million. We achieved $164 million in EBITDA and the EBITDA margin was 26% which is 6% higher than the $155 million EBITDA reported for 2011. Excluding the one-time gain from the sale of our investment in HHNEC in 2011 and the one-time gain from acquisition registered last year.

On a GAAP basis net loss for 2012 was $70 million versus $19 million in 2011 as compared to the previous year financing expenses increased mainly due to GAAP, non-cash financing expenses resulting from the changes in the fair market value of part of our debentures and warrants, which are recorded at fair market per GAAP and from the effect of Israeli shekel dollar exchange rate changes in our shekel denominated debenture.

Excluding those financing expenses which are non-cash and the one-time items in 2011 which was the gain from the sale of HHNEC and the one-time gain from the Nishiwaki acquisition and excluding the one-time Japan re-organizational cost net of taxes, the net loss on a GAAP basis for 2012 was $12 million as compared to $4 million in 2011 resulting that the GAAP is only $8 million between the year.

For the fourth quarter of 2012 non-GAAP gross profit was $49 million or 33% of revenue. Similar to the gross margin in the fourth quarter of last year despite a revenue reduction and it is a testament to some of the good work we have done in increasing efficiency across all our business units and geographies.

Operating income on a non-GAAP basis in the fourth quarter of 2012 was $32 million our operating margins of 22% and net profit on a non-GAAP basis of $22 million representing 15% net margins. EBITDA for the fourth quarter was $33 million compared with $40 million reported for the fourth quarter of 2011.

To conclude our 2012 financial results include many significant achievements including our 2012 record revenues our $164 million EBITDA reflecting 26% EBITDA margins our end of year cash balance which has increased by $32 million during the year, our current ratio, our debt-to-EBITDA ratio and all other financial ratios which have increased against the ratios at the start of the year.

That ends my financial summary and I would like them to transfer the call to Noit Levi.

Noit Levi

Thank you, Oren. Before we open up the call for the Q&A session, I would like now to add a general and legal statement to our results in regards to statements made and to be made during this call.

Please note that the fourth quarter and fiscal of 2012 financial results have been prepared in accordance with the U.S. GAAP and the financial tables in today’s earnings release include financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as established by the Securities and Exchange Commission as they apply to our company.

Namely, this release also presented financial data, which is reconciled as indicated by the footnotes below the table on a non-GAAP basis after deducting, one, depreciation and amortization; two, compensation expenses in respect to options grants; and three, finance expenses net, other than interest accrued such that non-GAAP financial expenses net includes only interest accrued during the recorded period.

Non-GAAP financial measures should be evaluated in conjunction with and are not a substitute for GAAP financial measures. The tables also contains a comparable GAAP financial measure to the non-GAAP financial measures, as well as the reconciliation between the non-GAAP financial measures and the most comparable GAAP financial measures.

EBITDA is presented as defined in our quarterly financial release. EBITDA is not a required GAAP financial measure and may not be comparable to a similarly titled measure employed by other companies. EBITDA and the non-GAAP financial information presented herein should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, sales share data or other income or cash flow statements that are prepared in accordance with GAAP and is not necessarily consistent with the non-GAAP data presented in previous filings.

I would like now to turn the call over to the operator. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instruction) The first question is from Andrew Uerkwitz of Oppenheimer. Please go ahead.

Andrew Uerkwitz – Oppenheimer & Company

Hey. Thanks Russell and Oren. I appreciate your update there good and thorough. So a couple of quick questions here. How should we think about the – you mentioned on the call revenue should, earnings kind of tick up of this first quarter low, but can you give us an indication at what rate will get snapback will be gradual?

Russell Ellwanger

I don’t want to over commit or under commit. We’re very confident of Q2 over Q1 growth very, very confident of some substantial H2 over H1 growth. A snapback I don’t think it’ll snapback immediately to $170 million level will be some work to get back up there. But we’re certainly looking at – targeting a strong second half and propelling or propelled by the shares that we’ve won. And a lot of execution has to happen.

The new entries that we have are very, very big volume potentials, but we have to execute for pristinely and quickly. The – reaching of $200 million revenue quarter I think is certainly on the horizon it’s not a question of it will happen, it’s a question of how quickly do we execute and do the customers execute in their market. That’s the interesting thing about a growth in market share.

If you are growing market share with a customers themselves already have the market and everything is qualified in that market that happens quicker, if you are growing market share with customers themselves are getting into new markets that happens more slowly. Our growth is a combination of both, so some of it is very dependent upon us just really executing on all the qualifications and ramps, and other than relies on our customers executing on the final application. So hopefully that gives you some more color, I know it’s not a black and white answer but...

Andrew Uerkwitz – Oppenheimer & Company

No, it’s very good. I appreciate that Russell. On the execution side on the expense side you guys have historically done a very good job of matching expenses with revenues. So as we see revenue growth return here, should we expect OpEx to the same and at about the same rates or you guys continue to have put a lid on that sort of thing and get some margin expansion along the way?

Oren Shirazi

Hi, Andrew, it’s Oren. Yes, so OpEx meaning R&D, M&A, SG&A should be a flat I mean we reduced them, we did very good, very reasonable work. So the levels of Q4 should be flat there might be minor increase in the marketing side of the expenses because of some commissions which are resulting from increased revenue and apart from that it should be pretty flat.

Andrew Uerkwitz – Oppenheimer & Company

Okay. And then, if I can ask just one last one quick here, on the balance sheet side you guys are doing a good job growing cash, what’s the level of cash you need to operate and then with any excess cash what are the plans there to do?

Oren Shirazi

Well, I think I described the cash during the year basically if you check our last three years 2010, 2011 and 2012 we are around $100 million positive cash flow from operations. And the CapEx is around $80 million to $100 million. So we don’t really need cash to operate the business. So we have always positive operating – cash flow that even is enough to fund all the CapEx needs and leave us still some net cash flow.

And now the only remaining item is of course the principal of debt or bond. So if you will look at 2012 we actually find a new credit line with GE that give us another credit line we also have the credit line from Wells Fargo. And looking forward, if you will look the coming two years are pretty much no bond principal payment above from a small Israeli shekel of $6 million a year. And the Wells Fargo and GE alone are also not during the coming period. So it’s only the Israeli bank which is this year $25 million. So if you’ll sum all the total of debt payable for 2013 principal its total of $31 million, $25 million bank and $6 million a smaller part of one of the bond. So $31 million and it’s even less than the credit line is available to us by the banks. So I think it’s the answer the question.

Andrew Uerkwitz – Oppenheimer & Company

Yes I appreciate that. Thank you guys, appreciate it.

Oren Shirazi

Thank you.

Operator

The next question is from Jay Srivatsa of Chardan Capital Markets. Please go ahead.

Jay Srivatsa – Chardan Capital Markets

Thanks for taking my – hello.

Russell Ellwanger

Hi, Jay.

Jay Srivatsa – Chardan Capital Markets

Yeah. Thanks for taking my question. Russell I want to get your view at a macro level in the semi market looks like tablets and smartphones have been doing well, but the rest of the market seems to be a little weak. As you look at fiscal 2013 what’s your general sense on overall market in semis and when do you see – when do you hope to see a nice recovery in that market?

Russell Ellwanger

That’s a very, very difficult question to try to answer. I – in reference to our specific business what we look at continually is to focus on growing market share. And if you grow market share then a bit independent of the market trend you can insure your self growth.

I had mentioned last year in our Q4 – during Q4 went to the Q3 release, but one area that we had been seeing weakness was within one of the segments that we serve that we serve well and that is within the discrete and MOSFET. That market still appears to be somewhat weak. However, we are starting to see an up tick in the demand of our customers there. It’s not an up tick that the orders are coming in for Q1, but it’s an up tick that we’re seeing right now coming in for Q2.

If you have basic units of MOSFETs and discreet that are going up I mean they’re very rarely the core of any system. They are needed building blocks in every system. So, the fact that we’re seeing that going up gives us a positive indication overall in the market, but really stronger than that I wish that I did have a stronger crystal ball but I don’t. I can certainly say that in the area of front end module the heart of our mobile platform communication and our growth within that is really a market share growth.

It’s the movement of the PM switch into SOI switch the movement for certain applications of gas power amplifier to the SiGe power amplifier and there we see very, very strong potential and opportunities.

Now this is already within the area that you said remain strong, but that’s an area that we see great strength because of what we are doing there. I certainly see a huge amount of activity happening with everyone to be moving into PMICs into the Power Management IC. And I think a lot of that is driven by tablets and form factor and the fact that it’s very difficult at this point to put a lot of conventional discretes within much smaller form factors. So we see a big movement there and a lot of activity design wins that we’ve had, joint projects that we’ve had within the overall PMIC market. I think that’s one area within power management that is definitely very strong.

And as mentioned in the call, we see a lot of activity happening with the 700 volt LED driver activities, is it right now a question of different suppliers seeding the market, is it a question that it’s a very, very big market growth, that’s a little bit hard for me to determine. I think it’s more of the former however, to where there are more seeding the market and the big demand is very close on the horizon. But the overall semi market that’s a little bit hard for me to talk to.

I know that there’s certainly a lot of work going on at IGBTs and MOSFETs on outside of the tablet area and really in the wide scale area and wide good area seems to be growing very, very strong especially as more money is going into third world and it becomes more industrialized, economies grow and quite good. So, are a very good area to be in and that’s where I think possibly the drive is for the increase that we’re seeing or starting to see within MOSFETs and discretes and possibly not PC is the demand right now, but more wide goods.

So, hopefully that gives you some color I answered. I know it’s not a complete answer, but if you talk to any five different people about what’s happening in the market you’ll get five different opinions at any given time and I don’t want to try to be a market sage. That’s not my role, but I think the biggest thing of our business again is trying to focus on areas that we know are strong within those three mega trends that I talked about, those are areas that for any given quarter who knows, but definitely it’s the focus of the industry, it’s the focus of growth. And if we are cemented in there with leaders then we have to grow with the leaders. Does that make sense the answer I gave you Jay?

Jay Srivatsa – Chardan Capital Markets

Yeah, fair enough. In terms of the guidance for Q1, I want to try and understand what, I mean this is just purely the drop off in Micron volume or is there any seasonal decline in your core business?

Russell Ellwanger

We typically see a seasonal decline in Q1, I mean that is something that, that is there, but the major impact of what we’re seeing is I wouldn’t again call it a drop off with micron business I would call it that forecasted supply agreement that we had. So there is no surprise in it and we didn’t buy the Nishiwaki factory for the sake of having Micron as a long-term customer. Micron is a good customer and the fact that we’ve been able to supply to them and truly we get excellent supplier report card from them, it’s a very good thing. There maybe other opportunities in the future that because of how well we’ve performed and having integrated the factory that they owned and supplying for them, maybe will help on some other activities in the future. But we did buy the factory for the sake of being able to meet our multiyear plan on customer demand. And as mentioned the advance platforms that have gone there from Vishay really didn’t need to go to Japan.

The activity that we have with them are very, very well known and large fabless in Asia to move their highest technology, while it’s an existing customer of ours, but we could not have competed on this flow if we didn’t have the Japan facility. We just didn’t have this type of capacity to get us a guarantee at any of other factories over the long-term. So, I believe that as stated the purchase of the Nishiwaki factory was a very, very good event for the company. The decline presently that is just the reality it takes time to transfer it takes time post transfer to qualify the parts and for some instances it takes time after the parts are qualified for a customer to develop that market.

Now if I look, I mentioned the fact of having really a very large automotive integrator and that we receive POs from that’s a type of business that really never goes away once you have it. But to get qualified on that you’re looking several years. So, all of that incremental business is built on top of doing these initial transfers. So yes, the biggest part of what we’re seeing is related to the agreement of volume reduction, but it was not unknown and it was not something that right now is outside of our plan. I think the factory has produced very well and has created good cash for us and it’s in a good position to continue to do well.

Jay Srivatsa – Chardan Capital Markets

Can you help us understand the Micron agreement one more time, I mean do you expect the steady-state starting Q1 to be a lower than what it was previously or does it terminate at some point?

Russell Ellwanger

The agreement was – a pricing agreement based upon the trailing 12 month before we bought the factory plus some uplift in margin that for the first portion of time allowed us to be cash flow positive in and out itself. And then after 18 months was more or less a monotonic decrease for the next 18 months until three years. There is no agreement at all after three years or ever.

Jay Srivatsa – Chardan Capital Markets

Okay.

Russell Ellwanger

Meaning, by agreement...

Jay Srivatsa – Chardan Capital Markets

It’s not...

Russell Ellwanger

What I mean is a formal commitment to buy wafers per month.

Jay Srivatsa – Chardan Capital Markets

Understood. You talked about Japan and some other the positive I things that you’re seeing there, can you help us understand when, what is your sense on when do you expect revenue contribution from Japan to start to become material for you as a company?

Russell Ellwanger

Within the second, third quarter. We mentioned that we have a major activity that’s ramping, starting to ramp this quarter. And it will be measurable within the second and third. And then come fourth quarter will be the, when we execute on it will be the start of the ramp of this very, very high volume transfer from an Asian customer so that’s by target that should, by target qualify in the middle to the end of the third quarter.

I mean, qualify meaning complete call test not the flow being qualified, but the parts being qualified. So that should start ramping in the fourth quarter. And then there is other customers that are already in there I mentioned Citizen the quote from Citizen and I never stated nor do I still have approval to state what or how much or anything of the sort but Citizen is a big company and you have a floor that was developed in the factory for them.

Jay Srivatsa – Chardan Capital Markets

All right. Last question, Oren, there was a request middle of the year by one of your large shareholders for a filing with SEC. Can you give us an update on where things are with those two large banks?

Oren Shirazi

Yeah, there is actually no update in that front, what you said is correct that in May of this year we filed prospectus that they asked to register a portion of their note however, there is no update, they didn’t said anything of that, and there was no update.

Jay Srivatsa – Chardan Capital Markets

Okay, thank you.

Operator

The next question is from Phelps Hoyt of Principal Global Investors. Please go ahead.

Phelps Hoyt – Principal Global Investors

Well, thanks. I got a few questions, just hitting back on this guidance theme, it sort of seems like the market wasn’t really where kind of step function change in the demand, but if I’m looking back at your financials it seems like the last time you posted sub 120 sales was early in 2010. So, can you just give us any more color on business away from a Micron contract that’s off?

Russell Ellwanger

The color that I gave is pretty accurate and that is the fact of having the discrete and MOSFET business being down. That is very real and that’s a reasonable portion of our business. From the 2010 timeframe that you’re talking about we’ve really had to refresh during this period of time and rebuild a lot of our activities. In 2010, the biggest portion of business was of the RF transceivers. And that business has totally moved away the customer that we were supplying that to at that time. That was our biggest single customer.

The customer that we were supplying to you at that time no longer makes RF transceivers. And so, that’s a many, many tens of millions of dollars of revenue that dropped out. So, the activities to replace that was really the different areas in the front end module and that’s what’s ramping presently. So, if you were to compare to the baseline in 2010 I think the core business has grown quite substantially if you compare it to core business in 2010. From 2010, we had non-wayfer business that was also fairly substantial. So…

Phelps Hoyt – Principal Global Investors

Okay, all right. I appreciate the color. That’s good. Can you give us an estimate of cash usage in the first quarter?

Russell Ellwanger

I’m sorry one more time please?

Phelps Hoyt – Principal Global Investors

Cash usage in the first quarter. Do you have any estimate you can give us? And you have healthy position there and you use some of the fourth quarter, which have an expectation for first quarter?

Oren Shirazi

Yeah so, like mentioned before in the last three years the average per year is a generation of $100 million positive cash from operations after paying interest, which is more than the CapEx requirement. And Q1 should not be any different than that although the revenues are bit lower, but still we are collecting the customer collection from Q4 revenues. And in regards to bonds payment or bank payments we have nothing on Q1. So the cost but the only principal payments that I mentioned $31 million is total this is due of that $26 million in Q4 and $5 million is in Q3. So for Q1 there is nothing from that so pretty good environment.

Phelps Hoyt – Principal Global Investors

Okay. And then last question, is there any information you can give us on the U.S sub Jazz technologies in terms of how they entered the year any general information you can provide?

Russell Ellwanger

Yeah sure. Jazz of course we’ll publish it separate financial very soon. We are filing voluntary and yeah Jazz ended the year with more than $40 million of cash on hand. Positive cash flow very nicely at more than $25 million, CapEx much lower than that. Wells Fargo credit lines $45 million of that we grew down approximately $20 million so still available. Overall, started the year with $19 million, ended the year with more than $40 million. So free cash flow net after everything grew $20 million net. So very good situation. And no maturities of bond or banks in next year.

Phelps Hoyt – Principal Global Investors

Great, I appreciate it. Thank you.

Operator

The next question is from Paul McWilliams of Next Inning Technology Research. Please go ahead.

Paul McWilliams – Next Inning Technology Research

Hi, guys, thank you for taking my call. On the Citizen deal, Citizen bought the micro display division from Micron so is that really just a transfer of business within Japan plant was doing for Micron in micro display?

Russell Ellwanger

It was a business that was developed at the Japan factory for micro display, but it is correct that was an activity that had been existing and was completed during the time of acquisition or since the time of acquisition.

Paul McWilliams – Next Inning Technology Research

Okay. So is the new business coming in from Citizen in addition to what is transferring that was Micron business and is now Citizen?

Russell Ellwanger

So, I am not exactly sure as to the question, there was nothing being produced at the time of the acquisition, right. So it’s not that there was production that we’re shipping out of Nishiwaki to Citizen at that time.

Paul McWilliams – Next Inning Technology Research

Okay. But what I am saying is Citizen bought the Micron product line and the Micron product line was been build in Nishiwaki prior to Citizen acquiring it, so now it just transfers from being a Micron piece of business to a Citizen piece of business or is there a new Citizen business in addition to what’s transferring by the acquisition?

Russell Ellwanger

I’m not trying to skirt your question at all Paul, I am a little bit lairy about saying too much about Citizen because I have a press release from them that’s all. But I can say that this business is all new business.

Paul McWilliams – Next Inning Technology Research

Okay. And I won’t press on that. In your front end module business are you just doing the semiconductor content there in other words just doing the fabrication or are you doing something beyond fabrication of chip stacking, assembling test does it extend beyond fabrication?

Russell Ellwanger

It’s a very, very question what you’re asking. At this point, we are producing controllers, we’re producing silicon germanium power amplifiers and we’re producing SOI base switches. We do have activities right now to where we are sampling integrated passive devices and we are having activities where we are evaluating interposers. And presently everything that we do is selling wafer level on PAs and switches and controllers. We’re doing nothing of the packaging, we’re doing nothing on 3D stacking I think what you’re referring to or...

Paul McWilliams – Next Inning Technology Research

Yes.

Russell Ellwanger

The reality presently is 2.5 gig and that we’re presently doing nothing. But we are having activities looking at interposers and the value that we could add in doing interposers.

Paul McWilliams – Next Inning Technology Research

Very good. So the TSV is a technology that you developed with your partners that can be leveraged through the stacking?

Russell Ellwanger

The TSV is a critical component of the silicon germanium PA.

Paul McWilliams – Next Inning Technology Research

Okay. got you.

Russell Ellwanger

Very good question Paul. Very good.

Paul McWilliams – Next Inning Technology Research

Thank you. It sounds to me – you’ll have to excuse my voice, I am dealing with a flu today. It sounds to me and correct me if I am wrong or elaborate if there should be some elaborations here that possibly in the transition from the take or pay you had with Micron to refill behind them as it would logically be assumed they would be moving the capacity out that there maybe a bit more air gap than you anticipated sometime ago. Would that be an accurate way to view that?

Russell Ellwanger

I don’t think that there is an air gap as far as the amount of time we thought it would take us to qualify and fill customers with our technologies. I don’t believe so, if there is, it’s fairly small. And it’s possible that we had thought that they would be ordering above the minimal amount that was contractually committed and there were periods when that was the case.

Paul McWilliams – Next Inning Technology Research

Okay. That was very understandable. Now help me understand and I know there is a lot of variables here, so I’m not trying to pin you down, I’m just trying to get a general feel and we could view as this as large Asian fabulous company as a example if you would like or you can speak more generically, but about when there is a time period from when you book a deal that is a transfer deal of an ongoing product line into a book to order before you start seeing revenue and I am not including here how long it takes a customer to get market share, we’re going to assume this is a deal where the customer

Russell Ellwanger

Who already has market?

Paul McWilliams – Next Inning Technology Research

Market and flow?

Russell Ellwanger

In most cases, for the time to it, I’m not talking about the, what we would call, risk production which is customer placing orders before it’s fully qualified. Risk production will usually happen a quarter before the big volume orders come in, but sometimes risk production is fairly significant. If they see a very strong demand, then we’ll take the risk and put in big orders depending, say for example use a $1,000 HTOL. They’ll put in a risk order and ask you to complete the wafers when it reaches 500, things of that sort. But I think in our case, a very good rule of thumb is probably one year, not from the time that you start talking with the customer, but from the time that you actually start the work until you really start the production ramp.

Paul McWilliams – Next Inning Technology Research

Okay, well, that’s about what I would have assumed, but I just wanted to get it from a guy that’s in the field. I’ve got one more question. This goes to a rumor that I read, well, it was boisterous being more than a rumor in the Israeli press that you’re negotiating with Micron is real to buy the old mnemonics fab, can you comment on that?

Russell Ellwanger

Of course not.

Paul McWilliams – Next Inning Technology Research

I understand that, I had to ask. Thank you again for your time. I better give my voice a rest and let you go into the next one.

Russell Ellwanger

Thank you very much, Paul. That’s always fun. Thank you.

Operator

There are no further questions at this time. Mr. Ellwanger, would you like to make your concluding statement?

Russell Ellwanger

Certainly. So again, we really thank our customers for their trust in us as a long-term partner. The model that we have where by our mission statement to provide unique value really means that we are the sole supplier for most of the products that we make and that takes a lot of trust. We’re thrilled with that and we’re very, very happy that we continue to grow our market share and have earned our customers’ trust. Very thankful for our investors, their belief in our business model, belief in the management, our employees for their capability, dedication and passion which has driven us to be number one specialty foundry in the world and which we believe will continue to drive us.

Look forward to continue to update you on progress over the coming quarters. And again, thank everyone for continued interest in our business. I wish you all a wonderful Valentine's Day. It’s now 6.30 p.m. here and I look forward to get home and celebrate with my sweetheart, my wife of 33 years. Thank you very much. Bye, bye.

Operator

Thank you. This concludes the TowerJazz fourth quarter 2012 results conference call. Thank you for your participation. You may go ahead and disconnect.

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