Tower Semiconductor's CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Tower Semiconductor (TSEM)

Tower Semiconductor Ltd (NASDAQ:TSEM)

Q2 2013 Earnings Conference Call

August 8, 2013 10:00 am ET


Russell Ellwanger - Chief Executive Officer

Oren Shirazi - Chief Financial Officer, Senior Vice President - Finance

Noit Levi - Director of Investor Relations and Corporate Communications


Jay Srivatsa - Chardan Capital Markets

Ken Nagy - Zacks Investment Research

George Berman - J.P. Turner & Company

Ziv Gill – Ramont

Noit Levi

Thank you and welcome to TowerJazz Financial Results Conference Call for the Second Quarter of 2013. Russell will open the call followed by Oren with a discussion of our results. After managements' prepared remarks, we will open up the call to the question-and-answer session.

Before we begin, I would 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 Form 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 everyone to our second quarter 2013 results conference call. During today's call, I'll review our business performance in the second quarter of 2013 by get into the rest of the year and beyond. Oren will then provide detailed financial summary and 2013 financial results.

Our revenues in the quarter came in at $125 million in the midrange of our guidance, an increase of 11% over the previous quarter. This represents a 26% decrease against Q2 2012, which period had a high micron M&A-base contractual revenue. However, the $125 million is an increasing core business wafer revenue, which will increase further in Q3. The second quarter had several noteworthy achievements. The second quarter as well as the first half year show more than 15% increase in design wins against the same period in the previous year.

As stated in previous calls, the design win is the first stage of bringing new and additional customer products into our factories with an average two-year horizon to reach volume levels of production. The entrance of a customer mask-set is the last step to enable a production ramp and typically takes an average of one-year to reach volume with the one to maybe two-year lifetime from that point. We realized a record 7,500 masks entering into our factories during the first half of 2013. This being 30% higher than the same period in 2012.

Design wins and the number of mask entering the factory are the most important indicators for continuous revenue growth during the years to come. The latter being closely tied to revenue and utilization performance one-year from now.

Looking at the individual business units, each and every one saw strong achievements in the previous quarter. In our CMOS image sensor unit, our focus remained medical, dental, non-destructive test x-ray, image sensors, high-end industrial cameras, high-end photography and near-infrared sensors for 3D gesture control application. We are seeing strong growth from our leading European customers, there is interest for new high resolution and high speed global shutter products from the industrial camera market as well as the high-end video market which utilizes high frame rate capabilities.

Numerous customers which we have gained over the past few years with the variety of products have moved into high volume production. In parallel, we have many new tape outs for next generation products including dental and medical x-ray that enable our customers maintain a world map and execution, keeping them at the forefront of the respective technologies and application. We are as well gaining traction in the Japanese market from customers who are looking for very high-end CMOS image sensor foundry capability.

Our high volume gesture control projects that I mentioned in the last conference call, is moving along very well and it’s met all its milestones. We expect the product to start ramping at the beginning of 2014. We are seeing additional traction in this space having started a new project with another customer in this area. These gesture activities are with named brand top Tier-1 customers. Backside illumination roadmap is solidified through a partnership and customers tapeouts are planned for the end of this year after full qualification.

During the course of the past quarter, we announced to ramp the volume production for CMOSIS 12 megapixel chips under a CMD product line. Since its introduction, the CMD product family has been very successful in getting market share. The sensors excellence performance was based on some CMOSIS collaboration and co-development with the TowerJazz R&D experts. The sensor offers high sensitivity and low noise, global shutter and a frame rate of a 150 frame per second providing best-in-class performance, serving various markets which is industrial inspection, broadcasting, motion analysis as well as others.

As an acknowledgement of our imaging capabilities, TowerJazz was selected and awarded to develop prototype and manufacture of very high-end space sensor which project is receiving full external funding. The sensor will include state-of-the-art noise and sensitivity figures of merit.

Moving on and looking at our RF and high-precision analog business unit, we continue to ramp our industry leading SOI technology for front-end modules. We announced the collaboration with Cavendish Kinetics bringing MEMS antenna solutions to the market enabling more efficient antennas in smartphones. The solution will allow the support of a broader range of frequency bands demanded by the fast growing 4G Smartphone segment resulting in more signal and fewer drop calls.

During the quarter, we announced an important collaboration with Nujira to bring to market Envelop Tracking chips. Envelop Tracking is a technology that reduces power consumption in 4G smartphone, power amplifiers, by as much as 50% through an intelligent control of the power supply to the power amplifier that track the envelope that the signal being transmitted and provide just enough power to amplify the signal so it reaches the basestation without providing excessive power at any given point in time.

In our power management business unit, we had a number of important achievements. We successfully transferred a 0.18 micron BCD platform from Israel to Japan and we are about to demonstrate a 98% yield from our first production lot enabling a dual search capability between the Israel and Japanese factories. In the 700-volt LED lighting product offering, we’ve began volume round. While I was in Korea last week, a major customer shared with me a press article of that day, stating major business growth for Seoul Semiconductor and LG within the China market for LED commercial lighting.

The article continued and forecasted extreme growth in the China market stating that as of last year, no Edison bulbs over 100 watts were allowed to be imported to China, this year, no Edison bulbs of about 60 watts and next year no Edison bulbs above 15 watts. This is all to be replaced by LED lighting which has a four to 6X reduced power consumption for the equivalent voltage.

The integrated LED makers that were mentioned, Seoul Semi and LG, our customers of our major customers in the specific field. We expect this launch to ramp in many thousands of wafers per month. And we continue to improve the offering. During the quarter, we announced an improved 700 volt RDS FM which leads – significantly reduced die size for LED commercial lighting and AC/DC conversion.

If we look at the transfer optimization process services business unit, specific integrated device maker transfer will be referred to IDN transfer. During this quarter, we extended our business relationship with International Rectifier. International Rectifier being a world leader in power management technology by entering into a seven year agreement under the terms of which TowerJazz will manufacture a multiple product families for IR.

As part of this latest collaboration, IR will use multiple fab in TowerJazz throughout the world. This is the second largest sheer wafer commercial contract we have ever entered into. This new deal with International Rectifier will add yet another layer to TowerJazz multiple IDM deals with which it is currently engaged.

In our CMOS business unit, we continue to develop our high voltage CMOS platform targeted for various analog applications which is LCD drivers. Prototype based on this platform for leading manufacture in this market have been shipped. Tapeouts for lower power platforms is now in progress targeted for the consumer electronics market in Asia. Also continuing the process of transferring existing customer products to our fab in Nishiwaki, Japan. We have started the development of specific customized CMOS flows that would be unique to the fab in Nishiwaki.

In Korea, we delivered samples for an LCD drive integrated circuit using high voltage CMOS to a specific customer and received very positive feedback on functionality. This is a demanding project using up to 20,000 wafer per month and we expect this to move to this high volume production in 2014.

In May, we announced the collaboration with TLI, technology leader and innovators for an acceleration sensor control IC and proximity illumination central IC based on our bands 0.18 micron CMOS technology, which enabled TLI to provide local offerings to mobile phone suppliers in Korea where the market leaders are located. The portion of smartphones with this ICs is expected to grow and TLI is targeting this fast growing market with two of its products utilizing TowerJazz’s process mask production is expected to start in Q3 2013.

Looking forward, we will continue expanding offering for the flat panel display portable wireless audio and analog markets with new voltage combinations as well as efficient high rating ESTs solution which are now in development supporting the most advanced RF modeling. We are specifically focusing on the automotive market needs and our planning to work with key customers implementing the highest qualities standards. We had significant achievement in the space and activities with the U.S. aerospace and defense realm.

Jazz Semiconductor received trusted foundry accreditation from the U.S. Department of Defense. Jazz Semiconductor being a fully-owned subsidiary within this, we have a segregated line and activity that enables the trusted foundry which allows future growth and very high security segment of the aerospace and defense market of the United States which would be served fully from the Newport Beach facility. We see this has another mean of supporting the local government in which we have our factories as well as the ways of growing very high value revenue through serving special needs that can only be served through the local factory.

In terms of a few other development in this quarter, we announced a major breakthrough in a disruptive magnetic technology that has been co-developed with Crocus Technology offering SRAM performance in terms of speed and power with non-volatile memory capabilities and targeting a volume release in December. We additionally announced the licensing and joint promotion agreement for the use of Crocus magnetic logic unit process technology for embedded system on chip application.

Products under this agreement are expected to hit the market before the end of the current year and we already have a few customers engaged that other specialty development including the following -- including several activities for which we are the only pure-play foundry supplying such solutions.

In June, we announced that we will manufacture full flow infrared sensors for camera devices, a market that Maxtech International expects to be in excessive $5 billion by 2015. In addition to traditional infrared applications, we will facilitate expansion to other consumer markets such as gaming personal security and application driven platforms. We will be the first and only large scale pure-play foundry capable of producing fully integrated sensors and thus enabling this product to enter into and create new commercial market segments. The application space is expected to grow substantially enabling a new and additional significant revenue stream for the company.

There was a press article early last week in India stating that the Planning Commission was rejecting the bids and the recommendations of Minister Kapil Sibal Communication and Electronic and Technology Ministry to move forward on the building of a semiconductor fabrication area in India. We did not and still do not have a specific detail of the significance or the reality of that press article. However, in the past days, there have been quotes in the press from Mr. Ajay Kumar, Joint Secretary of Minister Sibal Department as well as from Minister Anand Sharma, Minister of Commerce and Industry, these quotes appear very supportive of the project moving forward.

On June 18, in Israel, I had a meeting with Minister Sibal at which time he told me that all hurdles had been gone through, Finance Department was back in the project and that within the short-term, he would be submitting the project proposal into the full cabinet nature approval and that we would be hearing in a short-term a response as to the movement of the project.

We have not heard anything else of a formal nature other than the project is going forward, of course the project going forward does not mean that we won the project, although we remain very, very positive that our consortium with JP and IBM is very strong and very good position to receive the bid.

Earlier today, I spoke with the Head of the financial part of the consortium who remained extremely optimistic of the project going forward as we and I believe IBM does well. More about India, I really cannot say at this point, however, we do expect one way or the other to hear a decision within the short-term.

To summarize and looking forward, we guided Q3 with a mid-range up to $135 million or 8% quarter-over-quarter. In consideration of the reported growth and design wins and tapeouts, the tapeouts being the new mask entering into the factories, we’re optimistic that we will have continued growth into Q4, into Q1 and beyond that throughout 2014.

In summary, the second quarter of 2013 from a business and strategic perspective, we continue to progress strongly. We have a consistent focus on improving ourselves in order to better serve our customers and in order to better have -- to better perform in bottom line not just top line. As Mr. Shirazi speaks on the performance of this area and you’ll see that the revenue increase a very strong portion of it, dropped directly to the bottom line, demonstrating the efficiencies that will bring into the company as we continue to grow our technical capabilities.

Thank you. Oren?

Oren Shirazi

Thank you, Russell and hello everyone.

I'd like to start my financial review by providing a balance sheet analysis as of the end of the second quarter of 2013. We have significantly strengthened our balance sheet beyond 2013. Our net current assets, which is the amount of our current asset less amount of our current liabilities increased from $129 million as of December 31 2012 and $141 million as of March 31, 2013 to $157 million as of the end of June 2013.

Our current ratio which have improved from 1.8x as of the end of 2012, to 2.0 as of March 31 2013, and now stands at 2.1 as of the end of the second quarter of 2013. It is important to bear in mind that following the close of the quarter in July, we added a further $18 million to our cash position from the exercise of warrants from the right offering which I will discuss in a few minutes and this is not yet deflected in the net current assets figure, I just mentioned.

Our short-term debt was reduced from $50 million on December 31, 2012 to $35 million as of June 30, 2013. Our shareholders equity was $184 million at the end of the second quarter. Our cash balance as of June 30, 2013 includes $117 million of cash and deposits again excluding the additional $18 million we received from the recent warrant exercised in July.

Cash from operations excluding interest payment was a positive $25 million in H1 2013 or a positive $9 million net after payment of all interest. Capital investments during the quarter were $19 million. Our loan extension agreement with our Israeli lending banks signed in 2013 further strengthened our balance sheet and reduced the principal maturity do in 2013 and 2014 by $75 million to be $30 million. In June 2013, we executed an equity right offering to eligible TowerJazz security holders.

As a result of the right offering, we received aggregate proceeds approximately $40 million comprised to $20 million in June and $18 million in July. The remaining Series 8 warrant which has not being exercised, have been expired on July 22, 2013.

Following the right offering process, issued an outstanding ordinary share account is approximately 48 million in ordinary share of which approximately 18 million ahead by the Italy Corporation reflecting an approximately 39% shareholding. The amount of capital notes, still outstanding is approximately 8 million and this is significantly reduced from the $26 million outstanding capital notes at the beginning of the year. And this is following the conversion of about 70% of the capital notes into share which was done mainly in the first quarter of 2013. As a result, the ratio of capital notes to share to-date is 17% versus 100% two quarters ago.

With regard to the Israel operation, it is a long-term shareholder and the strong believer in TowerJazz strategy as evidenced by the public declaration according to which they stated they do not intend to create or sell, any of our shares in the market as well as by their participation in the right offering exercising 100% of their rights.

I will now going to the P&L analysis for the second quarter of 2013.

Revenues were $125.2 million compared with $112.7 million in the prior quarter approximately 11% growth quarter-over-quarter. During the quarter, we improved our gross operating and net profits and margin on a non-GAAP basis. On a non-GAAP basis, gross profit was $44 million or 35% margin as compared to $34 million or 30% margin in the prior quarter. Operating profit on a non-GAAP basis for the quarter is $26 million or a 21% margin better than the $15 million or 13% margin in the prior quarter.

Net profit on a non-GAAP basis improved to $18 million or 15% as compared to $6 million or 6% in the prior quarter. Non-GAAP basic earnings per share was $0.47 for the quarter versus $0.26 in the prior quarter. The weighted average number of ordinary shares outstanding as of the end of the quarter was 39 million. Our EBITDA for the second quarter was $27 million, we achieved a $12 million improvement in EBITDA compared to the third quarter of 2013 with almost 100% incremental EBITDA margin as compared to the $12 million incremental revenue.

On a fully diluted basis, we reported a non-GAAP earnings per share of $0.36 with the fully diluted weighted average number of shares count at 49.7 million fully diluted this number excludes an additional 23.2 securities that carry an exercise price or comparison ratio which are way above the average current price of the company's stock.

On a GAAP basis, the Q2 2013 net loss was $23 million similar to the prior quarter, net loss for the prior quarter included a one time financing income due to the arrangement signed with the banks in Q1 2013 to extend loan maturities. Excluding this one-time income effect last quarter, we improved our GAAP net income in Q2 2013 by $6 million compared with the previous quarter. On a GAAP basis, our loss per ordinary share was $0.59 as compared with $0.94 in the prior quarter.

To conclude, comparing Q2 2013 to Q1 2013 on a GAAP basis, revenues were $13 million higher with $10 million higher in gross profit and the $11 million higher in operating profit.

This ends my financial summary, and I would now like to transfer the call back to Noit Levi. Noit?

Noit Levi

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

Please note that the first quarter of 2013 financial results have been prepared in accordance with U.S. GAAP, and the financial tables in today's earnings release includes 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.

Mainly, this release also presents its financial data, which is reconciled as indicated by the footnote below the table, on a non-GAAP basis after deducting 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 include only interest accrued during the reported period.

Non-GAAP financial measures should be evaluated in conjunction with, and are not substitute for, GAAP financial measures. The tables also contain the comparable GAAP financial measures 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 as presented is 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, social data or other income or cash flow statement data prepared in accordance with GAAP and is not necessarily consistent with the non-GAAP data presented in previous filings.

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

Question-and-Answer Session


Thank you. (Operator Instructions) The first question is from Jay Srivasta of Chardan Capital Markets. Please go ahead.

Jay Srivatsa - Chardan Capital Markets

Yes, thanks for taking my question. Russell, as we look at the macro conditions reflected by our Q2 results and guidance, are we to conclude that we might be in the beginning stages of recovering the semiconductor market and if that’s not the case, could you help us clarify what your view is in terms of the overall sector?

Russell Ellwanger

I try not to make prophetic statements about overall sector and what’s happening in the general industry. For the blanket semiconductor. For the specific segments that we are involved in, we certainly see good demand at this point. The discrete market has come back pretty strong to the levels that we have been seeing in the past part of that has seen through the contract that we had done with international rectifier.

Certainly the whole realm and range power management is a very big focus everywhere right now. I think the demand that we will be seeing overall on the LED lighting will drive a lot of activity. The RF side, I think has been strong for a long time, there is even relative slowdown of bubble fall in demand, it’s a huge market. And for us, specifically it’s a market that our shares growing immensely in. Now, we have talked about it for I think the past some three quarters. But, the moments of the antenna switch from gallium arsenide PHEMT to SOI and our positioning in capability with the SOI for that. We are poised for very, very strong growth in this area from a market that we didn’t serve at all to a true share of market that we are going after of $150 million to $200 million. And I think the activities are in place for us to lamp into that and to achieve that and growing into in 2014 and achieve it in 2015.

And so, in those specific areas we really are doing very, very well. On power management to our platforms are growing nicely, I was again, in Korea last week. I met with a variety of customers and in our case all of it is really new substantial market entrants in market share growth.

So, how is the overall semi industry doing, I can’t say that’s its popping out, I mean, there is some reports right now that its slowing down. I think some of the other foundry growth and guidance from Q2 to Q3 isn’t necessarily overly strong. Our guidance I think is very nice at the 8% especially if one consider that’s still substantially back filling reductions in the Nishiwaki Micron contract.

So for us, we are doing very well. It is the overall industry doing well certainly the discrete market I think is looking strong from the demand that we are seeing. And the power management market is flourishing. The demand that we are seeing and the excitement from customers within the RF module, not just the SOI switch but our capabilities with silicon germanium based power amplifier. Now this is all I think going very, very nice. So, I know that didn’t 100% answer your question Jay but that’s really what I could say.

Jay Srivatsa - Chardan Capital Markets

No, that gives good color. In the last quarter, you have had a lot of design activity and agreements, the Nujira, the International Rectifier, and the Crocus. Help us understand when do you expect some of these agreements to really start to materially impact your top and bottom line as you look ahead for the next, say, year or so.

Russell Ellwanger

Nujira expects very nice ramps within 2014 from what we are seeing there that should be going up in that realm. The International Rectifier has been strong revenue its continuing to grow in strong revenue. We have transferred platforms in the past, this contract has stated in the PR, I don’t want to state beyond the PR, its just for multiple platforms, so we would see that continuing to grow but the International Rectifier activity has been substantial for us top and bottom line for a while.

And the Crocus you mentioned was another one? Crocus is targeted for volume release for us in December and the forecast there, again, a little bit specific for me to be talking about customers and forecast and but I think from everything that we are talking about and that we see where is (inaudible) his market looks very strong. So, we would expect that to be ramping through 2014 and 2015.

All right, area that you didn’t ask about is probably one of the bigger incremental areas for the company and that’s where we are building an annex to be able to do a full flow infrared detector, infrared sensor. So, in that case, there can be very, very large revenue. The activity is a very new activity for us. It’s an activity that’s aligned with and partnering with a customer. But, I would see that is having some portion of revenue coming in 2014. But, very, very substantial incremental market and upside in the 15, 16, 17 regions, I’m really talking substantial numbers. I mean very substantial. That’s a very nice margin.

So, I think that if you look at the activities that we announced in the last quarter many of them are very powerful, the IR contract I mentioned is the second wafer based second largest wafer based commercial contract the company has ever done. The activity that we are doing with the IR sensor is also promising to be extremely large. I mean, its just a question of the traction in the commercial environment.

Jay Srivatsa - Chardan Capital Markets

Okay. Your comments on the India project seems to suggest some uncertainty in terms of timing and when it should come to fruition. Realistically, what is your read on it, on when do you expect to be able to proceed on this project and start to see material revenues from this?

Russell Ellwanger

I can only state what the Minister Sibal stated to me. And that was that they would be bringing it, he would be bringing to the cabinet in July and we would be hearing shortly after.

I think its being going around long enough if you look at the amount of press there has been in India in the past week, it’s a huge amount of press quoting and citing many, many different officials. I think from the amount of activity and emotion that’s around it. I would expect to hear something one way or the other in the very short-term, I mean, within the next 1 month to six weeks. But that’s just my expectation Jay, I certainly do not speak for a government announcing a decision.

Jay Srivatsa - Chardan Capital Markets

All right. Last question Oren looks like there was a nice jump in gross margins as you look at Q3 with higher utilization and revenue run rate would it be fair to expect margins to expand?

Oren Shirazi

Yes, generally speaking for each $10 million increase in revenues which is the middle range of the guidance. You expect 50% to 60% incremental margin, this quarter actually it was better, we have a 100%. The reason was that on top of the fact that we had more revenues and quantities, we also had more inventories in the line and finished goods because we saw that Q3 coming. So accountingtly when you have more inventories with or finished goods, it’s of course in profit margin and we expect the same thing on Q3. So, I wouldn’t expect 100% incremental margin, you cannot do that every quarter 50% to 60% is a conservative assumption, yes.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

Thank you. Good luck.

Russell Ellwanger

Thank you.


The next question is from Ken Nagy of Zacks Investment Research. Please go ahead.

Ken Nagy - Zacks Investment Research

Thanks for taking my question. Just assuming you get the India plant, can you just explain why the margins would be so high on that?

Russell Ellwanger

One more time the question.

Ken Nagy - Zacks Investment Research

Assuming you get the India plant, can you just explain why the margins would look so high on that?

Russell Ellwanger

Sorry, I don’t know what you are referring to as far as anything reported about what the margins would be on the India plant I don’t know that we have ever spoken to that. But I could explain why that would be very high margins.

Ken Nagy - Zacks Investment Research


Russell Ellwanger

The activity that we are doing there for the first year, this is a service activity. Almost every dollars that we would get for the first three years is very close to 100% gross margin, it’s activity against a head count that isn’t huge head count, it’s not an activity against any COGS, it’s just against the head count.

Oren Shirazi

Yes, maybe I will take. Overall, it’s not here to build favor. I mean, we are not investing cash also. We are not participating in the investment. We are just providing managerial – just management in terms of property and other services, like Russell also mentioned. So our only cost is that some head count that we will put on that and therefore margin al the cashing that we will get doesn’t have against it cost or investment in the firm.

Russell Ellwanger

After the factory is completed, we will also be involved and we would have portion of the factory for our own sales, our own capability. And then we would come more into a standard fab model on the margin that would be selling half of the usage in the factory. But, we would have a capacity in the factory, that’s a very expensive factory half of having enabled the factory to be built rather than half of a capital investment.

Ken Nagy - Zacks Investment Research

Great, thank you.


The next question is from George Berman at J.P. Turner & Co. Please go ahead.

George Berman - J.P. Turner & Company

Good morning, gentlemen and thank you for taking my call.

Russell Ellwanger

You are very welcome.

George Berman - J.P. Turner & Company

As always, a great presentation. I have a couple of questions. Number one, explain to me the acquisition that you made in Japan, in the (Nuvada) facility, and the current fluctuations downwards guidance in Japanese yen. How does that, if at all, help us going forward and how are you looking at the switchover from the Micron revenues to your own revenues? How is that going?

Unidentified Company Speaker

You should mention the exchange rate.

Russell Ellwanger

I will talk about, Oren, talked you about the exchange rate, that’s we are working that, but I will answer on the transition, during the script, I have mentioned several activities. One of them being the previously announced contract with Vishay Siliconix and some of their flow families being bought up and qualified in the Nishiwaki facility. In the International Rectifier contract that we just announced, it was also stated that some of that will also go into the Japan factory.

In the script that I just read, I talked about qualifying for a Korean customer that has a potential of being at 20,000 wafer a month. So, those are the three big activities to drive the volumes in the factory. In addition to that, I have mentioned that our power management platform is qualified there with the first lots coming out at 98% yield. So, at this point, we have the ability to cross qualify and allow ourselves as we see and forecast our revenue ramp throughout 2014, so move products into the Nishiwaki factory and to have that added capacity for us.

So that’s the other area there and then there is a variety of Japanese customers themselves that have been brought into the factory as well as some Japanese customers that are brought into other factories for example into Newport Beach for some silicon germanium an SOI switch technologies.

So, that’s the methodology to fill the factory. At present, the factory is at about 40% utilization which was within our plans, we bought it meaning that we bought the factory with the idea that we truly needed to have added capacity. It’s now the challenge in the task to fill the factory within the next year and to get up to a point of utilization that the factory becomes break even in and of itself. The first several years of running the factory, the factory has produced a good amount of cash for the company.

George Berman - J.P. Turner & Company

Great, so the advantage of having qualified personnel on hand, the logistical positioning right across basically from China, close to Korea, should also help in gaining additional contracts?

Russell Ellwanger

Yes, the big Korean customer that we are talking about the deal was specific for Japan. So you are 100% correct.

George Berman - J.P. Turner & Company

So the -- according to press reports, one sees the Japanese yen dropping further in the value. That would all be additional gains for us?

Oren Shirazi

Well, so far until now and also for the coming year we have the major customer in Japan is Micron and contract prices with Micron are in yen. And on the other hand all the expenses – almost all the expense in Japan are in yen. So actually we have a natural edge that all our revenues are edged against all our expenses because everything, not everything but 90% of the expenses and the revenues are in yen. So it actually does not affect us at all. For the future, actually if the yen is becoming like 100, 105, 110 it’s an advantage for us because the revenues will be in dollar and expenses will be in yen. It’s important to know that our initial business plans and all the forecast was done when the yen was 75 to 80. So now we have an upside of 20% compared to those plans.

George Berman - J.P. Turner & Company

Right. Next question, explain to me the reasoning for the recent rights offering. It looks to me like you had even before this rights offering ample amounts of cash. The company’s generating positive cash flow. And I think the only sort of roadblock between a significantly higher valuation and the current price is the extraordinary amount of depreciation and amortization you have to carry every quarter, but even that seems to be reducing quite nicely by about $9 million from a year ago.

Oren Shirazi

Yes well, we wanted, I mean we have either corporation our strategic, our major shareholder that really knows our plans and strategic direction and we present from time to time to the board. And we were in the mindset that an equity investment, I mean an investment by other corp was something that it want to pursue and we also want to pursue. And equity to -- strengthen the equity, so basically we had two reasons, one is the lack of desires to invest, and invest in equity, the other we wanted to give the entire shareholders, the opportunity to participate in the same terms. And the third reasoning for that was strengthening the balance sheet. So you are correct George, that we have enough cash and balance sheet is strong. But still if you check like the ratio of shareholders equity in the balance sheet to total balance sheet.

So, it maybe 0.2, 0.25, the ratio of shareholders equity to debt. Also like, we believe before the right offering that it should have been front-front and this is where we chosen avenue which is on the one hand an equity fund raising, on the other hand not dilutive because it enabled shareholders to participate in the same-term and everybody does participate maintained this percentage. So, this was the initial idea behind that.

George Berman - J.P. Turner & Company

Yes, we participated 100% in the two rights offering so far. The depreciation amounts, there is many companies that have depreciation exceeding -- it's exceedingly high. For some reason, it seems to me like Tower Semiconductor gets especially punished for having the GAAP loss versus the non-GAAP income. If you earned $0.35 for the last quarter, as you state today, I am certain your stock would not be trading at below $5.

Oren Shirazi

Yes, I agree with you that on the depreciation we are like a special case, and you can really see it’s not the entire TowerJazz, its specifically fab 2, I mean. If you have a look how much it costs us to buy a fab 4 which is the Nishiwaki fab. So about $40 million cash and 20 shares, so $60 million took to purchase the Jazz facility fab 3 cost between $20 million to $30 million. But to built fab 2 cost us $1.5 billion. So actually this huge cost of establishing a fab from scratch fab 2, creates for us now such a burden of accounting of reflecting the historical expensive investment. So it’s really our assumption that we believe we should show to the investors, also the numbers excluding that.

And this is why really and you really see that the CapEx ongoing, I mean CapEx for this quarter I said it in the street was $19 million, 1-9. So its an annual outlet of $76 million but the depreciation on rate is doubled that amount.

George Berman - J.P. Turner & Company

Yes, yes.

Oren Shirazi

Oh, it’s really specialized item, we believe that, we focus that within two years the numbers of depreciation will go down to the level of the numbers of the CapEx then we can really be much more profitable and we don’t need to show the non-GAAP anymore, because the GAAP will reflect the operation efficiency.

George Berman - J.P. Turner & Company

Yes, all right. In the meantime, you just need to educate investors about the strength of your Company. Thanks for your time today and we will be continuing to follow you.

Russell Ellwanger

Thank you very much


The next question is from Ziv Gill of Ramont. Please go ahead.

Ziv Gill – Ramont

Hi, Oren; hi, Russell.

Russell Ellwanger


Ziv Gill – Ramont

Russell, I have a question. I am trying to get an indication of the future capital allocation decisions. So when you look at your business, the business that you see in, say, 2014 and 2015, given the design wins that Matthew described, how far are you from your desired portfolio?

I'm not asking about specific customers or specific segments, but when you try to think about the portfolio, how far are you and what do you think is needed in terms of additional capacity, perhaps?

Russell Ellwanger

Portfolio, you mean the portfolio of our product offerings, of our platform offering?

Ziv Gill – Ramont

Right, right. The combined revenue, which you give a certain breakdown, but it is not easy to see the whole breakdown, of course.

Russell Ellwanger

We have mentioned in the script having had a partnership for backside illumination. The backside illumination image sensor is a technology that some companies have right now variety foundries but a few foundries have it. It’s to enter into it a very high investment and especially because the first two years of the backside elimination, you are not going to have very, very high volumes. So, the ROIs on the CapEx is long coming.

The first line for backside illumination itself and I apologize this is a detailed answer but its – this is just an example and then I will get into it maybe a more generic overall answer.

But the CapEx to get involved in it. So the first capability is maybe somewhere around the order of $80 million. Now, if we do CapEx investment for expansion, we typically target at the worst a 9 month return on the investment half of the utilization on the capacity increase. This wasn’t always the case in the company. It is the case for the past years as Oren mentioned the initial investment for the company is so being depreciated and very difficult to handle. But as long as every incremental and investment we do on CapEx, new CapEx for expansion or for capability, if its targeted on a 9 month ROI, then I think it’s a very model and very justifiable.

The backside illumination would probably be on a three or four year ROI because you first have to do the development and then get the customers qualified on it and then drive the activity. So, in those areas, we are building a portfolio by trying to generate a partnership with somebody that has that capability where we are buying the service at first as we build up the customer base as we build up the module itself, as part of the bigger flow to then by the CapEx at the point that it has a return.

But, right now, I would say if you are looking at a portfolio that is not something that we have within our organic capability for next year, I would believe that as we really ramp the backside illumination within the image sensors we would want to have that in-house.

There is other capabilities that we do now for example one of power management platforms that’s a very, very differentiated platform required an extremely thick epitaxial growth. We also did not do that in-house. We outsourced that. But that itself is something we would most likely continue to outsource because that layer in and of itself does not add great differentiation, the flow and the knowledge of the flow at the differentiation.

And I hope, I’m answering your question here. So, from the bulk of what we do, I think more or less on capability CapEx we have what need with one major exception and that single exception is MEMS. For us to really grow strong into MEMS, it will take some substantial amount of CapEx. And that’s the one area that we would be looking at to go after in some variety of ways be it through an acquisition be it through buying more tools and bringing them on internally whatever it might be but we have had good success with certain MEMS projects. The Cavendish Kinetics that we announced, we think is really a one of a kind differentiated flow, we are very, very excited about the relationship we have with that company and very excited about the demand that the market has for their product. It’s a very, very demanding inflow and at this point even for that flow although we are able to produce it, we don’t have huge volume capability at this point that’s something that will take more investment to get to.

But we do have good capability with MEMS, we have strong engineering capability and strong R&D capability. How do we want to grow ourselves in that market and we do believe and the board believes that it’s a market that we want to go into is the best thing for us to go after an acquisition or is it best to try to develop that organically. So that would be the one area if I answer your question right now very specifically that is not as strong within our portfolio as it is within our strategic plan. I hope that answers your question, I tried to answer it as detailed as I could.

Ziv Gill – Ramont

It does and I appreciate the detail. Thank you.


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

Russell Ellwanger

Yes. Firstly, again, I really do thank everyone for their interest in the company we held today Migdal Haemek, a middle management meeting. We talked about where we are at, where we are going certainly some information that’s – they are non-public that we wouldn’t share with the public at this point. But, the company is in a very strong trajectory. I think the directions we are in, things we are doing are for everyone that’s within the company and sees it quite exciting.

We held last week, I’m sorry, the week before last in Japan a very large technical symposium for a variety of customers. We had 130 customers at the conference some existing customers, some people that were looking and interested. But it was a really an atmosphere that was so exciting during the reception after the conference was completed. I had given the opening key note and I was so thrilled at customers that came up to me and just being proud of the fact that they have just taped out into the Nishiwaki factory. They would be taping out shortly into the Nishiwaki factory.

So we are making an impact there I think that the activities are strong. Now, I’m not saying that these activities and these 130 customers that were there are 10 to 1000s of wafers per customers. It’s not I mean, Japan moved slowly but the organic capability in Japan is moving steadily. And that’s an exciting thing to see. I was in Korea last week as I mentioned, and boy the relationships there, the excitement there, our capabilities there, customers talking about our platforms, you look at it an AMOLED driver and a customer explaining to me how our platform was absolutely differentiated from an application that they had, the design that they wanted to do.

Any other platform that anyone else was providing. When you have customers that are that excited about your offering that makes any leader in a company extremely satisfied with where we are at. So, if you look at the present, we have come a very long way, we see Q3 as we guided with a nice piece of growth that 8% mid-range. Q4 is pretty visible at this point, we see continued growth in Q4. Q1 maybe a little less but visible enough that we would see growth in Q1. And then they are stated with these amount of mask sets entering our factories with all the things going on with SOI. We would believe that target and continued growth throughout 2014 is very realistic.

So that’s my summary. Thank everyone for involvement in the company. I want to thank all the shareholders who are very, very successful rights offering. We are very excited about the subscription there and the belief that you have in the company. Thank you very much.

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