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Tower Semiconductor Ltd (NASDAQ:TSEM)

Q2 2014 Results Earnings Conference Call

August 4. 2014; 10:00 a.m. ET

Executives

Russell Ellwanger - Chief Executive Officer

Oren Shirazi - Chief Financial Officer

Noit Levi - Director of Investor Relations & Public Communications

Analysts

Cody Acree - Ascendiant Capital Markets

Jay Srivatsa - Chardan Capital Markets

Josh Buchalter - Needham & Company

Lisa Thompson - Zacks Investment Research

George Burmann - J.P. Turner

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz, Second Quarter 2014 Results Conference Call.

All participants are currently present in a listen-only mode. Following managements prepared statements instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, August 4, 2014.

Joining us today are Mr. Russell Ellwanger, TowerJazz's CEO; and Mr. Oren Shirazi, CFO.

I would 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 second quarter of 2014. 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 Forms 20-F, F-4, F-3 and 6-K filed with the Securities and Exchange Commission, as well as filing with the Israeli Securities Authorities. 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 CFO, Mr. Oren Shirazi. Oren, please go ahead.

Oren Shirazi

Thank you, Noit. Welcome everyone and thank you for joining us today. I will now start by providing our financial highlights.

Both the P&L results and balance sheet for the second quarter of 2014, which is the first quarter in which we are including the statement of operations and P&L results of TPSCo, TowerJazz Panasonic Semiconductor Company, the company that we established as Panasonic in March 2014.

The balance sheet items of TPSCo were already included in our balance sheet as of March 31, 2014, which was the transaction closing date. In terms of our P&L metrics, as compared to the second quarter of 2013, we increased our revenues from $125 million to $234 million; increased our non-GAAP net profit from $18 million to $31 million; increased our non-GAAP earnings per share from $0.47 to $0.62 per share; reduced our loss GAAP per share from $0.59 to $0.31 and increased our EBITDA from $36 million to $33 million.

In addition we strengthened our balance sheet during this quarter by increasing our cash as of June 30, 2014 to $192 million, an increase of $69 million when compared to $123 million as of December 31, 2013 and a $9 million increased over the previous quarter.

During the quarter we generated $41 million in positive cash flows from operations, excluding $10 million interest payment and TPSCo, The Panasonic Tower Company received a loan of $87 million from two Japanese banks, JA Mitsui and Bank of Tokyo, which has been used to repay our bridge loan that we received from Panasonic in the previous quarter.

The interest rate on this JA Mitsui and Bank of Tokyo loan is TIBOR plus 1.65% and it matures in the middle of 2019. We invested $15 million net in fixed assets during this quarter and we paid $9 million of debt, net to our debt holders.

Analyzing the P&L in more depth, we see that our revenue for the second quarter of 2014 of $234 million reflects 87% increase over the second quarter of 2013 and the 76% increase over the previous quarter. Note that revenue for this quarter includes the revenue from Panasonic, but even excluding Panasonic and excluding the revenue for Micron, we reported significant revenue growth of 40% year-over-year for our top 10 customers and 50% for our top five customers, with a quarter-over-quarter growth of 20% and 11% for the 10 top customers and five top customers respectively.

Revenues for the first half of 2014 were approximately $367 million as compared to $238 million in the third part of 2013, an increase of 54%. On a non-GAAP basis, net profit for the quarter was $31 million, which represents 70% growth over the second quarter of 2013 and 59% growth over the previous quarter. This reflects $0.62 earnings per share for the quarter, which is substantially higher than the $0.47 earnings per share reported for the same quarter last year and the $0.40 per share in the previous quarter.

On a fully diluted basis the earnings per share calculation representation are not required under GAAP for the second quarter of 2014. This is since the company did not have GAAP net profit. Hence under GAAP, fully diluted earnings per share is the same as basic earnings per share for the second quarter of 2014.

However, in order to assist analysts and investors in understanding our diluted share count, we wish to note that head fully diluted earnings per share calculation and presentation being required under GAAP for the second quarter of 2014, the company would have added to it 51 million ordinary shares, an amount of 7 million potential shares underlying the capital notes; 4 million potential share under options and warrant; 11 million potential share underlying note series F due December 2015, unless held until maturity and repaid for cash; and 11 million possible potential share under note series F, due December 2016 unless held until maturity and repaid for cash.

And this in addition to 6 million potential shares underlying the Jazz notes which are due December 2018, also unless they will be held until maturity in 2018 and then repaid for cash. And just to give a perspective, this 7 million shares underlying the capital notes are as compared to 27 million shares that could have been underlying those notes as of a year ago, as a result of conversion accord in the previous year by Israel court and the banks mainly.

Our non-GAAP gross profit was $62 million, reflecting 27% growth margins. This $62 million gross profit reflects an increase of 42% compared to the $44 million reported in the second quarter of 2013 and an increase of 40% as compared to $44.5 million in the previous quarter.

Our EBITDA, which is again to non-GAAP operating profit was approximately $33 million, an increase of 26% as compared to $26 million in the second quarter of 2013. It is important to note that R&D and other operating expenses increased from $18 million in the second quarter of last year to $29 million now, with the growth primarily in R&D expenses, associated with R&D activity, mainly in regards to the newly established TPSCo in order to drive foundry customer engagement to utilize the available capacity and generate an annual run rate of above $100 million for the coming years as was stated in our press release on this morning.

On a GAAP basis, net loss for the quarter was $16 million, representing $0.31 per share an improvement as compared to a net loss of $23 million or $0.59 per share in the second quarter of 2013. Previous quarter $39 million positive net profit under GAAP included a few specific gains and cost items, which were detailed in our previous earnings call. Mainly $151 million in TPSCo acquisition gain net, offset by $71 million of restructuring and impairment non-cash cost items of the Nishiwaki Fab in Japan. Also on a GAAP basis, we recorded net profit for the first half of 2014 of $23 million or $0.47 earnings per share.

A new line recorded in the P&L is non-controlling interest line, reflecting 49% of TPSCo net profit or loss, since we owed 51% of all line items before this P&L line reflecting 100% of TPSCo result.

Regarding our balance sheet, the balance sheet items of TPSCo were already included in our balance sheet as of March 31, 2014, which was the transaction closing date. In terms of our balance sheet highlight as of the end of the second quarter of 2014, our shareholders’ equity was $191 million at the end of June, significantly higher as compared to $141 million at the end of 2013.

During the quarter, we announced the signature on our definitive loan contracts with JA Mitsui and Bank of Tokyo, to obtain $87 million loan to TPSCo. The interest rate on the loan is TIBOR plus 165% and mature in mid-2019. The proceeds of this loan were used to prepay entirely a bridge loan Panasonic provided to TPSCo in this same amount.

Cash and short term deposit as of June 30, 2014 were $192 million, an increase of $69 million when compared to $123 million as of December 31, 2013. The increase during the first half of 2014 was attributed mainly to $66 million of cash generated from operations, excluding interest payments of $16 million; $58 million of cash resulted from the TPSCo associated cash, associated with the transaction with Panasonic and receipt of a loan of $87 million from JA Mitsui and Bank of Tokyo, which has been used, as discussed previously to prepare on a funding bridge loan.

During that, our field period, we invested $24 million in fixed assets net and paid $14 million of debt net. This ends my financial review and I will be happy to accept questions at the end of the call.

And now I wish to turn the call to our CEO, Mr. Russell Ellwanger. Russell.

Russell Ellwanger

Thank you, Oren and welcome. The second quarter has a large significance for the company. Firstly, it was the first quarter we coordinated and integrated the activities and consolidated the fill financials of the newly established TowerJazz Panasonic Semiconductor Company.

As Oren discussed, the incremental addition of TPSCo placed us nicely above the $900 million annual revenue run rate. We encounter no operational surprises against our plan and better than expected business activities.

Within the first three months post launching of this venture, we signed strong contracts and entered business agreements with multiple third party Image Sensor companies and top-tier integrated device manufactures, which should reach annual run rates well about $100 million of high margin revenue, on top of the previously disclosed $360 million to $420 million forecasted TPSCo annual revenues from the Panasonic business.

These third party activities are just the beginning with other engagements at various stages in the sales funnel. Considering that $100 million plus incremental revenue engagements were closed within the first three month of sales activity, the value of the operation and technical offerings, as well as the strength of the TowerJazz customer base is clearly demonstrated.

Let’s look now at the organic growth of the company, another area of great significant. I will refer to three things: the revenue growth from our top customers; two, the number of full mask sets or in other words products entering our factories; and three, design wins.

As Oren had mentioned, our top five customers by revenue in the second quarter of 2014 grew 50% as compared to our specific revenue from them in the second quarter of 2013. The same measure for our top ten customers shows a growth of 40%. All business groups have sales and roadmap activities within the top five, as well as the next five customer groupings.

Growth numbers that’s just mentioned can only be achieved by serving customers who are giving us the major portion of their market share within strong industry growth segments. We expect this trend to continue and within our third quarter forecasted guidance, the top ten year-over-year revenue would be a 47% growth, that being our revenue from the top ten customers.

The second quarter was a corporate all-time record for new full mask sets entering our Israeli and California factories at 242, up 80% from a 130 in the second quarter of 2013. First half of 2014 versus first half 2013 is up 70% from 252 to 410 new products entering the factories. These products typically take three to six quarters to reach peak volume production, which is then maintained typically for one to one and a half years. Hence the second quarter and first half records of new products are strong indicators of 2015 and 2016 continued core growth.

The last growth indicator is the amount of design wins. This is the first step in acquiring a new product or new customer. Second quarter also demonstrated a record in design wins. This is a longer term metric taking from six months to one and half years from the design wins until the product or masks that if will enters into the factory, and then three to six quarters to reach volume production.

To summarize, all of the above indicators are revenue growth from our top customers. New products entry in the Fab’s and design wins for long term potential are strong indicators that we are serving the right customers in the right markets, fuelling quarter-over-quarter and year-over-year top and bottom line improvements.

I’d like now to discuss performance and developments within several of our business units with each and every one of our business units seeing positive momentum as we move through to 2014. The CIS business unit continues to be strong, and now with the addition of TPSCo we are generating new business in several areas that we did not serve until now.

The high-end worldwide cinematography and broadcasting market continues to grow rapidly, due to entrance of new companies providing super-high definition video cameras, have resolutions which are 4X HD resolution. superHD is now becoming a standard and film makers and even increasingly armatures prefer to shoot in 4k resolution. This market has been further boosted in high definition cameras becoming ever more affordable.

For many years TowerJazz has supplied sensors to the market leaders and is now increasing its penetration in this growing market by supplying high volume camera makers. The high end security market is also fast growing, especially in China and part driven by municipalities wiring the city with cameras to help keep order and reduce crime.

A major issue with such cameras was low sensitivity and low resolution. The trend now is to move to high sensitivity and at least HD resolutions. We have acquired customers starting projects in this area in TPSCo for High Definition and even Super High Definition sensors for the security market. We believe that this market especially in China will grow very fast over the coming years.

The industrial camera market based on fast Global Shutter Sensors is also growing quickly. We see growth in this market for all senor resolutions starting with 1.3 megapixel and up to 20 megapixel sensors, for which once such use is LCD, screen defect monitoring in LCD production lines.

TowerJazz is the market leader in providing foundry services for Global Shutter Pixels. The 110 nanometer CIS technology at TPSCo allows us to transfer our Global Shutter Technology to TPSCo to support next generation industrial sensors, while having the process both in Japan and in Israel to allow due-regional sourcing for our customers.

The x-ray sensor market, especially the one die per wafer for extra-oral dental and medical applications is growing very quickly. We have recently acquired several new customers in this area. We expect as well to see fast growth in the CIS solution for this market, replacing existing technologies such as the more historic in flat panel displays.

The cell phone camera market that dominates 85% of the entire CIS market continues to grow at a rate of above 5% to 7% annually. Our fast growing part of this market is the front high resolution camera for smart phones, which is now up to 16 megapixels.

These sensors are using 1.12 micron pixels. Such sensors are offered by three major sensor suppliers. The state of the art 1.12 micron pixel that we have at TPSCo at mass production, now on 65 nanometer technology and 300 millimeter wafers is very attractive to many customers in this market and we expect high volume manufacturing of high-end Smartphone cameras of several projects already next year.

In our RF high precision analogue business units, growth is driven primarily by two communication markets, the wireless market and the network infrastructure market. The wireless market includes wireless connectivity in consumer products such as mobile phones and tablets, as well as wireless connectivity for the internet of things, such as connectivity found in appliances or industrial equipment.

Within this market we produce the front end RF components that control the transmission and reception of signal to and from the antenna; components such as switches, power amplifiers, low noise amplifiers and tuning elements.

We have been gaining significant market share as technology has shifted from gallium arsenide, a technology which we do not serve, to RF CMOS, RF silicon-on-insulator and silicon-germanium, for which we are technology leaders. In addition, the market itself is growing faster than the overall semiconductor market.

Front end modules for example are expected to grow by 17% between 2014 and 2015 according to mobile experts. The combination of strong market growth and strong market share gains is contributing significantly to our overall growth this year, which is expected to continue for the next several years as these trends continue to play out.

The network infrastructure market is characterized typically by lower volumes, but by premium average selling prices for high performance and reliability. Within this market we built high data-rate receivers and transmitters for fiber optic links, using our high performance silicon germanium technology. These fiber optic links are used in a network back bone that carries most of the world’s voice and data traffic, as well as on the perimeter of the network connecting wireless base stations, data centers and even connecting homes, directly through fiber to home providers.

This year this business has seen strong growth associated with the build out of LTE networks in Asia. Longer term we expect continued growth fueled by new design wins and our highly differentiated silicon germanium technology.

Growth in our power business unit is driven by two major technologies; a 0.18 micron BCD technology, serving power management to audio and display driver products for consumer and enterprise markets, as well as our 700 volt technology, serving commercial LED lighting and motor driver markets. The market for 0.18 micron BCD is very large, as the technology can address power management, audio and display driver ICs for nearly all consumer devices for mobile to computing, but it is also well suited for more demanding applications in industrial and automotive.

Today much of this market is owned by integrated device makers, but more fabless and fab-lite customers are engaging with us and finding market success fueling our revenue growth and strong design in pipeline.

The 700 volt technology is well suited to the emerging LED lighting market and will grow as this market takes hold. Today’s LED bulbs are largely made up of discrete components, many of which can be integrated with our 700 volt process reducing cost. Indeed we have production volume in our initial 6-inch base process, but have now released an 8-inch based process that will enable die shrink and cost benefit to move more of the discrete component suppliers to integrated solutions and fuel future growth in this market space.

With regard to our mix signal CMOS business unit, we have added a rich offering from our strategic partnership with TPSCo, including low power, 65 nanometer and 45 nanometer technology platform. These platforms are best suited for the internet of things and other emerging markets. We see this expanding our existing capabilities for analogs specific applications, a market that we already served well, producing for example, various sensor products.

In addition, we have decided to broaden our offering in high voltage CMOS, the technology that is primarily used for display driver ICs. This market has been showing a steady cager of about 4% to 5% and some of our customers are forecasting spikes of demand in the coming years.

We have engaged with several customers for developing a customized process to their specific needs, including an advanced 1.8 volt/18 volt Process Flavor.

A brief note about Nishiwaki; as previously stated, we are in the process of ceasing the operations of that facility. Over the past two months we have worked to transition all our customers out of Nishiwaki to other Fab’s. Microns products have reached their end of life as per our contract with them. Beginning in Q3, there are no further revenues from Micron.

For our guidance, we expect revenues for the third quarter of 2014 to be $225 million, with an upward or downward range of 5%. Mid-range guidance represents 70% year-over-year growth and excluding Micron or Panasonic, 20% year-over-year organic growth. As stated, the Micron contract has ended. Q3 will contain no revenue from Micron as compared to $31 million in Q2 2014, hence a net non-Micron growth of $22 million quarter-over-quarter.

So to summarize, we enter 2014 in a very strong position. We continue to realize substantial core business growth, which we now expect to see propagate throughout all of 2014. In addition, the Panasonic joint venture will provide a strong set up in the coming quarter. This together with our proven ability to consolidate should provide us with a strong improvement in bottom line performance in the short, mid and long term.

Our previously cited strong double digit revenue growth from our top customers is evidence that our strategy to drive market leadership through ongoing performance and multi-generation road map alignment with key customers that are leaders in their respective market is indeed working.

As we move to 2014, we are on our path to achieve our goal of surpassing a revenue run rate of $1 billion. I remain excited with regard to our potential and our ability to fulfill our potential and above all, I’m very well buoyed up through the actions and activates that we have with key customers to align with us for their long term growth and success.

With that, I’d like to turn the time over Noit. Noit, please.

Noit Levi

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

Please note that the second quarter of 2014 financial results has been prepared in accordance with U.S. GAAP and the financial tables in today’s earning release includes financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements is established by the Securities and Exchange Commission as they apply to our company.

Namely, these results all presented financial data which is reconciled as indicated by the footnote below the table on a non-GAAP basis, after deducting, depreciation and amortization, compensation expenses in respect to options, grants and finance expenses net other than interested accrued, such that’s non-GAAP financial expenses net includes only interest accrued during the reported period. Non-GAAP financial measures should be evaluated in conjunction with and are not a substitute for GAAP financial measures.

The table also contains the comparable GAAP financial measures to the non-GAAP financial measure, 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 title 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, per share 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

Operator

Thank you. (Operator Instructions). The first question is from Cody Acree of Ascendiant Capital. Please go ahead.

Cody Acree - Ascendiant Capital Markets

Thanks for taking my questions and congratulations guys on the result. You talked a lot about the RF space being a strong driver. We’ve seen some very, very strong numbers out of that space. When you look at the growth over the next few quarters, can you just rank in order maybe your growth drivers and through the different segments?

Russell Ellwanger

The front end module in specific SOI based antenna switches, antenna tuners is the very, very strong growth driver for us presently and through the next quarters. On par would be what we call our TOPS business to where we have certain integrated device makers that transfer their flows or co-develop new flows with us, but those flows stay behind a firewall and are only used for those customers. They don’t become a standard foundry offering.

Those are two very big growth drivers for us in the case of both. They are both represented through multiple customers, are both represented by also very large blue-chip customers, as well as a variety of others that are trying to make their way into the markets.

The power management has presently a lot of traction happening within the 700 volt per LED drivers and we expect the largest order that we’ve ever received for that to be coming in within the next few weeks from a single customer. But I would say that those right now are three very, very big growth drives for us.

On the other side, although on volume, may be not as large of a growth driver, but as far as the margin that’s coming out of it, what we talked about with the optical transceivers for the LTE infrastructure, that has gone up very strong, is continue to grow very strong and we have seen some year-over-year, quarter-over-quarter growth within our CMOS image sensor business, which is also a very high margin business, so within those.

But the two biggest on revenue percentages will be the SOI switch and the IDM transfers. The big growth drivers as far as contributed margin is the silicon-germanium transceivers and the image sensor activities and the image sensor scans, many-many different types of applications. I had mentioned multiple during the script.

Cody Acree - Ascendiant Capital Markets

And then when you look at your market share gains. So when you are talking to customers, are you just looking at your trajectory? You’ve been gaining share for the last several years. But with the addition of the Panasonic facilities, how is that share trajectory shifted with design wins and mass coming in and may be also have you seen much of an impact from IBMs effort to exit the foundry business?

Russell Ellwanger

I think independent of any announcements that IBM might have made or has been assumed to have made, our growth has been very strong in all areas to where we would be competing with IBM and I think it deals with offering and service. I mean, more than that I won’t comment on anything about IBM, where they are setting on, what they will be doing with foundry or the overall semiconductor business. It’s not necessarily still clear.

But where we compete with them is on the area of the front end module and very specifically within silicon germanium, and we have established ourselves quite strongly in both of those areas.

As far as the TPSCo, what was your specific question there Cody?

Cody Acree - Ascendiant Capital Markets

I was probably just really trying to get to maybe a momentum, trajectory of design activity. Just customer engagement since you now have this advanced capacity of how customer engagements are going versus maybe the prior 12 months.

Russell Ellwanger

So where I referred to the amount of new products, this record number that we had of 242, all of that is within the standard TowerJazz facilities. That is not in relation to TPSCo at all. The basic growth that we are seeing and drive organic growth is really within our factories, and that’s the business that we’ve been building on, developing customer relationships for the past years.

In the area of TPSCo, there we’ve engaged with existing customers on both the IDM activity, IDM transfer to where we have several big contracts that have been agreed and signed, as well as on very high end image sensor. In the case of the IDM transfer into TPSCo, that’s a very big business. It’s not a lot of customers by the nature of that type of a business.

In the area of the image sensor, that’s been prominently in the 300 millimeter facility and that’s for very, very advanced sensors, where we talked about the 1.12 micron pixel, etcetera and in that case there is a lot of strong traction and big engagements, a lot in the pipeline. But although what has been closed in the first three months as I mentioned should easily break $100 million of high margin revenue within the next three year time period, incremental on top of what we already have within TPSCo, from a TPSCo customer being Panasonic.

We are really just at the beginning there of the engagements and there’s a lot of excitement, there’s a lot of customers learning about what’s going on there and getting involved. But where the major activity from design wins, the major activity from full mask set entrances, product entrances, it’s from the organic capabilities within the company.

Cody Acree - Ascendiant Capital Markets

That’s great Russell. Thank you very much and Oren, maybe for you on the operating expense side, since we did do such a large jump, can you just give us a bit of visibility as to what you’re expecting going forward?

Russell Ellwanger

Yes, like I stated in my part of the script, we have some of the cause that we knew that exist in the Panasonic transaction. Of course the Panasonic transaction brings positive EBITDA, we did not secure much, but when we went in depth and looked at the cost, we felt that some portion of that should be allocated financially from cost of goods to R&D and M&S, G&A of course like any other company.

And indeed the R&D resources invested in TPSCo and this Panasonic Tower Company is really big, is really large, so we are located from COGS to R&D and M&S -- G&A, the propel cost. And basically what you’ll see now, maybe because it’s the first quarter maybe it’s a little bit higher than usual, but basically what you see now is a good indicator for the coming quarters, which is just a classification internally between COGS and R&D, M&S. The total amount in the P&L is the same like we expected.

Cody Acree - Ascendiant Capital Markets

So this a good starting point then going forward and it looks like you’re not (inaudible).

Russell Ellwanger

Operator, we’re having a problem hearing.

Cody Acree - Ascendiant Capital Markets

Sorry. So you have a non-controlling interest contribution that looks like it’s largely offsetting the increase in OpEx. Is that what we should expect going forward?

Oren Shirazi

No, so what I said before is what we see in the COGS front, the R&D, M&S, G&A, this is what you should expect also going forward and this is a good number. In regards to the non-controlling interest line, which is typically 49% of the profits of the Panasonic Company, the net profit base, so no.

So this quarter, because it’s the first quarter we had some first time charges, cost charges, mainly amortization and depreciation. So basically for the future you should expect they are like $1 million or $2 million, not more than that, a small number, and still if you look at the P&L as a whole, from what is it driving from this Panasonic Company, JV is also considered a gain from acquisition of $15 million that you have in this specific line and also the line that you asked about, non-controlling interest, which is just accounting 49% of the net profit or loss.

Cody Acree - Ascendiant Capital Markets

And then lastly from me, you mentioned in the press release offers to restructure your debt. If you could maybe talk about what your expectations are there and how that might affect your share count going forward and obviously your interest expense?

Russell Ellwanger

We are looking at some ways to improve our balance sheet. Anything that would be entertained as a non-dilutive event would be exchanging shorter term debt for longer term debt and for the most part would be a wash or a betterment as far as the coupon that we’d be paying.

Cody Acree - Ascendiant Capital Markets

Are there any instruments that are convertible today than that share count you went through that could be eliminated in the kind of debt restructuring?

Russell Ellwanger

No, it would not I think have anything to do with. You’re referring to some of the convertible bonds.

Cody Acree - Ascendiant Capital Markets

Yes, that. So any restructuring would not impact any of the potentially dilutive instruments that are out.

Russell Ellwanger

No, it would not.

Cody Acree - Ascendiant Capital Markets

Okay, very good. Thank you guys and congrats.

Russell Ellwanger

Not to add any additional dilution.

Cody Acree - Ascendiant Capital Markets

Perfect. Thank you very much.

Operator

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

Jay Srivatsa – Chardan Capital Markets

Thank for taking my questions. Congratulations on the results Russell and Oren.

Russell Ellwanger

Thank you, Jay.

Jay Srivatsa – Chardan Capital Markets

First of all let me ask you with the outbreak of war, has there been any difference at your Fab’s and what do you foresee going forward in terms of any kind of disruptions and/or constrains as you look at how that war is progressing?

Oren Shirazi

No, no impact at all. We are located in the north part of Israel and the action that has been going on is in the south part of Israel, with a little effect on the center of Israel, but no effect at all on the north part of Israel. We didn’t miss any day of shipment or production. Of course, not to mention that 70% of our employees and Fab’s are outside of Israel, but even the 30% of our employees and Fab’s which are in Israeli, they are really in the north part of Israel and they have nothing to do with this country.

Jay Srivatsa – Chardan Capital Markets

Russell, can you give us an update on what’s happening …

Operator

I’m sorry for the interruption. This is the operator, can you please speak up. It’s just a little bit difficult to hear you.

Jay Srivatsa – Chardan Capital Markets

I’m sorry. Is this better? I hope it is.

Let me ask you Russell in terms of the India project, could you give us some update on what’s happing there. There seems to be a new administration in place, what does that do to your existing contracts and agreements that you have signed with them?

Russell Ellwanger

At the recent SEMICON West show in San Francisco, there was a joint session sponsor by SEMI and the Indian government. We were invited to join them. It was called “Connecting with India” event.

The government showed very, very strong support, very strong interest. If anything, it appears that Prime Minister Modi is more aggressive to make these activities work and to drive it, than maybe previously. At the SEMICON West show which was what the, I think the second week of July on that Tuesday afternoon, I presented to a fairly large audience on behalf of our consortium, which includes IBM and JP. I participated on a panel discussion with members of the Indian government, including Dr. A.J Kumar, the Head of the Electronics Office.

So, I think everything appears to be moving in a proper direction, nothing seems to be changing. Dr. Kumar did layout the Indian government plans for growing and supporting the local Indian semiconductor industry and stated strongly a cornerstone of that is the establishment of two domestic chip production facilities, one of which obviously our consortia, our consortium would be establishing.

We also announced government approved special benefit package for the two consortia that won the tenders. So presently we are awaiting final approvals. From our standpoint everything is moving and if anything, it appears that Prime Minister Modi is personally very involved in very strongly directing that this goes forward.

Jay Srivatsa – Chardan Capital Markets

Very good. You’ve mentioned a lot of design activity coming through the pipe. How do you hope to ramp up your capacity utilization in the Panasonic Fab, and if indeed that’s the direction you are going, when do you start to see material improvement in your gross margin profile?

Russell Ellwanger

That’s a two pronged answer. To begin with, as far as the front end module, in specific the SOI switch, as well as the power amplifier controllers, those are flows that are in the process of being dual qualified between Newport Beach and Migdal Haemek. We have available capacity in Migdal Haemek to allow for the growth that we expect to be having within this segment, as well as we have addition room within our 8 inch facility at Migdal Haemek to grow should we need to through some incremental CapEx investment.

We have also invested in Newport Beach, specifically around the 0.18 micron to increase the amount of starts been driven by both the silicon germanium infrastructure products and the SOI products and I think by the end of September the amount of starts relevant to those specific products will have increased by about 60%, that’s three month ago.

Now, one thing that we are moving on very strongly is to dual qualify the 0.18 BCD power management flow in one of the joint venture factories, that being the Tonami factory and the tactical and strategic drive that we have is in having that dual sourced to move the bulk of the BCD products into the joint venture, and then in Migdal Haemek and Newport Beach to drive the bulk of all the SOI front end module products.

Incremental margins will obviously come up independent of the joint venture as the 60% start for the SOI is enabled, which again is around the end of September. So I think that you would see that as far as shipments in Q4 and Q1 and then through the increase of both capacity and utilization in Migdal Haemek.

Now as far as the Panasonic in itself, I’m sorry not Panasonic, but the joint venture at TPSCo, so our joint venture with Panasonic, that we had stated from the contracts that we have already closed. We would start seeing an amount of revenue from those specifically in the second half of 2015. Any additional activities that we do through offloading the power management would also most likely come in that time frame and that will just be accretive to the bottom line of the company and obviously the top line as a revenue growth.

So in relation to the TPSCo, I would believe from everything that we see now and we had forecast now, that Q4 of this year, Q1, Q2 of next year might have some small improvements coming to the bottom line, but starting Q3 of ‘15 upwards throughout ‘16, ’17, ‘18 you would see, we believe a strong monotonic increase in top and bottom line coming out of the joint venture.

But the organic growth that we’ve been talking is predominantly driving up both, capacity increases and utilization increases within the organic factories and I think that the biggest part of gross margin contribution in the short term to mid-term we’ll be seeing through that.

Oren do you have anything to add to that?

Oren Shirazi

I don’t think, (inaudible).

Russell Ellwanger

Does that answer your question Jay?

Jay Srivatsa – Chardan Capital Markets

Yes, thank you very much, I appreciate it.

Russell Ellwanger

That was a long answer, but I think complete.

Jay Srivatsa – Chardan Capital Markets

I got it. Thank you. Good luck.

Russell Ellwanger

Thank you.

Operator

The next question is from Rajvindra Gill of Needham & Company. Please go ahead.

Josh Buchalter - Needham & Company

Hey guys. This is Josh Buchalter in for Rajiv. Thanks for taking my questions and congrats on a good quarter.

Russell Ellwanger

Thank you.

Josh Buchalter - Needham & Company

Again on gross margins, did you more a long term -- obviously there’s a lot of push and pulls with the Nishiwaki closure and the joint ventures. So, can you tell us how you’re thinking about that long term?

Oren Shirazi

Well, I believe that what you see now in Q2 ‘14 results and mainly if you look at the non-GAAP adjustments, so you really can see it without the depreciation, you can see it will be clean, this is pretty much our reflection and the only adjustment maybe you should do for the future is just to take out Nishiwaki, because like Russell mentioned, we had in this quarter approximately a $31 million revenue from Micron associated with cost.

Obviously the cost is a little bit higher than the revenue, otherwise there was no rush on us to cease the operation. And if you take out those numbers, you reached somehow improved margins $41 million after the cessation of operation and then if you look at also to the future, you then need to taking into assumption what Russell said before in the response to Jay about the improved margins from the incremental business in Panasonic JV.

So in this TPSCo now, we only make basic margins, because of the committed volumes from Panasonic. To that we should add all the incremental revenue that we expect to bring as a foundry business to this TPSCo company, which should be in a very high margin, just because we’ll be associated with only the incremental variable cost and typically in our industry the variable costs are a small portion as compared to the fixed cost and to the selling price of the wafer.

Josh Buchalter - Needham & Company

Okay, thank you, that’s helpful. And the Nishiwaki closing is still on track with the same timing?

Oren Shirazi

Yes, it’s very much on track, yes.

Josh Buchalter - Needham & Company

Okay, great. Thanks guys and congrats again.

Russell Ellwanger

Thank you.

Operator

The next question is from Lisa Thompson of Zacks. Please go ahead.

Lisa Thompson - Zacks Investment Research

Hi. I have a couple of questions. First up on Micron, could you tell us how much Micron revenues was in Q4 of the last year?

Oren Shirazi

It was approximately flat upon this level, the closer fit. Before $31 million it was about this level for the last six quarters pretty much that.

Lisa Thompson - Zacks Investment Research

Last six quarters?

Oren Shirazi

Yes.

Lisa Thompson - Zacks Investment Research

Okay. So how much was Micron in 2014 and how much was it in 2013?

Oren Shirazi

So it was about $30 million a quarter, so in 2013 there was four quarters, so 30X4 and in 2014 30X2.

Lisa Thompson - Zacks Investment Research

Okay. So it was all in there, all right. Okay, that helps with the internal growth concept. Now as far as the joint venture, what percent of capacity do you think your using right now?

Russell Ellwanger

As it’s all Panasonic business at present, I don’t want to overstate something that would state an awful lot about Panasonic, but at the Q1 release, the COO from TPSCo actually presented and he stated below 50%. So I think more than that I would not want to state.

Lisa Thompson - Zacks Investment Research

Okay, and if you were at a 100% capacity, where would your gross margins go?

Russell Ellwanger

If we were at 100% utilization at TPSCo?

Lisa Thompson - Zacks Investment Research

Yes.

Oren Shirazi

We can say that again, like Russell mentioned, we don’t want to go into the details of the business of Panasonic, because then you will know the current margins, but we are slightly below the 50%. This 100%, we indicated that we can be additional $150 million to $200 million at full capacity additional.

So this, the baseline, and we said in the press release that within the coming three yields we pretty much feel secure that we have secured agreements already to utilize at least $100 million and to answer before that, the incremental margin on this additional $100 million a year, $200 million a year everybody can do this assumption, but $200 million is the maximum possible. So this will be in very high incremental margins to gather the valuable growth.

Lisa Thompson - Zacks Investment Research

Okay, so we’re not going to have. Okay, thanks a lot. A great quarter, thank you.

Oren Shirazi

Thank you.

Operator

The next question is from George Burmann of J.P. Turner. Please go ahead.

George Burmann - J.P. Turner

Good morning gentlemen. Can you hear me?

Russell Ellwanger

Very well George. How are you?

George Burmann - J.P. Turner

Good and wonderful. Yourself?

Russell Ellwanger

Thank you. Very good.

George Burmann - J.P. Turner

Okay, congratulations to a great quarter as usual. We’re almost use to it now. I had a quick question. Since probably what, five, six, seven, eight years ago you have consistently reported GAAP net losses. Could you remind us what your tax rate situation would look like from here on out going forward as you ramp up profits?

Oren Shirazi

All right, its already in there. Okay, so we have three tax regions, Israel, U.S. and Japan. For the Israel, that region, we have -- Israeli tax laws are very convenient. In that aspect that allows you to carry forward with no any limit factor for the future, and also we have some enhanced depreciation for taxes. Meaning that whatever depreciation we are writing in the books, we are getting almost 2X that amount for taxes.

So basically we accrued already more than $1 billion of accrued expenses deductable for tax against future income. So from the Israeli operation we don’t believe we will gain a situation. We will accrue more than $1 billion of net profits, only at that point, which is our future we’ll pay taxes.

On the U.S. side we also have some net losses carried forward, but not in a significant amount. Meaning that you can be the U.S. – just the possibility will be fully utilized, creating a significant amount of net profit.

It will be taxable, averagely 35% tax rate there and in Japan the tax is about 36%, the tax associated results about 36%, but only in regards to the profit, the net profits that the Panasonic Tower Company will make, which is like we stated before, in the first one, one and a half years its limited because of the nature of the commitment that we got from Panasonic and the margin and only after one and a half years they should ramp up to a more significant amount.

George Burmann - J.P. Turner

Okay. Like sometimes when companies lose money for a considerable period of time, they are basically being told you will never be able to use the NOLs. Then they turnaround and start making money and all of a sudden the NOL comes back into play. I’m showing differed tax liability on your balance sheet of now $100 million. How should we look at that?

Oren Shirazi

Okay, so that’s two separate issues. There is no linkage between the first part of the question to the second, so I’ll address it.

The first part of the question, NOLs, so like I mentioned before, the major part of the NOLs that we have are basically NOLs and they are really carried forward for the future and we for conservative reasons, to be conservative we do not present in the balance sheet the asset that can be derived from that. Because obviously if we have, let’s say $1 billion losses carried forward, maybe another company would write 1 billion times the tax rate, which is in Israel applicable for the 25%.

So its $250 million of assets, that if we would not be conservative we could have write in the balance sheet against profits, but this you can only write in according to GAAP if you really believe that this $250 million you will enjoy from them in the coming future. We don’t see that we will have $1 billion of net profits in the coming year, so we don’t write it, but it’s really one of the assets that we have which is not in the balance sheet; that’s for the first part of it.

The second part of the question that you asked, tax liability, in the balance sheet this is actually just – I can say theoretical book related liability adjusted for – it’s called timing GAAP, timing differences on the tax. What is that $100 million? It’s really created in this last half year from actually the positive gain from the acquisition of Panasonic, of the TPSCo.

So actually as you know, we recorded in the P&L $166 million if you look at H1. $166 million of net gain from acquisition, the composition of that is about $265 million of gross gain, less $100 million provision for tax. So according to the accounting, it’s like this gain is of course not a taxable income and therefore you need to write like a liability for taxes.

But nobody should be worried about it, because this liability is not really payable, because against that gain we actually recorded the fixed assets of TPSCo in the value of $250 million, which is the third party appraiser value. We described it in the last quarter and this $250 million book value granted, we’ve increased depreciation rate. So actually for the future, the increased depreciation for tax purposes will offset this theoretical tax liability and actually all what I said now results in a zero effect on tax payments.

George Burmann - J.P. Turner

That’s what I wanted to find out. Now it might be a good goal for the company to work on utilizing that $1 billion loss carry forward in Israel, right?

Oren Shirazi

Exactly, that’s a good statement. Like I said, it’s one of the assets of the company. According to GAAP we cannot write it in the balance sheet, but for sure a upstream revenue profit that will go to the paired company tower by whatever way is really which could be actually not taxable, because we have these huge NOIs.

George Burmann - J.P. Turner

Okay. Next a question, you’re carrying now almost $200 million net cash on the balance sheet. What is a adequate amount of cash for you to hold. You had mentioned on previous calls that some of your customers were saying, well you don’t have enough cash; we’re kind of reluctant to give you orders. Now the cash balance has obviously significantly increased.

At what point in time, looking at these still very low stock prices would you consider utilizing some of the cash maybe to buy those convertible bonds back or some of the other debt back to increase the value of your company further?

Oren Shirazi

Okay, so you’re correct that the cash is very good, very big, but on the other hand we also have this right. So if you look at the balance sheet, we have $97 million short term debt, which is coming for its due date. For example we have Jazz Notes at $44 million and we have cash associated for that, so.

If you look on the cash net of the short term maturities, its $192 million less $97 million, so its $95 million, which is a normal amount. I mean for us it’s a good number against the long term debt that are also in the balance sheet and so we have these Jazz Notes. We have other debt to maturities in the coming two years. So we believe this number is okay to service the debts that we have.

In regards to buying back convertible bonds, it’s a very good statement what you will make and economically its very reasonable that we would do that, because for sure today the market environment enables us to pay less than 7.8% or 8% coupon that we pay and this is also what Russell related in the beginning in regards to maybe doing some refinancing that will lower the interest rate, etcetera.

But in regard to specific idea that you said about buying back convertible bonds, that’s a little bit of a problem, because technically under Israeli law, there is some Israeli law that only if you have two years of consecutive net profits you can do that. So we felt in the past we did not have it. For the last two consecutive years, technically we can actually not execute on that and this is why, another reason that we need this cash in order to have it for the payment of the bonds when they come due.

George Burmann - J.P. Turner

A lot of them are convertible into stock though, right?

Oren Shirazi

Yes.

George Burmann - J.P. Turner

The Jazz bonds, I think they convert into common stock. Are they in the money at the moment or are they still out?

Oren Shirazi

No, so the Jazz bonds that I referred, which are short term maturities which is $44 million and for that we need cash, they are doing June 2015 and they are not convertible at all.

George Burmann - J.P. Turner

Okay, good.

Russell Ellwanger

George, you made one statement that I’m sure that I never mentioned and that was a customer complaining about our cash balance. I have never had such complaints, nor has our cash balance been in a position that they would complain. But that I’m not sure what you had referred to there.

George Burmann - J.P. Turner

Okay, I thought I had remembered that from a previous conference call that you were looking to increase your cash position, so that the financials look strong.

Russell Ellwanger

That might always be the case, but certainly it’s not because the customer had complained about our cash balance.

George Burmann - J.P. Turner

Okay. Sorry for that indication there. Other than that I think you guys are pulling all the right levers and look forward to further growth in the company and hopefully in the value of your company in the market.

Russell Ellwanger

Thank you very much George. I appreciate it. Thank you.

Operator

The next question is from (Inaudible). Please go ahead.

Unidentified Participant

Good morning, good afternoon gentlemen. First question, regarding the Nishiwaki Fab, my understanding is the operating cost all total from that Fab were about $130 million per year. So what I’m just trying to clarify, is when one looks at the income statement today, that would suggest on a quarterly basis, that about $32 million of operating cost by the December quarter will not be there versus what you just reported in June. Is that correct?

Oren Shirazi

It’s practically correct. The $130 million is the fixed cost, only the fixed cost of the Nishiwaki which is the majority of the cost and this is what we said, is we’re saving from a savings operation, because this is fixed cost. In addition to that we have the variable cost, I mean when we manufacture there. So just for an example, basing on the previous numbers of $30 million revenue a quarter, so against that you have approximately $10 million of variable cost plus the $32 million fixed cost that you mentioned. So the total is $42 million actually.

Unidentified Participant

Okay. But as the Nishiwaki products are transferred over to your other Fab’s, that $10 million of variable cost is basically just being transferred from one location to another. So when we look in the December quarter, the difference in December versus the June quarter just reported will be that $130 million run-rate; is that correct?

Oren Shirazi

Yes.

Unidentified Participant

Okay, so I mean I’m stating something obvious, but basically as of the December quarter going forward your recorded gross margins will be maturely higher, because you are going to be having $130 million of annual cost that will no longer be reflected going forward.

Oren Shirazi

Yes.

Unidentified Participant

Okay, fine. And then just a second question, regarding going forward, because you are a larger company now, can you just kind of clarity what you expect to be your annual depreciation, amortization going forward and your annual capital expenditures that will be required?

Oren Shirazi

Okay. So basically it’s a good question, because the Q2 number are not clearing that because it both includes Panasonic and also includes Nishiwaki and also includes some one-time there of cost. But you can look at the Q2 number, which is high, again because it also includes Nishiwaki of about $8 million and deduct it, so you’ll have like $47 million, $45 million a quarter of depreciation on the P&A. Okay, so $45 million for quarter should be the run rate in the coming quarters including Nishiwaki, until let’s say Q1, 2015 and from Q1 2015 there is like a gradual reduction and not that high, but there is some step function that is bringing it down.

The final level that it will reach will be about $20 million to $25 million a quarter. So from $45 million to $20 million to $25 million, but this will take several other yields. So you can assume a linear reduction for the coming three years let’s say. This is because of the big investments we have made in Fab 2 in the past and which are more than the sustained costs that we spend now on TowerJazz. So it was Fab 2 was built in stages and in steps, so whenever once seven yields are completed from certain stage, so the depletion goes down.

So to conclude, if you take $45 million base line over three years, do some linear reduction towards $25 million, you are on the conservative side.

In regards to the CapEx payments. So we said I think in the past that we expect about $20 million a quarter. It could be maybe in quarters that we have a material amount of investments, $25 million, but this should be the range, much lower of course than the depreciation, because of the reason I’ve specified before.

This quarter by the way was and also previous quarter we were very low. We were really doing some savings here. So it was good results, but for the future we didn’t change the guidance that it’s about $20 million.

Unidentified Participant

Thank you and then one final question then. Regarding the numbers you are disclosing on the new mask sets entering the Fab’s, which is appreciated. What is the best way to asset the potential sales of those mask sets that will be able to provide, let’s say in four quarters. Because I understand each mask set could provide a different amount of revenue.

But when you show, let’s say that your mask sets entering the Fab’s were 242 in the current quarter, up about 85% year-over-year, are we to presume that the sales benefit could be also about 85% or is the number dramatically different, because we are talking about mask sets individual that represent greater or lower amounts of revenues now versus in the past.

Russell Ellwanger

It’s a very good question. I would say that not every mask set that’s entering has the same exact value. Some of them have extremely high value that there would be substantial growth that comes off of it. I would think that that’s a reasonable assumption. How much growth that comes of it, again I’m not trying to be allusive, but we have not provided really long term guidance and we provide targets.

But I would think that the 80% first half versus first half type of a number, 70% first half versus first half number should be able to growth full utilization of our factories and full utilization of our factories would put us probably somewhere organically at a – this is without any offloading into the TPSCo, but could put us somewhere organically of $160 million a quarter organic run rate.

Unidentified Participant

Right. So when the non-Panasonic Fab’s are full, they are doing $160 million of revenue per quarter and your thinking that possibility for reaching that level of revenue would be how far away?

Russell Ellwanger

Again, we don’t provide long term guidance. But as I stated, that those masks would be reaching their peak volumes in the, you know it’s 2015, 2016 timeframe. I would assume that I will be at our target anyway. It’s to be running at full utilization in the Q1, Q2 timeframe of next year.

Unidentified Participant

Got it, and one last thing. Regarding engaging new customers, obviously you did a splendid job here after three months of integrating Panasonic. Is there reason to expect that there’s plenty of additional potential customers to talk to, so that signing agreements with additional customers to bring in another $100 million of potential revenue in the future is also very doable in the near future or do you really think that most of the new customers who are interested you kind of signed up already.

Russell Ellwanger

Definitely the former. I think right now most customers are very, very interested, specifically at what is the offering. Each quarter we have what we call a TowerJazz Technical Symposium in a different region. On July 24 we had it at Shanghai, China. Had a very, very good representation of a variety of different segments of the Chinese market and part of the presentation there was the CEO of TPSCo and then they held a booth that they had very good action at and activity, where different customers came, potential customers came to understand what the offering was.

On I think September 18 we have the same activity in Amsterdam. I believe that there will be a very strong interest, to understand in particular the high voltage power capabilities of TPSCo as far as the foundry offering, looking at what is some strong segments within Europe.

So the initial activities, again they were strong and I think very quickly completed. The IDM transfer type of activities with its existing customers that we were able to get interested and were interested in the activities to move into the factories there.

On the image senor side it was customers that knew of our reputation in image sensor, which is really, quite, quite strong. And then in and of themselves, knowing the capabilities of Panasonic’s image senor products, were very interested themselves in getting involved and really more of less solicited us. So the image sensor really dealt with our reputation and customers then saying, Wow! This is going to be a foundry offering. We really want to get involved in that factory and contacting us for that type of an activity, and that is just the first front of that.

So right now our task and activity is training the sales force worldwide as to not just the continuous training of what we have organically with TowerJazz, but what is offered through TPSCo as a foundry offering and then having them engage with customers on it. That activity from the direct sales force really hasn’t started yet.

Unidentified Participant

Got it. There’s clearly an opportunity there, great. Well, I thank you very much and best of luck with this ongoing combination.

Russell Ellwanger

Thank you very much.

Operator

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

Russell Ellwanger

Yes certainly, thank you very much. So as always, thank you very much for you interest in the company. We have enjoyed, we look forward to continuing to update on the different progresses that the company is making; where we are going, what we are doing.

At stated, our strategy has been to align with customers that are leaders within their specific segments, perform for them in current products and be aligned on a multi-generation roadmap to where we are their partner, to add or enable differentiation for future generations and future products.

The amount of tape outs coming into the factory from top customers I think really does show that that strategy is working. One of the questions is to when will that and how much does that accrete into revenue. I think the organic growth that we are showing shows that it’s accreting real time as we speak.

The micron revenue that had been at about $30 million $31 million quarterly run rate will be supplanted very shortly through our organic business. On top of that we have the TPSCo business through Panasonic, all of the added capacity and new engagements that we have done and will continue to do there and just continue our outlook.

We had a very successful conference in China and a lot of activity going on there. I think as most know, a lot of growth happening in China within electronics, within semiconductor and I think we’ve been chosen as the foundry partner of choice for many analog applications.

On September 18 we’ll be in Amsterdam presenting to we believe a large group of big cross section of fabless and fab-lite semiconductor companies in Europe. Anyone that would have the opportunity to be there, you’d be invited. We’d very much enjoy hosting you as an investor at any of our TGS functions.

That being said, again thank you for following us, and we look forward to update you on many exciting things as time goes on. Thank you very much.

Operator

Thank you. This concludes the TowerJazz, Second Quarter 2014 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.

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