Noit Levi – Director, IR and Public Communications
Russell Ellwanger – CEO
Oren Shirazi – CFO
Jay Srivatsa – Chardan Capital Markets
Tower Semiconductor Ltd. (TSEM) Q2 2012 Earnings Call August 9, 2012 10:00 AM ET
Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz Second Quarter 2012 Results Conference Call. All participants are currently present in a listen-only mode. Following management’s prepared statements, instructions will be given for the question-and answer-session. (Operator Instructions) As a reminder, this conference is being recorded August 9, 2012.
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.
Thank you, and welcome to TowerJazz financial results conference call for the second quarter of 2012. Russell will open the call followed by Oren with a discussion of our results in the second quarter of the year.
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.
Thank you, Noit. Welcome to our second quarter 2012 results conference call. During the call, I’ll review our current areas of focus and why we believe these focuses will provide a base of several diversified growth engines for the future. However, I will begin by discussing the capital notes, the history and present status and then because this past month saw the one year anniversary of the Japan Nishiwaki facility acquisition and as next month is the four year anniversary of the Jazz merger, I’d like to review the activities and return on each of those.
So I’ll begin with the description of the notes. In 2006 and 2008 our two lending banks, Bank Hapoalim and Bank Leumi converted debt into a vehicle of capital notes and as part of this restructuring of the bank debt the Israel Corporation invested new money into the company. In all, the three capital note holders invested 550 million in cash and/or debt conversion and received capital notes convertible post-split into 27 million shares comprised of 14 million being held by the Israel corporation and 6 million being held by each of the banks representing $20.70 price per share underlying each capital note which is more than 2x of the current stock price.
For capital notes are solely an equity vehicle which each note being able to be converted into one share. There is no coupon associated with the notes nor any type of strike price. It is important to mention that under Israeli banking law, each bank has restricted to hold not more than 5% ordinary shares in a company of which it is a debt holder. Hence the banks cannot convert and hold more than 1.1 million shares underlying its notes. Bank Hapoalim and Bank Leumi asked the company to file a registration statement with the SEC in order to register 2.7 million and 3.0 million ordinary shares underlying capital notes respectively which would be issued if either or both banks wish to convert their capital notes or portion thereof into shares. The company fulfilled its obligation to the banks by following the registration statement and the shares underlying the notes were approved for registration by the SEC.
The company views the banks as knowledgeable and experienced stakeholders who have expressed no intention to immediately act on this registration in the market. The Israel Corporation has not requested that any portion of their notes be registered and as formally stated that it does not intend to sell or traded shares at the present time and as well has expressed its belief in the company’s strategy and growth plans.
The company continues discussions with the three noteholders towards potential solutions that will be positive to all shareholder but cannot commit to the timing or degree of participation or if there will be any participation at all.
So, now to refer to the first anniversary of the Japanese fab acquisition and the fourth anniversary of the Newport Beach Jazz merger. In June 2012, we celebrated the first anniversary of the acquisition of the Nishiwaki, Japan facility from Micron. For this facility, which included a three year binding revenue contract, we paid 40 million cash and 15 million stock. A full ROI of the cash and equity investment was achieved through the first nine months of Nishiwaki cash creation.
In addition to the nine months ROI, we own a facility that can produce 60,000 wafers per month with an asset value recently appraised by a third party expert at $160 million. Within this first year, we have generated from synergies consolidations and a head count resizing which is more in line with our foundry activities, a reduction in operational cost by approximately 30 million per annum. This should result in a steady state operational market increase of about 10 points against the previous baseline performance of this facility.
In deed the Nishiwaki factory has exceeded all of our forecasted metrics, I will discuss new business initiatives in relation to this facility in a few minutes. September is the 4 year anniversary of the Jazz merger. We will review a few highlights here as well. In the instance of Jazz, we paid zero dollar cash and 20 million in stock which also had a full return off of Newport Beach cash within the first nine months post acquisition.
From a premerger EBITDA performance of 15 million per annum Jazz apple to apple now create 16 and 19 million EIBTDA per annum. In addition, we have managed to gain new technologies and new customers by cross-sells and cross training, major cost reduction synergies, dual sourcing from our fabs and very importantly at the time of the acquisition we introduced a new branding and focused actions to be a true analog specialty foundry. This enabled us to surpass the 500 million annual revenue level bringing us to the enviable position of the number one specialty analog foundry worldwide by revenue and in so doing gaining multiple Tier I customers and continued increased market share.
One of the greater benefits in the manner we have preformed these two acquisitions is that we have not tried to assimilate the acquired companies culture into the mother culture but rather to take the best of each and create excitement for all by having an evolving culture that is focused on our market and customers.
So moving back to Japan like few key updates, we now have a number of top tier integrated device manufacturers for whom we actively are qualifying their flows into the Nishiwaki fab with production expects to start from early 2013. A top-tier existing top five TowerJazz customer has invested in tools and agreed to a take or pay contract to one of its most advanced flows to be transferred into high volume manufacturing in Nishiwaki. In addition, most recently a top-tier Japanese automotive supplier selected us and began in the second quarter to design to our (inaudible) platform targeting high volumes within the next few years. We’re also in advanced negotiations with a premier Japanese IDM who is planning to shut down a highly specialized lower volume factory with the aim of transferring all of its products for manufacturing at our Nishiwaki facility.
We also see strong sales synergies by having a Japanese fab to garner business for our fabs elsewhere. Having requested the local Japanese presence to be their interface another Japanese IDM is in advanced stages of qualification in Migdal Haemek and there are pre-wafer engagements with multiple Japanese customers for additional manufacturings in either Nishiwaki, Migdal Haemek or Newport Beach.
In Korea we have over 40 active engagements, this has been part enabled due to the proximity of the Nishiwaki fab as well as due to an extremely strong sales and technical support in Korea itself.
As the design tape and volume continues to increase we’ve added additional technical resource to the Korean team to augment already strong team in supporting our growing customer base and need. This is part of our natural progression as we focus on exceeding our Korean customer base demand and as many leading edge reference designs for consumers, cellular, medical and automotive products are now being developed by the Korean companies.
On June 21st, 2012 we held the TowerJazz technical global symposium in Korea. This was our second symposium in Korea and this year’s event showed our strong brand within Korea as the attendance was two times the prior event with over a 120 participants represented by 47 IDM tablets and design companies from both current and potential customers looking to TowerJazz for solutions on new opportunities.
The event commenced with my keynote which highlighted our latest technological advancements as well as our 2012 theme of the Pursuit of Excellence. As they were following me multiple detailed technical presentations from each of the business unit, my keynote focus mainly on TowerJazz values and corporate philosophies. The post conference survey results were extremely positive demonstrating again that our goals and trajectory in reaching them are that which our customers desire of us and that our beliefs are actual customer facing actions.
We also provided a technical overview on leading edge specialty process offering, shared our design enablement capabilities such as our sophisticated design kits, accurate models and comprehensive analog IP portfolio. The survey results indicated that the attendances found all relevant and beneficial.
We will host our 7th annual TowerJazz Global Symposium in October 31 to November 1, in Ervin, California, right next to our facility in Newport Beach. This two day symposium will focus on our aerospace and defense offering, as well on our commercial technologies and will offer updates on our specialty technology such as high speed silicon-germanium, CMOS image sensor, power management and others as well as our design enablement solutions. We’ll provide case studies from our customers and presentations by industry experts and leaders and academia.
In addition, on December 4, 2012 we will hold TowerJazz symposium in Tokyo, Japan an event we are very much looking forward to hosting for the first time.
I would like briefly to update on our initiative in India that we announced last quarter. To remind you this was an important business opportunity for us to expand our presence in the Indian market through an initiative by the Indian government to build a 300 millimeter factory. This initiative would enable us to build long term roadmap towards 300 millimeter wafer size, 90 nanometer analog technologies as well as companion chips in deep submicron technologies. It also provides us a major revenue stream or would also provide us a major revenue stream during the portion of fab build out and subsequent fab operation and would give us a specific portion of the fab capacity for our own customer needs. Our consortium is very strong which includes the leading or a leading Indian infrastructure conglomerate Jaypee Group as well as the leading technology firm IDM.
We received a positive feedback from the Indian government within the past weeks that our consortium is now going to the next step in the approval process. We expect to receive a decision before years end but again can give not guarantee to timing or if our consortium will ultimately win the selection.
Now I would like to update you with regards to our business unit, main focuses and activities as mentioned giving special attention to engines of growth. For RF and high precision analog, for latest growth engine for that business for the next two to three years is the explosion of silicon based front end modules for smartphones, tablets and Wi-Fi products. This market is growing exponentially for us to really convergence of several factors, the strong growth of smartphones, each smartphone has multiple front end modules to support multiple standards versus single front end module in older phones.
The change in technology from gallium arsenide to silicon this is a occurring today for the antenna switch with most generation designs targeting silicon on insulator for which we’re a leader for gallium arsenide p-HEMT which is the preferred technology for previous and current generations.
This is also beginning to take place for power amplifier functions where we have design wins with our silicon germanium technology versus the current gallium arsenide HBT incumbent technology and finally the proliferation of wireless beyond the smartphone further fueling this market through the growth of tablets and Wi-Fi connected peripherals. We continued to see strong design traction for our newest SOIC CMOS platform for RF switch applications, mobile phones and Wireless LAN front end.
We expect to ramp this newest process later this year and into 2013. Another significant growth engine for this business unit is the propagation of our high performance SiGe and higher volume consumer products. Two good examples are the use of silicon germanium in high speed wire connectivity such as Thunderbolt Light-Peak and USB 3.0 interfaces. In some cases displacing simple CMOS interfaces due to the higher data is required and use of our low noise silicon germanium technology and GPS low noise amplifier receivers which are beginning to displace the incumbent gallium arsenide technology.
We also continued to see strong traction in high end SiGe. On the technology side we announced breakthrough performance in a demonstration of 110 GHz Phased-Array radar designed by University of California San Diego in our industry leading SBC18H3 SiGe technology. On the commercial side we announced a breakthrough product with Phasor addressing satellite communications and radar build in our advanced SiGe platform. In power management there are three areas which we expect to fuel growth in this segment.
Share gains in the large display driver market our 700-volt technology for LED lighting and similar plan and the continued migration of power management production from IDMs towards foundries. In the area of display drivers LED, LCD, plasma display drivers today we have only a small share of the total market because of our late investment in this area relative to that of our competitors but now have a distinct technology advantage with our 0.18 BCD Process, good initial production volumes, strong design win momentum and very good customer traction particularly in Korea, where we have made a strategy investment in the past several years with the local office and strong local technical support. For this reason we anticipate strong market share gains in the next several years in this very large market.
The second major area is without flagship 700-volt technology. In the short-time since we announced this technology, we’ve had strong design win momentum for LED lighting applications, a press announcement with Samsung on the use of this process and now initial production orders which are expected to ramp over the next few years to a very significant portion of our total power revenue. In addition to LED lighting, we have opened a new market space with high side version of our 700-volt process that is being adopted by customers to drive IGBT and MOSFET or gallium nitride powered devices for many consumer appliance applications.
The final major area of growth in power management is where today the IDMs still dominate the market but with our 0.18 BCD technology with embedded MBM and strong investments and design enablement, we are supporting more fabless design startups and are partnering with key IDMs to complement their internal technology, seeing that typical power management products that are built in IDMs and 0.5 micron lithography versus more advanced 0.18 micron node.
Today, we produce leadership products in the area of load switching, DC-DC converters, LBOs as well as highly integrated digital power management. And in addition to expect to growth in these more traditional areas, we see strong design win moment in new areas. One example being Power-over-Ethernet where today we had no market share but it differentiated technology and good initial design activity.
During this quarter, we continue to strong ramp of both classy audio and load switch products build into leading LED TVs, PCs and tablet and products. We also had a strong spike in new design activity for 700-volt targeting the LED lighting as mentioned previously and received some initial risk production orders.
We continue our work with Samsung on high side 700-volt for power inverter applications. During the quarter, we also achieved AEC-Q1000 automotive qualification for 0.18 BCD platform and support of a major Korean automotive design win. This will help expand the application base for our existing platform to this new large market segment in both Korea and elsewhere.
Moving to CMOS Image Sensor, we see four major growth engines. A continuous growth in the high end, high margin, full photography and cinematography. Our technology targeted specifically to that market gives excellent performance and low noise, low dark current and efficiency driven sensitivity which places us to be among the leading edge of the technology in this market. Our patented stitching technology allows large format sensors and combined with our in-house color filters and microlens processing provides very strong roadmap for our customers.
We also see strong traction coming from very distinguished Japanese imaging companies. Now that we also have a state-of-the-art manufacturing facility in Japan and we have begun to see these activities having resulted in a very large project with one of them. The Nishiwaki facility in particular has a very good reputation in very low dark current performance which is required for the high end DSLR market.
The second area is medical and dental x-ray sensors. The very strong market of intraoral dental sensor of which we have a major share is now growing into extraoral and medical large sensors. Our patented stitching with our unique pixel technology in very high yields of large format x-ray sensors makes us the first choice for all the major players in this market. In the x-ray market, we continue to win more and more business from Europe and Korea, while the current business remains stable. We just announced the very successful wafer size sensor development with the UK partner Rutherford that is in addition to several such products we already run in mass production and at a very high and stable yield.
The third area is the very fast growing 3D camera market for gaming and gesture control applications. In this area we joined forces with leading companies to development state-of-the-art technology that is also used for automotive applications, another high growth engine for us.
Lastly, the fast growing industrial vision market in which we see a lot of success with many of our European and U.S. based customers and now we see also penetration into Japan. As far as technology developments our 0.18 or 0.16 micron periphery and 0.11 micron pixel designs is on schedule and we expect to release this advanced technology in the fourth quarter this year.
We already have two leading customers using this technology as early adopters one of which we expect will drive into very high volumes. For mixed-signal CMOS our main focus of this unit is to drive customers to use the TS18 flow established in our new fab in Japan. This flow is using well established technology in TowerJazz for mixed-signal CMOS and informs the base platform for our specialty offering. We are in a process of qualifying in for automotive believe that this will be specifically attractive for automotive customers especially those based in Japan.
Our broad base of customers in Southeast Asia will be well served by this mature technology and will enjoy the outstanding quality and accessibility of the Japanese factory. We continue to expand our offering and support for specific growing applications such as timing controllers, RFID tags, high speed voltage translators, analog switches and many more. Significant growth engine utilize the new offering in the half node of 152-nanometer providing an excellent opportunity for customers to get a significant cost reduction solution for 0.18 micron design.
Finally, as mentioned our IDM transport or the specific name or TOP business unit which stands for Transfer Optimization and Process Services has launched multiple IDM projects in Japan and expanded some of our customer production into Migdal Haemek. As mentioned we won our first Japanese IDM transfer into Migdal Haemek which project is in the qualification stage. We also moved into production with our first Migdal Haemek MEMS customer.
I would like now to mention the outlook for the coming quarter for the third quarter we provided revenue growth of between 152 million to 162 million, I mentioned our expectations continued margin improvements which we realized in Q2.
In general, and looking forward, we previously stated that the cornerstone of our success is our close relationship with our customers wherever they are. We focus to intently and genuinely listen to our customer’s input and drive quick change throughout the company whenever we see a disconnect between how we view ourselves versus how the customer views us. For most all of our technology platforms our technical roadmap is aligned with our customers and specifically with those customers who are acknowledged worldwide leaders and in many instances our developments are performed to their express multi generation device output requirements.
As we continue to drive the performance based trust from our customers which also then results in providing unique value to them, we are confident to continue to move forward to lead our specialty analog foundry segment. We have expressed on multiple occasions our 2012 theme that being the Pursuit of Excellence and as well explain some of our activities within that pursuit. We have much good happening within company, many avenues of growth and multiple new activities.
One critical focus within our culture is even in the midst of great growth and excitement that we have and maintain a common understanding that at times the most sublime innovation is simplification. Maybe the truest test of a great teacher or a master is exactly that, the ability to simply. We target growth with an underlying philosophy to one, drive industry leading performance outputs without added cost and unneeded complexity and two, to improve efficiency and reduce process based bureaucracy which in turn yield speed, a key factor to success.
So to close my remarks TowerJazz as a business remains very strong, we’re in position to bring our analog specialty leadership to the next level. In 2010, we took the number one position in the specialty industry, in 2011 we extended that lead by close to $100 million compared to our closest competitor. And if we look at our closest two or three competitors the revenue has remained fairly flat over the past years. In 2012, we look to extend this lead even further.
Our first half of 2012 revenues are 29% higher than those of the first half of 2011 a figure which is well ahead of our industry peers performance. One thing is for sure, time is the Tower of all truth, we are excited to see this story that comes at the end of the next few years. Much excitements, much achievements and a tremendous employee force that is full of passion. With that I would like now to hand over the call to our CFO, Mr. Oren Shirazi.
Thank you, Russell, and hello, everyone. Looking at our Q2 results it is clear that we had an outstanding quarter from many financial aspects. We significantly improved our margins as compared to the previous quarter from $10 million to $12 million range or by 5% to 7% data point across the board. We achieved $62 million EBITDA which is 28% and 42% better than the comparable periods and we achieved $42 million in positive operational cash flows or $33 million positive in cash flows net of payment associated with the Japan efficiency plan as Russell described.
Our second quarter revenue grew 21% year-over-year to $169 million slightly above the mid-range guidance we provided three months ago. Revenues for the first half of 2012 grew 29% by $76 million over the first half of 2011 and even with the 7% forecasted sequential revenue reduction we’re focusing a 12% to 14% revenue increase in the first nine months of 2012 as compared to same period in 2011.
We strongly improved our non-GAAP profit while reporting operating profit of $53 million of operating margin of 31%, an increase of 44% over last year and 31% over the previous quarter. On an EBITDA basis we reported $62 million which is 42% over $36 million as reported in the same quarter of last year excluding the one-time gain on acquisition, acquisition related and transaction cost and 28% over the $40 million as reported in the previous quarter.
We greatly improved our margins. As compared to the previous quarter, gross margin improved from 35% to 40%. Operating margin improved from 24% to 31% and net margin improved from 20% to 27%. On a GAAP basis comparing the quarter to the same quarter last year revenue grew by $29 million, a net loss of $9 million which is $8 million better than last year’s bottom-line result excluding the one-time acquisition gain and $10 million better than the previous quarters bottom line result.
We ended the quarter with $171 million in cash balance and short-term deposits demonstrating growth as compared to $101 million as of December 31, 2011 and $158 million into previous quarter. During the second quarter of 2012 we executed a cost reduction plan to increase the efficiency of our Japanese facility including a reduction in workforce of 280 employees from the Japanese employee’s base.
This will enable $30 million in annual savings which will significantly improve our margin. Payment in regard to this cost reduction plan of $9 million made during this quarter is presented under cash flow from operating activity. One-time expense of $6 million are included in the statements of operations for the second quarter of 2012 under a separate line named reorganizational cost. No additional expenses are expected to be accrued in future period following execution of the above mentioned plan.
As we recently announced, we completed a reverse split of our shares at a ratio of one-to-fifteen to regain compliance with NASDAQ minimum split requirement and maintain our stock listing on the NASDAQ market. The reverse split will use a number of our ordinary shares to approximately 22 million shares. Similarly the underlying shares to be issued from conversion of outstanding convertible securities will be reduced by the ratio of one-for-fifteen.
Moving to the balance sheet analysis, over the past months we have succeeded in strengthening our balance sheet. We improved our current ratio which is our current asset divided by our current liabilities from 1.16 times at the end of 2011 to 1.66 times as of June 30, 2012. We also improved our net current assets profit from $36 million as of the end of last year to $139 million with a reduction in our net debt to EBITDA ratio to a ratio of 2.1x. We also reported $152 million in shareholder’s equity and $908 million in total assets as of June 30, 2012. We increased our cash balance to 171 million up from $101 million at the end of the year and $158 million at the end of last quarter mainly from the following activities.
During the second quarter of this year, we generated $42 million from operations or $33 million including $9 million payments due to the previously described Japanese efficiencies plan. We also received $14 million from the GE credit line drawn down at LIBOR plus 2.6%. And we invested $26 million in CapEx investment.
Moving into the P&L, as Russell mentioned earlier, our revenue increased year-over-year by 21% to $169 million. We are reporting an EBITDA of $52 million in the quarter which is a 42% improvement over that of last year which was $36 million. Excluding the acquisition related cost the recent efficiency plan expenses and the onetime gain from acquisition. This is also a strong improvement of 28% over last quarter’s EBITDA which was reported at $40 million.
On a non-GAAP basis, second quarter 2012 gross profit was $68 million representing 40% gross margin. This is a 34% increase over the gross profit of $51 million or gross margin of 36% which we achieved in the second quarter of 2011 and 16% increase over gross profit of $59 million we achieved in the previous quarter.
Operating profit on a non-GAAP basis in the second quarter of 2012 was $53 million or operating margins of 31% an increase of 30% or 44% over operating profit of $37 million or operating margin of 26% as achieved in the second quarter of 2011. This was also an increase of 31% over operating income of $40 million or operating margin of 24% in the previous quarter.
Non-GAAP net profit in the second quarter of 2012 was $45 million or $2.08 per share post delivered share split exchange of 1 or 15, which became effective on August 5, 2012. This represent a 27% net margin. This is 60% over the $28 million or $1.42 per share for the second quarter of 2011. Non-GAAP net profit is 35% above the previous quarter of $33 million or $1.56 per share which represent a net margin of 20%. On a GAAP basis comparing the quarter to the same quarter last year, revenue grew by $29 million and net loss was $9 million which is $8 million better than last year’s bottom line excluding that one-time acquisition gain recorded last year and $10 million better than the previous quarter’s bottom line results.
This ends my financial summary for the quarter and I would like to now to transfer the call back to Noit Levi.
Thank you, Oren. 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 statements made and to be made during this call.
Please note that the second quarter of 2012 financial results have been prepared in accordance with the U.S. GAAP and the financial tables in today’s earnings release include financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as established by the Securities and Exchange Commission as they apply to our company.
Namely, this release also presented financial data, which is reconciled as indicated by the footnotes below the tables on an non-GAAP basis, after deducting one, depreciation and amortization, two compensation expenses in respect to auctions, 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 not substitute for GAAP financial measures. The tables also contains a 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 presented is defined in our quarterly financial release. EBITDA is not required GAAP financial measure and may not be comparable to similarly titled measure employed by other companies. EBITDA and the non-GAAP financial information presented herein should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating investing and financing activities, sales share data or other in fact on cash flow statements that are prepared in accordance with GAAP and is not necessarily consistent with the non-GAAP data presented in previous filings.
I would now like to turn the call over to the operator. Operator?
Thank you. (Operator Instructions) The first question is from Jay Srivatsa of Chardan Capital Markets. Please go ahead.
Jay Srivatsa – Chardan Capital Markets
Yeah, thanks for taking my question. Russell your guidance seems to reflect general sense of pull back or in the overall semiconductor market. Can you give us some sense on what’s your read in the market overall. And are you seeing specific segments pulling back or are you seeing just overall weakness related to macro conditions?
We see one specific segment that has pulled back that contributes for probably the bulk of this 7% lower mid-range guidance, and that would be within discretes. It seems that the other segments are doing very well for us. Now the thing that’s a little bit hard for me to say off of business forecast is that as mentioned previously in most all of our segments we’re growing very nicely in market share.
So I can’t comment off of our forecast and POs on the overall increase, decrease, stability of the worldwide semi demand because obviously if you’re growing market share you will not see a reduced tide as quickly as others might. But in the area of discretes to where we have a good portion of business, we have seen a reduction in the forecast, reduction in POs and as well a reduction in the guidance of our specific customers themselves.
Jay Srivatsa – Chardan Capital Markets
All right. In the past you’ve talked about being able to achieve a $200 million revenue run rate by end of fiscal ‘12. Given your guidance, you believe that you could be able in position to get there in Q4 or are you expecting that to be more of a fiscal ‘13 event?
So from a capability standpoint we’re able to achieve it. It’s a question really of the orders. So the products, the activities, the transfers, they’re all in line, things have happened, I, in a very serious note I’m quite convinced that we will see the $200 million, it’s not a question of if, it’s really just a question of when. From what I see presently do I think that we would have $200 million of orders in Q4, it does not appear likely, really not, but is it a possibility for Q1, Q2. At some point everything snaps back, the core snaps back and we’ll be there.
We’ve continued as mentioned in multiple times to grow our market share even in the discreet area we’ve grown our market share. It just seems that for whatever reasons in that area to where we have several very large customers their business is down but our portion of that business for the most part is increasing and increasing very steadily. So as far as the target that we had given at the beginning of the year to achieve $200 million in Q4, I think at this point that’s not very realistic. At what point will we achieve it, I would believe that will be there not too far in the future, the operational capabilities there, the technical capability and the right activities are there, it’s just a question of the demand lining up with what we’ve done. Does that answer your question Jay.
Jay Srivatsa – Chardan Capital Markets
Yes it did, thank you. In terms of margins, you’ve had, you’ve done a very good job of improving gross margins back up to levels that you had previously before the Nishiwaki acquisition, can you give us some sense on where things are in terms of utilization at Nishiwaki and how you see a gross margin profile expand over the next couple of quarters?
So, Nishiwaki, I won’t talk about the utilization there because it’s under contract. And if I talk about utilization you could really directly calculate what is the size of the micron business which we’re not disclosing or do we necessarily have permission to disclose the specific micron business on a quarterly basis. From the contract itself, we had several thousands of wafers per weak that was not within the contract. So, there was always the possibility of having upside on top of the contract and we are qualifying customers to get in there but overall worldwide capacity is right now about 70%.
Jay Srivatsa – Chardan Capital Markets
All right. In terms of the contract with the Indian customer or we assume that this is another contract that you’ve received over the last year compared to the one you had previously or it is an extension of the existing one. And if it’s a new one, can you give us some insight into when you hope to start to see material revenues from this contract?
Could you start the question again. Jay, I maybe misheard, or I thought you said India but could you just restate it please?
Jay Srivatsa – Chardan Capital Markets
Yes. I – you alluded to a contract with the Indian government for a 300 millimeter fab. I wanted to – the question was when do you expect that to start to what you call it material in terms of revenues?
So, that’s the bid that I had spoken of, it’s nothing different than what I think that we announced it with the release two quarters ago and then regarding some details on it last quarter. The government had asked for an open bid for an individual or for a group to come in to build and operate a 300 millimeter factory. In our case we joined with two other companies one is JP a very large Indian conglomerate providing power, infrastructure, and cements in India as their major businesses and with IBM. IBM would be the technology provider 45, 65, 90-nanometer digital technology. We would build the factory.
We would operate the factory and nominally bring analog blocks into the 90-nanometer on platform and JP is the predominant owner of the factory. The government asked for bids. They received the first round of bids in December from ourselves and other groups as of last week we received a correspondence from the government that they reviewed everything. We will be going forward to the next round with them. They have not formally announced how many people involved in the next round, how many have been screened out or anything of the sort. It has been stated by the governments directly and/or indirectly that they would be making decisions before the end of this year, but India no different than any other government.
It’s very difficult to know what timelines are going to adhere to within any process. From the time that everything is approved the timeline of the factory is as follows and that’s the only thing that I could say should we or our consortium win the bid. The factory from ground breaking would take three years to the point of having qualified silicon earnings to the factory. And that would be at a certain capacity, the ultimate capacity of the factory would be 30,000 wafer per month. So it’s three years to get started, we would build the factory contracting to build it, we would also operate the factory contracting to operate it, all agreements are with Jaypee. Again I, our thought and belief is that it will close before the end of this year, but there is no way that we can guarantee that or have any assurance that, that is the case. Hopefully that answers your question Jay.
Jay Srivatsa – Chardan Capital Markets
Yes, yes it is. And in terms of the capital notes given that the registration has been approved by the SEC realistically what, what is your view on, on if and when the conversion will happen from these banks. Are you getting the sense that they are not inclined to do it or is it your sense that they will do at some point in time and not near term?
I stated in the call that the banks have not indicated that they would be doing any short-term actions in the market. I really, I am not in a position to speak for the banks as to what they would do or not do. I also stated in the call that we are still in discussions with the banks to try to come up with an alternative that would be a win for all shareholders I mean as stated as well.
Now trying to sound too nippy here but being the fact that we’re not the owners of the notes, we can’t give any guarantees on any outcomes of what these discussions would lead to or not lead to and at this point they have or we have complied with their request to register with the SEC and it was about 50% of their note holdings that were registered on upon request those notes can be converted to shares and then they could be traded. As stated however, the banks cannot hold more than 5% at any given time so the amount that they would hold is somewhat small but what does, is our hope is that we would be able to come up with something that would be a win for all parties and can we give more details on that we really can’t because sorry I don’t want to set expectations that aren’t real that I don’t have direct control over.
All right, how and when they would exercise again that’s something that really should be asked to the banks. I, it would be nice if I honestly could speak for them that I can make commitments but I can’t.
Jay Srivatsa – Chardan Capital Markets
I understand. Last question on your long-term debt, in the past you’ve done a very good job of reducing your long-term debt, in the last few quarters it appears to be creeping up again. What is your plans with your existing cash and/or strategy to try to look at your debt long, reducing your long-term debt again.
All right Jay. Actually if you look at the net debt so it actually went down I mean on a gross sale level we increased debt by 80 million but the same amount was increased in the cash so on a net basis its stays flat and with the GE loan that we just signed and drew down $14 million so this is was just an activation of a credit line and we still have open availability both in GE credit line and Wells Fargo credit line which we don’t drove and don’t, we didn’t indicate if we intend to drove but to your question I mean the current EBITDA if you look at the run rate of 52 in this quarter so the run rate is at more than 200 million and previous EBITDA run rate was 160, 170 well I said that if we are at a ratio of net debt to EBITDA of about 2.5x up to 2.5x up to 3x this is reasonable for us currently we are even below that so we think we are in a good position. The net debt to EBITDA right now is about 2.1x so we believe that from strategy point of view we are at the right level of debt compared to EBITDA.
Jay Srivatsa – Chardan Capital Markets
Thanks Oren, thanks Russell.
You are very welcome, thank you.
The next question is from (inaudible). Please go ahead.
My question is with regard to profitability, I am looking at the GAAP figures I see that for the third quarter the profitability is about 3% and that profitability rate doesn’t make sense to me when I look at your – the competitive strength of your technology and my question is why with your technology strength aren’t you able to achieve a higher profitability, are you sacrificing profitability to get more growth? Thank you.
Can you just explain what is the 3% that you mentioned?
The operating profit for the second quarter on a GAAP basis.
Yeah, but when we look at the GAAP we have to remember that there is – there are lot of historical depreciation which is has mainly resulted from the establishment of Fab 2 which was huge 1.5 billion project, so when we analyze it we’ve exclude it in order to have an apple-to-apple data without I mean to see the continuation the ongoing operational margins and this why we have this analysis that show that actually our operating margins are 31% not 3% I mean if you include that historical accounting of what cost us to build Fab 2. If you look at our recent acquisition of Jazz in Japan to what I’ve explained the purchasing Jazz in Japan it cost us like one was $20 million the other was $55 million nothing like the $1.5 billion, so this is why you should look at the operational margin on it. So anyway the gross margin is now 40% the operational margins is 31% and the net margin is 27% I think for foundry for manufacture of chips I think is very nice profitability margins.
When do you finish preceding Fab 2?
So Fab 2 was built on, there is no like a specific date because Fab 2 was built in steps. We started it at 5k wafer per month in an investment of $800 million and then every time we had a delay, added more capacity which cost more and each such expansion of Fab 2 started seven year schedule of depreciation. So it’s going down, it should be going down quickly linearly along the coming years, every quarter, every year there is a reduction, we were in higher numbers a year ago, now we are in lower numbers, we’ll be more lower numbers next year.
Do you have an operating margin target?
Yes, the best in our industry, our field, the best in our field are reaching like 40%, 45% not like the non-GAAP operating margins or if you look at from the EBITDA point of view, we more look on the EBITDA point of view which is the same. It’s about 40%, 44% currently we are around 30%.
So, your goal is to increase by about 10%?
Yes, that’s the target going forward.
And we got realistic?
Yes. As we continue to convert the capacity in Nishiwaki to our flows, as we continue qualifying the programs we have going on in power management and in the front end module, I think it sound very realistic.
Thank you very much.
There are no further questions at this time. Mr. Ellwanger, would you like to make you concluding statements?
Certainly, as mentioned in the Japan facility, we took actions that on an ongoing basis should be able to increase the operating margin by about 10 points. That during the first year of activity, I think is a very nice stamp of approval of driving efficiencies during a time of changing a model from being part of a DRAM integrated device maker to bringing on multiple flows as a foundry.
We see a lot of excitement from our customers. We have customers leader, true leaders in their segments have selected us year-over-year for Supplier of the Year Award that we’re aligned with on long-term roadmap or aligned with on short-to-medium term roadmap and for market share increases. Our belief in the future is very strong it’s very bright, I think performance of Q2 was outstanding. Q3 has a small dip in revenue we expect the margins to maintain the same trend as we saw in Q2. And where I believe strategically engaged in all the right things, tactically doing that which we need to do. We look forward to continuing over time to see improvements on all aspects.
We really or none or have an incredible employee base and people that are very passionate about what they do, people that when customers visit the sites, customers leave extremely excited, extremely convinced that we are the right partner for them to have. We’ll continue to work on this, we’ll continue to listen to our customers, we’ll continue to change as per customer’s need and not to be resilient to change. Everyone needs to have strategy, everyone needs to vision, everyone needs to proper staffing.
An excellent staff allows a vision to evolve, excellent people give inputs, they look at reality, they move things along. I believe that that’s what we have to have come from 100 million revenue negative 60 million cash from operations, to a run rate of about 650 million revenue consistent over 100 million cash from operations that’s a huge move in a company.
I thank those that have invested that have been with us over this journey and as stated earlier I see the next few years at the end of which being a story that people will be extremely excited with as now all of the efficiencies and size that we’ve had can drive into very, very selective top line growth and very good bottom line growth. So I thank everybody as mentioned we’ll be having a symposium in Newport Beach in October, it’s an open environment, those who had wished to come are more than welcome to come, touch our technologies, touch our people, see what we have and become more convinced yourself. So thank you and till the next call.
Thank you. This concludes the TowerJazz second quarter 2012 results conference call. Thank you for your participation. You may go ahead and disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!