高塔半導體 (TSEM) 2009 Q2 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the Tower Semiconductor Second Quarter 2009 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 12th, 2009.

  • Joining us today are Mr.

  • Russell Ellwanger, Tower CEO, and Mr.

  • Oren Shirazi, CFO.

  • I would now like to turn over the call over to Noit Levi, Director of Investor Relations and Public Communications.

  • Ms.

  • Levi, would you like to begin?

  • Noit Levi - Director - IR and Public Communications

  • Thank you.

  • Welcome, everybody, to Tower Semiconductor's financial results conference call for the second quarter of 2009.

  • Joining us today are Mr.

  • Russell Ellwanger, Tower's CEO, and Mr.

  • Oren Shirazi, Tower's CFO.

  • Russell will open the call, followed by Oren with a discussion of our results in the first half of 2009.

  • This will be followed by Russell with a discussion on the performance of our four major sectors during the last half year.

  • After management's prepared remarks, we will open the call up for the question-and-answer session.

  • Before we begin, I would like to remind you that some statements made during this call maybe 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, S-4, S-3 and 6-K, filed with the Securities and Exchange Commission, as well as filings with the Israeli securities authorities.

  • They are also available on our website.

  • Tower assumes no obligation to update any such forward-looking statements.

  • Now I would like to turn the call over to our CEO, Russell Ellwanger.

  • Russell, please go ahead.

  • Russell Ellwanger - Chairman & CEO

  • Thank you, Noit.

  • Welcome, everyone, and thank you very much for joining us today.

  • We're very pleased with our current results, which demonstrate that we are firmly on the right track.

  • As I will discuss in today's call, I truly believe Tower is entering a new chapter in its history and we are emerging from the recent global downturn as a stronger and leaner company, with platforms primed for long-term and profitable growth.

  • In a few seconds, I'll hand over to Oren, our CFO, who will review Tower Jazz's current positioning as a fully integrated Company, as well as our recent achievements.

  • Oren will discuss our extended global operations presence.

  • He'll review our cross-selling opportunities realization and we'll discuss in detail our cost-savings measures, amounting to more than $80 million.

  • In addition, Oren will discuss the second quarter results in some detail, in which we performed to the fourth quartile of our previously provided guidance at $60.6 million, as well as provide guidance of double-digit growth for the third quarter and our expectations beyond.

  • Following Oren's summary, I'll go into further detail with regard to our strategy performance across all four of our specialty segments during the quarter, as well as my expectations and strategy into the future.

  • Finally, we'll open the call for Q&A.

  • And now I'd like to turn the time over to Oren.

  • Oren, go ahead, please.

  • Oren Shirazi - CFO & VP - Finance

  • Thank you, Russell, and hello, everyone.

  • The past year was very tough for our industry and the global economy as a whole.

  • It was still a resounding success for Tower on multiple fronts.

  • We significantly improved our position strategically, financially and operationally.

  • We used the downturn period wisely and executed on our long-term growth strategy to expand our higher margin specialty business.

  • The Jazz merger occurred at precisely the right time for us as a Company.

  • It gave us many benefits, which I will review, and enabled us to reach the following achievements.

  • One, our business has extended from having two facilities located in Israel into a global operation, adding Jazz foundry in Newport Beach, California, as well as excess capacity with two Chinese foundries, one of which is HHNEC, an affiliate of the Japanese NEC that is 10% held by Jazz.

  • The merger with Jazz provided with an additional capacity of approximately 250,000 wafers per year at eight-inch wafer size.

  • This has already assisted us in attracting more and larger customers, increased opportunities and more efficient distribution and customer support.

  • Two, the merger has also provided us with a strongly broadened and expanded process platform.

  • Russell will speak to this in detail.

  • But it befits to me to say it has improved our market position and placed us firmly as the leader in various specialty process technologies.

  • We are now differentiated through specialty process technologies and we are well known in the industry as one of the leading specialty foundries in the world.

  • Three, as a result of the above, we have seen a huge increase in ASPs.

  • ASPs per layer is the average selling price per manufacturing layer.

  • These data of the ASP have increased 35% year over year in Q2 '09.

  • Additionally, we have been able to target higher margin and significant opportunities which fall outside the traditional model.

  • Further, the merger has introduced to us significant cost-savings opportunities among Jazz and Tower's customer base, since there was almost no overlap between both of our top 20 customers.

  • Our products are now being sold or there are activities for them to be sold to six of the Jazz top customers and vice versa, as Jazz products are being sold or are imported to be sold, to three of Tower's customers.

  • Finally, apart from our long-term top-line growth benefit, in the past year we remained focused on controlling costs and driving Tower towards profitability as quickly as possible.

  • As you may remember, throughout the past year, we announced a number of steps to reduce costs while continuing our investment in our capabilities, mainly process, design and R&D.

  • This included both cost saving through realizing savings and synergies from the merger of Tower and Jazz, as well as additional cost reduction measures, which resulted in two times the saving figure that we had originally targeted.

  • The merger allowed us to examine all support structure, or, if you will, contract activities.

  • Tower and Jazz having been of similar revenue size pre-merger enabled substantial reduction in context of headcount and a maximization of efficiencies in transactions by using best of breed, as well as leveraging our new size for volume contracts.

  • The result has been a substantial reduction in cost of over $80 million annual run rate.

  • In summary, the increased diversification across our product line and markets and customers as part of the merger with Jazz has strongly assisted us in successfully managing throughout the difficult environment of the past year.

  • The steps we have taken to realize our strategy has allowed us to emerge from the current economic crisis a much stronger company, positioned for growth.

  • Our efforts have put us well on the path of realization of our goal of becoming the leading specialty foundry in the world, as a key component in the achievement of our overreaching goal of delivering long-term value to our shareholders.

  • We believe the above benefits from the merger were key enablers for the 24% growth we guided for Q3 '09 in our press release earlier today.

  • As well, a key enabler to the desire of Yorkville Investors, a US New Jersey fund, to invest in Tower's ordinary shares.

  • As announced, Yorkville has committed to invest in Tower up to $25 million over the next 24 months by the way of standby equity lines, in consideration for ordinary shares of Tower to be issued at 3% discount to the market price of the ordinary shares, as set forth in the agreement.

  • Today, no draw-downs have been made under this agreement.

  • No warrants or any other debt or any derivative instrument are issuable by Tower under the agreement.

  • Additional information regarding the agreement is included in the Company's filed Form 6-K and prospectus supplement.

  • Now, turning to our Q2 balance sheet, our balance sheet as of June 30 is strong.

  • We had $38 million in cash; shareholders equity, $74 million; 10% holding in HHNEC, presented at the book value GAAP of $17 million.

  • We were in full compliance with all the banks, bonds and debt covenants on the older agreements.

  • Current ratio is positive at 1.5 as compared to 1.2 at December '08, and we continue to aggressively pursue the $45 million in grants from the Israeli government through the investment center, which were committed, promised, but yet to be received.

  • Now, turning to the P&L.

  • As released, revenues were $60.6 million, in the upper range of the guidance.

  • Our GAAP net loss for the second quarter was $31 million, or $0.19 per share, an improvement against $0.25 per share in Q2 '08.

  • As of the first half of '09, narrowed by $2 million, as compared to the same period in '08 and by $16 million compared to the same period two years ago.

  • EBITDA for the second quarter of '09 was positive for the 15th consecutive quarter and cash from operations, $4 million positive for the quarter for the 11th consecutive quarter.

  • Looking at the results on a non-GAAP basis, we achieved $16 million gross profit, representing 26% gross margin, an improvement as compared to 21% in the first half of '09.

  • Non-GAAP operating profit was $4 million, an improvement of 158% compared to previous quarter.

  • Non-GAAP net profit for the second quarter of '09 improved to $5.4 million, representing 9% net profit margin.

  • When compared to the pro forma consolidated net loss on the second quarter of '08, which is an aggregation of Tower's and Jazz's operational results, we improved our net bottom line of the P&L by $5 million, against $45 million reduction in revenue, which means that we saved $50 million of cost, quarter over quarter, representing $200 million annual run-rate of cost reductions.

  • As I mentioned earlier, this all further is evidenced by the success of our cost-reduction activities and the synergies on the merger with Jazz.

  • Overall, we have many achievements in the second quarter, including a number of new project wins and collaborations which demonstrate the value we add to our customers with our highly advanced specialty wafer process, designer-centric models and kits, which Russell will review in a moment.

  • The financial results of these wins we already begin to see in the coming quarter, which brings me to the financial guidance in the third quarter.

  • We expect revenue to jump to between $73 million to $77 million, representing sequential growth of 24%.

  • Our strong third quarter guidance is built on the basis of our significantly improved visibility.

  • We have seen a substantial increase in the level of orders from several customers and we are also commencing the production release of a number of new projects.

  • All this, combined with our customers' improved focus for the remainder of the year, as well as our lower expense footprint, strongly increases our optimism with regard to the coming quarter.

  • Overall, we see an improved and positive environment and many new opportunities due to our increased focus of our business in the specialized segment.

  • And, as a result, we may expect to see continuous sequential growth, resulting in being the single foundry that will exit 2009 with year over year growth against 2008, as Russell stated in the release earlier today.

  • Now I will transfer the call over to Russell, our CEO.

  • Russell Ellwanger - Chairman & CEO

  • Thank you, Oren.

  • So our merger with Jazz was not only long-term strategic, but the timing, just prior to the economic meltdown of late last year, put us in a very unique position.

  • Where others needed to, to use an allegory, cut off good working hands or feet to show the optimal weight on the scale, we, as Oren discussed, were able to reduce cost while optimizing efficiency.

  • We did this with a reduction of duplicate contextual functions within the two companies, as well as having obtained better supply contracts through the increased combined volume of the two companies, and at the same time we were able to increase our focus and output of core capabilities, namely our specialty product offering roadmaps and design services.

  • Therefore, we significantly improved our position from a strategic, financial and operational perspective.

  • We have now emerged as a more focused and a more efficient company, and together with Jazz we are one of the leaders in the specialty space.

  • I would like to spend a little time, with more detail, not the performance of the various segments of our business, mainly focus on our diverse specialty product line.

  • Firstly, in terms of our RF applications business, we very much see a rebound from the wireless customers in the market.

  • we continue to see particular strength in the fast-growing area of digital TV, where we supply silicon TV tuners that are replacing traditional cam tuners down in set-top boxes, satellite receivers, television sets and PC TV receivers.

  • In 2009, according to Techno Systems analysts, the fixed reception silicon tuner market is 170 million units, with that number nearly expected to double to over 300 million units by 2013, and we are the epicenter of this growth.

  • Our silicon germanium and specialized RF CMOS processors offer unique advantages to our customers, enabling extremely low noise, coupled with best in class power consumption, which in turn helps our customers to grow their market share, and it is the reason our business is growing with multiple new design wins in this high-growth TV tuner market segment.

  • I'd like to highlight two recent examples, both of which demonstrate our specialized focus on this segment has enabled us to emerge a leader in this growing space.

  • We recently announced volume production of the [XD] 5000 tuner for LG's high-end flat-panel TV, manufactured using our silicon germanium process.

  • XD chose us due to the unprecedented size reduction, outstanding noise and power performance of our tuners where both analog and digital reception is required.

  • In addition, they were impressed with our design enablement tool, integrating high levels of functionality and allowing them a fast time to market.

  • Additionally, shortly after the end of the quarter, we announced volume production of Entropic's EN4020 multimode silicon tuner, manufactured using Jazz's 0.18 micron CMOS process and its world-class RF modeling design kit.

  • By choosing Jazz, Entropic realized a smaller die size by scaling down the analog portion of the chip without compromising quality and has brought to market the most advanced multimode, low-cost silicon tuner to date.

  • At the higher performance end, we are continuing to make progress in wining designs and demonstrating the cost advantages of silicon germanium over gallium arsenide in applications such as the front-end module of cell phones, optical networks, radar and other millimeter wave applications.

  • One particularly impressive demonstration that we announced this quarter was UCSD's design of a single chip phased array KU band 12 gigahertz to 15 gigahertz radar, built in our 0.18 micron silicon germanium technology that replaces eight gallium arsenide components and is currently being transitioned to a leading US defense contractor for turning into a product.

  • UCSD's success in developing this breakthrough chip depended largely on Jazz's 0.18 micron silicon germanium by CMOS process, models and design kit.

  • This is a prime example of the capabilities of the highly advanced specialty wafer processes, models and kits we offer to our customers.

  • To support customers transitioning from gallium arsenide to silicon germanium, we have partnered with the leader in gallium arsenide-based design tools, Agilent Technologies, and have jointly developed an ADS design kit based on our high-end 0.18 micron silicon germanium process.

  • These PDKs offer design teams a smooth transition from gallium arsenide-based high frequency product design to silicon-based product design by using the same Agilent ADS design environment now available with Jazz's high-performance silicon germanium technology.

  • This his helping lower the transition cost and time to market of customers migrating from gallium arsenide design to silicon germanium by maintaining a consistent EDA platform.

  • This activity was highlighted by Agilent Technologies in a press release from them dated June 2nd.

  • I'd like, now, to briefly talk about our full solutions MEM processing business, in which Jazz continues to make significant strides in growing business and where in Israel we are also growing equally as well.

  • In fact, we have already surpassed shipments of 50 million MEMS devices and we are well on the way to reaching a 100 million milestone in the coming years.

  • This year, we are on track to realize a 38% year over year growth in MEMS wafer revenue, despite this year proving to be a tough one due to the economic downturn.

  • We have a number of projects in the pipeline and in particular we are qualifying a MEMS device into a leading handset platform jointly with our lead RF MEMS customer, WiSpry.

  • In this application, we have worked together to create a tunable capacitor for the handset market.

  • In Israel, we are as well focused on mass production of MEMS applications.

  • MEMS projects are progressing well, demonstrating our capability, combined with having full-flow MEMS processing specific here to two customers, the complementary MEMS ASIC chip will be as well manufactured at Tower.

  • One of them will utilize our new 0.18 micron power management platform.

  • Israel, in particular, is an area where MEMS business is blooming and we are seeing very great traction with many startups.

  • We are finalizing agreements with several geographically varied MEMS R&D proto-to-low volume centers to enable customers to move from a prototype stage to a high-volume production stage seamlessly.

  • We expect to announce additional MEMS design wins and partnerships in the coming quarters and we're excited to update you as we progress.

  • Our medical device and imaging business is characterized by both high margins and the longevity of the product cycle, two particular attributes for long-term growth and performance.

  • According to global industry analysts, the image sensor market is expected to reach $12 billion by 2012.

  • A breakthrough that I am particularly proud of is our recently announced successful development of the smallest image sensor in the world, designed for endoscopic applications together with Medigus.

  • The single-use market is estimated to be worth a half billion dollars, with a compound average growth rate of 16%.

  • This image sensor and camera represent a dramatic breakthrough in the endoscopic medical field, as it opens a wide hatch of new markets and medical applications that were not previously achievable.

  • By combining design and advice and working close with the Medigus system developers, we're able to maximize the camera pixel count by minimizing the noise over the three-meter data transfer line with the smallest camera in the world.

  • Our sensor design capabilities, along with best-in-class pixel performance, have allowed us to get into this very high-margin market.

  • This successful project has already seen enormous traction amongst the end user leaders in this market, and we achievement to achieve volume production in mid 2010.

  • I believe that this product will prove to be a significant revenue generator for us over the next decade, due to the fact that is a disposable camera and will require very high volume.

  • Our successful partnership with CMT, a company recently acquired by Talus, continues on track.

  • Our jointly developed product has experienced significant traction amongst the leading medical X-ray equipment companies.

  • We have already demonstrated major performance and price benefits compared to the products currently being used throughout the industry.

  • With regard to sensors in the dental X-ray area, we also see strong growing demand and expect this to continue.

  • In the Western world, the average adoption rate of digital X-ray versus film is about 40%, with a forecast to be above 90% within three years.

  • Although absolute numbers are difficult to obtain for the East, we do see a very large growth in demand in the Far East.

  • Tower has about 70% to 75% in the digital CMOS dental applications, which we see as staying steady as the market continues to grow.

  • We also recently announced a successful line scanner imager product with Panavision, which we expect to ramp during the second half of 2009.

  • These line scanners were developed using Tower's advanced photo diode pixel process and pixel IP, demonstrating state-of-the-art differentiating [dark] current, no lag and state-of-the-art low tempo noise performance.

  • These image sensors are used in spectroscopy, bar code, touch screen, OCR, machine vision measurement and other applications.

  • As you can see, these very exciting recent developments in our medical device and imaging business provide us with a lot of optimistic for the coming quarters and years.

  • Finally, I'd like to finish by talking about our 0.18 micron power solution technology, our platform with a scalable 20 to 60 volts with the lowest RDSon is considered by all to be the best in the foundry industry today.

  • In addition to that, our zero mask adder NVM remains unparalleled throughout the industry.

  • The scalable and modular power management platform has experienced a huge amount of traction in the last months.

  • I'd like to talk about some of the recent design wins, demonstrating our lead in the industry our design potential.

  • We achieved a design win with Dongwoon in Korea, which chose us for our leading design capabilities and our modeling accuracy.

  • The win was for high-volume production of LED lighting devices using our 20-volt to 60-volt scalable LDMOS power management process technology, a differentiator in our peak power management offering.

  • I would like to quote Mr.

  • Dong Cheol Kim, Dongwoon's CEO, where he said, we have used many other fabs, but we found Tower to have the best customer support and superb design services, parameter and modeling accuracy, which is an extremely important element for a successful and on-time design, end quote.

  • In addition, we recently announced a design with 3PEAKIC Microelectronics for their energy saving LED driver [IC].

  • According to Strategies Unlimited, the global LED market is forecast to exceed $5 billion in 2012, with an estimated CAGR of 28%, and we have carved for ourselves a strong niche in this growing market.

  • Another design win was for Cesign for a class D amplifier.

  • Our technology enables customers like Cesign to optimize performance and cost for their products, while greatly reducing the design cycle.

  • We expect to be able to announce additional major design wins in the coming quarters, which further demonstrate our technical leadership in this field.

  • So, as you can see, all parts of our specialty business are powering ahead, and, as Oren mentioned earlier, we expect to see very significant growth in the third quarter and profitability beyond.

  • Our mix continues to move more strongly into the area of specialty, as demonstrated, as Oren had mentioned, by a year over year increase in our average selling price of 35%.

  • As a last note, the revenue from our technology transfer business, where we take specialized proprietary customer flows and port the flow itself into Tower, is strongly recovering, as our customers see increased demand.

  • And, as we press released, the business continues to grow with new customers, such as Crocus for MRAM technology.

  • To summarize, as the industry continues to recover, our leadership and the value add of our services and capabilities will provide us with sustainable top and bottom-line growth over the coming years.

  • In the second quarter, we registered 83 new customer design wins, the highest quarterly number in the Company's history, and a strong testament to customer acknowledgement of our capability.

  • We see this design win trend continuing.

  • This increase in design wins should propel growth to be well ahead of the industry in general.

  • We have emerged from this economic slowdown with an improved position strategically, financially and operationally.

  • We have differentiated through continued investments in specialty processes and technologies in high-growth segments and have cemented ourselves as a leading specialty foundry.

  • As a result of these efficiencies we have built into the Company, we expect Q3 bottom-line EBITDA results to be at a minimum 400% higher than Q4 '08, the first post-merger quarter and having been at similar revenue at $77.5 million to our present Q3 guidance midpoint of $75 million.

  • In summary, then, we are very positive and have a very strong basis for our optimism with regard to both near-term and long-term future and believe we will be the only semiconductor foundry to exit 2009 having shown profitable growth.

  • And now I'd like to hand the time over to Nati Somekh Gilboa, our Corporate Counsel, for some general legal statements prior to going to Q&A.

  • Nati, please go ahead.

  • Nati Somekh Gilboa - VP, Chief Legal Counsel

  • Thank you, Russell.

  • And I would like to add the general and legal statements to our results in regard to statements made and to be made during this call.

  • Please note that the second quarter's 2009 financial results have been prepared in accordance with US 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 a non-GAAP basis, after deducting depreciation and amortization, compensation expenses in respect of option grants and finance expenses net other than interest paid, such that non-GAAP financial expenses net include only interest paid during the reported period.

  • Non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, GAAP financial measures.

  • The tables also contain the comparable GAAP financial measures to the non-GAAP financial measures, as well as the reconciliation between the non-GAAP financial measures and the most comparable GAAP financial measures.

  • Further, 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 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.

  • The pro forma consolidated operational indicators and results is an aggregation of Tower and Jazz's operational results for periods before the merger date, which was September 19th, 2008.

  • Following the merger with Jazz, the amounts presented in our financial report and in today's release include Jazz's results, commencing September 19th, 2008.

  • The balance sheet, as of June 30th, 2009, and December 31, 2008, include Jazz's balances as of such date.

  • We will now open the call for the question and answer session.

  • Operator?

  • Operator

  • Thank you.

  • Ladies and gentlemen, at this time we will begin the question and answer session.

  • (Operator Instructions).

  • There are no questions at this time.

  • One moment, we have a question from [George Berman] of GunnAllen Financial.

  • Please ask your question.

  • George Berman - Analyst

  • Good morning, gentlemen.

  • Thank you for taking my call.

  • Russell Ellwanger - Chairman & CEO

  • Good morning.

  • George Berman - Analyst

  • I have to say, an absolutely phenomenal quarter.

  • Russell Ellwanger - Chairman & CEO

  • Thank you very, very much.

  • George Berman - Analyst

  • And the future looks very bright, too.

  • Like the stock, it seems like we're rising like a phoenix from the ashes, huh?

  • Russell Ellwanger - Chairman & CEO

  • Thank you.

  • George Berman - Analyst

  • The growth in revenues forecasted for the current quarter, that puts you probably annualized, close to or over the original revenue estimates when you joined with Jazz Semiconductor, right?

  • Russell Ellwanger - Chairman & CEO

  • No, not exactly.

  • George Berman - Analyst

  • You're looking for about $77 million, $78 million, and I think the combined company was at the time forecasting or possibly doing $300 million or $400 million a year.

  • Russell Ellwanger - Chairman & CEO

  • Correct, correct.

  • We're at the low end of what we would have been, correct.

  • But we would have seen ourselves, had we not had the Q1, Q2 as an impact of the economy, we would have seen ourselves be higher at this point for the year.

  • If you mean the annual run rate from Q3 and what we see Q4, that's getting more toward the end of what we had been targeting when we did the merger.

  • George Berman - Analyst

  • Yes, and you are now able with your tremendous order influx to also utilize your ownership of the Chinese foundries?

  • Russell Ellwanger - Chairman & CEO

  • We're in discussions to do some things with them, correct.

  • George Berman - Analyst

  • And you keep mentioning that you own a 10% ownership position that is valued at book value.

  • Give me an estimate, what would it really be worth, if you, say, were to monetize it?

  • Oren Shirazi - CFO & VP - Finance

  • So HHNEC are not a public company, so it's difficult to approach the question, but for what was released by iSupply and others can give you an idea how to calculate it.

  • I mean, iSupply and others released that HHNEC are running about $320 million revenue a year, so according to multiplier, which is common in the industry and which is 1.5 on the revenue and reduced debt, you come out at a value at normal days when the market is not collapsing of something like $50 million.

  • Now, you can reduce if you think that now the market is lower and maybe you come out with something like $30 million, $40 million fair value that someone can calculate based on economical models.

  • According to GAAP, however, since it's public and not traded, this is the requirement presented at only $17 million.

  • George Berman - Analyst

  • Right, and what is your -- how do you profit from that 10% ownership?

  • Oren Shirazi - CFO & VP - Finance

  • No, we don't profit.

  • We don't recognize in our books any profit from that, because under accounting GAAP only more than 20% you can take.

  • George Berman - Analyst

  • I mean holding a 10% stake in that company, what kind of benefits do you derive from having that ownership?

  • Oren Shirazi - CFO & VP - Finance

  • So, firstly, Russell has a seat on their Board of Directors, so we have one seat there and Russell is attending every Board meeting, and we have the manufacturing agreement.

  • And, of course, we have a way to effect any vote through the voice of ourselves, and of course we have the value of that, that sometime when they will [exceed OIP] or we will sell it somebody else, we will of course get the net profits.

  • Russell Ellwanger - Chairman & CEO

  • As well in being one of the owners, it does enable different types of relationships and possible partners.

  • George Berman - Analyst

  • I see, I see.

  • I also saw in one of your recent press releases that you not only received a contract from a new customer, but you also took an equity stake in this customer.

  • Is this something that we could look forward to into the future?

  • Russell Ellwanger - Chairman & CEO

  • It's a model that made a lot of sense for us and for Crocus.

  • George Berman - Analyst

  • Crocus, right.

  • Russell Ellwanger - Chairman & CEO

  • And we did a very similar thing with CMT, the joint venture that we have there with CMT, which recall CMT, the company that was bought by Talus.

  • So in there we actually have an equity stake in its actually a joint venture.

  • So, yes, it's a model that makes sense for us, not to overextend ourselves in it, but there's certain times when particularly in-kind investment makes very good sense for the customer and for us, where we believe that they have a very, very good chance for growth and the investment is primarily in kind, where it means that we're not putting in cash but we're providing services that take on a cash value, it's a win-win for both companies.

  • George Berman - Analyst

  • Still enjoying a profit on OSI, though, right?

  • Russell Ellwanger - Chairman & CEO

  • I'm sorry, please, what?

  • George Berman - Analyst

  • When you say that you provide services in the kind, you would still make a profit on the manufacturing services, there.

  • Russell Ellwanger - Chairman & CEO

  • Of course.

  • George Berman - Analyst

  • And end up with an equity stake that could become very valuable down the road.

  • Russell Ellwanger - Chairman & CEO

  • Yes.

  • George Berman - Analyst

  • Okay, overall capacity.

  • Can you give me an idea if revenues with the contracts that you have already announced more coming, if revenues was approaching $100 million, $125 million a quarter, would that necessitate further capital investments?

  • Russell Ellwanger - Chairman & CEO

  • No, I think at the $125 million level we could probably take care of it with organic capacity, depending again on the mix.

  • Where we're driving much higher ASPs, that would certainly be the case.

  • But, as we mentioned, we have supply agreements overseas and we would probably initiate some of those supply agreements presently.

  • We have a good amount of capacity internally and the capacity we're really reserving and using for our specialized high-margin flows.

  • George Berman - Analyst

  • Okay, then a quick question.

  • The convertible debentures that you acquired through the Jazz merger, have you paid some of those already off, or are you planning on maybe buying them back in the market?

  • I don't think -- other than that, you have no debt coming through for a number of years, correct?

  • Oren Shirazi - CFO & VP - Finance

  • Yes, the (inaudible) on the Jazz bonds are due on the end of 2011 and until then we are paying the interest in full.

  • Every half year, we are paying 4% interest, so the total is 8% interest and it is of course something that we always were, if you look in the history of Tower and Jazz, always we were in compliance with all the covenants and all the payment schedules, and we never had any issue with that, even in the tough times.

  • You know just in Q1, just in December of January and February, those really months we paid an amount of $19 million for bondholders in Tower and Jazz for interest and principal.

  • Now our position is very strong.

  • First, we have the $38 million cash on hand.

  • Secondly, we have no principal payment of bonds, not in Tower Israel and not in Jazz Newport Beach until the end of '11.

  • George Berman - Analyst

  • Oh, great.

  • Oren Shirazi - CFO & VP - Finance

  • So, yes, so we have 2.5 years without any payment down the road.

  • George Berman - Analyst

  • Okay, good.

  • Look forward to participating in your hopefully continuously strong future.

  • Thanks for the conference call.

  • Russell Ellwanger - Chairman & CEO

  • Thank you very much, and thank you for your questions.

  • Operator

  • (Operator Instructions).

  • There are no further questions at this time.

  • Mr.

  • Ellwanger, would you like to make your concluding statement?

  • Russell Ellwanger - Chairman & CEO

  • Just again that we really sit in an incredible position, great momentum in the Company, 83 design wins in the quarter, a forecast for Q3 that's substantially above the industry and we would see Q4 as having continual growth.

  • We can't put a number on the degree of growth at this point, but we see Q4 being above Q3.

  • We see the design wins being fuel for our continued growth.

  • We're just very optimistic on how we're moving, the platforms, the acknowledgement the platforms have from our customers.

  • I would like to just end the call by inviting everybody on it to come to Newport Beach on November 5th.

  • We're having a technology conference.

  • We'll be presenting in detail some of the specialty flows that we have.

  • We have customers that will be presenting there.

  • It would be I think very worthwhile and you're certainly welcome to come.

  • There's no entry fee, so please find out about it on our website and every one of you is welcome to come.

  • Operator

  • Thank you.

  • This concludes the Tower Semiconductor second quarter 2009 results conference call.

  • Thank you for your participation.

  • You may go ahead and disconnect.