高塔半導體 (TSEM) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the TowerJazz first-quarter 2010 results conference call.

(Operator Instructions).

As a reminder, this conference is being recorded May 12, 2010.

Joining us today are Mr.

Russell Ellwanger, Tower CEO; and Mr.

Oren Shirazi, CFO.

I would like to turn the call over to 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 first quarter of 2010.

Joining us today are Mr.

Russell Ellwanger, TowerJazz CEO; and Mr.

Oren Shirazi, TowerJazz CFO.

Russell will open the call, followed by Oren with a discussion of our own results.

This will be followed by Russell with a discussion of the performance of the business during the past quarter.

After management's prepared remarks, we will open the call up 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 Israel securities authorities.

They are also available on our website.

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

Now, I'd like to turn the call to our CEO, Russell Ellwanger.

Russell?

Please go ahead.

Thank you, Noit.

We continue to meet with many analysts, shareholders, and potential shareholders that are interested in our stock.

There is a general excitement and appreciation of our accomplishments, how in the foundry landscape we singularly were able to grow revenue double digit in one of the toughest times for our industry, and vastly improved bottom-line EBITDA, and that we would target a mid-double-digit growth for 2010.

We indeed have achieved much.

I'd like to contrast this to when I first joined Tower.

This quarter, actually this month, is my five-year anniversary with TowerJazz.

When I first joined, Tower's revenue for the first quarter of 2005 was $23 million.

Today, we announced first-quarter revenue of $114 million, five times higher revenue, with a shift from Q1 2005 of approximately negative $12 million EBITDA to a positive $35 million EBITDA.

I think this was a nice achievement for any company in any sector.

But the major difference in the Company over the past five years are the customers that we are now working with.

As I go on into the conference call, I'll speak to our customers.

High-end, Tier 1 customers that are the market leaders in their individual segments.

More than that, I'm very pleased to announce, based on our first-quarter run rate results, we are now the number one specialty fab by revenue, according to all published results.

We have achieved our goal of becoming the industry leader for specialty offerings.

Now I'd like to take this opportunity to thank each of the TowerJazz management and its employees that have put their heart and soul into growing TowerJazz into the Company that we have changed into at this day.

I stated that it was and still is our goal to be the number one foundry for specialty offerings.

Now that we've achieved it, it certainly doesn't mean that we can rest on our laurels.

We are the leaders in specialty technology, and as I explained last quarter, this was done by driving innovation that relies on engineering solutions to solve the problems of interfacing digital system to the real world through a vast array of specialty semiconductors, such as wireless RF, analog, high-voltage analog, imaging, and other sensor and communications chips.

In order to remain the leading specialty foundry, we need to continually lead our industry in innovation, as we have done to date pretty successfully.

We need to continue to leverage our deep understanding of the problems faced in each of the unique applications in each of our businesses.

Our lead was created through the selective creativity of our highly skilled employees that enabled breakthrough solutions to the problem of engineering inside of the silicon, rather than simply decreasing the geometry of the silicon devices in line with Moore's law.

This is where my excitement comes from, and where the future challenges that face our Company will reside.

As I said last quarter, it is why our name, TowerJazz, is demonstrative of the jazzy and creative ways we think and meet challenges throughout the Company.

I'll begin today's call by reviewing our major accomplishments in the first quarter, provide a summary of the various parts of our businesses.

I will end by discussing our second-quarter guidance, as well as how we are tracking to achieve our major target for 2010 as a whole.

Oren will then review the first-quarter financial results in detail.

After that, we'll open the call for questions.

I'd first like to talk about Korea.

The Korean region is home to many highly skilled IC designers and industry-leading semiconductor companies, and a thriving region for technical and manufacturing innovation.

In this region, we have and continue to develop strong business partners.

In the past few months, we made numerous announcements of customer wins in Korea, in which we are targeting several hundreds of millions of revenue over the coming years.

We have seen a strong growing customer momentum in Korea, which includes engagements with engagements with C&S Technology, Cesign, Dongwoon, SemiHow, and others.

This evidence the traction and technical high regard we're receiving in this market amongst all of our product groups.

About two months ago, we announced an agreement with Korea's IC Design Education Center to help accelerate the country's specialty IC design expertise.

IDEC promotes projects for the purpose of national competitiveness by educating highly qualified design experts through support in Korean universities.

IDEC will provide Korean universities with access to a broad range of specialty process and technologies from our Migdal Haemek fab.

This agreement underscores our highly appreciated industry innovation and technology leadership which resides in Korea.

This program is our way of early partnering with the next generation of Korean technical leadership, which in turn will have long-term benefits to the students and universities there, the Korean semiconductor industry, and TowerJazz.

Another important event for us in Korea is our first Global Symposium, announced last week.

This conference will take place next week, Wednesday, and will focus on process technologies and designs-enablement capabilities.

Market interest has been extremely high with over 100 executives and design engineers representing 50 Korean companies having confirmed their attendance.

We will highlight the breadth and depth of our specialty offerings, focusing on the latest technical advances in areas such as modular power management platforms, RF silicon germanium applications, as well as current trends in imaging technology.

We will also introduce our very highly differentiated non-volatile memory offerings, which are being used as enablers for applications within our power platforms and RF platforms.

I will move on now to discuss our various business units in which we are seeing strength across the board.

Demand for our services is very strong.

So strong, in fact, that we've been turning away lower margin, less differentiated business to the benefit of fully differentiated platforms for our strategic partners.

With regard to the various parts of our business, I'd like to start with the RF business unit.

Our RF and high-performance analog business continued to grow in Q1 with strong revenue momentum in all of our primary market segments, including that of radio transceivers and front-end modules for cellphones and WiFi, digital TV tuners for set-top boxes and large-screen TVs, and high-speed networking components.

To accelerate our growth further, and capture strong market potential, we expanded capacity more than 50% of our RF technology by cross-qualifying our fab in Newport Beach and Migdal Haemek, Israel, both in 0.18 micron and 0.13 micron.

In 0.18 micron, we are already shipping in volume production products that are cross-qualified.

In 0.13 micron, we announced this week availability of design kits for a 0.13 silicon germanium by CMOS platform from Migdal Haemek to complement the technology available from our Newport Beach factory.

An added benefit to the 0.13 micron process in Migdal Haemek is the availability of a high-volume copper back end, which helps improve RF performance and provides an added die shrink for integrated logic.

The new technology has already been adopted for designs in next-generation TV tuners and WiFi transceivers, which together form a greater than $1 billion market, and existing design wins alone have the potential for $50 million to $100 million in wafer sales for the Company.

In the quarter, we continued to show strong design win momentum for new technology across all market segments, with particular strength in the area of complementary bi-CMOS for high-speed analog products and front-end modules for cellphones and WiFi.

The area of complementary bi-CMOS, we have the only broad offering in the foundry industry as most complementary bi-CMOS projects -- or products are fabricated within [IDM].

This quarter, we added a 14 V process to our existing portfolio to address line driver applications, with multiple tape-outs and one product already sampled and ready to ramp production.

In the area of front-end modules, we created industry-leading antenna switch IP blocks that complement our SOI technology and help customers migrate antenna switch for cellphones and WiFi from gallium arsenide-based technology to silicon-based with several designs taped out by a Tier 1 front-end module provider.

Moving to power management, I previously mentioned Korea.

Our momentum in Korea in power management is, well, I guess, somewhat exponential.

Several products already moved to mass production, while others are in difference stages of prototype.

We have won at many companies and are using our design service capabilities to win even more projects.

These projects are being enabled by our design center performing a full from spec to product design survey.

We are happy to announce that our 700 V platform that we started development with [grand tech] of Korea a few months ago is getting very good results and we're employing it in schedule.

Three customers have already designed on this platform.

The main end market is LED lighting, which is ramping very fast due to its strong impact on energy conservation.

Moving to CMOS image sensors, our joint venture with Thales, a medical CMOS-based flat-panel detectors, is moving along very well.

We have received our first PO from a customer for prototype detectors.

Detectors were installed in this customer's system and performed very well, outperforming its current generation solution.

In parallel, we have presented the completed detector in demonstration to three major U.S.

medical equipment companies with great success.

Out of the three, two have already decided to adopt our solution since it is outperforming all current known solutions for CMOS, as well as the non-CMOS-based thin-film transistor and image-intensifier solution, and at that for all performance parameters.

This has well enabled the immediate substantial cost reduction to the overall system, whilst enabling top-end margins for TowerJazz.

This is one of the examples where TowerJazz and our customers share a substantial win-win, lower costs for the customer at greatly enhanced performance and substantial margins for TowerJazz.

This being based upon innovative, one-of-a-kind technology solutions.

We started ramping to mass production a specialty CMOS sensor project to one of our customers whose end customer is one of the major electronics companies worldwide.

The ramp is planned to be very steep, and it can eventually get to hundreds of thousands of wafers per year.

We expect to press release this significant project in the third quarter when the end product is released into the market for Christmas 2010.

Really, stay in tune for this.

It's an exciting application with a market that can be huge.

Looking at our transfer optimization and process services, what we abbreviate as TOPS, in this TOPS PL, we are expediting the plans of the production ramp and increasing capacity and volume production for our customers in all three fabs.

Siliconix in fab one, International Rectifier in fab two.

We are qualifying more and more technologies and products.

A non-released first-year customer has passed quality in our Newport Beach fab and is preparing to ramp to mass production.

In addition, our Asian project is progressing according to plan.

For design enablement, we are continuing to enhance our enablement offerings, making our customers' and potential customer path into TowerJazz easier and shorter.

Recently, we announced collaborations with the IPL Alliance, cooperation with Tanner EDA, as well as our Cadence IC 6.1 offerings.

The above gives the widest possible flexibility for our customers to design into TowerJazz, enjoying world-class process development kits.

A good problem to have is too much work.

As I spoke about, we are operating at our Newport Beach factory and Migdal Haemek six-inch factory at full utilization.

The Migdal Haemek eight-inch factory will also be at full utilization by the third quarter.

To increase our revenue base capability, we have and continue to take a number of steps.

Number one, if you remember last quarter, we announced accelerated plans for additional capacity based on current and forecasted customer demand.

In fab two, located in Israel, we increased our capacity by approximately 30,000 wafers per year.

In our facility located in Newport Beach, California, we increased capacity by 36,000 wafers per year, both to enable these fabs to accommodate the increase in demand.

When this capacity becomes fully available in the third quarter, it will result in increased capacity of approximately 66,000 wafers per year, growing our revenue potential by $45 million with only a $15 million capital expenditure.

Two, we are utilizing our manufacturing agreement with HHNEC in China for outsourcing certain projects.

Three, we are cross-qualifying our tools in Israel with those in Newport Beach for a variety of customers and product flows.

This is to enable greater versatility and flexibility, and hence enable us to optimize our manufacturing plants for our major customers.

Four, we have started turning away low-margin business to free up capacity for higher-margin business.

This higher-margin business is predominantly with customers where we add value, where we have long-term partnerships to do the value that we add.

This will have the effect of increasing our average selling price and hence incremental profitability, beginning in the third quarter.

And fifth, we are considering substantial incremental build-out of our eight-inch facility in Migdal Haemek, presently at 30,000-wafer per month capacity.

Depending upon product mix, the clean room is capable to support upwards of 50,000 K wafers per month when fully equipped.

Finally, I'd like to introduce our guidance for the second quarter of 2010.

We expect the second-quarter revenues to jump to between $123 million and $128 million, a mid-range sequential growth of 10% and 107% year over year.

Our strong guidance is well ahead of the industry's expected growth.

During the Needham conference the second week of January, we shared with Wall Street a target of $500 million 2010 revenue with $160 million EBITDA results.

Already in Q2, we are guiding a $500 million quarterly run rate, and all indications show continued monotonic growth in Q3 and Q4.

We foresee surpassing the $500 million revenue mark and the $160 million EBITDA level.

This is the result of the strong acceptance of our high-value offering and extreme execution in expediting the design to proto to manufacturing cycles.

We have been the number one growth foundry over the past four years.

We expect 2010 growth to be slightly over $200 million from the $300 million in 2009 to over $500 million in 2010.

This extreme growth has been accomplished by winning at major Tier 1 companies who are the undisputed leaders of their respective markets.

These are customers with whom, based upon our performance, we can grow market share and high-value products over many years to come, and these customers have substantial share to give.

For this reason, we are bullishly optimistic on our long-term future, both in revenue growth and in profitability.

I'd now like to hand over the time to our CFO, Oren Shirazi.

Oren, please go ahead.

Thank you, Russell, and hello, everyone.

The first quarter was another successful quarter, starting off 2010 on a high from which we expect to be a record deal.

This is very clear by our achievement of an all-time record EBITDA of $35 million in the quarter and all-time record revenue of $114 million in the quarter and gross profits of $16 million in the quarter, the achievement of operating profit for the first time since 2000, and a non-GAAP net profit of $29 million, or $0.14 per share, in the quarter.

Going into further depth, and I will review the balance sheet and P&L items, whereby you can see improvement in all parameters, as follows.

As of the end of the first quarter, we had $83 million in cash on our balance sheet, more than two times the cash we had as of March 2009.

Our current assets grew from $110 million as of March 31, 2009, to $167 million as of December 31, 2009, with further growth to $180 million as of March 31, 2010.

Our current ratio, which is the total current assets divided by the total current debt, has increased from 1.49 as of March end to 1.72 as of December end, with further growth to 1.85 as of March 31, 2010.

Our long-term debt was reduced during the quarter by $24 million with shareholders' equity growth of $9 million.

Using the targeted 2010 EBITDA of $160 million results in a debt to EBITDA ratio as of March 2010 of 2.56 times, as compared with ratios well above 4 times we had in the past.

Further to this debt to EBITDA ratio improvement, our senior management is highly focused on alternatives to reduce and simplify our overall debt structure.

Currently, we are exploring various opportunities to this extent with our current banks and bondholders, and we target that in the foreseeable future we will be in a position to update you with positive developments in this regard.

This completes my balance-sheet analysis.

I will be happy to receive any follow-up questions in today's Q&A session.

We'll now go to the P&L analysis.

After we reported in the previous quarter a turnaround to GAAP gross profit, we achieved it again this quarter with $16 million of gross profit, and additionally we achieved a positive GAAP operating profitability.

This means that our operations generated enough revenue to cover all the OpEx that we have, which are all the costs involved in operating our facilities, including R&D expenses, marketing and sales expenses, G&A expenses, and depreciation.

Further, we turned around our earnings per share on a non-GAAP basis into a positive $0.14 per share, as compared with $0.02 loss per share in the first quarter of 2009.

Revenue was at an all-time record for the first quarter, reaching $114 million, $66 million higher year over year, with $34 million higher EBITDA, representing 60% incremental EBITDA margin.

More notable is that for this $56 million revenue increase, we had a year-over-year $32 million non-GAAP net profit improvement, representing a 57% incremental net profit margin.

Further comparing to the previous quarter, the $13 million revenue growth from Q4 2009 to Q1 2010 resulted in $10 million higher gross profit and $20 million better non-GAAP net profit, mainly due to the cost reduction and savings done.

On a GAAP basis, we again achieved in the first quarter a gross profit in the amount of $16 million, compared to a gross profit of $7 million in the fourth quarter of 2009.

Our GAAP net loss for the quarter was $36 million.

It's important to note that this figure includes financing expenses of $34 million, a major portion of which are non-cash charges due to the increase in our share price and our tradable securities price.

This, while good for investors showing increased shareholders' value, generates a significant increase in the fair market value of our securities, in particular our convertible bonds.

We generate enough -- on non-cash GAAP financing expense.

Excluding these financing expenses and other, net loss for the quarter would've been $2 million, a significant improvement of $25 million as compared to $27 million in the first quarter of 2009 and $13 million in the previous quarter.

Net profit in the first quarter of 2010 was $29 million on a non-GAAP basis, or $0.14 per share earnings, which is substantially better than the non-GAAP net profit of $9 million, or $0.05 per share, achieved in the prior quarter.

EBITDA for the first quarter of 2010 was $35 million, an all-time record, and up substantially for the $2 million reported in the first quarter of 2009 and from the $23 million reported in the previous quarter.

Gross profit was $49 million in the quarter on a non-GAAP basis, over five times -- sorry, over four times as compared to the first quarter of 2009 and 27% growth over the prior quarter.

This represents a gross margin of 43% compared with gross margin of 21% in the first quarter last year and gross margin of 39% in the prior quarter.

As I said earlier, on a GAAP basis the Company reported a gross profit of $16 million.

Operating profit grew by 51% over the prior quarter to $35.2 million on a non-GAAP basis and significantly improved when compared to that of the first quarter of 2009.

This represents an operating margin of 31% in the current quarter, compared with 2% in the first quarter of 2009 and 23% in the prior quarter.

Looking at our operational expenses as a percentage of revenue is evidence of the continuous improvement in our margins.

Our R&D expenses in the first quarter of 2010 were 5% of revenue, as compared to 8% in the first quarter of 2009, and our marketing and sales and G&A expenses dropped to 9% of revenue, an improvement when compared with 12% of revenue in the first quarter of 2009.

I would like now to turn transfer the call to Nati Somekh Gilboa, our Chief Legal Officer and Corporate Secretary.

Thank you, Oren.

Now I'd like to add the general and legal statement for our results in regards to statements made and to be made during this call.

Please note that the first-quarter 2010 financial results have been prepared in accordance with 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 D 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 to option grants, and finance expenses net other than interest paid, such as 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.

EBITDA is presented as defined in today's earnings release.

EBITDA is not a required GAAP financial measure and may not be comparable to a similarly titled measure employed by other companies.

EBITDA and the non-GAAP financial information presented herein should not be considered in isolation or as a substitute for operating income; net income or loss; cash flows provided by operating, investing, and financing activities; 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.

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

Operator?

(Operator Instructions).

Jay Srivatsa, Chardan Capital Markets.

Thanks for taking my question and congratulations on a good quarter and strong guidance.

There's been some comments made on acquisitions, potentially looking at to increase capacity.

Could you give us a little bit of color on what kind of timing you're looking for and how much capacity you hope to increase?

Firstly, thank you, Jay, for the kind comments.

We had announced last quarter that we were in active discussion, and certainly from a purviewing activity, actively looking for incremental capacity through acquisition.

We are predominantly looking at an asset acquisition, not an acquisition of a business.

We are in serious discussions presently.

If something would materialize, most likely there would be a press release of one sort or another in the end of June, beginning of July for the present opportunities that we're looking at.

But it's very difficult to state from -- no matter how intense discussions are, if it will enter into a definitive agreement.

But certainly, we are looking at accretive capacity and -- on the order of tens of thousands of wafers a month in facilities.

We'd also be looking in regions to where it would have a strategic value for us to have a location.

Next question, on -- you mentioned you feel pretty comfortable about the full-year number of $500 million.

Do you expect the second-half quarters to be sequentially higher or do you see any seasonality in the business in the second half?

No, from every indication we have, Q3 will be stronger than Q2, Q4 will be stronger than Q3.

And as we mentioned in the call, the incremental capacity that we ordered and installed will be fully up and running in Q3 to take advantage of a revenue growth in Q4.

So, it looks at this point that we would have monotonic growth in the second half of the year.

Okay.

Oren, you mentioned about the debt and how you've pared back a little bit.

Can you share with us what your future plans are?

You have roughly about $83 million in cash.

Are you looking to use some cash to buy back debt?

Can you kind of expand on that?

So, it's a little bit sensitive question.

So we are in discussions, and this is why I prefer to just repeat what I said, which is that we are highly focused on reducing the debt.

Although we believe that the 400 -- currently in the balance sheet, you can see these [four hundred oh four], which is 2.5 times debt to EBITDA ratio, which is a very good ratio in our industry.

Still, we are focused, and it is our target to reduce it and to change and to simplify the debt structure of the Company, and we are exploring various opportunities to this extent right now with the banks and with the bondholders.

But since nothing was signed yet, or in a level that can be disclosed, it cannot detail further.

But like I mentioned in the script, we are targeting in the foreseeable future to be in a position to update with positive development in this regard.

All right.

In terms of your gross margins, you've had a nice jump in margins.

Where do you think your longer-term gross margins can go from here?

Oren?

If you check TSMC and other -- and the big four, the best of the benchmark deals -- the best we can, I think, at this current capacity level reach is about 45%, 47%, and we are at about 40%.

So we have room to grow, and then naturally, in -- of course, we will grow with this focus that Russell gave before of a quarter-over-quarter increase.

On top of that, of course we can further expand at fab two mainly, where we have already all the clean room and all the facilities in place and just a matter of additional CapEx to it, and also from the external capacity expansion that relates to what you asked before about the possible acquisition.

So, if we do that, once we do that, of course margins can go up to the range of 50% to 55%, which is really excellent.

Last question and I'll step off the queue.

You -- it looks like the share count has gone up a little bit, which I suspect is some of the bonds got converted.

What do you expect the share count to be in Q2?

The share count, if you look at our release, relates to a number of 207 million.

The share count that's used to calculate the point fourteen -- I mean, the $0.14 per share earnings and non-GAAP, it's 207 million shares.

These 207 million shares is a weighted-average number per GAAP, which is a number that we report -- we have to report.

The actual expected number for when Q2 started is 226 million, which is the current shares outstanding as of today, following some small money-raising that we did in Q1 and some conversions, like you mentioned.

So, just to repeat, to be clear, the weighted average number that is used for calculating the EPS in Q1 is 207 million.

The current outstanding ordinary shares is 226 million.

Thank you very much.

Nice quarter.

Ken Nagy, Zacks Investment Research, Inc..

Congratulations on a great quarter.

I just have one question today.

My question is, what's the average time that it takes for a design win to be transformed into meaningful revenue?

Good question.

Last year, we completed the year and announced that we had a record 308 design wins.

Those that had to happened in Q1, Q2 of last year would be starting, on average, pilot production in the Q3/Q4 timeframe this year, so you're looking, depending on the product type, somewhere between three quarters and five quarters, on average, to start introduction production volumes.

But to reach full volume, you're looking at somewhere between six -- from the start of pilot production -- months at the earliest.

To have a volume production, somewhere about 18 to 20 months away from the design win.

So what we announced today of having 111 design wins for the first quarter, that's, for the most part, would be starting to have pilot production in the first and second quarter of 2011, and starting to ramp into volume production at the end of 2011, lasting for 2012, 2013, depending on the end customer's acquisition of their customers.

So the design wins that we have now is a very, very strong indication of continued growth in 2012, 2013.

And as we mentioned, those design wins, predominantly specialty, they are very nice margins for us, so the profitability goes hand in hand.

Vernon Essi, Needham & Company.

Thank you for taking my questions and congratulations on a GAAP operating profit.

I wanted to just -- this is [not] my favorite question of you guys.

I wanted to just revisit your wafer output and where your footprint is and sort of the revenue it can serve?

You went through a lot of numbers there, and I want to make sure I understand sort of the timing of where you are with certain pieces of that.

I think the last time we talked, you said about 900,000 total per year output was the footprint you have, and I assume that includes the 66,000 you were mentioning on the call.

Is that correct?

Yes.

I think further on you made some comments about potentially adding substantially to your current site, and I didn't know if that was a definitive or is that contingent upon your situation with an acquisition, or what that plan looked like.

It's independent of the acquisition.

As I mentioned, we are now in the Migdal Haemek fab, the eight-inch factory, at about 30,000 wafers per month, or we will be in the manufacturing mode in Q3.

We've already acquired the tools to be there.

The factory, depending on the flows that we're running, could actually be anywhere between 50,000 to 55,000 wafers per month.

So there is another 20,000 to 25,000 of incremental capacity that can be put into the factory.

Depending again on the flow, we would see that having an incremental several hundred million dollars of revenue for us.

So, that's -- the present discussion is with multiple equipment suppliers on trying to structure a large deal that would be beneficial for them in the terms and beneficial for us.

What would be the investment, again, for the -- another 20,000 to 25,000 wafers?

I think you had given a number of the capital expenditure.

What we'd be targeting is somewhere between $60 million to $70 million.

Just from a depreciation schedule standpoint, what would that look like incrementally on an annual basis?

We depreciate over seven years, so it would be $10 million per year.

That's helpful.

I assume that the 900,000 wafers serves the revenue footprint well and above the $500 million for the year, obviously.

I mean, what are we looking at if you were to fully utilize this and load it almost perfectly?

I assume you're talking a much higher revenue number than that, correct?

From our internal manufacturing capability, upwards close to $600 million.

And then, as mentioned, we have outsourcing agreements with HHNEC, but we also have other other deals to where we are taking advantage of outsourcing our capabilities -- for example, the Asian deal.

But off of an organic wafer business, it's upwards of $600 million, maybe slightly shy of $600 million.

And then, lastly, just some discussion on the overall industry.

Obviously, things are running extremely tight across the board, and it sounds like you are in a sort of the interesting problem, which is sort of a nice problem to have, of possibly turning away some business.

Can you just discuss -- first of all, how you go about that?

How you make that as a business decision?

If there is anything you'd like to share on that front.

How you choose certain areas?

I assume it's not just all P&L related, but maybe it is.

And then, also, is there any specific market that you would highlight as being in a situation where they are really stretched and desperate for any production going into the second half of the year?

There's a variety of questions in that question.

Yes, I'm sorry about that.

Think of it as you wish, but those are sort of the two things I wanted to focus on.

I'm sorry about that.

No, you don't need to be sorry for anything.

It's a very good question, or a very good series of questions.

To begin with, we had stated that for the 308 design wins that took place in 2009, that 86% of them were within what we consider our specialty offerings.

14% was digital CMOS.

Now, why would we have design wins in digital CMOS?

For those customers that we have strategic engagements with, we do wish to be a full-service provider, so in order that they would have a one-stop shop or that we would be selling a digital chip that would complement an analog chip, we will go ahead and take on the digital business, even though that in and of itself be might not be very high margin, but in the big picture, to show partnership and to be partners with very large customers, it makes very good sense to supply them with those parts.

So that's something that's in our model, that we will continue to have in our model, as we do believe in being strong partners with our customers.

What we have strongly stated across the customer base is that most anybody that could manufacture at any one of a variety of factories that has no real attachment to us because of the special value that we are offering them, that becomes really a spot type of a deal.

If they need a certain volume, if we have the capacity, we will provide the wafers for them for that volume.

But we don't make long-term commitments, and it's not a strategic partnership.

So those are the customers, then, that we would be turning away is the low volume to where there is nothing strategic in the relationship.

It sounds maybe harsh, but it's not really harsh at all.

Even if it's only several hundred wafers a month, if you're strategic to somebody, then other opportunities will always come across.

If your only value is price negotiation, that's really not where we want to be.

So, that's -- our entire model is driving analog to where we add value for our customer.

We, through adding value, are able to get a reasonable margin and they are able to get products that have value to their end product.

And in many cases, singular through our capabilities.

Did that answer your first part of the question?

Absolutely, that was very helpful.

And the second part was what, I'm sorry?

Just to talk about any specific end markets where you're seeing real extended lead times or just desperate for capacity through your services or where people are just -- obviously, that's happening across the board, but are there any examples that look to be in worse shape than others?

I don't know worse shape or not.

I think it's a very good issue to have.

As I mentioned in the call, having too much business is the best type of problem that a person could confront, right?

(multiple speakers) Certainly for you it is.

I guess I'm asking it from the other side of it.

If you're trying to supply, obviously, some mixed-signal ICs out there and you can't find a good manufacturing source to fill it quickly, you're going to have some problems.

So that's the sort of -- the motive for the question.

I think if you're looking at what segment really has huge demand at the moment, multiple power management devices are in very, very strong demand and all front-end modules -- cell phone front-end module devices -- are in very strong demand.

Cell phone is growing very, very big at the moment.

So the end market -- I mean, the end customers are having very, very strong demand in that area.

Controllers, transceivers, it's a big market.

Just to elaborate on the power side, you're talking about more of the local [p mix] type devices or across the board in terms of the positioning of the voltage and power?

Across the board.

It's -- power management devices really run across the board.

They interface to all digital for many consumer applications.

Jay Srivatsa, Chardan Capital Markets.

I had a quick follow-up.

You had mentioned previously about achieving GAAP profitability in the second half.

I want to find out if you are still on track to do that.

Yes.

Jim Stone, PSK Advisors.

Congratulations, gentlemen, on a great quarter.

I wonder if you can comment a bit on the competitive environment, who you worry about the most.

And then, also, in terms of the design wins, could you talk about the design losses where people went to a competitor and then some of the reasons they might have gone to a competitor?

The first part of the question, I can answer very freely and easily.

I have to think if the second part of the question I want to answer at all.

But on the first part, we have in Korea, as I mentioned, a very, very booming business within power management.

Who is our competition in Korea?

It's really two local companies.

It's MagnaChip.

Now MagnaChip have a very, very strong financial difficulties, so that disempowered them, in some cases, for areas that we're involved in right now.

And Dongbu.

Dongbu has very, very strong capabilities.

They receive technologies initially through Texas Instruments, and it's a very good company.

In the Dongbu model, however, they are also an integrated device maker.

So in some of their model, they compete with their end customers.

Or with their customers.

In our model, we are a pure-play foundry.

Although we offer full design service for our customers, we make absolutely no products that are sold into the end market.

It's not in our model to be an integrated device maker, so our customers have a lot of assurety to work with us, that any product we do, any IP that comes into us will never be used to make a product that goes against them.

And I think that that's a very strong difference for us.

However, that being said, in Korea, both MagnaChip and Dongbu are good companies.

So, we look at them, we have to benchmark against them, and we have to win against them.

Overall within the -- within our industry, as much as TSMC is the lead digital provider in the world, they also have very good analog capabilities.

So, we always look at TSMC, understand what they're doing, and try to make sure that we offer things to our customers that would be looked at to be of value equal or better from what they could get from TSMC.

And there are offerings that we have that TSMC isn't involved in, but in some offerings, TSMC is very, very good.

I mean, in all offerings that TSMC has, they are very, very good.

But there's offerings that compete with us to where they are also very good.

So that's really, for us at the moment, the major things that we look at.

Now there's always other foundries that you look at.

You try to make sure, see what they're doing, what they're not doing, but for the most part, those are those that we look, we try to understand what they're doing because they're involved in strategic areas that we're involved in.

Now, who else is involved in ours?

There's a multiple grouping of foundries that have competitive technologies to ours, but not very many that we lose to.

In the case of our high-end RF offerings, the major competition that we have is IBM.

Now, IBM is, as well, certainly not a pure-play foundry, so they don't have the same type of a model at all that we do.

But IBM has extremely good technology and they are certainly leaders in multiple segments of what they do.

So, that would be our major competition within the high-end RF.

Now, that in and of itself, really does answer your second question.

I'm saying, are there people who have gone down the road with you, and then decided not to go ahead for other than their end product isn't going to go out or whatever?

I'm talking where you lost because of a competitive issue.

I told you who our major competitors are, so if we would've lost, it would've been against one of them.

But I certainly don't want to explain why we would lose on a conference call.

Understand.

Thank you very much.

Robert Katz, Senvest.

Very, very nice quarter.

Congratulations.

Two questions.

One is an easy question.

What is your tax rate and what do you expect it to be going forward, especially as you expand into different geographies?

And second question is about the number of wafers shipped in the quarter, recognized for revenue, and wafer starts.

And you talked a bit about taking on higher gross margin business.

How do you see your price per wafer moving forward?

And you are expanding capacity, but is there also an expansion in the price per wafer?

I will start.

It's Oren.

About the tax rate, so it's actually very interesting.

The average -- the weighted average tax rate is very low, and I will explain why.

So for the Migdal Haemek business, we have a huge amount of accrued NOLs, and net loss carry forward which, under Israeli law, carries forward forever without any limitation of time, and we have a huge amount of $1 billion.

This is not necessarily from accounting losses.

This is also for all kinds of tax credits because of the position of the location of the fabs.

The one fab, two fab in the north part of Israel.

So, basically, even if we are having a net profit, we are not paying taxes until we cover an accumulated amount of net profits of more than $1 billion, which is not in -- at least the upcoming one year.

So the tax rate for the Israeli operations is zero for the upcoming foreseeable future and much more.

About the Newport Beach, the California operation, so there are two types of tax.

There is the California state tax from which we actually are, again, enjoying the fact that we have NOLs in Israel, because under the California state tax laws you can do a worldwide global calculation of that, and you will get a credit for the Israeli NOLs.

So, also this rate is about zero.

The only thing that is left is the fed, IRS tax rate, for the government of the U.S., and also end that, just have the NOLs.

Actually it has $100 million of NOLs that it had from before Tower purchased that.

But under some change of control provision, we can only utilize like $2 million to $4 million per year of NOLs.

On top of that, there are some tax credits.

So basically I can tell you about Q1, that the -- while the provision in the books was about 30% from the tax -- from the income before tax of Jazz and 0% from the Israeli operation, still the total amount paid was only $700,000 cash payment, which you will see in a day or two the full financials of Jazz on a Form 10-Q and you will see that it is about -- less than 10% of the Jazz profit before tax.

So on a consolidated basis, this is something which is, of course, very small.

So we are enjoying in that front, actually.

This was the first question about the tax.

About the shipment and all that, so basically fab one and fab three, fab three is the California fab of Jazz, so fab one and fab three were in very high utilization number, north to 90%, and fab two was below this amount, which is what gives us what Russell mentioned before, the future growth when fab two will reach this amount of -- these percentages of more than 90%.

Alright.

And [demand for] number of eight-inch equivalent wafers that you shipped in the quarter?

We don't disclose this data per fab, actually on a usual basis, but like I mentioned, it was below 90.

I can tell you it was above 50, so somewhere in that range.

About 50, and that's eight-inch equivalent.

Okay, thank you very much, and great job, guys.

[Shree Nadason], Lazard Asset Management.

Just some housekeeping stuff.

I don't know I'm not sure if you provided CapEx guidance for the year.

Is there a number for that?

And also, can you clarify the non-cash financing costs?

There's a big difference between cash and non-financed -- I'm sorry, non-cash financing line in the -- in your quarterly results here.

Is the difference all due to the accretion amount embedded in the convertibles?

And then, my last question is, you've laid out capital usage plans for the year in terms of CapEx and potentially acquisitions.

Can you talk about what your cash usage might be in terms of ranges for the year for those two activities?

Sure.

The first was the CapEx plans for the year.

So, we did not release it, but this is not -- before I will relate to what your third question, so the baseline CapEx expenses, including sustained capital needs and IPs and capital, this amount is about $15 million, one five, per quarter.

And in Q1, it was actually $13 million.

So this is the range of the amount of the CapEx payment.

Now, what you asked about the financing expenses, this is indeed very interesting, and you see it on the non-GAAP that the cash financing expenses were $4 million, but the total accounting GAAP financing expense was $34 million, and this $30 million difference created this increase in the net loss.

So this $30 million -- the $4 million is interest -- actual interest that was paid to our bank and bondholders.

The $30 million is what I referred to in my script and also in the press release, we wrote about it, this is under U.S.

GAAP and also actually under IFRS, once there are certain vehicles, like certain types of warrants and certain types of convertible bonds, that have to be presented under the accounting GAAP at their market value.

Or at their fair value, if there is no market.

So, we have some kinds of these vehicles, and these vehicles in Q1, their market value, of course, went up very nicely because following the increase in the stock market -- of the stock in the stock market, so the stock, I believe, went up in Q1 at about 60%, which created about 60% increase in the value of these bonds in the market because these bonds are in the money.

So, this is the reason for the need to adjust it on an accounting basis by an additional $30 million, which goes against the P&L.

Of course, this has no cash meaning because the par value of the principal amount that is payable by TowerJazz is the same.

But, still, it has to be presented in a higher value than the actual liability is because of these accounting rules.

And now, your third question was about how much CapEx will we need in order for the future plans, right, to (multiple speakers)

No, [you're] talked about, I think, potentially making acquisitions, right.

To add to CapEx, add to your capacity.

So, I'm wondering, what kind of cash cost that might entail.

I know so you may not be able to provide a specific number, but, roughly speaking, what kind of commitments might that entail?

Several tens of millions.

[George Berman], JP Turner.

Phenomenal quarter, gentlemen, congratulations.

I'm a little bit disappointed that you will not be able to utilize the entire $1 billion NOL this year.

The reduction in long-term debt by $25 million, was that simply due to some of those convertible debentures being converted to common stock or did you actually pay down debt?

No, it was conversion of bonds that were in the money.

How many of those bonds are still left?

I know from the old Jazz time, you had a convertible debenture out there.

Yes, but the convertible debenture under the Jazz label that you know, which is $123 million, they are totally out of the money.

They are at $4.07.

So nothing from there could be converted.

I mean, before the stock will be above $4.00.

Right, right.

So how many of those -- the debentures that were converted are still around?

60 million.

60 million.

So if they were converted, your debt would drop to 340, then, roughly, yes?

Yes, correct.

Okay.

And the previous question was concerning the large financing expenses of $33.7 million under a GAAP number in the first quarter.

How much of that is actual cash outlay for interest and how much is the accretion value, non-cash imputed interest?

The cash is $3.6 million.

This is -- if you look at the table below the press release, you will see an adjustment between the non-GAAP and the GAAP.

So, you will see the $3.6 million is the cash and the other $30 million is not cash, and it's just an adjustment to fair market value.

Brilliant.

The HHNEC relationship seems to be now coming more and more into play where you can probably lay off some wafer manufacturing to them.

How valuable do you think that is for you and where do you carry that on your balance sheet?

The outsourcing to HHNEC really has little to actually nothing to do with the equity interests in HHNEC.

It's a separate agreement.

So the outsourcing agreement sits separate to it, and that agreement is important to us, and they are a good manufacturer for us and the relationship is strong.

As far as the equity, where it's carried on the balance sheet, Oren?

Yes, so under accounting GAAP, this was valued at the time of the acquisition of TowerJazz of $17 million by professional experts at the parties, very conservative number probably.

Currently, there is some market report that HHNEC is planning some merger with Grace, it was [release] -- it was stated, and then they plan to do an IPO and people -- analysts value this as post-merger and IPO will be worth, like, $1.2 billion, and our share will go down to like 5% or 6%.

So speculatively, it is up to $60 million or $70 million potential value.

But since it did not happen yet, we still are carrying it at $17 million under the accounting rule.

You cannot just increase the value unless there is really a liquid market.

[Ron Senator], [Fair Fund].

Very nice quarter.

Two questions.

One, compared to your recent -- or to the first quarter's EBITDA margins, and to the expected ramp up in utilization, your annual EBITDA margin looks rather conservative.

Is this just for the sake of conservatism or is there any change in the cost structure because you want to obviously bring some additional capacity on board?

What's behind this?

And then, I have another question on capital structure, if you don't mind.

In answer to your first question, I did state during the call that we believe that we'll surpass the $160 million EBITDA.

So, that's -- when we started the year, that was the target that we gave to Wall Street, was the $500 million at $160 million EBITDA.

But I would agree that it appears that we will surpass it.

You know, given the very impressive incremental margins that you experienced in the first quarter, is this something that we can look forward as -- sort of as a representative margin because, honestly, I'm trying also to analyze the implication of the Asian contract going forward?

How much of a deviation from corporate margins is that?

Actually, the Asian contract has incremental margin which is very similar to any incremental margin we make from our regular -- from the average wafer.

By coincidence, this is how it came out to be.

So, it doesn't change the margins.

It just improves, of course, the bottom line and the top line.

So, when -- at some point in time, when the Asian contract is being substituted by another -- by other business (multiple speakers)

It will make no difference.

Last question, on capital structure again, given the very large difference between the current outstanding shares and the potential fully diluted shares outstanding, can you elaborate a little bit on the capital notes?

Under what circumstances could they actually be converted?

What are the terms that are actually applicable to that?

The 400 million?

(Multiple speakers) related to that in the past, and again, I cannot talk too much about it because it relates to what I said in the beginning that we are really now in very advanced discussions and we are exploring currently various opportunities with our banks and bondholders in regard to the debt structure, and this is somehow related, so prefer not to get into that at this point.

And like I mentioned, we are really focused to have, in the foreseeable future, a positive update about all these issues.

So we are very, very sensitive for us to enter into that in the middle of the discussions.

But under current conditions that were actually -- were published in the latest 10-K, the conversion rate, the $1.42 per share, is this applicable to the current capital notes?

Yes, to most of them.

But, as we stated in the past, there is a lot of things that -- limit or disable opportunity to go forward with that, like that it was not registered, that it was not approved by the SEC to go forward with that process, and all that history.

So, basically from 2006, there was no update in that issue.

Thanks.

Good luck.

There are no further questions at this time.

Mr.

Ellwanger, would you like to make your concluding statement?

Certainly.

So as talked about during the call, we did have, I believe, a very strong quarter.

The very substantial amount of design wins, this 111 record design wins, is a very nice indication of things to come, of what's going to happen with our growth over the next years.

In the five years I have been in the Company, the major difference that we have now versus five years ago is the reception that we have at the Tier 1 companies.

The way we are treated, the excitement that they have to work with us, and the wins that we are gaining there.

And that really does fuel excitement for everybody in the Company.

We will be presenting at the UBS conference in New York on June 9.

I think our slot is at 4 PM.

We invite everyone that would have opportunity to come to the presentation.

I think we will be showing many things that are exciting in our business, many things that are exciting about our products, and you will see why we are gaining good traction with very high margins.

I thank you all for your interest, and would as well, if you're in the neighborhood, invite you to visit our facility at Migdal Haemek or at Newport Beach.

I think the greatest thing that you'd see is the excitement among our employees to be part of a Company that's achieving what we are achieving.

And that excitement becomes really contagious.

So, again, I thank you very, very much and look forward to talk with you either prior to the next quarterly release, if we have something exciting, or at the UBS conference.

Thanks and bye-bye.

Thank you.

This concludes the TowerJazz first-quarter 2010 results conference call.

Thank you for your participation.

You may go ahead and disconnect.