高塔半導體 (TSEM) 2012 Q2 法說會逐字稿

Welcome to the TowerJazz second-quarter 2012 results conference call.

All participants are currently present in a listen-only mode.

Following management's prepared statements, instructions will be given for the question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded August 9, 2012.

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

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

Ms. Levi, please go ahead.

Thank you and welcome to TowerJazz financial results conference call for the second quarter of 2012.

Russell will open the call, followed by Oren with a discussion of our results in the second quarter of the year.

Before we begin I would like to remind you that some statements made during this call may be forward-looking and are subject to uncertainties and risks 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 filings with the Israeli securities authority.

They are also available on our website.

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

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

Russell, please go ahead.

Thank you, Noit.

Welcome to our second-quarter 2012 results conference call.

During the call I'll review our current areas of focus and why we believe these focuses will provide a base of several diversified growth engines for the future.

However, I will begin by discussing the capital notes, their history and present status; and then, because this past month saw the one-year anniversary of the Japan Nishiwaki facility acquisition and as next month is the 4-year anniversary of the Jazz merger, I would like to review the activities and return on each of those.

So I'll begin with a description of the notes.

In 2006 and 2008 our two lending banks, Bank Hapoalim and Bank Leumi, converted debt into a vehicle of capital notes; and as part of this restructuring of the bank debt, the Israel Corporation invested new money into the Company.

In all, the three capital noteholders invested $550 million in cash and/or debt conversion, and received capital notes convertible post-split in 27 million shares comprised of 14 million being held by the Israel Corporation and 6 million being held by each of the banks, representing $20.70 price per share underlying each capital note, which is more than 2X of the current stock price.

While capital notes are solely an equity vehicle, with each note being able to be converted into one share, there is no coupon associated with the notes nor any type of strike price.

It is important to mention that under Israeli banking law each bank is restricted to hold not more than 5% ordinary shares in a company of which it is a debt holder.

Hence the banks cannot convert and hold more than 1.1 million shares underlying its notes.

Bank Hapoalim and Bank Leumi asked the Company to file a registration statement with the SEC in order to register 2.7 million and 3.0 million ordinary shares underlying capital notes, respectively, which would be issued if either or both banks wished to convert said capital notes or a portion thereof into shares.

The Company fulfilled its obligation to the banks by filing the registration statement, and the shares underlying the notes were approved for registration by the SEC.

The Company views the banks as knowledgeable and experienced stakeholders who have expressed no intention to immediately act on this registration in the market.

The Israel Corporation has not requested that any portion of their notes be registered and has formally stated that it does not intend to sell or trade its shares at the present time and, as well, has expressed its belief in the Company's strategy and growth plans.

The Company continues discussions with the three noteholders towards potential solutions that would be positive to all shareholders, but cannot commit to the timing or degree of participation, or if there will be any participation at all.

So now to refer to the first anniversary of the Japanese fab acquisition and the fourth anniversary of the Newport Beach Jazz merger.

In June 2012, we celebrated the first anniversary of the acquisition of the Nishiwaki, Japan, facility from Micron.

For this facility, which included a three-year binding revenue contract, we paid $40 million cash and 15 million stock.

A full ROI of the cash and equity investment was achieved through the first nine months of Nishiwaki cash creation.

In addition to the nine-months' ROI, we own a facility that can produce 60,000 wafers per month with an asset value recently appraised by a third-party expert at $160 million.

Within this first year, we have generated from synergies, consolidations, and a headcount resizing which is more in line with our foundry activities a reduction in operational costs by approximately $30 million per annum.

This should result in a steady-state operational margin increase of about 10 points against the previous baseline performance of this facility.

Indeed, the Nishiwaki factory has exceeded all of our forecasted metrics.

I will discuss new business initiatives in relation to this facility in a few minutes.

September is the four-year anniversary of the Jazz merger.

We will review a few highlights here as well.

In the instance of Jazz, we paid zero dollars cash and $20 million in stock, which also had a full return off of Newport Beach created cash within the first nine months postacquisition.

From a pre-merger EBITDA performance of $15 million per annum, Jazz apple-to-apple now creates $60 million to $90 million EBITDA per annum.

In addition, we have managed to gain new technologies and new customers by cross-sales and cross-training, major cost-reduction synergies, dual-sourcing from our fabs, and very importantly, at the time of the acquisition we introduced a new branding and focused actions to be a true analog specialty foundry.

This enabled us to surpass the $500 million annual revenue level, bringing us to the enviable position of the number-one specialty analog foundry worldwide by revenue and, in so doing, gaining multiple Tier 1 customers and continued increased market share.

One of the greater benefits in the manner we have performed these two acquisitions is that we have not tried to assimilate the acquired companies' culture into the mother culture, but rather to take the best of each and create excitement for all by having an evolving culture that is focused on our market and customers.

So moving back to the Japan, a few key updates.

We now have a number of top-tier integrated device manufacturers for whom we actively are qualifying their flows into the Nishiwaki fab, with production expected to start from early 2013.

A top-tier existing top-five TowerJazz customer has invested in tools and agreed to a take-or-pay contract for one of its most advanced flows to be transferred into high-volume manufacturing in Nishiwaki.

In addition, most recently a top-tier Japanese automotive supplier selected us and began in the second quarter to design to our shallow epi platform, targeting high volumes within the next few years.

We are also in advanced negotiations with a premier Japanese IDM who is planning to shut down a highly specialized lower-volume factory with the aim of transferring all of its product for manufacturing at our Nishiwaki facility.

We also see strong sales synergies by having a Japanese fab to garner business for our fabs elsewhere.

Having requested the local Japanese presence to be their interface, another Japanese IDM is in advanced stages of qualification in Migdal Haemek, and there are pre-wafer engagements with multiple Japanese customers for additional manufacturings in either Nishiwaki, Migdal Haemek, or Newport Beach.

In Korea, we have over 40 active engagements.

This has been a part enabled due to the proximity of the Nishiwaki fab as well as due to an extremely strong sales and technical support team in Korea itself.

As the design tape and volume continues to increase, we have added additional technical resource to the Korean team to augment our already-strong team in supporting our growing customer base and needs.

This is part of our natural progression as we focus on exceeding our Korea and customer base demand and as many leading-edge reference designs for consumer, cellular, medical, and automotive products are now being developed by the Korean companies.

On June 21, 2012, we held the TowerJazz Technical Global Symposium in Korea.

This was our second symposium in Korea, and this year's event showed our strong brand within Korea, as the attendance was 2 times the prior event, with over 120 participants represented by 47 IDM fabless and design companies from both current and potential customers, looking to TowerJazz for solutions on new opportunities.

The event commenced with my keynote, which highlighted our latest technological advancements as well as our 2012 theme of the pursuit of excellence.

As there were, following me, multiple detailed technical presentations from each of the business units, my keynote focused mainly on TowerJazz values and corporate philosophies.

The post-conference survey results were extremely positive, demonstrating again that our goals and trajectory in reaching them are that which our customers desire of us, and that our beliefs are actual customer-facing actions.

We also provided a technical overview on leading edge specialty process offerings, shared our design enablement capabilities, such as our sophisticated design kits, accurate models, and comprehensive analog IP portfolio.

The survey results indicated that the attendancies found all relevant and beneficial.

We will host our seventh annual TowerJazz Global Symposium in October 31 through November 1 in Irvine, California, right next to our facility in Newport Beach.

This two-day symposium will focus on our aerospace and defense offering, as well as on our commercial technologies, and will offer updates on our specialty technologies such as high-speed silicon germanium, CMOS Image Sensor, Power Management, and others, as well as our design enablement solutions.

We will provide case studies from our customers and presentations by industry experts and leaders in academia.

In addition, on December 4, 2012, we will hold TowerJazz Symposium in Tokyo, Japan, an event we are very much looking forward to hosting for the first time.

I would like briefly to update our initiative in India that we announced last quarter.

To remind you, this was an important business opportunity for us to expand our presence in the Indian market through an initiative by the Indian government to build a 300-millimeter factory.

This initiative would enable us to build long-term roadmap towards 300-millimeter wafer size, 90-nanometer analog technologies, as well as companion chips and deep sub-micron technologies.

It also provides us a major revenue stream -- or would also provide us a major revenue stream during the portion of fab buildout and subsequent fab operation, and would give us a specific portion of the fab capacity for our own customer needs.

Our consortium is very strong which includes a leading Indian infrastructure conglomerate, Jaypee Group, as well as a leading technology firm, IBM.

We received a positive feedback from the Indian government within the past weeks that our consortium is now going to the next step in the approval process.

We expect to receive a decision before year's end, but again can give no guarantee of timing or if our consortium will ultimately win the selection.

Now I would like to update you with regard to our business unit main focuses and activities, as mentioned, giving special attention to engines of growth.

For RF and high-precision analog, the latest growth engine for that business for the next two to three years is the explosion of silicon-based front-end modules for smartphones, tablets, and WiFi products.

This market is growing exponentially for us due to the convergence of several factors.

The strong growth of smartphones -- each smartphone has multiple front-end modules to support multiple standards versus single front-end module and older phones.

The change in technology from gallium arsenide to silicon -- this is occurring today for the antenna switch, with most generation designs targeting silicon-on-insulator, for which we are a leader, versus gallium arsenide PHEMT, which is the preferred technology for previous and current generations.

This is also beginning to take place for power amplifier functions, where we have design wins with our silicon germanium technology, versus the current gallium arsenide HBT incumbent technology.

And finally, the proliferation of wireless beyond the smartphone, further fueling this market through the growth of tablets and WiFi-connected peripherals.

We continue to see strong design traction for our newest SOI CMOS platform for RF switch applications and mobile phones and wireless LAN front-ends.

We expect to ramp this newest process later this year and into 2013.

Another significant growth engine for this business unit is the propagation of our high-performance SiGe and higher volume consumer products.

Two good examples are the use of silicon germanium in high-speed wire connectivity such as Thunderbolt/Light Peak and USB3 interfaces, in some cases displacing simple CMOS interfaces due to the higher data rates required, and the use of our low-noise silicon germanium technology in GPS low-noise amplifier receivers, which are beginning to displace the incumbent gallium arsenide technology.

We also continue to see strong traction in high-end SiGe.

On the technology side we announced breakthrough performance in a demonstration of a 110-gigahertz phased array radar designed by University of California-San Diego in our industry-leading SBC 18H3 SiGe technology.

On the commercial side we announced a breakthrough product with Phasor addressing satellite communications and radar built on our advanced SiGe platform.

In Power Management, there are three areas which we expect to fuel growth in this segment -- share gains in the large-display driver market, our 700-volt technology for LED lighting in consumer appliance, and the continued migration of Power Management production from IDMs towards foundries.

In the area of display drivers, LED, LCD, plasma display drivers, today we have only a small share of the total market because of our late investment in this area relative to that of our competitors, but now have a distinct technology advantage with our 0.18 BCD process, good initial production volumes, strong design win momentum, and very good customer traction particularly in Korea, where we have made a strategic investment in the past several years with a local office and strong local technical support.

For this reason we anticipate strong market share gains in the next several years in this very large market.

The second major area is with our flagship 700-volt technology.

In the short time since we announced this technology, we have had strong design win momentum for LED lighting applications, a press announcement with Samsung on the use of this process, and now initial production orders which are expected to ramp over the next few years to a very significant portion of our total Power revenue.

In addition to LED lighting, we have opened a new market space with high-side version of our 700-volt process that is being adopted by customers to drive IGBT and MOSFET or gallium nitride power devices for many consumer appliance applications.

The final major area of growth in Power Management is where today the IDMs still dominate the market.

But with our 0.18 BCD technology with embedded NVM and strong investments in design enablement, we are supporting more fabless design startups and are partnering with key IDMs to complement their internal technology, seeing that typical Power Management products today are built in IDMs in 0.5 micron lithography for some more advanced 0.18 micron node.

Today we produce leadership products in the area of load switching, DC-DC converters, LDOs, as well as highly integrated digital Power Management.

And in addition to expected growth in these more traditional areas, we see strong design win momentum in new areas, one example being power-over-ethernet, where today we have no market share, but a differentiated technology and good initial design activity.

During this quarter we continue the strong ramp of both Class D audio and load switch products built into leading LED TVs, PCs, and tablet end-products.

We also had a strong spike in new design activity for 700-volt, targeting the LED lighting as mentioned previously, and received some initial risk production orders.

We continue our work with Samsung on high-side 700-volt for power inverter applications.

During the quarter, we also achieved AEC Q1000 automotive qualification for our 0.18 BCD platform in support of a major Korean automotive design win.

This will help expand the application space of our existing platform to this new large market segment in both Korea and elsewhere.

Moving to CMOS Image Sensor, we see four major growth engines.

A continuous growth in the high-end high-margin still photography and cinematography -- our technology targeted specifically to that market gives excellent performance in low-noise, low dark current, and efficiency-driven sensitivity, which places us to be among the leading edge of the technology in this market.

Our pattern stitching technology allows large-format sensors and, combined with our in-house color filters and micro-lens processing, provides very strong roadmap for our customers.

We also see strong traction coming from very distinguished Japanese imaging companies, now that we also have a state-of-the-art manufacturing facility in Japan; and we have begun to see these activities having resulted in a very large project with one of them.

The Nishiwaki facility in particular has a very good reputation in very-low dark current performance, which is required for the high-end DSLR market.

The second area is medical and dental X-ray sensors.

The very strong market of intraoral dental sensor, of which we have a major share, is now growing into extra-oral and medical large sensors.

Our patented stitching with our unique pixel technology and very high yields of large-format X-ray sensors makes us the first choice for all the major players in this market.

In the X-ray market we continue to win more and more business from Europe and Korea, while this current business remains stable.

We just announced a very successful wafer size sensor development with a UK partner, Rutherford.

That is in addition to several such products we already run in mass production and at a very high and stable yield.

The third area is the very fast-growing 3D camera market for gaming and gesture control applications.

In this area we joined forces with leading companies to develop state-of-the-art technology that is also used for automotive applications, another high-growth engine for us.

Lastly, the fast-growing industrial vision market, in which we see a lot of success with many of our European and US-based customers, and now we see also penetration into Japan.

As far as technology developments, our 0.18 or 0.16 micron periphery and 0.11 micron pixel design is on schedule, and we expect to release this advanced technology in the fourth quarter this year.

We already have two leading customers using this technology as early adopters, one of which we expect will drive into very high volumes.

For Mixed-Signal/CMOS, our main focus of this unit is to drive customers to use the TS18 flow established in our new fab in Japan.

This flow is using well-established technology in TowerJazz for Mixed-Signal/CMOS, and it forms the base platform for our specialty offering.

We are in a process of qualifying it for automotive, believe that this will be specifically attractive for automotive customers, especially those based in Japan.

A broad base of customers in Southeast Asia will be well served by this mature technology and will enjoy the outstanding quality and accessibility of the Japanese factory.

We continue to expand our offering and support for specific growing applications such as timing controllers, RFID tags, high-speed voltage translators, analog switches, and many more.

Significant growth engine utilized a new offering in the half-node of 152-nanometer, providing an excellent opportunity for customers to get a significant cost-reduction solution for 0.18 micron design.

Finally, as mentioned, our IDM transfer -- or the specific name, our TOPS business unit, which stands for transfer optimization and process services, has launched multiple IDM projects in Japan and expanded some of our customer production into Migdal Haemek.

As mentioned, we won our first Japanese IDM transfer into Migdal Haemek, which project is in the qualification stage.

We also moved into production with our first Migdal Haemek MEMS customer.

I would like now to mention the outlook for the coming quarter.

For the third quarter we provided a revenue guidance of between $152 million to $162 million and mentioned our expectation to continue the margin improvements which we realized in Q2.

In general and looking forward, we previously stated that the cornerstone of our success is our close relationship with our customers wherever they are.

We focus to intently and genuinely listen to our customers' input and drive quick change throughout the Company whenever we see a disconnect between how we view ourselves versus how the customer views us.

For most all of our technology platforms, our technical roadmap is aligned with our customers -- and specifically with those customers who are acknowledged worldwide leaders.

And in many instances, our developments are performed to their express multi-generation device output requirements.

As we continue to drive a performance-based trust from our customers, which also then results in providing a unique value to them, we are confident to continue to move forward to lead our specialty analog foundry segment.

We have expressed on multiple occasions our 2012 theme, that being the pursuit of excellence, and as well explained some of our activities within that pursuit.

We have much good happening within the Company, many avenues of growth, and multiple new activities.

One critical focus within our culture is, even in the midst of great growth and excitement, that we have and maintain a common understanding that at times the most sublime innovation is simplification.

Maybe the truest test of a great teacher or a master is exactly that -- the ability to simplify.

We target growth with an underlying philosophy to, one, drive industry-leading performance outputs without added cost and unneeded complexity; and two, to improve efficiency and reduce process-based bureaucracy, which in turn yields speed, a key factor to success.

So to close my remarks, TowerJazz as a business remains very strong.

We are in position to bring our analog specialty leadership to the next level.

In 2010 we took the number-one position in the specialty industry.

In 2011 we extended that lead by close to $100 million compared to our closest competitor.

And if we look at our closest two or three competitors, their revenue has remained fairly flat over the past years.

In 2012 we look to extend this lead even further.

Our first half of 2012 revenues are 29% higher than those of the first half of 2011, a figure which is well ahead of our industry peers' performance.

One thing is for sure -- time is the teller of all truth.

We are excited to see the story that comes at the end of the next few years.

Much excitement, much achievement, and a tremendous employee force that is full of passion.

With that, I would like now to hand over the call to our CFO, Mr. Oren Shirazi.

Thank you, Russell, and hello, everyone.

Looking at our Q2 results, it is clear that we had an outstanding quarter from many financial aspects.

We significantly improved our margins as compared to the previous quarter from $10 million to $12 million range, or by 5% to 7% data points across the board.

We achieved $52 million EBITDA, which is 28% and 42% better than the comparable periods.

And we achieved $42 million in positive operational cash flows, or $33 million positive cash in flow net of payments associated with the Japan efficiency plan Russell described.

Our second-quarter revenues grew 21% year-over-year to $169 million, slightly above the midrange guidance we provided three months ago.

Revenues for the first half of 2012 grew 29% by $76 million over the first half of 2011.

And even with the 7% forecasted sequential revenue reduction, we are forecasting a 12% to 14% revenue increase in the first nine months of 2012 as compared to same period in 2011.

We strongly improved our non-GAAP profit while reporting operating profit of $53 million or operating margin of 31%, an increase of 44% over last year and 31% over the prior quarter.

On an EBITDA basis, we reported $62 million, which is 42% over $36 million as reported in the same quarter of last year, excluding the one-time gain on acquisition, acquisition-related and transaction costs, and 28% over the $40 million as reported in the prior quarter.

We greatly improved our margins.

As compared to the prior quarter, gross margin improved from 35% to 40%.

Operating margin improved from 24% 31%.

And net margin improved from 20% to 27%.

On a GAAP basis, comparing the quarter to the same quarter last year, revenue grew by $29 million and net loss was $9 million, which is $8 million better than last year's bottom-line results, excluding the one-time acquisition gain, and $10 million better than the previous quarter's bottom-line results.

We ended the quarter with $171 million in cash balance and short-term deposits, demonstrating growth as compared to $101 million as of December 31, 2011, and $158 million in the prior quarter.

During the second quarter of 2012, we executed a cost-reduction plan to increase the efficiency of our Japanese facility, including a reduction in workforce of 280 employees from the Japanese employees' base.

This will enable $30 million in annual savings, which will significantly improve our margins.

Payment in regard to this cost-reduction plan of $9 million made during this quarter is presented under cash flow from operating activities.

One-time expense of $6 million are included in the statement of operations for the second quarter of 2012 under a separate line named Reorganizational Cost.

No additional expenses are expected to be accrued in future periods following execution of the above-mentioned plan.

As we recently announced, we completed a reverse split of our shares at a ratio of 1 for 15 to regain compliance with the NASDAQ minimum bid requirement and maintain our stock listing on the NASDAQ market.

The reverse split reduced the number of our ordinary shares to approximately 22 million shares.

Similarly, the underlying shares to be issued from conversion of our pending convertible securities will be reduced by the ratio of 1 for 15.

Moving to the balance sheet analysis, over the past months we have succeeded in strengthening our balance sheet.

We improved our current ratio, which is our current assets divided by our current liabilities, from 1.16 times at the end of 2011 to 1.66 times as of June 30, 2012.

We also improved our net current assets profit $36 million as of the end of last year to $139 million, with a reduction in our net debt to EBITDA ratio to a ratio of 2.1X.

We also reported $152 million in shareholder's equity and $908 million in total assets as of June 30, 2012.

We increased our cash balance to $171 million, up from $101 million at the end of the year and $158 million at the end of last quarter, mainly from the following activities.

During the second quarter of this year we generated $42 million from operations, or $33 million including $9 million payment due to the previously described Japanese efficiencies plan.

We also received $14 million from the GE Credit line drawdown at LIBOR plus 2.6%.

And we invested $26 million in CapEx investments.

Moving into the P&L, as Russell mentioned earlier, our revenue increased year-over-year by 21% to $169 million.

We are reporting an EBITDA of $52 million in the quarter which is a 42% improvement over that of last year which was $36 million, excluding the acquisition-related costs, the recent efficiency plan expenses, and the one-time gain from acquisition.

This is also a strong improvement of 28% over last quarter's EBITDA, which was reported at $40 million.

On a non-GAAP basis, second-quarter 2012 gross profit was $68 million, representing 40% gross margin.

This is a 34% increase over the gross profit of $51 million or gross margin of 36% which we achieved in the second quarter of 2011, and 16% increase over gross profit of $59 million we achieved in the prior quarter.

Operating profit on a non-GAAP basis in the second quarter of 2012 was $53 million or operating margin of 31%, an increase of 44% over operating profit of $37 million or operating margin of 26% as achieved in the second quarter of 2011.

This was also an increase of 31% over operating income, or $40 million, or operating margin of 24% in the prior quarter.

Non-GAAP net profit in the second quarter of 2012 was $45 million or $2.08 per share post the reverse share split action of 1 for 15, which became effective on August 5, 2012.

This represents a 27% net margin.

This is [60]% over the $28 million or $1.42 per share for the second quarter of 2011.

Non-GAAP net profit is 35% above the prior quarter or $33 million or $1.56 per share which represents a net margin of 20%.

On a GAAP basis comparing the quarter to the same last year, revenue grew by $29 million and net loss was $9 million, which is $8 million better than last year's bottom line, excluding that one-time acquisition gain recorded last year, and $10 million better than the previous quarter bottom-line results.

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

Thank you, Oren.

Before we will open the call to Q&A session I would like now to add the general and legal statement to our results in regard to statements made and to be made during this call.

Please note that the second quarter of 2012 financial results have been put out 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, [these] results are presented financial data which is reconciled as indicated by the footnotes below the tables on a non-GAAP basis after deducting, one, depreciation and amortization; two, compensation expenses in respect to options, grants; and three, finance expenses net other than interest accrued such that non-GAAP financial expenses net include only interest accrued during the reported period.

Non-GAAP financial measures should be evaluated in conjunction with and are not substitutes 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 more comparable GAAP financial measures.

EBITDA as presented is defined in our quarterly financial release.

EBITDA is not 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 (inaudible) or as a substitute for operating income, net income or loss, cash flows provided by operating, investing, and financing activities, per-share data, or other income or cash flow statement data prepared in accordance with GAAP, and is not necessarily consistent with the non-GAAP data presented in previous filings.

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

Operator?

(Operator Instructions) Jay Srivatsa, Chardan Capital Markets.

Yes, thanks for taking my question.

Russell, your guidance seems to reflect a general sense of pullback in the overall semiconductor market.

Can you give us some sense on what is your read in the market overall?

Are you seeing specific segments pulling back, or are you seeing just an overall weakness related to macro conditions?

We see one specific segment that has pulled back that contributes for probably the bulk of this 7% lower mid-range guidance.

That would be within discretes.

It seems that the other segments are doing very well for us.

Now, the thing that is a little bit hard for me to stay off of business forecast is that, as mentioned previously, in most all of our segments we are growing very nicely in market share.

So I can't comment off of our forecast and POs on the overall increased, decreased ability of the worldwide semi demand.

Because obviously if you are growing market share, you will not see a reduced tide as quickly as others might.

But, in the area of discretes to where we have a good portion of business, we have seen a reduction in the forecast, reduction in POs, and as well a reduction in the guidance of our specific customers themselves.

All right.

In the past, you have talked about being able to achieve a $200 million revenue run rate by end of fiscal '12.

Given your guidance, do you believe that you could be able -- in position to get there in Q4?

Or are you expecting that to be more of a fiscal '13 event?

From a capability standpoint, we are able to achieve it.

It is a question really of the orders.

So the products, the activities, the transfers, they are all in line.

Things have happened.

I, in a very serious note, am quite convinced that we will see the $200 million.

It is not a question of if; it is really just a question of when.

From what I see presently, do I think that we would have $200 million of orders in Q4?

It does not appear likely.

Really not.

But is it possibility for Q1, Q2?

At some point everything snaps back, the core snaps back, and we will be there.

We have continued, as mentioned multiple times, to grow our market share.

Even in the discrete area we have grown in market share.

It just seems that for whatever reasons in that area to where we have several very large customers, their business is down.

But our portion of that business for the most part is increasing, and increasing very steadily.

So as far as the target that we had given at the beginning of the year to achieve $200 million in Q4, I think at this point that is not very realistic.

At what point will we achieve it?

I would believe that we will be there not too far in the future.

The operational capability is there, the technical capability, and the right activities are there.

It is just a question of the demand lining up with what we have done.

Does that answer the question, Jay?

Yes, you did.

Thank you.

In terms of margins, you've had -- you've done a very good job of improving gross margins back up to levels that you had previously before the Nishiwaki acquisition.

Can you give us some sense on where things are in terms of utilization at Nishiwaki and how you see your gross margin profile expand over the next couple of quarters?

Nishiwaki, I won't talk about the utilization there because it is under contract.

If I talk about the utilization, you could really directly calculate what is the size of the micron business, which we are not disclosing nor do we necessarily have permission to disclose the specific micron business on a quarterly basis.

From the contract itself, we had several thousands of wafers per week that was not within the contract.

So there was always the possibility of having upside on top of the contract, and we are qualifying customers to get in there.

But overall, worldwide capacity is right now about 70%.

All right.

In terms of the contract with the Indian customer, are we to assume that this is another contract that you have received over the last year, compared to the one you had previously?

Or is it an extension of the existing one?

And if it is a new one, can you give us some insight into when you hope to start to see material revenues from this contract?

Could you start the question again, Jay?

I maybe misheard it.

I thought you said India.

But could you just restate it, please?

Yes, you alluded to a contract with the Indian government for a 300-millimeter fab.

The question was, when do you expect that to start to become material in terms of revenues?

That is the bid that I had spoken of.

It is nothing different than what I -- I think that we announced it with the release two quarters ago, and then we got into some details on it last quarter.

The government had asked for an open bid for an individual or for a group to come in to build and operate a 300-millimeter factory.

In our case, we joined with two other companies.

One is Jaypee, a very large Indian conglomerate providing power, infrastructure, and cement -- in India is their major businesses; and with IBM.

IBM would be the technology provider, 45-, 65-, 90-nanometer digital technology.

We would build the factory; we would operate the factory; nominally bring analog blocks into the 90-nanometer platform.

And Jaypee is the predominant owner of the factory.

The government asked for bids.

They received the first round of bids in December from ourselves and other groups.

As of last week we received a correspondence from the government that they have reviewed everything.

We will be going forward to the next round with them.

They have not formally announced how many people are involved in the next round, how many have been screened out, or anything of the sort.

It has been stated by the government directly and/or indirectly that they would be making decisions before the end of this year.

But Indian, no different than any other government, it is very difficult to know what timelines are going to adhere to within any process.

From the time that everything is approved, the timeline of the factory is as follows, and that is the only thing that I could say.

Should we or our consortium win the bid, the factory from groundbreaking would take three years to the point of having qualified silicon running through the factory.

And that would be at a certain capacity.

The ultimate capacity of the factory would be 30,000 wafer per month.

So it's three years to get started.

We would build the factory, contracting to build it.

We would also operate the factory, contracting to operate it.

Our agreements are with Jaypee.

Again, our thought and belief is that it will close before the end of this year.

But there is no way that we can guarantee that or have any assurance that that is the case.

Hopefully that answers your question, Jay.

Yes, it is.

In terms of the capital notes, given that the registration has been approved by the SEC, realistically what is your view on if and when the conversion will happen from these banks?

Are you getting the sense that they are not inclined to do it?

Or is it your sense that they will do it at some point in time and not near term?

I stated in the call that the banks have not indicated that they would be doing any short-term actions in the market.

I really am not in a position to speak for the banks as to what they would do or not do.

I also stated in the call that we are still in discussions with the banks to try to come up with an alternative that would be a win for our shareholders.

And as stated as well, not trying to sound too iffy here, but being the fact that we are not the owners of the notes we can't give any guarantees on any outcomes of what these discussions would lead to or not lead to.

At this point, they have or we have complied with their request to register with the SEC.

There was about 50% of their note holdings that were registered.

Upon request, those notes can be converted to shares, and then they could be traded.

As stated, however, the banks cannot hold more than 5% at any given time, so the amount that they would hold is somewhat small.

But what is our hope is that we would be able to come up with something that would be a win for all parties.

Can we give more details than that?

We really can't, because I don't want to set expectations that aren't real, that I don't have direct control over.

But how and when they would exercise, again, that is something that really should be asked of the banks.

It would be nice if I honestly could speak for them and I can make commitments, but I can't.

I understand.

Last question on your long-term debt.

In the past you have done a very good job of reducing your long-term debt.

In the last few quarters it appears to be creeping up again.

What is your plans with your existing cash and/or strategy to try to look at your debt, reducing your long-term debt again?

Hi, Jay.

So actually if you look at the net debt, it actually went down.

On a gross level, we increased debt by $80 million; but the same amount was increased in the cash.

So on a net basis, it stayed flat.

And with the GE loan that we just signed and drew down $14 million, so this is -- was just an activation of a credit line.

And we still have their open availability both in GE Credit line and Wells Fargo credit line which we don't draw and we don't -- we didn't indicate if we intend to draw.

But to your question, the current EBITDA if you look at the run rate of 52 in this quarter, so the run rate is like more than $200 million; and previous EBITDA run rate was 160, 170.

We always said that if we are at a ratio of net debt to EBITDA of about 2.5X, up to 2.5X, up to 3X, this is reasonable for us.

Currently we are even below that, so I think we are in a good position.

The net debt to EBITDA right now is about 2.1X.

So we believe that from strategy point of view, we are at the right level of debt compared to EBITDA.

Thanks, Oren.

Thanks, Russell.

Ethan Etzioni, Halman-Aldubi.

My question is with regard to profitability.

I am looking at the GAAP figures.

I see that for the third quarter the profitability is about 3%, and that profitability rate doesn't make sense to me when I look at the competitive strength of your technology.

My question is, why with your technology strength, aren't you able to achieve a higher profitability?

Are you sacrificing profitability to get more growth?

Thank you.

Can you just explain what is the 3% that you mentioned?

The operating profit for the second quarter on a GAAP basis.

Yes, but when we look at the GAAP we have to remember that there is a lot of historical depreciation which is mainly resulted from the establishment of Feb 2, which was a huge $1.5 billion project.

So when we analyze it, we exclude it in order to have apple-to-apple data without -- I mean to see the continuation, the ongoing operational margins.

This is why we have this analysis that shows that actually our operating margins are 31%, not 3% if you include that historical accounting of what it cost us to build Fab 2.

If you will look at our recent acquisition of Jazz in Japan that Russell explained, the [13] Jazz in Japan it cost us like -- one was $20 million, the other was $55 million.

Nothing like the $1.5 billion, so this is why you should look at the operational margin [only].

So anyway the gross margins are 40%.

The operational margins are 31% and the net margins is 27%.

I think for a foundry for manufacturer of chips I think it is very nice profitability margins.

When you finished depreciating Fab 2?

Fab 2 was built on a -- there is no like specific date, because Feb 2 was built in steps.

We started it at 5K wafer per month in an investment of $800 million.

And then every time we had a delay or added more capacity, which costs more, and each such expansion of Fab 2 started the seven-year schedule of depreciation.

So it is going down.

It should be going down pretty linearly along the coming years.

Every quarter, every year, there is a reduction.

We were in higher numbers a year ago.

Now we are in lower numbers.

We will be in more lower numbers next year.

Do you have an operating margin target?

Yes.

The best in our industry, our peers, the best in our peers are reaching like 40%, 45%, not -- like the non-GAAP operating margins.

If you look at from the EBITDA point of view, we more look on the EBITDA point of view, which is the same; it is about 40%, 44%.

Currently we are around 30%.

SO your goal is to increase by about 10% then?

Yes, that is the target going forward.

Is that realistic?

Yes, as we continue to convert the capacity in Nishiwaki to our flows, as we continue qualifying the programs we have going on in Power Management and in the front-end module, I think it is very realistic.

Thank you very much.

There are no further questions at this time.

Mr. Ellwanger, would you like to make your concluding statement?

Certainly.

As mentioned, in the Japan facility we took actions that on an ongoing basis should be able to increase the operating margin by about 10 points.

That during the first year of activity I think is a very nice stamp of approval of driving efficiencies during a time of changing a model from being part of a DRAM integrated device maker to bringing on multiple flows as a foundry.

We see a lot of excitement from our customers.

We have customers, leaders -- true leaders in their segments have selected us year-over-year for Supplier of the Year Award -- that we are aligned with on long-term roadmap.

We are aligned with on short0 to medium-term roadmap, and for market share increases.

Our belief in the future is very strong.

It's very bright.

I think performance of Q2 was outstanding.

Q3 has a small dip in revenue.

We expect the margins to maintain the same trend as we saw in Q2.

And we are, I believe, strategically engaged in all the right things, tactically doing that which we need to do.

We look forward to continuing over time to see improvements on all aspects.

We really, bar none, have an incredible employee base, people that are very passionate about what they do, people that when customers visit the sites, customers leave extremely excited, extremely convinced that we are the right partner for them to have.

We will continue to work on this.

We will continue to listen to our customers.

We will continue to change as per customers' needs and not to be resilient to change.

Everyone needs to have strategy.

Everyone needs to have vision.

Everyone needs to have proper staffing.

An excellent staff allows a vision to evolve.

Excellent people give input.

They look at reality; they move things along.

I believe that that is what we have.

To have come from $100 million revenue, negative $60 million cash from operations, to a run rate of above $650 million revenue, consistent over $100 million cash from operations, that is a huge move in a company.

I thank those that have invested, that have been with us over this journey.

And as stated earlier I see the next few years at the end of which being a story that people will be extremely excited with, as now all of the efficiencies and size that we have had can drive into very, very selective top-line growth and very good bottom-line growth.

So I thank everybody.

As mentioned, we will be having a symposium at Newport Beach in October.

It is an open environment.

Those who would wish to come are more than welcome to come, touch our technologies, touch our people, see what we have, and become more convinced yourself.

So thank you and till the next call.

Thank you.

This concludes the TowerJazz second-quarter 2012 results conference call.

Thank you for your participation.

You may go ahead and disconnect.