高塔半導體 (TSEM) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the TowerJazz third quarter 2012 results conference call.

(Operator Instructions).

As a reminder, this conference is being recorded November 15th, 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's financial results conference call for the third quarter of 2012.

Before we begin, I would like to remind you that some statements made during this call may be forward-looking and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected.

These uncertainties and risk factors are fully disclosed in our Form 20-F, F-4, F-3, and 6-K, filed with the Securities and Exchange Commission, as well as filings with the Israeli Securities Authority.

They are also available on our website.

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

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

Russell, please go ahead.

Thank you, Noit, and welcome, everybody, to our third quarter 2012 results conference call.

Our third quarter revenues were approximately $155 million.

If we exclude Micron revenue, which revenue by our stated model decreases in the second and third year of our take or pay agreement, this represents a 13% increase in our core wafer business versus the same quarter in 2011.

During the quarter we improved our margins with a 4 point gross margin increase to 37% versus 33% for Q3 2011 and operating margins up 4 points, or 18%, increasing to 26% operating margin for this past quarter versus 22% for Q3 2011.

This is the result of efficiency and cost reduction measures we took, as we described during the second quarter review, and completed during the third quarter of 2012.

We are pleased with the performance and progress made in the quarter, and especially in the activities that will drive continuous growth and improvement.

I'll spend some time now to describe a few of these significant activities.

For the first nine months, we recorded $491 million of revenue year to date, growing 13% versus the same period of last year.

During this period, we realized a record amount of new photo masks entering into our factory.

To explain, the mask sets entering the factory is significant and one of the final milestones in the new opportunity design win cycle.

From the time that the prototype mask set enters the factory, there is usually a nine to 12 month lead time to volume production ramp, and then a typical two-year life cycle at volume production.

For these past nine months we had 5,600 new masks enter our factories, representing a 50%, 40%, and 20% increase versus 2009, 2010, and 2011, respectively.

This gives us confidence in continued growth in 2013, as this record number of prototypes enters high-volume production.

Additionally, in Q3 2012 we realized a record number of initial stage design wins, 30% higher than the average of the preceding 10 quarters, beginning in 2010.

As such, we are optimistic in the future, as our existing customer and customer opportunity funnel remains strong and growing.

In Japan, we are in advanced stages of a unique win/win agreement with a brand name integrated device maker.

With many factories in Japan producing value-add product with proprietary flows, but not at high levels of factory utilization, it is good business sense to drive to fab closure, whilst transferring not only the flow within the Japanese geographic region, but also the core technical team.

The flow, plus the core technical team, ensures not only success for this generation of products, but, as well, a continuum in the road map with the device and integration experts that know not only the flow, but also understand the systems, processes, and future road map of the IDM, and are trusted by the design and application engineers to remain within the IDM company.

This is the model that is in advanced stages and we expect it will close within the next month.

This should set into practice a model that is of great value in the Japanese semiconductor ecosystem.

Considering this deal, in addition to the other Japanese-based activities that we've presented in previous calls, and including the large growth that we are seeing in the Korean market with customers that are focusing their activities in the Nishiwaki factory, we remain thrilled with the progress to date and the future advantages that the capacity, operational excellence, and talented and dedicated employees offers us in our Japanese factory.

In a few weeks, on December 4th, we'll be hosting our first TowerJazz Technical Global Symposium in Japan.

We'll be highlighting our success in transitioning TowerJazz Japan from DRAM to a highly efficient qualified analog power manufacturing site, and we'll strengthen our visibility among Japanese semiconductor companies, research institutions, and academia, by building awareness for our broad range of specialty process technologies and design enablement capability.

We've received strong response with, at present, executives and lead engineers from over 40 companies having confirmed attendance.

A significant activity that was announced during this past quarter was a new and expanded multi-year committed manufacturing agreement with Vishay Siliconix, representing hundreds of millions of dollars.

This expanded business relationship is multi-year, extending through 2018.

Two advanced Vishay Siliconix product families will be manufactured at our Japanese facility.

One family is already entering qualification testing, three months ahead of schedule.

There is, as well, a continuation and expansion of activities in our Migdal Haemek fabs 1 and 2. This agreement includes a jointly built, large-scale epi center for advanced super junction families.

The engagement is the largest single customer engagement in the Company history.

It is of personal significance to me, as after joining Tower in 2005, the first joint customer celebration I attended was to celebrate our first project with Vishay.

To have a customer partner so satisfied with our performance that after seven years of activity, they enter into such a broad and far-reaching agreement is personally rewarding and fulfilling and is evidence of the capabilities and dedication of our employees, from manufacturing operators through to the technology managers.

This new collaboration with Vishay in Japan will enable us with steady baseline revenue and a long-term strategic customer in the Japanese fab, in addition to what has just previously been discussed.

Now I'd like to update you with regard to our business units.

Within design enablement, we recently released many process design kits with enhancements, as well as new platforms, including an ESD PDK for each of our major platforms.

We continue with our open PDK policy, and released a major update to our iPDK recently, enabling our customers the freedom of choice in their EDA supplier.

We have been asked to enlist our design services leading power customers to enable the design of integrated power management ICs, as well as for AMOLED drivers.

In our top MEMS business unit, additional new technology platforms are being transferred into our fabs from several existing customers.

At the same time, we see several opportunities for technology transfers from TowerJazz to potential customers.

We are ramping production for a MEMS auto-focus product, which promises substantial growth potential over the coming years.

We mentioned the success already of our first IDM transfer of an advanced discrete power MOSFET technology in Japan, and we are on track for ramping this technology production in early 2013.

We are seeing more and more interest from Japanese markets for this type of technology transfer.

In the mixed signal CMOS business unit, we continue to serve our customers in unique markets.

In the recent quarter, we qualified our 0.18 micron CMOS flow in our facility in Nishiwaki, Japan, providing us with a dual source for uninterrupted product ramp and supply.

We recently partnered with a key customer to develop next generation analog switches on an advanced 0.18 micron platform, and are working with additional key customers that utilize the advantage of the 152-nanometer platform, which is now in its final qualification stages.

An important addition to our offering is the previously mentioned advanced ESD process design kit that we've just released for all customers.

And our power management business unit this quarter released design kits for a new 0.18 micron BCD process, offering our customers as much as a 20% die shrink through improved RDS(on).

The design kit is being adopted by lead customers for the next generation products, such as Class-D audio and display drivers for top-brand flat-screen TV and mobile devices.

In addition to that, we are ramping production volume on our 700-volt process or LED lighting.

That being said, in 2013 we look forward to strong growth in our power business unit, fueled by both our 0.18 micron BCD technology in applications such as PMICs, Class-D audio and display drivers, as well as our 700-volt process with products in LED lighting and motor drivers.

This strong growth will require multiple manufacturing sites, and we plan to qualify our 0.18 micron BCD technology in Japan, in addition to Israel, where it is currently running in volume production.

The same will hold as the 700-volt volumes grow.

With regard to CMOS image sensors, in the past quarter we invested in bringing new products to the market, especially in the X-ray and industrial camera markets.

We've just returned from a successful week at the VISION Show in Stuttgart, where all of our European customers presented their sensors and their customers presented their industrial cameras based on sensors manufactured at TowerJazz.

We are at a point where almost all of the customized industrial cameras are using sensors manufactured at our facilities, using our state-of-the-art technologies.

We recently won several design wins in Japan and continue to grow our industrial camera market share.

In our RF high-precision analog business unit, we qualified several SOI products with suppliers to tier-one handset providers.

Silicon-on-insulator is replacing gallium arsenide as the technology for many switch and tuning applications in cell phone and other wireless devices, and this represents a large new market for TowerJazz.

We also released design kits to lead customers for our fourth generation silicon germanium technology, SBC18H4, with speeds of 350 gigahertz.

The technology is targeted at applications in wireless backhaul, optical networks, automotive radar, and microwave imaging, and we see strong potential for growth here.

Finally, we had a record number of tape-ins in our Newport Beach facility from an unprecedented amount of new design activity for RF/HPA platforms.

In fact, the month of September surpassed our prior monthly record by more than 25%.

Looking ahead, we believe the RF/HPA business unit has significant growth potential in the coming years.

This will be driven, in a large part, by a ramp in our latest silicon-on-insulator technology, replacing gallium arsenide for switch and tuning ICs in many wireless devices.

We believe that TowerJazz is positioned as one of only a few suppliers with appropriate technology to serve this new market.

In 2012, we have seen a large amount of SOI design activity, and this will fuel revenue growth in '13.

In addition, we expect new products to ramp in our high-end silicon germanium technology, where we are the technology leaders, as well as our wireless silicon germanium technology, where we expect strong growth for power amplifiers for wireless applications in mobile platforms.

These switch and power amplifier activities, which are referred to, together with the PA controllers, as a front-end module, are of significant importance to us.

I'll explain a bit further.

Phones of just a few years ago supported typically one major standard and 2 to 4 bands, typically, either GSM and later GPRS or edge or CDMA.

Today's smart phones support many of these same legacy standards in addition to 3G, WCDMA, and 4G LTE, as well as two bands of WiFi, and several other regional standards, or up to 8 to 14 bands.

Each of these bands typically requires a tuned power amplifier, and the signals from the antenna, and, in some cases now, multiple antennas, flow through an increasingly complex matrix of switches to route them properly.

This is creating a surge in the market for power amplifier switches and other components to these front-end modules that deliver and receive power from the antenna.

Coupled with the transition of many of these components from gallium arsenide technology to silicon, this is leading to a large market potential for TowerJazz, who serves the switch market with SOI technology and the power amplifier market with silicon germanium.

In short, these transitions bring the number of front-end modules from one, in the phones of the past, to five or even seven for the advanced smart phones of today.

That moves the bulk of these devices to technologies we provide.

We are uniquely positioned with performance-based customer relationships to gain a major portion of this market as the platforms continue to shift from gallium arsenide to SOI for switches, and to silicon germanium for WiFi PAs.

We see up to $200 million of incremental revenue in this market segment.

At the end of October, we held our seventh annual TowerJazz Technical Global Symposium in Irvine, California, right next to our facility in Newport Beach.

The symposium provides us with the opportunity to present our latest specialty process technologies, as well as showcase our customers' advanced applications.

This two-day symposium focused the first day on our aerospace and defense offerings, and the second day on our commercial technologies and offerings, and updates on our specialty processes such as high-speed silicon germanium, CMOS image sensors, power management, and others, as well as our design enablement solutions.

We had guest speakers from leading companies such as Alcatel-Lucent/Bell Laboratories, Boeing, Forza Silicon Corporation, Lockheed Martin, Think Strategically, Triune Systems, UC-Irvine, and the US Air Force Space and Missile Center, among others.

Over 130 participants from over 90 companies attended our conference and provided great feedback on both the content and the experience they had there.

The customer feedback surveys were assuring that we continue in directions that our customers desire.

In particular, the response to our stated strategy to have multi-generation customer road map alignment and commensurate dedicated development was unanimously appreciated.

So, looking at the outlook for Q4, our guidance is a revenue of between $147 million to $157 million.

We had expected higher growth, but one segment of our business, serving discretes, did not meet our expectations.

This is predominantly due to the decrease in discrete component content in tablets versus PCs.

We expect growth to return to this segment as a function of our market share growth and as tablets upgrade -- I'm sorry, and as the tablet-upgrade rate of change exceeds the drop in PC to tablet content.

As mentioned earlier in the call, we are overall bullish in 2013 due to the increase in fab tape-ins and target 2013 to have growth against the 2012 year.

We'll speak more to this at the Q4 close.

So, I remain extremely excited with regard to our present, mid-term, and long-term potential, and with that, I would now like to hand the call over to our CFO, Mr. Oren Shirazi.

Oren, please?

Thank you, Russell, and hello, everyone.

Looking at our third quarter results, I would like to firstly review and explain the strong improvements across the board in our gross, operating, and net margins.

We significantly improved our non-GAAP margins over the last year, with gross margins up to 37% versus 33% last year and operating margins at 26% versus 22% last year.

Our non-GAAP operating profit for the nine month period improved by $17 million to $133 million in 2012 versus $116 million in 2011.

The improved margins enabled us to maintain our profit at the same level in the third quarter of last year with lower revenues, demonstrating the success of the efficiency actions we undertook, reducing the workforce in our Nishiwaki facility and improving our cost per layer and per wafer across the board.

Our non-GAAP net margin improved this quarter to 20% as compared with 18% in the third quarter last year.

We achieved $40 million in EBITDA, and the EBITDA margin was 26%, stronger than the 22% in EBITDA margin in the third quarter last year, excluding a one-time gain from the sale of investment in HHNEC we recorded in 2011.

We ended the quarter with $161 million in cash.

We achieved $26 million in positive operating cash flow, excluding $11 million of termination and other payments associated with the Japan reduction in force efficiency plan, which we commenced on the second quarter of 2012 and completed during this quarter.

Net cash from operating activities, including this $11 million payment, was positive at $15 million.

The cost reduction plan in our Japanese facility also improved our margin significantly by enabling $30 million in annual savings.

Our efficiency measures included a reduction in the workforce of approximately 300 employees from the Japanese employees base, and other cost reduction activities.

During the month of October 2012, we accepted binding orders for our long-term bonds in the amount of approximately $25 million for a private offering among Israeli investors, whose bonds were originally issued in 2010 and are due for payment in December '15 and December '16.

This transaction has been closed and completed following the receipt of Tel Aviv Stock Exchange approval and other regulatory approvals.

This will demonstrate again the strong support we continue to get from the financial market.

Regarding other outstanding convertible securities in October 2012, Bank Hapoalim converted 767,000 of their capital notes to shares, representing approximately 1% of our fully diluted share count.

The bank did not sell any of it and is holding it as ordinary shares, representing approximately 1% of our fully diluted or 3% of the outstanding shares.

Moving into a more detailed analysis on the balance sheet, we improved our current ratio from 1.16 times as of the end of 2011 to 1.60 times as of September 2012.

We also improved our net current assets from $36 million as of the end of last year to $129 million, with a net debt to EBITDA ratio of 2.2.

An accounting item that affected our balance sheet explains the increase in shareholders' equity and the corresponding decrease in long-term debt we see in the balance sheet, and I wish to provide the accounting literature for it.

In accordance with US GAAP, in specific, ASC 470-20, formerly known as EITF 98-5 and EITF 00-27, if an official conversion feature exists for bond series F, which have been measured in accordance with such GAAP rules as $110 million, classified as an increase in shareholders' equity with a corresponding decrease in the carrying value of the debentures presented as long-term debt.

The said amount will be accreted through the remaining life of the debentures to non-cash financing expenses, unless converted beforehand.

Following the above picture, shareholders' equity substantially increased as compared to the previous quarter to the amount of $248 million and long-term debt decreased to $285 million.

It is important to know that this has not impacted the third quarter P&L report and has absolutely no cash impact on the Company, whatsoever, and is not changing the par value of any of our debt or shareholders' equity.

We increased our cash balance to $160 million, up from $101 million at the end of last year.

The main cash drivers during the first nine months of 2012 were the creation of $65 million in positive cash flow from operating activities, or $85 million, excluding the $20 million reorganizational plan payments related -- associated with the Japanese fab.

In addition, we received $80 million from expansion of Bond Series F, and $14 million loan under the GE credit line for (inaudible) Japan.

This was offset by $78 million of CapEx investment and $21 million of debt payments.

During the quarter, we invested $25 million in CapEx, as explained below, generated -- and, as explained below, generated $26 million of positive cash flow from operating activities, excluding the $11 million reorganizational payment associated with the Japanese fab, the reduction in force plan.

Moving into the P&L statement.

As I mentioned, revenues for the nine month period was $491 million, higher than $436 million in the nine month period last year, an increase of 13%.

Our third quarter revenues were $155 million, in line with our guidance.

On a non-GAAP basis, the third quarter 2012 gross profit was $57 million, representing a 37% gross margin, higher than the 33% in the third quarter of 2011.

Operating profit, on a non-GAAP basis in the third quarter was $40 million or operating margins of 26%, higher than operating profit of $39 million or margins of 22%, as achieved in the third quarter of 2011.

Net profit, on a non-GAAP basis in the third quarter of 2012 was $32 million or $1.40 per share, representing 20% net margin.

This compares to $32 million or $1.50 per share, representing 18% net margin in the third quarter of 2011.

Fully diluted earnings per share, based on non-GAAP results would be $1.77 for the nine months ended September 30, 2012, by dividing the $110 million non-GAAP net profit, after GAAP adjustments, by the weighted average number of shares outstanding on a fully diluted basis, which is 68 million.

EBITDA for the third quarter was $40 million, higher than $39 million for the third quarter of 2011, excluding the one-time gain from realization of the investment in HHNEC last year.

On a GAAP basis, gross profit in the third quarter of 2012 was $19 million or 12% of revenue, higher than $16 million or 9% in the third quarter last year.

Net loss on a GAAP basis in the third quarter of 2012 was $18 million, or $0.84 per share as compared to $2 million net profit or $0.09 per share in the third quarter of 2011.

Financing expenses increased, which, as seen in the report, is mainly due to GAAP non-cash financial expenses, resulting mainly from the changes in the fair market value of part of our debentures and warrants that are recorded at fair market value in accordance with GAAP, as well as the effect of the shekel/dollar exchange rate changes.

Net loss excluding financing expenses and the net effect of the one-time gain improved by $6 million.

To conclude, we are encouraged by the continued margin improvement demonstrated by our non-GAAP operating profit for the nine month period, which improved by $17 million to $133 million in 2012 versus $116 million in 2011, as well as for the third quarter itself, in which our non-GAAP gross margin improved to 37% versus 33% last year and our operating margins improved to 26% versus 22% last year.

All of this resulted in that the net profit, on a non-GAAP basis for the first nine months of 2012 improved by 19% to $5.42 per share, as compared to $4.56 per share in the first nine months of 2011.

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 open up the call to the 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 third quarter 2012 financial results have been prepared in accordance with US GAAP and the financial tables in today's earning release include financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as established by Securities and Exchange Commission, as they apply to our Company.

Namely, these results represent financial data which is reconciled, as indicted by the footnotes below the tabled on a non-GAAP basis, after deducting 1) depreciation and amortization; 2) compensation expenses in respect to option grants; and 3) finance expenses 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 a reconciliation between the non-GAAP financial measures and the most comparable GAAP financial measures.

EBITDA is presented as defined in our quarterly financial 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, net income or loss, cash flows provided by operating, investing, and financing activities, per share data or other income or cash flow statements that are prepared in accordance with GAAP, and is not necessarily consistent with the non-GAAP data presented in previous filings.

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

Operator?

Thank you.

(Operator Instructions).

The first question is from Jay Srivatsa of Chardan Capital Markets.

Please go ahead.

Yes, thanks for taking my question.

Russell, the Japan agreement, can you talk to us a little bit more about, first, when you expect this contract to start materializing in terms of meaningful revenues?

And second, just longer term, what does it do to Tower in terms of penetrating some newer accounts in -- newer customers in Japan?

Certainly.

So, you're referring to the deal that I said is not yet finalized, the one that's in advanced stages of the -- where I described the model of factory closure moving activities into our Nishiwaki facility with core team technical headcount?

Right.

Okay.

So, the agreement would actually be an immediate revenue, in that there's a fair amount of non-recurring engineering expense that's associated with it.

The actual production revenue would probably be somewhere about 14 to 18 months after the onset of the project, when the flows are qualified and start ramping in production.

And that would last for an indefinite period of time.

Now, the other question was, what does it mean for the rest of the Japan industry?

Actually, the -- a few weeks ago I was in Japan and in rounds of discussion with this specific customer, but also mentioned the model to others, and many were very, very interested, and were very excited to see the final press release of this activity as a motivation for them to move forward with something similar.

So, as in many areas, and maybe Japan is more so, it's fairly conservative and it's difficult for the first person to enter into a new type of adventure, but not very difficult for the second to jump in afterwards.

Can we commit that this model will be followed by others?

I certainly can't do that, but I would believe that it has a very good chance, because the need is certainly there.

There's many, many factories in Japan owned by IDMs that are not fully utilized.

There's older factories still at 4-inch, 5-inch, 6-inch, that could make very good sense to take these flows, port them into an 8-inch flow, and really consolidate and shut down factories.

So, I assume that this will move forward.

One of the strong positives of this type of a deal, and it deals, honestly, just with the geographic location, is the fact that very few employers ever really want to put solid employees on the street.

To be able to transfer a core technical team, along with transferring a product flow, and ensuring long-time employment of that team, is a very, very big bonus.

So, I think that that has a very added plus, just in the eyes of the perception of a Japanese executive as to how they are perceived in treating their employees and how they wish to treat their employees.

So, I hope that answers your question.

Does it?

Yes, it does.

So, just so that I'm clear, you're talking about analog process -- analog and mixed-signal process flows.

It's not CMOS we're not talking about, are we?

It is a very strong advanced analog flow, yes.

Okay.

Next question is on Vishay.

I know they've been a customer of yours for a while.

Help us understand what has transpired in terms of engaging with them in terms of new products that gives you the confidence it's going to be a multi-hundred-million type contract?

It's a committed contract, as I mentioned.

There's a take-or-pay agreement associated with it.

So, that's the basis of the confidence.

So, are these newer products that you're going to be manufacturing for them, or is it just a ramp-up in their existing product engagements?

It's many new flows, and it's a continuation of families that are already in the factories.

I mentioned two advanced flows are going in to Nishiwaki, one of which is now entering into qualification.

Those are advanced flows.

I'm certainly not at liberty to release what flows we're working on with Vishay, but those are new flows.

We had in the press release the fact that we had an epi center, jointly built epi center, within the Migdal Haemek facility.

That's definitely new flows.

Those are super junction flows, multiple layers of epi, on top of which is a MOSFET flow.

So, they're new projects, obviously.

Okay.

And so, is it fair to expect your contribution from Vishay to increase sequentially in 2013 versus 2012?

Yes, I think that that's fair.

Okay.

In terms of the Micron process flows itself, I mean, where are you in terms of transferring TowerJazz's process flows into the fabs in Japan?

Has it been completed?

And, if so, when does the Micron business taper off for you?

The Micron business is, as well, a contractual business.

So, the first 18 months of the business is, by model, cash flow positive.

We're still within those first 18 months.

From 18 months through the 36 months, it decreases quarterly.

At the end of the 36 months, it doesn't go to zero, but there's no contractual commitment after 36 months for any business at all.

The specific amount of wafers that we sell to Micron and what the contract specifically is on the ramp-down or anything of the sort, that has not been made public, and that is guarded under non-disclosure agreement.

But the fact of the ramp-down from the 18 month onward, that's very clear, and that we have expressed.

As far as the status of our flows, the bulk of everything is built off of a core CMOS.

The -- I believe it was mentioned in my script -- well, I know it was -- the bulk 0.18 CMOS flow is qualified in Nishiwaki.

Off of that, then, we have variants that are built, blocks that are added for the power flows for the BCD, and those are, in parallel, being qualified as we speak.

But the core CMOS flow is qualified, as well as having mentioned a flow from Vishay that is not a CMOS flow.

That is going into production qual or qualification, and there is, as well, let's say, two other flows there that are customer-specific that are qualified or in the midst of being qualified.

Okay.

Last question from me.

In general, there is a sense from the larger device manufacturers that the semi market is clearly weak and many are looking ahead to 2013 to see some form of a recovery.

What's your read on the market?

When do you expect we'll start to see meaningful growth in the market, and consequently, to your revenue line, as well?

I really stay away from general predictions of the market.

I don't know of anyone who's been very, very accurate on that.

What we try to stay up on is, really, number one, being close to our customer forecast, although a year off they can be very, very off themselves.

On a quarter-to-quarter basis, our customers are usually fairly correct.

But the major thing that we focus on isn't necessarily the market trend.

There's -- overall market trend, there's not so much that we can do towards that, one way or the other, other than in times that the market is cautious to, ourselves, be very, very cautious about spend.

But the major thing we focus on is market share growth.

And as long as you have market share growth, you really can out-trend the market itself.

The overall statement still remains true.

When the tide is down, all ships go down.

When the tide is up, all ships go up.

But if you're continually growing market share, you have the ability when the tide goes down to not go down as much as the others, or maybe to not go down at all, but to not grow as much as you did in the past.

If we look at the mid-range of our guidance in Q4, we'll certainly have growth this year.

It's not a great growth for the market.

2009, I believe that we were the only foundry -- well, I know that we were the only foundry in the world to have year-over-year growth, at least, those that report numbers.

And so, in years we have been able to outgrow the market, although it hasn't been big growth, but by growth in market share.

So, that's really our big focus, and that's the only thing that we really do have true control over, is to make sure that we're in markets that are growing markets that, over time, will grow, and within those growing markets that our market share is growing.

And I, hopefully, expressed that well during the call, that the amount of masks that had entered into the factory, 5,600 in the first nine months, that's a very, very good number for our size of a foundry.

And some 50% higher than what was in 2009.

And, as well, that first-stage design win was at our highest quarter ever in Q3.

So, our funnel and opportunities are not drying up at all.

I look at our opportunities right now within front-end module, and I think that they're extremely strong.

We have and enjoy very, very close customer relationship with the leaders in front-end module providers.

We have very close cooperation, good IP protection from one to the other, and the market right now, our served market, has increased by a factor of 3 as the switch has moved from gallium arsenide pHEMT to SOI and as a good portion of the power amplifiers are moving to silicon germanium.

And the market itself is growing quite substantially as the amount of front-end modules is increasing with more advanced mobile communication platforms.

So, that's the main thing that we focus on is really to try to be in the markets that are growing, and to align ourselves with the market leaders so that we have strong road map differentiation by them trusting us and working on not just this generation, but two generations forward of product, making sure that at the time that the product is ready to be taped out, that we have the flows and the IP blocks that are needed for these flows.

So, again, I apologize, but I really do not feel comfortable to give any type of a broad, sweeping statement about market or market recovery, but I can say that we do focus on market share growth, and I think we're doing a good job at it.

All right.

Just one question for Oren.

The ASC 470-20 rule that you've used in your balance sheet -- what is -- I mean, is there a timeline on this?

Or do you see this being to perpetuity.

What do you mean, timeline?

For the accretion?

Yes.

Yes, it's throughout the life of the bond, which is by the end of 2016.

However, if it is converted before, it's not happening.

I mean, so the benefits stay with us under the shareholders' equity.

Okay, fair enough.

Thank you.

Thank you very much.

Good questions.

Thanks.

The next question is from Andrew Uerkwitz of Oppenheimer & Company.

Please go ahead.

Okay.

Thanks for taking my questions.

Excellent color on the previous ones.

I just have some housekeeping ones, trying to figure out how to think about the next couple of quarters.

The first is on the expense side.

It looks like OpEx has come down, then back up.

How should we kind of think about that over the next couple of quarters?

We usually don't give future-looking guidance on the specific items, but generally speaking the previous quarter, the second quarter of 2012, was exceptionally good.

We had there some one-time that we discussed, I think, in the previous call, and this quarter is good.

It's not exceptionally good, but it's good.

Like I mentioned, if you compare it to previous quarters, it's good, and we believe that the levels that you see now are supposed to stay pretty much.

It could be that the expenses, that there is some room for reducing of some of the fixed expenses, but it's not a significant amount from this quarter level.

Great, thanks.

And then, hey, Russell, just real quick, there's a lot of design wins, a lot of tape-outs here, so I think it looks like '13 should be a good year.

Are there any areas of weakness or that are on the decline that are providing any headwinds, beside the one you mentioned?

I guess what I'm trying to get at, is the sequential decline we're seeing, is it just broad-based macro-related or is there any real pockets of weakness?

In general, or specific with our business?

Specific with your business?

No.

I don't think there's really any specific pockets of weakness.

As mentioned the little script that I gave, that we see silicon germanium, in general, growing very, very nicely for us in many, many approximately, especially within the millimeter-wave side, as well as with the front-end module.

Some businesses that we had in the past are fully gone at this point.

We no longer serve them.

If we look at RF transceivers, that was something that we had strong revenue on at some point two years ago to five years ago, and that technology has moved away from technology nodes that we serve.

I wouldn't say that that's a weakness, it's just a technology node that moved from us and we've focused on other things that needed higher voltages and capabilities that would be more suited for the node that we're involved in.

Maybe another area is some TV tuners.

But in general, and in specific, I don't see any real weaknesses in the markets that we're going after and the things that we're doing.

We do have a reasonably sized discrete business and it's a strong business.

I said that it's not growing at the rate that we had expected within our own plans, which is the case.

Our Q4 guidance is not what we had initially expected at the beginning of the year.

And one of the areas deals with, really, discrete growth that we didn't see that we had expected.

It's not that the discrete business is down.

It's not down at all.

It didn't grow as we thought it would grow.

And that has some very specific reasons.

The biggest part is what I had mentioned in the call, that -- at least we believe this is the biggest part -- and that is tablet discrete content is greatly reduced versus PC reduced content.

But, over time, with the rate of change of tablets due to the price point of the tablet versus the big PC, we think that that will take care of itself, and, again, we're continually growing nice market share within that area.

So, I don't see specific weaknesses.

I do think our growth will remain and will look very strong.

We -- to talk about growth in 2013, on top of a pretty good base, when anyone could take from the call that we've given that the amount of revenue from Micron will be dropping over 2013.

So, to talk growth, it means that our core business is extremely strong, because we're not just talking growth off of the 2012 baseline, but we're talking growth off of the 2012 baseline minus, because some of that 2012 baseline will be diminished as the Micron contract decreases through 2013.

So, hopefully, that answers you, Andrew.

Yes.

No, it definitely does.

And then last question, from a cash perspective -- and you guys have grown cash very nicely over the past several quarters -- is there a point -- I mean, is there a target, minimum cash you're thinking about?

How do you kind of think about your cash balance?

We kind of look at it as compared to the debt, always.

So our current debt is like $480 million.

So, if we reduce the cash, so we are at about $320 million net debt, and we compare that to the EBITDA.

And the EBITDA is, the run rate if you take the last four quarters, is $170 million, $180 million.

So, the ratio is about 2X or slightly below 2X.

And if you take conservative EBITDA, so it's 2X.

This is the place we want to be.

This is pretty much our target to be not higher than 2X.

So, we are at, of course, the maximum that we don't want to be above it, so if we can be between 1.5 to 2.5 we are targeting 2 there.

With a 2X, it's reasonable.

So, this is to address your question about the cash.

We really look at it as net debt to EBITDA.

Perfect.

Thanks again for my question, guys.

Thanks.

Thank you, Andrew.

You're welcome.

The next question is from Phelps Hoyt of Principal Global Investors.

Please go ahead.

Yes, thank you, guys.

It seems like you're running the Company very well right now.

Just thought I'd go back to that net debt number.

$480 million is the par amount of all the debt outstanding right now.

Is that correct?

Yes, it's correct.

Okay.

And then I had a question about the issuable shares.

I see what the fully diluted shares are, but can you just give us an update -- it probably hasn't changed very much -- but can you just give us what the total issuable shares are, including the capital notes and convertible bonds and warrants, and option plans?

Yes, it's exactly the number that I mentioned in my script, so 68 million.

Also, it's written in the footnotes of the -- in the -- below the P&L.

So, 68 million.

Okay.

So, there's nothing excluded from that number?

No.

No.

Okay.

Last question is regarding the India negotiations for the fab there.

There was some information earlier in the year about something might happen in India with a new fab, and you might be a participant, somehow.

Can you update us on that?

Certainly.

Certainly, I'd be happy to.

So, the -- what you're referring to, we had announced that there's a three-way consortium.

It's Jaypee, which is a large Indian infrastructure company, very strong in the power grid and in cement manufacturing and highway construction, et cetera.

So, they're involved.

IBM is the technology provider, and ourselves as the integrator, fab contractor/builder, and fab operator.

That has moved through several levels of decisions.

Two weeks ago, plus/minus a day, we had a face-to-face meeting with what's called the Empowered Committee.

It's the government-appointed committee to make the decision on the program.

I was there personally for that with Jaypee and IBM.

The went, I think, very, very well.

They had asked for, not decreased scope, but increased scope in the project, and that was asked to be resubmitted by the 14th.

We did resubmit an increased scope and they're now going to be calling another face-to-face meeting.

They said within that meeting, which has been said by the government consistently, that they will be making a decision before the end of this year and that's what we're awaiting.

As we stated before, however, we believe that we're in a very strong position.

We believe at this point it's just between us and one other consortium, and we cannot, however, predict the outcome or even if there will be an outcome.

It's difficult to say that a government will do what it says it will do when it says it will do it.

But that's where the status is, presently.

We're all very confident and I think it'd be a wonderful activity.

If it is a positive outcome, is there a way to size what the opportunity would be for Tower?

It's a very big opportunity for Tower, twofold.

There's a very large revenue stream during the point of building the facility, and, once the facility is built, Tower would have a certain capacity of the factory that it would be using towards its own customers, and, possibly, using other parts of the factory for its own customers, but under different models.

So, the revenue stream is large, and I -- we haven't yet released specific numbers on it, but it's large millions.

All right.

Thank you.

That's all I had.

Thank you.

There are no further questions at this time.

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

Yes.

So, thank you very much for your participation in the call, for your interest in the Company.

We really are more and more excited as we look forward to the future, as we get prepped to move into 2013.

Many, many exciting things happening.

We look forward to update on the activities with this Japan deal that we're talking about.

There is actually something else that I said in the press release that I referred to -- where is it here -- as well as in advanced stages of an enabling agreement for one of our strong strategic initiatives.

So, I look forward, at the next conference call, to giving an update on that, as well.

I was a little bit surprised no one asked for some specifics on that, but happy enough that you didn't.

But we'll look forward to that and many, many existing things to talk about over the next quarters and, nominally, years.

In the very short term, would very much like to invite anyone who would have the opportunity to our global symposium in Tokyo on December 4th.

If you can make it there, we'd personally love to host you at our factory in Nishiwaki.

And then also, the second week of January we'll be presenting at the Needham conference.

We don't have the specific date yet that we'll be presenting, but we'd be very happy to meet anybody in New York, either at the conference itself.

At the conference they have one-on-ones, or at a separate meeting sometime around that.

So, with that, thank you very, very much, and look forward to update with you at the end of Q4.

Thank you.

Thank you.

This concludes the TowerJazz third quarter 2012 results conference call.

Thank you for your participation.

You may go ahead and disconnect.