高塔半導體 (TSEM) 2014 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Noit Levi - Director of IR and Communications

  • Thank you and welcome to TowerJazz financial results conference call for the second quarter of 2014. (Operator Instructions).

  • Before we begin, I would like to remind you that some statements made during this call may be forward-looking and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected. These uncertainties and risk factors are fully disclosed in our Forms 20F, S4, S3 and 6-K filed with the Securities and Exchange Commission as well as filings with the Israeli securities authorities. They are also available on our website. TowerJazz assumes no obligation to update any such forward-looking statements.

  • Now I would like to turn the call to our CFO, Mr. Oren Shirazi. Oren, please go ahead.

  • Oren Shirazi - SVP of Finance and CFO

  • Welcome everyone and thank you for joining us today. I will now start by providing our financial highlights, both the P&L results and balance sheet for the second quarter of 2014 which is the first quarter in which we are including the statement of operations and P&L results of TPS Co., TowerJazz Panasonic Semiconductor Company, the Company that we established with Panasonic in March 2014.

  • The balance sheet items of TPS Co. were already included in our balance sheet as of March 31, 2014 which was the transaction closing date.

  • In terms of our P&L metrics as compared to the second quarter of 2013, we increased our revenues from $125 million to $234 million; increased our non-GAAP net profit from $18 million to $31 million; increased our non-GAAP earnings per share from $0.47 to $0.62 per share; reduced our loss per GAAP per share from $0.59 to $0.31; and increased our EBITDA from $26 million to $33 million.

  • In addition, we strengthened our balance sheet during this quarter by increasing our cash as of June 30, 2014 to $192 million, an increase of $69 million when compared to $123 million as of December 31, 2013 and a $9 million increase over the previous quarter.

  • During the quarter, we generated $41 million in positive cash flows from operations excluding $10 million interest payment and TPS Co., the Panasonic tower company, received a loan of $87 million from two Japanese banks, JA Mitsui and Bank of Tokyo, which have been used to repay our bridge loan that we received from Panasonic in the previous quarter. The interest rate on this JM Mitsui and Bank of Tokyo loan is TIBOR plus 1.65% and it matures in the middle of 2019. We invested $15 million net in fixed assets during this quarter and repaid $9 million of debt net to our debt holders.

  • Analyzing the P&L in more depth, we see that our revenue for the second quarter of 2014 of $234 million reflects 87% increase over the second quarter of 2013 and a 76% increase over the previous quarter. Note that revenue for this quarter includes the revenue from Panasonic but even excluding Panasonic and excluding the revenue from Micron, we reported significant revenue growth of 40% year-over-year for our top 10 customers and 50% for our top five customers with a quarter-over-quarter growth of 20% and 11% for the 10 top customers and five top customers respectively.

  • Revenues for the first half of 2014 were approximately $367 million as compared to $238 million in the first half of 2013, an increase of 54%. On a non-GAAP basis, net profit for the quarter was $31 million which represents 70% growth over the second quarter of 2013 and 59% growth over the previous quarter. This reflects $0.62 earnings per share for the quarter which is substantially higher than the $0.47 earnings per share reported for the same quarter last year and the $0.40 per share in the prior quarter.

  • On a fully diluted basis, the earnings per share calculation and presentation are not required under GAAP for the second quarter of 2014. This is since the Company did not have GAAP net profits and under GAAP, fully diluted earnings per share is the same as basic earnings per share for the second quarter of 2014. However, in order to assist analysts and investors in understanding our diluted share count, we wish to note that had fully diluted earnings per share calculation and presentation been required under GAAP for the second quarter of 2014, the Company would have added to its 51 million ordinary shares an amount of 7 million potential shares underlying the capital notes, 4 million potential shares under options and warrants, 11 million potential shares underlying notes [still assessed] due December 2015 unless held until maturity and repaid for cash, and 11 million possible potential shares under notes still assessed due December 2016 unless held until maturity and repaid for cash. This in addition to 6 million potential shares underlying the Jazz notes which are due December 2018 also unless they will be held until maturity in 2018 and then repaid for cash.

  • Just to give a perspective, this 7 million shares underlying the capital notes are as compared to 27 million shares that could have been underlying those notes as of a year ago as a result of conversion accrued in the previous year by either [corp and the bank] (inaudible).

  • Our non-GAAP gross profit was $62 million reflecting 27% gross margin. This $62 million gross profit reflects an increase of 42% compared to the $44 million reported in the second quarter of 2013 and an increase of 40% as compared to $44.5 million in the previous quarter.

  • Our EBITDA which is akin to non-GAAP operating profit, was approximately $33 million, an increase of 26% as compared to $26 million in the second quarter of 2013. It is important to note that R&D and other operating expenses increased from $18 million in the second quarter of last year to $29 million now with the growth primarily in R&D expenses associated with R&D activity mainly in regards to the newly established TPS Co. in order to drive foundry customer engagement, to utilize their available capacity and generate an annual run rate of about $100 million for the coming year as was stated in our press release from this morning.

  • On a GAAP basis, net loss for the quarter was $16 million representing $0.31 per share, an improvement as compared to a net loss of $23 million or $0.59 per share in the second quarter of 2013. Previous quarter $39 million positive net profit under GAAP included a few specific gains and cost items which were detailed in our previous earnings call mainly $151 million in a TPS Co. acquisition gain net offset by $71 million restructuring and impairment non-cash cost items of the Nishiwaki fab in Japan.

  • Also on a GAAP basis, we recorded net profit for the first half of 2014 of $23 million or $0.47 earnings per share. A new line recorded in the P&L is noncontrolling interest line reflecting 49% of TPS Co. net profit totals since we hold 51% of all line items before this P&L line reflecting 100% of TPS total results.

  • Regarding our balance sheet, the balance sheet items of TPS Co. were already included in our balance sheet as of March 31, 2014 which was the transaction closing date. In terms of our balance sheet highlights as of the end of the second quarter of 2014, our shareholders' equity was $191 million at the end of June, significantly higher as compared to $141 million at the end of 2013.

  • During the quarter, we announced a signature on a definitive loan contract with JA Mitsui and Bank of Tokyo to obtain $87 million loan to TPS. The interest rate on the loan is TIBOR plus 165% and matures in mid-2019. The proceeds of this loan were used to prepay entirely a bridge loan Panasonic provided to TPS Co. in the same amount.

  • Cash and short-term deposits as of June 30, 2014 were $192 million, an increase of $69 million when compared to $123 million as of December 31, 2013. The increase during the first half of 2014 was attributed mainly to $66 million of cash generated from operations excluding interest payments of $16 million, $58 million cash resulted from the TPS Co. associated cash, associated with the transaction with Panasonic, and receipt of a loan of $87 million from JA Mitsui and the Bank of Tokyo which has been used as discussed previously to prepay Panasonic Regional.

  • During that half year period, we invested $24 million in fixed assets net and paid $14 million of debt.

  • This ends my financial review and I will be happy to accept questions at the end of the call. Now I wish to turn the call to our CEO, Mr. Russell Ellwanger. Russell?

  • Russell Ellwanger - CEO

  • Thank you, Oren, and welcome. The second quarter had large significance for the Company. Firstly, it was the first quarter we coordinated and integrated the activities and consolidated the full financials of the newly established TowerJazz Panasonic Semiconductor Company. As Oren discussed, the incremental addition of TPS Co. placed us nicely above the $900 million annual revenue run rate.

  • We encountered no operational surprises against our plan and better than expected business activities. Within the first three months post launching of this venture, we signed strong contracts and entered business agreements with multiple third-party image sensor companies and top-tier integrated device manufacturers which should reach annual run rates well above $100 million of high-margin revenue on top of the previously disclosed $360 million to $420 million forecasted TPS Co. annual revenues from the Panasonic business.

  • These third-party activities are just the beginning with other engagements at various stages in the sales funnel. Considering that $100 million plus incremental revenue engagements were closed within the first three months of sales activity, the value of the operation and technical offerings as well as the strength of the TowerJazz customer base is clearly demonstrated.

  • Let's look now at the organic growth of the Company, another area of great significance. I will refer to three things. Our revenue growth from our top customers. Two, the number of full mask sets or in other words, products entering our factories. And three, design wins.

  • As Oren had mentioned, our top five customers by revenue in the second quarter of 2014 grew 50% as compared to our specific revenue from them in the second quarter of 2013. The same measure for our top 10 customers shows a growth of 40%. All business groups have sales and roadmap activities within the top five as well as the next five customer groupings.

  • Growth numbers as just mentioned can only be achieved by serving customers who are giving us the major portion of their market share within strong industry growth segments. We expect this trend to continue and within our third-quarter forecasted guidance, the top 10 year-over-year revenue would be a 47% growth, that being our revenue from the top 10 customers.

  • The second quarter was a corporate all-time record for new full mask sets entering our Israeli and California factories at 242, up 80% from 130 in the second quarter of 2013. First half of 2014 versus first half 2013 is up 70% from 252 to 410 new products entering the factories. These products typically take three to six quarters to reach peak volume production which is then maintained typically for 1 to 1.5 years, hence the second-quarter and first-half records in new products are strong indicators of 2015 and 2016 continued core growth.

  • The last growth indicator is the amount of design wins. This is the first step in acquiring a new product for a new customer. The second quarter also demonstrated a record in design wins. This is a longer-term metric taking from six months to 1.5 years from the design win until the product or mask set if you will enters into the factory and then three to six quarters to reach volume production.

  • To summarize, all of the above indicators are revenue growth from our top customers, new products entering the fabs, and design wins for long-term potential are strong indicators that we are serving the right customers in the right markets fueling quarter-over-quarter and year-over-year top and bottom line improvements.

  • I would like now to discuss performance and development within several of our business units with each and every one of our business unit seeing positive momentum as we move through 2014. The CIS business unit continues to be strong and now with the addition of TPS Co., we are generating new business in several areas that we did not serve until now. The high-end worldwide cinematography and broadcasting market continues to grow rapidly due to the entrance of new companies providing super high definition video cameras at resolutions which are 4 times HD resolution. Super HD is now becoming a standard and film makers and even increasingly amateurs prefer to shoot in 4K resolution. This market has been further boosted in high definition cameras becoming ever more affordable.

  • For many years, TowerJazz has supplied sensors to the market leaders and is now increasing its penetration in this growing market by supplying high-volume camera makers. The high-end security market is also fast-growing especially in China in part driven by municipalities, wiring the city with cameras to help keep order and reduce crime.

  • A major issue with such cameras was low sensitivity and low resolution. The trend now is to move to high sensitivity and at least HD resolution. We have acquired customers starting projects in this area in TPS Co. for high definition and even super high definition sensors for the security market. We believe that this market especially in China will grow very fast over the coming years.

  • The industrial camera market based on fast global shutter sensors is also growing quickly. We see growth in this market for all sensor resolutions starting with 1.3 megapixel and up to 20 megapixel sensors for which (inaudible) is LCD screen defect monitoring in LCD production lines.

  • TowerJazz is the market leader in providing foundry services for global shutter pixels. The 110 nm CIS technology at TPS Co. allows us to transfer our global shutter technology to TPS Co. to support next-generation industrial sensors while having the process both in Japan and in Israel to allow dual regional sourcing for our customers.

  • The X-ray sensor market especially the one die per wafer for extra oral dental and medical applications is growing very quickly. We have recently acquired several new customers in this area. We expect as well to see fast growth in the CIS solution for this market replacing existing technologies such as the(inaudible) silicon flat-panel displays.

  • These cell phone camera market that dominates 85% of the entire CIS market continues to grow at a rate of about 5% to 7% annually. A fast-growing part of this market is a front high resolution camera for smartphones which is now up to 16 megapixels. These sensors are using 1.12 micron pixels. Such sensors are offered only by three major sensor suppliers. These state-of-the-art 1.12 micron pixel that we have at TPS Co. in mass production now on 65 nm technology and 300 mm wafers is very attractive to many customers in this market and we expect high-volume manufacturing of high-end smartphone cameras of several projects already next year.

  • In our RF high precision analog business unit, growth is driven primarily by two communication markets, the wireless market and the network infrastructure market. The wireless market includes wireless connectivity and consumer products such as mobile phones and tablets as well as wireless connectivity for the Internet of Things such as connectivity found in appliances or industrial equipment. Within this market we produced the front end RF components that control the transmission and reception of signals to and from the antenna, components such as switches, power amplifiers, load noise amplifiers and tuning elements.

  • We have been gaining significant market share as technology has shifted from gallium arsenide, a technology which we do not serve to RFCMOS, RF silicon on insulator and silicon-germanium for which we are technology leaders.

  • In addition, the market itself is growing faster than the overall semiconductor market. Front end modules for example are expected to grow by 17% between 2014 and 2015 according to mobile experts. The combination of strong market growth and strong market share gains is contributing significantly to our overall growth this year which is expected to continue for the next several years as these trends continue to play out.

  • The network infrastructure market is characterized typically by lower volumes but by premium average selling prices high for performance and reliability. Within this market we build high data-rate receivers and transmitters for fiber optic links using our high-performance silicon-germanium technology. These fiber optic links are used in the network backbone that carries most of the world's voice and data traffic as well is on the perimeter of the network connecting wireless base stations, data centers, even connecting homes directly through fiber to home providers. This year this business has seen strong growth associated with the buildout of LTE networks in Asia. Longer-term we expect continued growth fueled by new design wins in our highly differentiated silicon-germanium technology.

  • Growth in our power business unit is driven by two major technologies, our 0.18 micron BCD technology serving power management, audio and display driver products for consumer and enterprise markets as well as our 700 V technology serving commercial LED lighting and motor driver markets. The market for 0.18 micron BCD is very large as the technology can address power management, audio and display driver ICs for nearly all consumer devices from mobile to computing but it is also well suited for more demanding applications in industrial and automotive.

  • Today much of this market is owned by integrated device makers but more fabless and fab-lite customers are engaging with us and finding market success fueling our revenue growth and strong design win pipeline. The 700 V technology is well suited to the emerging LED lighting market and will grow as this market takes hold. Today's LED bulbs are largely made up of discrete components many of which can be integrated with our 700 V process reducing cost.

  • Indeed, we have production volume in our initial 6 inch base process but have now released an 8 inch base process that will enable die shrink and cost benefit to move more of the discrete component suppliers to integrated solutions and fuel future growth in this market space.

  • With regard to our mixed signal CMOS business unit, we have added a rich offering from our strategic partnership with TPS Co. including low power 65 nm and 45 nm technology platform. These platforms are best suited for the Internet of Things and other emerging markets. We see this expanding our existing capabilities for analog specific applications, a market that we already serve well producing for example various sensor products.

  • In addition, we have decided to broaden our offering in high-voltage CMOS, a technology that is primarily used for display driver ICs. This market has been showing a steady CAGR of about 4% to 5% and some of our customers are forecasting spikes in demand in the coming years. We have engaged with several customers for developing a customized process to their specific needs including an advanced 1.8 V/18 V process [flavor].

  • A brief note about Nishiwaki. As previously stated, we are in the process of ceasing the operations of that facility. Over the past few months, we have worked to transition all of our customers out of Nishiwaki to other fabs. Micron's products have reached their end of life as per our contract with them. Beginning in Q3, there are no further revenues from Micron.

  • For our guidance, we expect revenues for the third quarter of 2014 to be $225 million with an upward or downward range of 5%. Midrange guidance represents 70% year-over-year growth and excluding Micron or Panasonic, 20% year-over-year organic growth. As stated, the Micron contract has ended. Q3 will contain no revenue from Micron as compared to $31 million in Q2 2014 hence a net non-Micron growth of $22 million quarter over quarter.

  • So to summarize, we enter 2014 in a very strong position. We continue to realize substantial core business growth which we now expect to see propagate throughout all of 2014. In addition, the Panasonic joint venture will provide a strong set up in the coming quarter. This together with our proven ability to consolidate should provide us with a strong improvement in bottom-line performance in the short-, mid- and long-term.

  • Our previously cited strong double-digit revenue growth from our top customers is evidence that our strategy to drive market leadership through ongoing performance and multi-generation roadmap alignment with key customers that are leaders in their respective markets, is indeed working.

  • As we move through 2014, we are on a path to achieve our goal of surpassing a revenue run rate of $1 billion. I remain excited with regard to our potential and our ability to fulfill our potential. And above all and very well buoyed up through the actions and activities that we have with key customers who align with us for their long-term growth and success.

  • With that I would like to turn the time over to Noit.

  • Noit Levi - Director of IR and Communications

  • Thank you, Russell. 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 regards to the statements made and to be made during this call. Please note that the second quarter of 2014 financial results has been prepared in accordance with US GAAP and the financial tables in today's earnings release include financial information that may be considered non-GAAP financial measures under Regulation G and related report and requirements as established by the Securities and Exchange Commission as they apply to our Company, namely this release also presented financial data which is reconciled as indicated by the footnote below the table on a non-GAAP basis after deducting depreciation and amortization, compensation expenses in respect to option grants and finance expenses net other than interest accrued such that non-GAAP financial expenses net include only interest accrued during the resulted period.

  • Non-GAAP financial measure should we evaluated in conjunction with and are not a substitute for GAAP financial measures. The tables also contain the comparable GAAP financial measures to the non-GAAP financial measures as well as the reconciliation between the non-GAAP financial measures and the most comparable GAAP financial measures.

  • EBITDA as presented is defined in our quarterly financial review. 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 relation or as a substitute for operating income net income or loss of cash flows provided by operating investing and financing activities per share 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

  • (Operator Instructions). Cody Acree, Ascendiant Capital.

  • Cody Acree - Analyst

  • Thanks for taking my questions and congratulations, guys, on the results. You talked a lot about the RF space being a strong driver. We have seen some very, very strong numbers out of that space. When you look at the growth over the next few quarters, can you just rank order maybe your growth drivers to the different segments?

  • Russell Ellwanger - CEO

  • The front-end module in specific SOI phased antenna switches, antenna tuners is a very, very strong growth driver for us presently and through the next quarters. On par would be what we would call our tops business to where we have certain integrated device makers that transfer their flows or codevelop new flows with us but those flows stay behind a firewall or are only used for those customers. They don't become a standard foundry offering. Those are two very big growth drivers for us. In the case of both, they both represented through multiple customers, both represented by also very large blue-chip customers as well as a variety of others that are trying to make their way into the market.

  • The power management has presently a lot of traction happening within the 700 V for LED drivers and we expect the largest order that we have ever received for that to be coming within the next few weeks from a single customer. I would say that those right now are three very, very big growth drivers for us.

  • On the other side although on volume maybe not as large of a growth driver but as far as the margin that is coming out of it, what we talked about with the optical transceivers for the LTE infrastructure that is -- has gone up very strong. It is continuing to grow very strong and we have seen year-over-year quarter-over-quarter growth within our CMOS Image Sensor business which is also a very high margin business. Within those but the two biggest on revenue percentages would be the SOI switch and the IDM transfers.

  • The big growth drivers as far as contributed margin is the silicon-germanium transceivers and the image sensor activities and the image sensor scans many, many different types of applications I had mentioned multiple during the script.

  • Cody Acree - Analyst

  • And then when you look at your market share gains, so when you are talking to customers you just look at your trajectory, you have been gaining share for the last several years but with the addition of the Panasonic facilities, how has that share trajectory shifted with design wins and masks coming in? And maybe also have you seen much of an impact from IBM's effort to exit the foundry business?

  • Russell Ellwanger - CEO

  • I think independent of any announcements that IDM might have made or has been assumed to have been made, our growth has been very strong in all areas to where we would be competing with IBM and I think it deals with offering and service and more than that I won't comment on anything about IBM as where they are sitting on, what they will be doing with foundry or the overall semiconductor business. It is not necessarily so clear. But where we compete with them is on the area of the front end module and very specifically within silicon-germanium and we have established ourselves quite strongly in both of those areas.

  • As far as the TPS Co., what was your specific question there, Cody?

  • Cody Acree - Analyst

  • I was just trying to get to maybe a momentum trajectory of design activity, just customer engagement since you now have this advanced capacity of how customer engagement has gone versus maybe the prior 12 months?

  • Russell Ellwanger - CEO

  • So where I referred to the amount of new products, this record number that we had of 242 all of that is within the standard TowerJazz facilities. That is not in relation to TPS Co. at all. So the basic growth that we are seeing and drive organic growth is really within our factories and that is the business that we have been building on developing customer relationships for the past years.

  • In the area of TPS Co., there we have engaged with existing customers on both the IDM activity, IDM transfer to where we have several big contracts that have been agreed and signed as well as on very high end image sensor.

  • In the case of the IDM transfer into TPS Co., that is very big business, it is not a lot of customers by the nature of that type of a business. In the area of the image sensor, that has been in the predominantly in the 300 mm facility and that is for very, very advanced sensors where we talked about the 1.12 micron pixel, etc. and in that case there is a lot of strong traction and big engagements a lot in the pipeline. But although what has been closed in the first three months as I mentioned, should easily break $100 million of high-margin revenue within the next three-year time period incremental on top of what we already have within TPS Co. from a TPS Co. customer being Panasonic, we are really just at the beginning there of the engagements and there is a lot of excitement, there is a lot of customers learning about what is going on there and getting involved. But the major activity from design wins, the major activity from full mask set entrances, product entrances is from the organic capabilities within the Company.

  • Cody Acree - Analyst

  • That is great, Russell. Thank you very much. Oren, maybe for you on the operating expense side because we did see such a large jump, can you just give us a bit of visibility as to what you are expecting going forward?

  • Oren Shirazi - SVP of Finance and CFO

  • Yes, so like I stated in my part of the script, we have some of the costs that we knew that exist in the Panasonic transaction. Of course the Panasonic transaction brings positive EBITDA -- we didn't say exactly how much -- but when we went in-depth and looked at the costs, we saw that some portion of that should be allocated financially from cost of goods to R&D and SG&A of course like any other company. And indeed the R&D resources invested in TPS Co. in this Panasonic tower company is really big, really large so we allocated from COGS to R&D and SG&A the proper costs and basically what you see now and maybe a little bit because it is the first quarter maybe it is a little bit higher than usual but basically what you see now is a good indicator for the coming quarter which is just a classification internally between COGS and R&D. The total amount in the P&L is the same like we expected.

  • Cody Acree - Analyst

  • So this is a good starting point then going forward and it looks like your (technical difficulty)

  • Russell Ellwanger - CEO

  • Operator, we are having a problem hearing.

  • Cody Acree - Analyst

  • So you have a noncontrolling interest contribution that looks like it is largely offsetting the increase in OpEx. Is that what we should expect going forward?

  • Oren Shirazi - SVP of Finance and CFO

  • No, so what I said before is what we see in the COGS, R&D, and SG&A this is what you should expect also going forward and this is a good number. In regards to the noncontrolling interest line which is typically 49% of the profits of the Panasonic Company net profit base so no, so this quarter had -- because it is the first quarter had some first-time charges mainly amortization and depreciation so basically for the future you should expect they are like one or two million, a small number and still if you look at the P&L as a whole from what is driving from this Panasonic company JV, so also considered again from acquisition of 15 million that you have in this specific line and also the line that you asked about, noncontrolling interest which is just accounting 49% of the net profit overall.

  • Cody Acree - Analyst

  • And then lastly for me, you mentioned in the press release offers to restructure your debt. If you could maybe talk about what your expectations are there and how that might affect your share count going forward and obviously your interest expense?

  • Russell Ellwanger - CEO

  • We are looking at some ways to improve our balance sheet. Anything that would be entertained as a non-dilutive event would be exchanging shorter-term debt for longer-term debt and for the most part would be a wash or a betterment as far as the coupon that we would be paying.

  • Cody Acree - Analyst

  • Are there any instruments that are convertible today than that share count you went through that could be eliminated in any kind of debt restructuring?

  • Russell Ellwanger - CEO

  • No, it would not I think have anything to do with -- you are referring to some of the convertible bonds?

  • Cody Acree - Analyst

  • Yes, so any restructuring would not impact any of the potentially dilutive instruments that are out?

  • Russell Ellwanger - CEO

  • No, it would not.

  • Cody Acree - Analyst

  • Okay, very good. Thank you, guys and congrats.

  • Russell Ellwanger - CEO

  • It would not add any additional dilution.

  • Cody Acree - Analyst

  • Perfect. Thank you very much.

  • Operator

  • Jay Srivatsa, Chardan Capital Markets.

  • Jay Srivatsa - Analyst

  • Thanks for taking the question. Congratulations on the results (inaudible)

  • Russell Ellwanger - CEO

  • Thank you, Jay.

  • Jay Srivatsa - Analyst

  • First of all, let me ask you, with the outbreak of war, has there been any (technical difficulty) in fabs and what do you foresee going forward in terms of any kind of disruption and/or (technical difficulty) as you look at how that war is progressing?

  • Oren Shirazi - SVP of Finance and CFO

  • No impact at all. We are located in the North part of Israel and the actions that have been going on is in the South part of Israel with a little effect on the center of Israel but no effect at all on the North part of Israel. We didn't miss any day of shipment or production of course, not to mention that 70% of our employees and fabs are outside of Israel. But even the 30% of our employees and fabs which are in Israel they are really in the North part of Israel and have nothing to do with this conflict.

  • Jay Srivatsa - Analyst

  • Good. Russell, can you give us an update on what is happening --?

  • Operator

  • I'm sorry for the interruption. This is the operator. Can you please speak up, it is just a little bit difficult to hear you.

  • Jay Srivatsa - Analyst

  • I am sorry. Let me ask you, Russell, in terms of the India project, could you give us an update on what is happening there? There seems to be a new administration in place. What does that do to their existing contracts and agreements that you have signed with them?

  • Russell Ellwanger - CEO

  • At the recent SemiCon West Show in San Francisco, there was a joint session sponsored by Semi and the Indian government. We were invited to join them. It was called Connecting with India event. The government showed very, very strong support, very strong interest. If anything it appears that Prime Minister Modi is more of aggressive to make these activities work and to drive it than maybe previously at the SemiCon West show which was I think the second week of July on that Tuesday afternoon, I presented to a fairly large audience on behalf of our consortium which includes IBM and JP.

  • I participated on a panel discussion with members of the Indian government including Dr. Ajay Kumar, Head of the Electronics office. So I think everything appears to be moving in a proper direction. Nothing seems to be changing. Dr. Kumar did lay out the Indian government plans for growing and supporting the local Indian semiconductor industry and stated strongly a cornerstone of that is the establishment of two domestic chip production facilities one of which obviously are consortia or consortium would be establishing.

  • He also announced government to prove special benefit package for the two consortia that won the tenders. So presently we are awaiting final approvals. From our standpoint everything is moving and if anything it appears that Prime Minister Modi is personally very involved and very strongly directing that this goes forward.

  • Jay Srivatsa - Analyst

  • Very good. You mentioned a lot of design activity coming through the pipe. How do you hope to ramp up your capacity utilization in the Panasonic fab? And if indeed that is the direction you are going, when do you start to see material improvements in your gross margin profile?

  • Russell Ellwanger - CEO

  • That is a two-pronged answer. To begin with, as far as the front-end module and in specific the SOI switch as well as the power amplifier controllers, those are flows that are in the process of being dual qualified between Newport Beach and Migdal Haemek. We have available capacity in Migdal Haemek to allow for the growth that we expect to be having within this segment as well as we have additional room within our 8-inch facility in Migdal Haemek to grow should we need to through some incremental CapEx investment.

  • We have also invested in Newport Beach specifically around the 0.18 micron to increase the amount of starts being driven by both the silicon-germanium infrastructure products and the SOI products and I think by the end of September, the amount of starts relevant to those specific products will have increased by about 60% versus three months ago.

  • Now one thing that we are moving on very strongly is to dual qualify the 0.18 BCD power management flow in one of the joint venture factories, that being the Tonami factory and the tactical and strategic drive that we have in having that dual sourced to move the bulk of the BCD products into the joint venture and then in Migdal Haemek and Newport Beach to drive the bulk of all the SOI front-end module products.

  • Incremental margins will obviously come up independent of the joint venture as the 60% start for the SOI is enabled which again is the end of September so I think the you would see that as far as shipments in Q4 and Q1 and then through the increase of both capacity and utilization Migdal Haemek.

  • Now as far as the Panasonic in itself, I'm sorry, not Panasonic but the joint venture at TPS Co., so our joint venture with Panasonic, that we had stated from the contracts that we have already closed we would start seeing incremental revenue from those specifically in the second half of 2015. Any additional activities that we do through offloading the power management would also most likely come in that timeframe and that will just be accretive to the bottom line of the Company and obviously the top line as the revenue grows.

  • So in relation to the TPS Co., I would believe from everything that we see now and would forecast now that Q1, Q2, Q4 of this year Q1, Q2 of next year might have some small improvements coming to the bottom line but starting Q3 of 2015 upwards throughout 2016, 2017, 2018, you would see we believe a strong monotonic increase in top and bottom line coming out of the joint venture.

  • But the organic growth that we have been talking about is predominantly driving up both capacity increases and utilization increases within the organic factories and I think that the biggest part of gross margin contribution in the short term to mid-term will be seen through that. Oren, do you have anything to add to that?

  • Oren Shirazi - SVP of Finance and CFO

  • I agree with (inaudible).

  • Russell Ellwanger - CEO

  • Does that answer your question, Jay?

  • Jay Srivatsa - Analyst

  • Yes, thank you very much. I appreciate it.

  • Russell Ellwanger - CEO

  • It was a long answer but I think complete.

  • Jay Srivatsa - Analyst

  • I got it. Thank you. Good luck.

  • Operator

  • Rajvindra Gill, Needham & Company

  • Josh Buchalter - Analyst

  • This is Josh Buchalter in for Raji. Thanks for taking my question and congrats on the good quarter. Again on gross margins, maybe more long-term, obviously there is a lot of push and pulls with the Nishiwaki closure and the joint venture so can you tell us how you are thinking about that long-term?

  • Oren Shirazi - SVP of Finance and CFO

  • I believe that what you see now in Q2 2014 results and mainly if you look at the non-GAAP adjustment so you really can see it without the depreciation, you can see it really clean, this is pretty much a reflection and the only adjustment maybe you should do for the future is just to take out Nishiwaki. Because like Russell mentioned, we had in this quarter approximately $31 million revenue from Micron associated with costs obviously the costs a little bit higher than the revenue otherwise there was no rationale to cease the operation. And if you take out those numbers, you will somehow improve the margins from day one after the cessation of operations and then if you look more forward to the future, you then need to take into assumption what Russell said before in the response to Jay about the improved margins from the incremental business in Panasonic JV.

  • So in this TPS Co. now, we only make basic margins because of the committed volumes from Panasonic. To that we should add all the incremental revenue that we expect to bring as a foundry business to TPS Co. which should be in a very high margin just because we will be associated with only incremental variable costs and typically in our industry the variable costs are a small portion as compared to the fixed cost and to the selling price of the wafer.

  • Josh Buchalter - Analyst

  • Okay, thank you. That is helpful. And the Nishiwaki closing is still on track for the same timing?

  • Oren Shirazi - SVP of Finance and CFO

  • Yes, it is very much on track.

  • Josh Buchalter - Analyst

  • Okay great. Thanks, guys, and congrats again.

  • Operator

  • Lisa Thompson, Zacks.

  • Lisa Thompson - Analyst

  • I have a couple of questions. First off, on Micron, could you tell us how much Micron revenues was in Q4 of last year?

  • Oren Shirazi - SVP of Finance and CFO

  • It was approximately split on this level that Russell stated before, 31 million. It was about this level for the last six quarters, pretty much split.

  • Lisa Thompson - Analyst

  • Last six quarters?

  • Oren Shirazi - SVP of Finance and CFO

  • Yes.

  • Lisa Thompson - Analyst

  • Okay. So how much was Micron in 2014 and how much was it in 2013?

  • Oren Shirazi - SVP of Finance and CFO

  • So it was about $30 million a quarter so in 2013 there was four quarters so $30 million times 4 and in 2014, $30 million times two.

  • Lisa Thompson - Analyst

  • Okay, so it was all [to that]. All right. Okay, that helps with the internal growth concept. Now as far as a joint venture, what percent of capacity do you think you are using right now?

  • Russell Ellwanger - CEO

  • As it is all Panasonic business at present, I don't want to overstate something that would state an awful lot about Panasonic. But we had at the Q1 release, the COO from TPS Co. actually presented and he stated below 50%. So I think more than that I would not want to state.

  • Lisa Thompson - Analyst

  • Okay. And if you were at 100% capacity, where would your gross margins go?

  • Russell Ellwanger - CEO

  • If we were at 100% utilization at TPS Co.?

  • Lisa Thompson - Analyst

  • Yes.

  • Oren Shirazi - SVP of Finance and CFO

  • So we can say that again like Russell mentioned, we don't want to go into the details of the business of Panasonic because then you will know the current margin but we are slightly below the 50%. It is 100% we indicated that we can be an additional $150 million to $200 million at full capacity additional to the baseline and we said in the press release that within the coming three years we pretty much feel secure that we secured agreements already to utilize at least $100 million and I answered before that the incremental margin on this additional $100 million a year or $200 million a year everybody can do his assumption but $200 million is the maximum possible so this will be in very high incremental margins to cover the variable.

  • Lisa Thompson - Analyst

  • Okay, so you are not going to help. Thanks a lot. Great quarter. Thank you.

  • Operator

  • George Burmann, J.P. Turner.

  • George Burmann - Analyst

  • Good morning, gentlemen. Congratulations to a great quarter as usual, almost used to it now. I had a quick question. Since probably five, six, seven, eight years ago you have consistently reported GAAP net losses. Could you remind us what your tax rate situation would look like from here on out going forward as you ramp up profits?

  • Oren Shirazi - SVP of Finance and CFO

  • So we have three tax regions, Israel, US and Japan. For the Israeli tax region, we have Israeli tax laws are very convenient in that aspect that allows you to carry forward with no any limit taxes for the future so actually and also we have some enhanced depreciation for taxes meaning whatever the depreciation we are writing the books we are getting almost 2X that amount for taxes. So basically we accrued already more than $1 billion of accrued expenses deductible for tax against future income. So from the Israeli operation, we don't believe we will gain (inaudible) we will accrue more than $1 billion of net profit only at that point which is for our future will pay taxes.

  • On the US side, we also have some net losses carry forward but nothing significant amount meaning that if indeed the US (inaudible) facility will be fully utilized creating a significant amount of net profit, it will be taxable average at 35% tax rate there.

  • And in Japan, the tax is about 36%, the tax associated with us about 36% but only in regards to the net profits that the Panasonic tower company will make which is like we stated before in the first 1, 1.5 years it is limited because of the nature of the commitment that we got from Panasonic and the margin and only after 1.5 years they should start to ramp up to a more significant amount.

  • George Burmann - Analyst

  • Okay. Is there any like sometimes when companies lose money for a considerable period of time they are basically being told you will never be able to use the NOLs. Then they turn around and start making money and all of a sudden the NOL comes back into play. I am showing deferred tax liability on your balance sheet of now $100 million. How should we look at that?

  • Oren Shirazi - SVP of Finance and CFO

  • So that is two separate issues. There is no linkage between the first part of the question to the second so I will address it. The first part of the question, NOL, so like I mentioned before, the major part of the NOLs that we have are the Israeli NOLs and they are really carried for the future and we for conservative reasons, to be conservative, we do not present in the balance sheet the asset that can be derived from that because obviously if we have let's say $1 billion loss of carry forward, maybe another company would write 1 billion times the tax rate which is in Israel applicable for us it is 25%. So it is $250 million of assets that if we would not be conservative we could have write in the balance sheet against profit but this you can only write according to GAAP if you really believe that this $250 million you will enjoy from them in the coming future.

  • We don't see that we will have $1 billion of net profit in the coming year so we don't write it but it is really one of the assets that we have which is not in the balance sheet. That is for the first part.

  • The second part of the question that you ask tax liability in the balance sheet, this is actually just a I can say theoretical book related liability just for it is called timing GAAP, timing differences on the tax. What is that 100 million, it is really created in this (inaudible) from actually the positive gain from the acquisition of Panasonic of the TPS Co.

  • So actually as you know, we recorded in the P&L $166 million if you look at H1; $166 million of net gain from acquisitions. The composition of that is about $265 million of gross gain less $100 million provision for tax. So according to the accounting, it is like this gain is of course not a taxable income and therefore you need to write like a liability for taxes but nobody should be worried about it because this liability is not really payable because against that gain we actually recorded the fixed assets of TPS Co. in the value of $250 million which is the third-party appraisal value. We described in the last quarter and this $250 million book value grant us with increased depreciation rate. So actually for the future the increased depreciation will offset for tax purposes -- will offset this theoretically tax liability and actually what I said now results in zero effect on tax payments. (multiple speakers)

  • George Burmann - Analyst

  • That is what I wanted to find out. Now it might be a good goal for the Company to work on utilizing that $1 billion loss carry forward in Israel, right?

  • Oren Shirazi - SVP of Finance and CFO

  • Exactly. That is a good statement. Like I said, it is one of the assets of the Company. According to GAAP, we cannot write it in the balance sheet but for sure, upstream revenue profit that will go to the parent company tower by whatever way really could be actually not taxable because we have this huge NOL.

  • George Burmann - Analyst

  • Okay. Next, a question. You are carrying now almost $200 million net cash on the balance sheet. What is an adequate amount of cash for you to hold? You had mentioned on previous calls that some of your customers were saying well, you don't have enough cash, we are kind of reluctant to give you orders. Now the cash has obviously significantly increases. At what point in time looking at the still very low stock price would you consider utilizing some of the cash maybe to buy those convertible bonds back or some of the other debt back to increase the value of your Company further?

  • Oren Shirazi - SVP of Finance and CFO

  • Okay, so you are correct that the cash is very good, very big but on the other hand we also have debt so if you look at the balance sheet, we have $97 million short-term debt so if you adjust which is coming for its due date for example, we have the Jazz notes $44 million and we have cash associated with that so if you look on the net cash, I mean cash net of short-term maturities, it is $192 million less $97 ml, so it is $95 million which is a normal amount timing for us it is a good number against the long-term debt that is also in the balance sheet and so we these Jazz notes, we have other debt to maturities in the coming two years so we believe this number is okay to service the debt that we have.

  • In regards to buying back convertible bonds, it is a very good statement what you make and very economically, it is very reasonable that we will do that because for sure today the market environment enables us to pay less than 7.8% or 8% coupon that we paid. And this is also what Russell related to in the beginning in regards to maybe doing some refinancing that will lower the interest rate etc.

  • But in regards to specific idea that you said about buying back convertible bonds, that is a little bit of a problem because technically under Israeli law, there is some Israeli law that only if you have two years of consecutive net profit you can do that. So in the past we did not have it for the last two consecutive years technically we can actually not execute on that and this is why another reason that we need this cash in order to have it for the payment of the bonds when they come due.

  • George Burmann - Analyst

  • A lot of them are convertible into stock though, right?

  • Russell Ellwanger - CEO

  • Yes.

  • George Burmann - Analyst

  • The Jazz bonds, I think they convert into common stock. Are they in the money at the moment or are they still out?

  • Oren Shirazi - SVP of Finance and CFO

  • No. So the Jazz bonds that I referred which are short-term maturities which is $44 million and for that we need cash, they are due in June 2015 and they are not convertible at all.

  • George Burmann - Analyst

  • Oh good. Okay.

  • Russell Ellwanger - CEO

  • George, but you made one statement that I am sure that I never mentioned and that was a customer complaining about our cash balance. I have never had such complaints nor has our cash balance been in a position that they would complain but that -- I'm not sure what you had referred to there.

  • George Burmann - Analyst

  • Okay, I thought I remembered that from a previous conference call that you were looking to increase your cash position so the financials look strong.

  • Russell Ellwanger - CEO

  • That might always be the case but certainly it is not because a customer had complained about our cash balance.

  • George Burmann - Analyst

  • Okay. Sorry for that indication there. Other than that I think you guys are pulling all the right levers and look forward for further growth in the Company and hopefully in the value of your Company in the market.

  • Russell Ellwanger - CEO

  • Thank you very much, George. Appreciate it. Thank you.

  • Operator

  • (inaudible)

  • Unidentified Participant

  • Good morning, good afternoon, gentlemen. First question, regarding the Nishiwaki fab, my understanding is the operating costs all total from that fab were about $130 million per year. So what I'm just trying to clarify when one looks at the income statement today that would suggest on a quarterly basis that about $32 million of operating costs by the December quarter will not be there versus what you just reported in June. Is that correct?

  • Oren Shirazi - SVP of Finance and CFO

  • It is partially correct. The $130 million is the fixed cost, only the fixed cost of the Nishiwaki which is the majority of the cost and this is what we said is we are saving from the operations because this is fixed cost. In addition to that, we have their variable costs -- I mean when we manufacture so just for an example basing on the previous numbers of $30 million revenue a quarter, so against that you have approximately $10 million of variable cost plus the $32 million fixed cost that you mentioned so the total is $42 million actually.

  • Unidentified Participant

  • Okay. But as the Nishiwaki products are transferred over to your other fabs, that $10 million of variable cost is basically just being transferred from one location to another so when we look at the December quarter, the difference in December versus the June quarter just reported will be that $130 million run rate. Is that correct?

  • Oren Shirazi - SVP of Finance and CFO

  • Yes.

  • Unidentified Participant

  • I'm stating the obvious but basically as of the December quarter going forward, your reported gross margins will be materially higher because you are going to be having a $130 million of annual costs that will no longer be reflected going forward?

  • Oren Shirazi - SVP of Finance and CFO

  • Yes.

  • Unidentified Participant

  • Okay, fine. Just a second question regarding going forward because you are a larger company now, can you just clarify what you expect to be your annual depreciation and amortization going forward and your annual capital expenditures that will be required?

  • Oren Shirazi - SVP of Finance and CFO

  • Okay, so basically it is a good question because the Q2 numbers are not clearing that because it also includes Panasonic and also includes Nishiwaki and also includes some one-time there of costs but you can look at the Q2 number which is high again because it also includes Nishiwaki of about $8 million and deducted so you have like $47 ml, $45 million a quarter of depreciation on the P&L, okay? So $45 million a quarter should be the run rate in the coming quarters until -- including Nishiwaki -- until let's say Q1 2015 and from Q1 2015, there is like a gradual reduction and you know that is high but there is some step functions that is bringing it down.

  • The final level that it will reach will be about $20 million to $25 million a quarter. So from $45 million to $20 million to $25 million but this will take several years so you can assume a linear reduction for the coming three years let's say. This is because of the big investments we made in fab 2 in the past and which are more than the sustained CapEx that we spend now so it was -- the factory was built in stages and instead so whenever seven years our completed from a certain stage, so the depreciation goes down. So to conclude, if you take $45 million on a baseline over three years, do some linear reduction towards $25 million, you are on the conservative side.

  • In regards to the CapEx payments, so we said I think in the past that we expect about $20 million a quarter. It could be in maybe in quarters that we have a material amount of investment, $25 million but this should be the range, much lower of course than the depreciation because of the reason I specified before.

  • This quarter by the way and also previous quarters were very low. We were really doing some savings here so it was good results but for the future we didn't change the guidance that it is about $20 million.

  • Unidentified Participant

  • Thank you. Then one final question regarding the numbers you are disclosing on the new mask that's entering the fabs which is appreciated, what is the best way to assess the potential sales of those mask sets will be able to provide let's say in four quarters? Because I understand each mask set could provide a different amount of revenue but when you show let's say that your mask sets entering the fabs were 242 in the current quarter, up about 85% year-over-year, are we to presume that the sales benefit could be also about 85% or is the number dramatically different because we are talking about mask sets individually that represent greater or lower amounts of revenue now versus in the past?

  • Russell Ellwanger - CEO

  • It is a very good question. I would say that not every mask set that is entering has the same exact value. Some of them have extremely high value that there would be substantial growth that comes off of it. I would think that that is a reasonable assumption how much growth that comes off of it we -- again I'm not trying to be illusive but we have not provided really long-term guidance. We provide targets but I would think that the 80% first-half versus first-half type of a number, 70% first-half versus first-half number should be able to grow full utilization of our factories and full utilization of our factories would put us probably somewhere organically at a -- this is without any offloading into the TPS Co. but could put us somewhere organically of $160 million a quarter organic run rate.

  • Unidentified Participant

  • Right, so when the non-Panasonic fabs are full, they are doing $160 million of revenue per quarter and you are thinking that the possibility for reaching that level of revenue would be how far away?

  • Russell Ellwanger - CEO

  • Again, we don't provide long-term guidance but as I stated, those masks would be reaching their peak volumes in the 2015, 2016 timeframe. I would assume that our target anyway is to be running at full utilization in the Q1, Q2 timeframe of next year.

  • Unidentified Participant

  • Got it. One last thing, regarding engaging new customers, obviously you did a splendid job here. After three months of integrating Panasonic, is there a reason to expect that there is plenty of additional potential customers to talk to so that signing agreements with additional customers to bring in another $100 million of potential revenue in the future is also very doable in the near future or do you really think that most of the new customers who are interested you kind of signed up already?

  • Russell Ellwanger - CEO

  • Definitely the former. I think right now most customers are very, very interested specifically what is the offering. We had a -- each quarter we have what we call a TowerJazz technical symposium in a different region. On July 24, we had it at Shanghai, China, had a very, very good representation of a variety of different segments of the Chinese market and part of the presentation there was the CEO of TPS Co. and then they held a booth that they had very good action at and activity where different customers came, potential customers came to understand what the offering was.

  • On I think September 18, we have the same activity in Amsterdam. I believe that there will be a very strong interest to understand in particular the high-voltage power capabilities of TPS Co. as far as the foundry offering, looking at what is some strong segments within Europe.

  • So the initial activities again, they were strong and I think very quickly completed. The IDM transfer type of activities were with existing customers that we were able to get interested and were interested in the activities to move into the factories there. On the image sensor side, it was customers that knew of our reputation in image sensor which is really quite, quite strong and then in and of themselves knowing the capabilities of Panasonic's image sensor products were very interested themselves in getting involved and really more or less solicited us.

  • The image sensor really dealt with our reputation and customers then saying wow, this is going to be a foundry offering. We really want to get involved in that factory and contacting us for that type of an activity. That is just the first front of that.

  • So right now our task and activity is training the sales force worldwide as to not just the continuous training of what we have organically within TowerJazz but what is offered through TPS Co. as a foundry offering and then having them engage with customers on it. That activity from the direct sales force really hasn't started yet.

  • Unidentified Participant

  • Got it. It is truly an opportunity there, great. I thank you very much and best of luck with this ongoing combination.

  • Operator

  • There are no further questions at this time. Mr. Ellwanger, would you like to make your concluding statement?

  • Russell Ellwanger - CEO

  • Certainly. Thank you very much. So as always, thank you very much for your interest in the Company. We have enjoyed, we look forward to continuing to update on the different progresses that the Company is making, where we are going, what we are doing. As stated, our strategy has been to align with customers that are leaders within their specific segments, perform for them in current products and be aligned on a multi-generation roadmap to where we are their partner to add and enable differentiation for future generations and future products.

  • The amount of tapeouts coming into the factory from top customers I think really does show that that strategy is working. One of the questions is to when will that and how much does that accrete into revenue, I think the organic growth that we are showing shows that it is accreting real time as we speak. The Micron revenue that had been at about a $30 million, $31 million quarterly run rate will be supplanted very shortly through organic business. On top of that, we have the TPS Co. business through Panasonic, all of the added capacity and new engagements that we have done and will continue to do there and just continue outlook.

  • We had a very successful conference in China. A lot of activity going on there I think as most know, a lot of growth happening in China within electronics, within semiconductor and I think we have been chosen as the foundry partner of choice for many analog applications.

  • On September 18, we will be in Amsterdam presenting to a large group of big a cross-section of fabless and fab-lite semiconductor companies in Europe. Anyone that would have the opportunity to be there you would be invited. We very much enjoy hosting you as an investor at any of our TGS functions.

  • That being said, again thank you for following us and we look forward to update you on many exciting things as time goes on. Thank you very much.