高塔半導體 (TSEM) 2015 Q1 法說會逐字稿

Welcome to the TowerJazz first-quarter 2015 results conference call.

(Operator Instructions) As a reminder, this comment is being recorded May 13, 2015.

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

I will now turn the call over to Mrs.

Noit Levi, Vice President of Investor Relations and Corporate Communications.

Mrs.

Levi, please begin.

Mrs.

Levy, please begin.

Thank, you and welcome all to TowerJazz financial results conference call for the first quarter of 2015.

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

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

They are also available on our website.

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

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

Russell, please go ahead.

Thank you, Noit, and welcome all for joining our call today.

This is a very significant quarter for me personally.

This month marks my 10th-year anniversary at Tower, now TowerJazz.

In today's conference call, I would like to take a look back over the past decade on what we have achieved and how these achievements will springboard us into the future.

In joining the Company in May 2005, the status was as follows.

Operationally, one 6-inch factory at partial utilization and a new 8-inch factory of low capacity and, at that, at low utilization.

There was an annual run rate for revenue of approximately $100 million.

EBITDA was negative $20 million.

Cash from operations was negative $55 million, and a net debt of $550 million.

In my interview rounds, I saw a motivated and capable workforce and, in particular, felt an immediate bond with Oren Shirazi, at that time acting CFO, now CFO and Senior Vice President of Finance; Dr. Itzhak Edrei, at that time, Vice President R&D and now President; and Ms. Dalit Dahan, at that time Vice President Human Resources, now Senior Vice President Worldwide Human Resources and Information Technology.

As well, I had strong interactions with Mr. Idon Ofer, at that time chairman of Israel Corporation, Tower's largest shareholder.

Mr. Ofer and I aligned quickly, giving mutual long-term commitments, which we have both strongly held to.

I took the job and our journey began.

The first step was to correct the base financials.

To do this, firstly, we structured the organization from a central R&D in central sales and marketing into business units.

Each with its own general manager, research and development headcount, product marketing, and customer support.

Secondly, now with a structure that allowed group-by-group financial accountability, we gave each business group targets and communicated to the market that we would achieve positive EBITDA in six months, namely Q4 2005, and positive cash from operations in 18 months, namely Q4 2006.

Both were achieved and have been sustained ever since.

In 2005, 2006, we were predominantly a second- or third-source digital technology provider, with the exception of having started the CMOS image sensor business group in 2005 under general management of Dr. Avi Strum.

During this time, we reviewed and revamped our strategy and capabilities.

It became quite apparent that our fabs in Israel could not compete successfully head to head with the major global digital foundries which invest steady-state billions of dollars on technology nodes following Moore's law.

We looked at alternatives.

Semiconductor innovation improves either, one, an ability to process more information in a given square inch of silicon through digital transistor scaling and new software algorithms, e.g.

digital Moore's law.

Or, two, an ability to communicate sense, power, hear, see, and display information through specialty semiconductor developments.

Innovation and specialty analog semiconductors is fundamentally different than innovation in the digital world since it does not rely on a predictable scaling of the (technical difficulty) driven by Moore's Law, but rather on a deep understanding of problems faced in each unique application coupled with burst of creativity that enabled breakthrough solutions to these problems (technical difficulty) inside the silicons rather than simply scaling the silicon devices.

It is a model that is economically based upon equipment reuse, with a few tens of millions annually spent on capability, CapEx, rather than the digital roadmap multibillion-dollar annual investments.

We saw that this alternative, that is, unique specialty analog semiconductor markets, were of great demand, and we have the internal capabilities and human intellectual property to serve and grow to this demand.

We took a most important strategic decision and shifted our Company's focus on analog specialty components and technology offerings.

This was not an easy change.

It meant substantial shift in customer base and moving away from some large digital customers.

But it has proven successful.

Since then, our focus has been driving innovation and engineering solutions to the problems of interfacing the real analog world through a vast array of specialty semiconductors such as wireless RF, power management, imaging, and other sensors.

All being analog devices to digital systems and back again to the real world.

In (technical difficulty) first with Jazz Technologies, a California-based company which was an RF analog specialty leader, and we have added strong benefit of bringing to our management team Dr. Marco Racanelli, now senior vice president and general manager of the RF high precision analog and power management business units.

The addition of Jazz positioned us for accelerated growth and gave us a leap up, becoming a top-five foundry.

It expanded our global reach, provided us with a broadened and expanded process portfolio, and enabled us to leverage significant cross-selling opportunities.

On top of all this, it enabled us to make significant cost savings without harming our ability to grow.

In addition, in 2008, we had a big change in the governance of the Company.

I met with Mr. Amir Elstein.

At that time, he was executive vice president office of the CEO, and a member of the board of directors at Teva Pharmaceuticals.

Amir began his career at Intel, at which he spent 23 years.

He started as an R&D process engineer, grew through multiple technical leadership positions of fab operations manager, and then became a corporate officer at Intel, the co-CEO of Intel Israel, and managing director of the Intel electronics group, driving the strategy and technical roadmap of the microcontroller business units.

He had silicon in his blood.

We appreciated each other's talents, experience, and capabilities and its opportunities for enhanced success.

Amir joined the Board.

In 2009, Amir became the Chairman of the Board of Directors and revamped the Board to the specific needs of the Company.

As a semiconductor expert, he has been a partner in the strategy and tactics of the Company.

In 2010, we crossed a big milestone of $0.5 billion in revenues with commensurate bottom line.

This revenue level provided us with another major achievement.

Based on the ranking by revenue of all specialty foundries, we moved from position number 12 in 2005 to 6 in 2008 to 3 in 2009, and we finished 2010 as the number one mobile specialty analog foundry.

We became an acknowledged global analog leader with best-in-class RF and image sensing capabilities.

Fast forward to 2014, we formed TowerJazz Panasonic Semiconductor Corporation.

This is among the most important and strategic events to date.

It significantly enhanced our leadership in the specialty analog space.

It brought us multiple world-leading analog platforms of the highest quality together with advanced 300-millimeter capability and technology nodes, and the capacity to allow us to roll serve our organic growth and go nicely beyond a $1 billion annual run rate.

I look back over the past 10 years, and I am truly pleased with what we have accomplished at TowerJazz, and I am very invigorated to begin the next 10 years.

To look at the present and then into the future, our first-quarter 2015 revenues were $226 million, which represents an increase of 71% over those of the first quarter of last year.

Excluding TPSCo and Micron, there is a 33% year-over-year organic growth in the Company nicely distributed over all of our business units with 31% growth from our top 10 customers.

Our design wins in the first quarter were 30% higher than those in the same quarter last year.

We also recorded an all-time corporate record for the number of mass entering our factories.

Mass grew by 37% in the first quarter versus Q1 last year, and when including TPSCo third-party business, it recorded a 45% increase in mass growth as compared to Q1 2014.

Specifically in regard to TPSCo, we continued to increase the production volume.

In Q1, we had a new product tape-out on average every three days, a significant milestone considering that this venture has only been in existence for one year.

These tape-outs come from a broad range of new customers and multiple technology nodes from 65 nanometer up to 0.3 micron.

TPSCo has seen strong activity in our power management and CIS process flow technologies as well as customized embedded MBM solutions.

Additionally, our first 65-nanometer RF SOI devices have been measured and samples have been received by a strategic advanced roadmap customer.

More on that in a few minutes.

TPSCo has completed the transfer of all the significant components of the TSA team power management platform and has begun to offer tape-outs to customers for qualification.

This provides us additional flexibility and capacity planning, and it allows our customers added business continuity assurance.

Some large and important end users require from their suppliers global diversity and manufacturing.

At TowerJazz, our customers can have this in a one-stop shop.

Finally, TPSCo continues to collaborate well with our partner Panasonic on many projects that benefit both Panasonic Corporation and third-party foundry customers.

By providing our customers with both TowerJazz and Panasonic process solutions, TPSCo is gaining rapid traction in the foundry space and provides the only viable pure-play foundry service in all of Japan.

Looking at the other business activities, I will focus a bit on the specific growth of the markets in which we are playing as well as how each of our business units maintains and plans to extend their competitive leadership.

Beginning with radiofrequency high-precision analog business unit, which is our largest business unit by revenue.

Our RF market is subdivided into two high-growth segments, that being driven by the handset RF front-end module and that being driven by the data infrastructure market.

The RF front-end module market continues to grow at a rate that outpaces overall handset growth due to the fact that the latest 4G long-term evolution smart phones need to support multiple more bands than older models.

This increase in the front-end module component count and complexity translate for us into more silicon area per phone and, hence, higher wafer sale.

In terms of the data infrastructure market, we serve it with our high-performance silicon germanium technology, using components that make high-speed fiber optic connections.

These connections are used in the Internet backbone supporting the world's exponentially growing data traffic needs from use in data centers to supporting the growth in cloud and server farms, as well as delivering high-speed services to our homes and businesses.

We are the only pure-play foundry that has made consistent investments in silicon germanium technologies since the 1990s and have thus built a technology barrier that is difficult for any competitor to overcome.

This, together with our continued investment in technology, customer service, and capacity, promises to secure our strong market share as this high-value market continues to grow.

To update with some of our activities during this quarter.

We recently released samples of our latest SOI technology that leapfrogs the performance of our current highly successful technology for handset RF front-end modules.

With this technology, we have secured design wins at lead customers and expect to see the initial product tape-outs for this platform this quarter.

The technology will substantially reduce insertion loss in wireless front-end module components, improving connectivity and battery life.

As mentioned, we also produced our first 300-millimeter SOI wafers in our TPSCo factory.

The RF performance of these samples are unrivaled and were provided to a leading advanced roadmap customer.

Our platform performance and roadmap, combined with our 300-millimeter new capacity in addition to the two 200-millimeter factories already qualified for RF SOI technology, offers our customers substantial opportunity to stay with us and grow with us in the long term.

We also successfully prototyped several products at our newest low-power, high-performance silicon germanium process intended to reduce power consumption for high-speed fiber-optic connections.

We continued to win significant market share in high-performance silicon germanium fiber-optic market, where our technology offers customers unparalleled performance.

We are also presently supporting the production ramp of our first RF MEMS component for the handset front-end module.

Cavendish Kinetics and ZTE's Nubia just press-released the adoption of this tunable antenna technology to enable their new borderless screen advanced smart phone.

These specialized components offer performance that cannot be matched with non-MEMS solutions, and we are perfectly positioned to take advantage of growth in this area as it plays out over the next years.

In our TOPS business unit led by Ms. Zmira Shternfeld-Lavie, we transfer large customers' specific flows into our factories that are then used exclusively for those respective customers.

This quarter, we began aggressive ramping of several large transfers in TPSCo.

This is on top of the big activities within the rest of the Company that have been previously press-released.

The CMOS image sensor business unit continues to be strong, and with the addition of TPSCo we have generated new business in several areas that we previously did not serve.

Our advanced and proven CMOS image sensor technology is targeted for high-end still and video imaging, machine vision, dental and medical, security automotive, and 3-D gesture control.

Our long-term, extensive experience in the imaging field, combined with our in-house know-how, enables best-in-class, customized designs.

We do have the best-in-class, 1.12-micron pixel at TPSCo that allows us to compete very well in high-megapixel smart phone cameras.

Himax is moving towards mass production, and we have won another large Chinese customer in this area.

Since there is a shortage of such sensors in China, the timing is just perfect for us to take major market share in this region.

Successful design wins of Himax and the other Chinese customer can bring us in a very short time to 300-millimeter sensor orders of several thousand wafers per month.

In the 3-D gesture control market we continue to grow.

And now in addition to Intel, which we recently announced, we have two major time-applied customers having demonstrated very good performance of their sensors based on our flow.

This enhances our presence in the high-growth 3-D gesture control market.

This technology is also going to other markets such as automotive.

We see this technology as very fast growth.

Shifting to our power business, our power platforms have been designed in major products serving mobile, computer, consumer, and automotive markets with strong customer presence in North America, China, Korea, and Japan.

The demand for power management in mobile devices constantly grows and requires continued improvements in power efficiency.

Similarly, LED general illumination land market is predicted to grow at 31% CAGR for the next years and demands intelligent, efficient LED lighting controls.

Our power platform offers maximum flexibility, enabling customers to create cost-effective products at any desired level of integration and achieve first-pass success for faster time to market.

The integration of our low-mask-count, non-voluble memory IP blocks provides also significant differentiation and cost effectiveness for enhanced power management solutions.

We have realized a 50% increase of demand for our power products as compared to 2014.

This activity has become a significant portion of TowerJazz revenue.

Lastly, regarding our business units, through our Newport Beach facility we supply strategic onshore foundry services for critical US aerospace and defense applications through industry and segment expertise.

We have extensive capabilities, and we bring a broad range of commercially available technologies and services to the A&D community.

We see trends in three-dimensional integrated circuits; silicon-based MEMS switches; migration of visible, near-IR image sensors to silicon CMOS in solid-state platforms, and very large wafer-scale phase arrays, all of which our A&D technologies are well positioned to support.

To close, we target Q4 of this year to achieve a $1 billion annual revenue run rate and 40% non-GAAP gross margin.

Our second quarter of 2015 guidance is $235 million, in line with these targets and with our previously stated target of quarter-over-quarter growth throughout the year.

Most significant, in this past quarter we strengthened our balance sheet, reducing net debt to $160 million, yielding a net debt to EBITDA coverage of 0.8.

This will enable us the correct financial structure for sustainable GAAP net profit going forward.

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

Oren, please.

Thank you, Russell, and welcome, everyone.

Earlier today, we announced our results for the first quarter of 2015.

The first quarter demonstrated a significant turning point on all our balance sheet metrics and other financial indicators including our total gross debt reduction by $293 million year over year, our net debt reduction by $244 million, and net debt to EBITDA ratio reduction to below 1X.

This, coupled with shareholders' equity, increased to its record level since inception.

In addition, we achieved very good (inaudible) performance, with non-GAAP gross margins of 36% and EBITDA run rate exceeding $200 million on an annual basis.

I will start with additional analysis of the P&L report.

On the revenue side, we achieved revenue of $226 million for the quarter, reflecting 71% year-over-year growth, as compared to $133 million for the first quarter of 2014.

With strong organic growth of 33%, which excludes revenue from micron and Panasonic and 31% growth from the top 10 customers.

Non-GAAP gross profit for the first quarter of 2015 was $81 million, an 81% improvement from the $45 million recorded in the first quarter of 2014, representing a very strong gross profit margin of 36%.

EBITDA, which is akin to non-GAAP operating profit, was $51 million for the third quarter, 86% higher than the first quarter of 2014, reflecting an analyzed EBITDA run rate exceeding $200 million.

Non-GAAP net profit for the quarter was $50 million, or $0.78 per share, representing 22% net profit margin.

This is an increase of 2.5X as compared to the $20 million for its 10% net profit margin reported in the first quarter of 2014 and higher than the $46 million or 20% net profit margin of the previous quarter.

Gross profit on a GAAP basis for the first quarter of 2015 was $33 million, a significant increase when compared to $4 million in the first quarter of 2014.

Net loss on a GAAP basis for the quarter was $73 million as a result of $85 million of non-cash other financing expenses.

This was primarily due to the successful accelerated conversion of our series F debentures of $162 million, which otherwise would have been recorded as financing expenses for our 2015 and 2016.

Please note that such accelerated accretion and amortization expenses are recorded only in accordance with US GAAP and are not impacting our results under IFRS, which amounted to $10 million.

Looking forward, the $162 million bonds as conversion, which accrued in the first quarter of 2015, will result in a cost reduction in our future P&L report of approximately $14 million on average per quarter in the coming three quarters of 2015, which comprised a greater than $3 million interest savings and $10 million in other financing costs.

And (inaudible) the cost reduction of approximately $8 million on average per quarter in each of the 2016 quarters, which comprised of $1.6 million interest savings plus $6.4 million in other financing costs.

All these supporting our efforts to achieve sustainable GAAP net profit going forward.

Moving to share count analysis, fully diluted earnings per share calculation and presentation are not required under GAAP for the first quarter 2015 when reporting a GAAP loss.

However, in order to maintain transparency and provide information of the complete share count in light of the state that we target GAAP profits in the coming quarters, the shares underlying the following securities made potential [EBITDA] to the 77 million outstanding shares as of the date of this release.

Approximately 13 million possible shares underlying options and warrants, 3 million underlying debenture Series F, 3 million underlying capital notes, and 6 million underlying Jazz notes which are due December 2018 unless repayable with cash.

Moving to currency exposure analysis, I would like to mention again the currency-rated effects on our revenue and P&L, which, as you will see, have no material impact on the bottom line.

A, with respect to the euro currency, we have no impact and don't expect any impact from it to our financials.

B, with respect to Israeli shekel, the impact is not material and is limited to about $250,000 per quarter gain to the P&L on any 1% devaluation in this quarter against the dollar.

And C, with regard to Japanese yen, our revenue from Panasonic and TPSCo is denominated into the Japanese yen currency.

And since most of the expenses of TPSCo are in yen, this creates a sort of financial hedge, hence very limited impact if at all to our P&L.

Moving to the balance sheet analysis, during the quarter, we significantly strengthened our balance sheet to reduce debt levels and improved all financial ratios.

As previously stated, $162 million of Series F debentures were converted to share.

This reduced the principal amount of debentures F that is payable in 2015 and 2016 from $232 million as of a year ago and $197 million as of December 31, 2014, to only $35 million as of March 31, 2015.

This is an important turnaround point at which we are facing a clear balance sheet and debt structure, and they have now an amount of debt that is reasonably (inaudible), amounting less than $296 million of gross debt as compared to $589 million a year ago, or $162 million of net debt as compared to $406 million net debt a year ago.

During this quarter, we also completed a $45 million volume (inaudible) transaction to earlier redeemed Jazz notes and saved future interest across (inaudible).

The conversions and early voluntary redemption not only significantly improved our balance sheet but also improved our financial ratio, resulting in a 49% increase in shareholders' equity to a record of $292 million as of March 31, 2015, reduced short-term liabilities from $300 million to $203 million, reduced net debt from $406 million to $162 million, and net debt to EBITDA ratio of only 0.8X, which is improved significantly against previous period, and current ratio of 1.7X as compared to 1.3X as of December 2014.

Also, this enables us to improve our future profitability by financing expenses cost reduction of approximately $14 million as specified before for the remaining quarters of 2015 and $8 million average (inaudible) for the quarter in the quarters of 2016.

During the first quarter of 2015, the main cash activities were -- which resulted in cash on hand of $134 million as of March 31, 2015 were positive cash generation from operations of $44 million, or $40 million net of interest payments.

Profits from exercise of warrants and options of $6 million, investments in fixed assets of $28 million, [less] principal payment including the early redemption of Jazz notes of $47 million, and $25 million for an issue our key employees retirements related payment.

In summary, we had another excellent quarter in all financial aspects.

We significantly strengthened the balance sheet and improved the financial ratios as well as very meaningful year-over-year growth in revenue and gross and operating profit coupled with a huge debt reduction of greater than $200 million just during this quarter.

And now I wish to turn the call back to Noit.

Noit?

Thank you, Oren.

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

Please note that the first quarter of 2015 financial results have been prepared in accordance with US GAAP, and the financial tables in today's earnings release into financial information that may be considered non-GAAP financial measures under Regulation G and related with (inaudible) requirements that are established with the Securities and Exchange Commission as they apply to our Company.

Namely, this release also presented financial data which is reconciled as indicated by the footnotes below the table on a non-GAAP basis after deducting, one, depreciation and amortization, two, compensation expenses in respect to option grants, and, three, finance expenses net other than interest accrued such that non-GAAP financial expenses net includes only interest accrued during the resultant period.

Non-GAAP financial measures should be evaluated evaluated in conjunction with and not substitutes for GAAP financial measures.

The tables also contain the comparable GAAP financial measures to 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 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 relation or as a substitute for operating income, net income abroad, cash flows provided by operating, investing, and financing activities, per-share data, or other income or cash flow statements that were 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?

(Operator Instructions) Cody Acree, Ascendiant Capital.

Thanks, guys, for taking my questions, and congratulations on another good quarter.

Russell, maybe if we could start with new revenue contribution to this quarter.

And then for your guidance, you went through -- and thank you for the details on the different divisions.

But could you just go through the magnitude or rank order of strength that you are seeing from each division?

How are you -- did you see that contributing margin?

And what are you expecting for June?

So as we stated before, we don't break down the revenue of Panasonic into the specific business units that would serve it or that we would break it up into, as it gets too specific to what we have from one single customer.

As far as the overall revenue in the Company and the breakdown of that ex TPSCo, it's still pretty much the same as the last time we spoke in the last conference call -- somewhere about 35% as related to the RF HPA.

Somewhere about 16%, 18% as the CMOS image sensor.

Probably about 16%, 18% is also the TOPS business that we have.

Power management is somewhere about 10%.

Mixed-signal CMOS activities are upwards of about 12%.

We have a scattering of small activities including the A&D.

Let me ask that a different way.

What I guess I'm trying to get at is a level of activity, not necessarily revenue generation.

But you talked about new customers, new designs, mask sets coming in.

If you just had to put a growth rate on that or a trajectory on activity, are those rank ordered in the same versus revenue contribution, or are you seeing some standout?

On absolute dollars, the RF SOI is the biggest driver on dollars itself.

On percentage, probably everything is pretty much on par with each other.

The 30% that we see in the organic growth I think is pretty well averaged over all the business units.

But obviously if one of them is 35% of the revenue, the absolute dollars is higher.

But as I stated and I tried to point that out strongly, the growth itself is pretty well shared over multiple business units, which is something that we are actually very, very pleased with.

That we are not, as far as the growth engines of the Company, overly leveraged in one area versus another.

And Oren, you've made pretty good progress on gross margins.

A couple hundred basis points upside this quarter.

What were the drivers of that gross margin upside, and then contribution expectations for the next few quarters?

Yes, so indeed, as compared to the 27% for an establishment of TPSCo in Q2 last year, 27% non-GAAP gross margins we achieved 36% in Q4.

And this quarter, again, 36%.

Indeed, we were expecting to start this year with 34% and reach to Q4 2015 with 38%.

And then Russell even made the target to be 40%.

So from 34% to 40%.

And indeed Q1 was better than expectations, and we overachieved to 36% in Q1.

One of the reasons is SOIghtly better mix in terms of a profitable business over a less profitable business that we had mixed in the revenue.

And the other thing is higher utilization than expected, so we really see an increased demand.

As one also can see the forecast for Q2 where the guidance is better than maybe others expected.

So this means that Q1 had more utilization than expected, more activity.

So we -- in and line and the middle of the line is higher, which means that more cost can be attributed over the wafers, which means that it creates better gross margin, of course.

And then lastly, Russell, you mentioned Intel and gesture recognition and then another couple customers that you are working with.

Do you have any other color that you can give us on expectations for how big of a contribution that kind of business might end up being for you?

And any color on expected timing of not maybe one customer but just those customers that you're dealing with as a whole?

We believe that the gesture business itself is a very large business and that we're well positioned to be able to take a major portion of it.

I'm SOIghtly sensitive to give a real number right now, as we press-released only one customer and that's Intel.

And I wouldn't want people to think that I'm correlating, and I certainly wouldn't want Intel to think, I'm correlating their forecast into what I'm telling the Street.

But certainly the gesture market is large.

I think that in the end it's possible for us within the whole gesture market to have a reasonable share.

And I don't know somewhere of the $100 million, $150 million of market -- I don't think that that's unreasonable for us to have within the gesture market.

$150 million of the market --

$100 million to $150 million, I think that --

That's more revenue contribution or is it size of the market?

I think that we could see it getting to $100 million to $150 million if the gesture market continues to grow to the degree that we believe it will.

Thank you, guys.

Congrats.

Jay Srivatsa, Chardan Capital Markets.

Congrats on good numbers and guidance.

Russell, there has been some reports that the Chinese smart phone market is slowing down.

And there's also some concern about the wireless infrastructure market over there.

I know some of your customers have some exposure there.

Are you seeing any drop off in activity in terms of orders from those customers, or is this more of a temporary phenomenon that you think will pass?

What is your read on that market?

I can only state what we're seeing on the demand.

And our demand has stayed strong and is actually getting stronger.

So I don't see that we have any tail-off at all.

As far as the specific end customers that our customers are selling to, that isn't 100% granular to me.

There's certain models that I know would be going into some major branded companies.

But overall, again, our demand is not slowing down with the lever.

If anything, it's increased, and the infrastructure demand has increased very, very strongly.

Okay.

In terms of Panasonic, where are you at in terms of transferring process flows into the fabs?

Meaning, have you been able to get them new customers or existing customers transferred from other fabs into the Panasonic fabs?

Or are you still running purely the Panasonic product?

And if that's the case, what are the some of the steps you are taking to get more products or more customers into the existing fabs at Panasonic?

So we press-released maybe four months ago or so, Fairchild.

And so Fairchild was a press release customer that we brought up in Panasonic.

I mentioned during the call that on average we had a new product enter into the factory every three days.

So obviously there's a lot of activity going on there.

The platforms that have been transferred itself are the power management platform.

So we have the -- what we call TS-18.

And, as stated, that allows us flexibility as far as really load products.

We have very, very high demand for RF SOI that gives us flexibility then to have the power management not in Migdal Haemek fab two, but to have it in TPSCo factory and to be able to allow customers now greater capacity with Newport Beach fab three and fab two supporting the RF SOI beat.

So that certainly is a place that we're taping out going.

Now, there is additional capabilities that we've taped out to for third party.

I mentioned Himax very specifically; that was a PR.

And that's moving.

And in addition to Himax, we had acquired another for highly integrated smart phone cameras.

We have another customer that is taping out to us as well.

So there's a lot of activities happening in the 300 millimeter.

But, yes, we have I think a very substantial amount of activity going on in TPSCo.

Had stated that we would expect to see several tens of millions of dollars of third-party revenue in the second half of this year, and I believe we're still on track for that.

Okay.

That's very good.

Help us understand where things are with the Indian project.

Any update there?

Not really.

The project has been moving along or not moving along for over three years.

There was a change of government in the meantime; new empowered committee was formed.

From the first time that the consortium got together and agreed to be working together, a lot of time has passed.

A lot of things have changed.

The only update is possibly that one of the members of the consortium has sent a letter to the government and possibly will be having a face-to-face meeting with the empowered committee over the next months.

But there's nothing specific to report on other than it really is something that if and when it happens would be an accretive event for the Company.

It's certainly not something that is within our annual plan.

It's not within our multi-year plan.

But it would be an additional benefit especially on the bottom line as the money would be coming in a very high margin.

Only guess the question is is there delays just due to political issues there, or is the government not planning on proceeding with the project anytime soon?

Or are they still undecided on who the providers are going to be?

What level -- where is it in terms of the status of the project?

Again, Jay, from what we have heard, there have been two consortium that have been selected.

I don't believe that there is any question in their minds about who is being selected.

I believe as far as what is the status and where are things at, how quickly does the government move, that's really not something that I can answer.

I've not been informed of any major stumbling blocks from the government, but have not been informed that we are moving forward either.

Okay.

Switching topics, just -- if we take a high-level view here in terms of your future growth, where do you see that coming from?

Are you seeing more integrated device manufacturers going fabless or fabless light?

Or are you seeing more customers coming away from your competitor to your fabs?

Where are things at in terms of where you see the future growth of the business going?

Our TOPS business is 100% driven off of the fact of IDMs going fab light.

That was the press release from Fairchild where they were consolidating internal capabilities and moving capabilities outside of Fairchild in the fab light type of a format.

So certainly that business is a fab light type business.

In the case of our RF SOI and, as well, the silicon germanium, those are capabilities that maybe some IDMs never had if you were to consider front-end module makers as IDMs for the fact that they have their own gallium arsenide, they have their own filters.

But they did not have RF-CMOS.

So is it a fab light model for them or is it a fabless model?

It depends on how you want to define it.

But I would not see any of them at this point spending the $1 billion-plus to bring up a factory that they themselves might not be able to fully utilize.

So, again, is that a fab light or is it a fabless model?

I really don't know.

But the RF space is for the most part served -- we serve customers that do not have the RF-CMOS capabilities themselves.

So that's -- now, in the case of the imaging, in all cases, we're dealing with fabless companies or companies that maybe have a few fabs but not in that area.

And that is just a market itself that is growing.

I think one of the big trends that there are -- people call it the Internet of Things, but I'm not sure that that term is used properly.

But for the Internet of Things, it's not just the fact of seamless connectivity; it's really the fact of smart systems.

So you have to have -- in the Internet of Things, if everything truly is connected, their systems become more self diagnosing.

And that really is done through sensors.

So that's basically a huge drive.

The whole wireless seamless connectivity is a big drive, so that's why that's growing.

And our portion of that isn't from people that are making their own devices.

Power management is a place that there are very, very strong IDMs.

Are we gaining from that from IDMs?

I don't think our growth there is from IDM at all.

I think IDMs have for the most part stayed as IDMs.

Our growth within the power management is really from a lot of fabless companies; maybe in a few cases a fab light model, but for the most part it is fabless companies.

All right.

Maybe one last question for Oren.

Given the increasing margin profile you talked about and the drop-off in the interest, is it fair to assume that GAAP profitability could continue for the rest of the year, or do you expect any non-cash items to change that profile?

Yes, so it's a good question.

I -- related to it in my script basically -- if you compare to previous model or expectation, we would have recorded an average of about $13 million every quarter in the coming three quarters of 2015 and about $8 million in each quarter in 2016 comprised from a -- in 2014, for example, the $13 million from $3.2 million from interest payable on those bonds that were converted plus about $10 million on a non-cash financing.

So this is the $13 million saving that we'll accrue.

And based on that, indeed, the model shows that one may expect a net profit.

The only specific issue about it, like you mentioned, is a possibility that the remainder of bonds F will be converted, which is of course very reasonable.

Since only $35 million remaining, the impact will not be big, but it can be an amount of up to $12 million throughout the end of 2016.

So if there will be no further conversion, we will have about $2 million every quarter now of non-cash financing.

And we can overcome that and be net profitable, like we said.

The specific quarter that it will be converted -- this can be again an accelerated conversion with accelerated pooling of the expenses, which is a good thing for the future.

So if I can wrap it up -- so it means that if -- in Q2 for example this quarter, there is no more conversion and so far there was no conversion.

And it's reasonable to assume that it will not be converted because before Q4.

Then in (inaudible) Q2 is structure is possible to achieve net profit.

And also Q3.

And only Q4 if indeed there will be conversion, it can be the opposite direction.

However, if a conversion will occur in Q3 2015 -- so Q3 2015 will have these effects, then Q2 2015 will be profitable, Q4 will be profitable.

And the same goes for 2016.

So basically the structure, excluding any one-time impact, enables sustainable net profit, and this is what we said.

We stated it.

Excluding, of course, one-time events.

Got it.

Thank you.

Congrats on a good quarter and guidance.

Richard Shannon, Craig-Hallum.

Russell and Oren, thank you for taking my questions.

And I will echo the congratulations on a good start to the year.

I guess my first question regarding your RF HPA segments -- probably a little bit more detail on that RF and SOI versus more optical -- I guess the silicon germanium there.

Can you give us a sense of the split between those two basic buckets there?

And are the growth profiles for those going forward?

Are they markedly different?

I think at present, the growth of the RF SOI is very strong and very big, and a very accelerated and aggressive roadmap.

Is the growth profile similar?

I would really have to look at it and see.

I've not done the breakdown.

I would think that the RF SOI probably has a bit higher growth profile than does the optical switch.

The optical switch, however, is growing strong and I think over the next years has a very nice trajectory.

The optical switch is a very, very high-margin part.

It is very advanced, very difficult to duplicate.

So -- but I'd really have to get back with you on the specific growth of the silicon germanium versus the RF SOI.

I don't have that off the top of my head.

Russell, would you have any idea how much the split of revenues between those two currently?

I can get back to you on it.

I would think it's probably somewhere about 65/35, 60/40, in that range.

That's fair enough.

Just a rough guess is great.

Let's see, a couple of questions on the TPSCo fab.

I didn't -- unless I missed it, I didn't hear any update on any kind of revenue potential you see in 2016 and 2017.

As I recall, I think you said upwards of $200 million for 2017 specifically.

Can you give us an update on those estimates, please?

There's been no change.

What we have said is that we have at this point opportunities that have been worked, design wins that we've had that could be running $150 million to $200 million incremental revenue in the 2017 time frame.

And we are still sitting with that.

It could be accelerated.

There is a lot of new activities that have come on board.

But the $150 million to $200 million is, I think, a very good number for the 2017 time frame of third-party revenue.

And just a follow-up question on the topic of TPSCo.

You mentioned in your prepared comments about some (inaudible) exposure and interest level coming from Japan.

I wonder if you could segment the interest level here a couple different ways related to that JV.

One is Japan versus outside of it.

And also if you can give us a sense of any of your end markets that you are getting materially more interesting contributions from like Matt said for design win activity perspective than others.

As far as the biggest interest that we have and that we have been driving, it's within the CMOS image sensors.

It's not solely coming out of Japan.

But it's the CMOS image sensor activities that we have and their very strong capability on the technical platforms.

The most recent activities incremental to that have been in the order of the (technical difficulty) where we take the customer flows and bring them into the factories.

And I have stated before that we are very selective on the customers we choose for that because it takes a lot of work, and those flows are really isolated.

They are proprietary to the customer itself.

So every IDM flow that we take on into the factory, be it in Migdal HaEmek, be it in Newport Beach, be it now in TPSCo, we really want to make sure that it's a strategic customer, that it makes sense, and that it will be viable as far as the volume.

But we have a lot of demand, and a lot of growth is happening there within the tops group.

From -- in particular, two large customers; one of them having been press-released, and that is Fairchild.

The other area that I mentioned that we are driving growth in is that of power management, where we have a platform that is now in the final stages of qualification.

And then qualifying customers into that platform for dual sourcing from Migdal HaEmek into TPSCo.

In addition, we have very high-volume activities going on in TPSCo in the RF space from Japanese customers.

Okay.

I appreciate that detail.

I think that's all the questions for me.

Thank you very much.

Lisa Thompson, Zacks Investment Research.

I just wanted to clarify on the interest expense on the converts.

How much interest did you pay for the converts this quarter, so that we can do a fully diluted earnings per share?

No, we didn't say any coupon payment on the bonds that were converted, and also will not say because whatever bundle that that chose to convert lost the rights to get the coupon.

So we paid nothing.

Okay.

Right, but of the $3.6 million in interest, did any of that -- that must go to other convertible.

No.

There is two numbers which are $3.6 million micro (inaudible).

$3.6 million that I mentioned in the script is the future saving and also was a saving already in Q1 that we don't need to pay this as the coupon to bundle the F that converted.

And this is really zero.

It's not -- was not paid that future cost reduction.

The $3.6 million reported statement this quarter is the semiannual coupon for the Jazz note orders for the notes that are due December 2018.

Okay, so that's all the convert.

The Jazz notes, the convertible.

Right?

Yes.

Okay.

All right.

So if I take that out of EBITDA to net income I can get my fully diluted income.

Yes.

Okay.

And then next quarter, that should be zero?

Next quarter for the Jazz notes, it will be zero because it is semiannual payment.

There will be, though, a payment to the bonds Series B and F, which are remaining the small amounts that remain which is $2 million total of interest payment.

(inaudible).

Okay.

So in the third quarter you get the $2 million and another $3.6 million?

No.

On the Q3 we have only the $3.6 million of Jazz.

Again, so maybe I'll clarify.

Jazz notes, which are due December 2018, they are paying the coupon semiannually in Q1 and Q3.

And that is really bonds DNS are paying also semiannually but in Q2 in Q4.

So it means that under the new more simplified structure of debt that we have, we have actually $4 million interest payments in Q1, $2 million in Q2, $4 million in Q3, and again, $2 million in Q4.

Great.

Thanks.

That helps a lot.

David Duley, Steelhead Securities.

You mentioned the (inaudible) and the SOI business to your Panasonic factories of 300 millimeter.

What kind of capacity increase do you think this represents?

Or is that the wrong we look at it?

You are just managing your capacity.

It seems like that's a very rapidly growing market, and it appears that you are putting a lot more capacity on -- added.

Actually, the 300-millimeter capability is one that isn't presently needed.

The performance that we're getting out of it is also not presently needed.

The point of having done the activity is really providing very strong customers with a long-term roadmap and assuring them that they can stay with us, not just on this breakthrough technology that is being taped out to presently but on something that gives significantly better performance for the future.

The TPSCo 300-millimeter factory is a small to midsize 300-millimeter factory that will probably be really focused on for the fact of the CMOS image sensors.

The fact of having that factory enables us to develop platforms, customer need for an advanced roadmap.

And then probably would allow us to look at that and get into other 300-millimeter factory prior to the time that we would see the demand for the SOI.

But if we move forward and customers move forward, in the roadmap would be several years down the road, we would be bringing on additional 300-millimeter capacity for that specific technology.

But the point of doing it now is, as I state, to show customers our capability, allow them to stay with us long term because of that capability.

And then, should there be additional demand, to be able to, through whatever type of the business model, move into additional 300-millimeter capacity with the ability to load it quite quickly.

We did have, independent of TPSCo, an opportunity a few years back to get involved in a 300-millimeter facility that would have had a loading agreement.

But we had no internal 300-millimeter capability in our customers that were driving that.

So beyond the time of the loading agreement, we would have been very much hurt by having a running cost that we would have needed to pay for out of the Company because the fab itself wouldn't have been able to be cash positive.

At this point, the drive in the growth of 300 millimeter for SOI would really be that at the time we would have another opportunity, which may or may not be being looked at at any given time.

We would be in a position to be able to take that opportunity but not to have a fear that after whatever loading agreement you have from the seller, that you would run into a strong cash negative due to running cost.

Was that an understandable answer?

Yes.

Maybe just in that segment of business now, though, it's a rapidly growing segment.

There's been some capacity issues with one of competitors.

Could you just give us a commentary about what you see the trajectory of that business for you guys and perhaps an update on the overall size of the market and your market share?

I think the market is somewhere on RF SOI about $400 million, maybe $500 million -- in that range.

Probably presently by shipment we are maybe 25% of the market share, and we would like to bring that up nicely into the major portion of it.

40%, 50%, 55%, 60%, whatever it might be.

So that's where it would be targeting to bring our share that business to.

I did mention that we have put out a new platform where three lead customers are involved.

Two of them have taped out into it.

Another one is -- we call -- we have a design win.

We don't have a masthead yet.

But -- so I think we have a long-term roadmap there.

I don't think, I know that we have a long-term roadmap there and customer interest to continue to grow with it.

We are building out capabilities for additional 200-millimeter capacity.

Part of that is through the offload of the power management and other technologies into the TPSCo to be able to maximize the footprint of the Migdal HaEmek 8-inch factory to be able to do more and more SOI.

And we've had -- we've made some strong commitments to customers for SOI capacity for 2016.

Okay.

And switch gears a little bit on the image sensor business.

There's been a lot of chatter with on the vision being purchased and Sony and Samsung selling some stuff outside but mostly using their capacity internally.

But this kind of a stores in that business now, particularly for a lot of Chinese customers.

And I was just wondering how is that industry dynamic impacting you guys.

You've talked a lot about image sensor business, but I was just wondering if you get a little bit more specific and dig into some of those details.

Certainly.

The sensor business is very interesting because there's a huge, huge variety of applications.

We have a very strong market share within, for example, dental x-ray.

These are stitch die.

They're very large die.

It's bigger than the photo field itself, so you are stitching fields together.

We are looking at engagements where we are moving more directly into medical systems, so medical panels.

Since we have had some customers in activities there, but we're now looking at a much stronger engagement into medical panels themselves.

Those markets are strong markets, as it's a change with maybe a betterment of performance against TFT type solutions presently.

You have the high-end camera areas -- studio cameras that I think we have a good market share in presently.

There is as well -- if you look at the smaller point-and-shoot cameras, that market is really diminishing fairly strongly.

And why?

Because the cell phone camera itself has very, very good performance.

So the high-end cell phone camera -- the 14-megapixel and beyond, that's the area that we are engaged in now through the TPSCo 300-millimeter, 65-nanometer flow; this 1.12-micron pixel.

And I think that we are in a very unique position there in order to gain market share.

And that is our major focus.

Dealing with a 300-millimeter factory is to be able to do these smaller-pixel very advanced cameras.

So we're driving that very, very strong.

There are other areas such as industrial cameras.

There's many, many different readers for industrial global pixel cameras.

And we are in strong position there.

So the overall image sensor market has many, many diversified applications.

And I think the strong growth ones, we're pretty involved in with leading customers and aligned on leading customer roadmaps.

Have you seen an increase in let's say the Chinese handset guys or other handset customers looking for image sensor capacity?

I'm not sure that I've seen it directly from the handset provider itself.

I've seen it from the camera module maker for the handset suppliers.

Okay, excuse me.

I didn't ask the question right way.

So, yes, definitely.

I mentioned that in China, the advanced cameras for smart phones -- the high-end camera, high-megapixel cameras, we are seeing a lot of demand for that presently.

Excellent.

Thank you very much.

There are no further questions at this time.

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

Certainly.

Firstly, thank you very much for your interest and your time.

I personally have very much enjoyed this past decade at TowerJazz.

And as I look back on what we've achieved, we really have a lot to celebrate together.

As I move into my second decade with the Company, I think we're standing now at the strongest point that we've ever been.

And I really believe that 2015 will begin a very fruitful harvest of the efforts of the past years.

I look forward to continually updating as we move forward to closer to the target of the 40% non-GAAP margin in Q4, the $250 million quarterly run rate.

This will be very exciting to update on.

And then really the midterm target of 50% non-GAAP margin in 2017.

So really look forward to this and to continue to update and speak.

We -- I believe we're having a pretty good presence of different conferences in the US.

We have participation tomorrow, May 14, in the B. Riley conference in Los Angeles.

Dr. Racanelli will be presenting and meeting with investors.

In addition, on May 28, I will be participating in the Craig-Hallum conference in Minneapolis.

We would be very pleased to meet anybody there.

In the meanwhile, obviously, any questions, time that you would like to have with Ms. Noit levy, the VP of Investor Relations, Oren Shirazi, or myself, please email and we will set up a time and spend time with you.

I think that the more that you as an investor base and analysts understand our business and where we're going, the more excited you will be about the Company.

And we will look forward to keeping you updated in that.

So just lastly, really thank our customers for their trust in us as a long-term partner.

Our investors for belief in our management business model.

And very especially, our employees for their capability, dedication, and passion.

And that's really what's driven us to be the number one specialty foundry in the world.

Thank you very much.

Thank you.

This concluded TowerJazz's first-quarter 2015 results conference call.

Thank you for your participation.

You may go ahead and disconnect.