高塔半導體 (TSEM) 2012 Q4 法說會逐字稿

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

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

Thank you, Noit. Welcome to all of you to our fourth-quarter and full-year 2012 results conference call. During today's call, I will review our achievements during 2012 and some look ahead into 2013. Oren will then provide detailed summary for our fourth-quarter and full-year 2012 financial results.

Our revenues in 2012 grew by 5% over 2011, maintaining our position as the number one specialty foundry. In the immediate going into Q1, we see a reduction in revenue as per the planned decreases in the Micron volume agreement in Nishiwaki. We see this as short-term.

We bought the Nishiwaki factory due to the capacity requirements dictated by our multiyear customer demand plan. This demand is being realized and will be satisfied in the Nishiwaki factory with for example the press release, Vishay-Siliconix advanced technology transfer, an additional very large Asian-based fabless existing customer transferring its highest volume flow to Nishiwaki, and multiple new Japanese and Korean customer engagements. I will speak a bit later in more detail to the Nishiwaki factory.

Last week we were honored to present one of the keynote speeches at the prestigious Nikkei world semiconductor summit in Tokyo along with the Micron CEO, a global foundry CEO, and a few other companies including in TSMC. Japan is waking up and all are taking note. However, we are solely positioned with a domestic pure play foundry offering.

I will share a portion of the message I shared there at this conference. After a brief introduction of our Company, I began by speaking to three megatrends in the industry -- these being first, green energy, second, seamless connectivity, third, multifunction systems.

Megatrend one, green everything, energy efficiency, economic development throughout the world, economic development in Third World nations, the total demand for energy is far greater than supply.

Battery technology is not at all advancing commensurate with the need, hence power management is needed to get more life out of a brick, so to speak. To drive technology penetration, the ratio of performance to price energy consumption unit must go up year-over-year, so energy considerations become the primary decision factor in designing new systems. Everything in the future will require power management for efficiency, portability, and power density.

Megatrend two, wireless connectivity, seamless connectivity. Everything will be connected wirelessly. Wireless technology such as WiFi, LTE, ZigBee, NFC, and Bluetooth are becoming commonplace. Most every device is now requiring wireless functionality not just to communicate with the net but to communicate with other devices. High performance RF is required to enable high levels of seamless communication.

Megatrend number three, smart everything, multifunction embedded systems. Electronics has long not been solely for entertainment but rather for critical applications where failure causes unacceptable damage to humans, environment, and assets. Hence systems must become smart, self-regulating, and self-reliant.

For a system to be smart, it must sense the stimulation and then make decisions, sometimes ad hoc, and learn from previous decisions, all this with minimal energy. To do this we need the integration of high-performance mixed-signal analog and sensor technology and in many cases many advances in MEMS to smart system integrations.

If we look at the market, it becomes a very, very interesting survey if we take from 2009 to 2015, last three-year actual, next three-year forecasted, overall semiconductor, this is end unit sales are at a rate of about 74% year-over-year growth. If you break that down, however, into the deep digital micro components as a growth of 66%, memory 65%, logic 52%, all of these below the overall semiconductor total average.

Where is the growth then? What is really happening? Where is the excitement? And excitement is always aligned with growth. It is with analog mixed-signal at 100%, discreet is 102%, optical 106%, and sensors and actuators at 148%.

These four areas are the areas that we serve, analog mixed-signal, discreet, optical, and sensors. This is where we focus. This is where we believe that we will be continuing to add shareholder value. Over time our chosen strategy, where we are going after is the area of growth. It is the area that we are growing our market share.

If we look at these trends, green everything, wireless everything, smart everything, they are served through the high-performance analog that we supply, the power management chips that we supply, the high-end RF in particular, the high-end silicon germanium platforms, our SOI switch platforms and for the sensors with our imaging capabilities and our activities into MEMS technology.

So we believe that our strategy is very, very aligned with the megatrends of the industry, the megatrends of the industry must be aligned with the growth segments of the industry. This is where we are focused. This is our strategy. This is where we are performing and gaining market share.

Next in the talk at the Nikkei Summit, I spoke specifically to something that is very, very culturally driven, culturally borne within Japan. It comes to quality and the basic focus of quality, Japanese quality, starts in discipline.

The world really should have taken note a few years ago with the big national disaster that they had with the tsunami. The note that should have been taken was how the Japanese people handled it. In all of the cities and villages that were evacuated, there was not one reported event of looting, not one reported event of vandalism.

In the temporary shelters, people queued on line for food. Those that queued online made way for the elderly to get to their food first. It is a society that has discipline.

In most of the world, a Japanese 5S program has been implemented. I won't mention what the five S's are in Japanese, -- seiri, seiton, etc., etc. -- but what do they mean in the equivalent?

First, tidiness. Throw away all rubbish and unrelated materials in the workplace. Orderliness, put everything in proper place for quick retrieval and storage; cleanliness, clean the workplace. Everyone should be a janitor. Standardization, standardize the way of maintaining cleanliness. Discipline, practice 5S daily. Make it a way of life. This also means commitment.

Now very interesting, in Japan this is not taught when somebody enters industry. It begins in the kindergarten. It becomes part over generations of a cultural DNA. As a company, we have benefited immensely through this DNA of Japan quality.

Rami Duek, a veteran in Israel, the Fab 1 Manager in our factory in Migdal HaEmek, was the first site manager of Nishiwaki for the first year after the acquisition. Came back about three, four months ago, and brought over many of the practices that they had in Japan into our factories in Israel and driving them as well into our factory in Newport Beach.

The standardization, the way of maintaining cleanliness, the way of maintaining quality, the activities there, the kaizen, the [taizen], is now programs we have throughout the Company.

We are proud to announce, very pleased to announce Rafi Mor, who had most recently been the Site Manager of the Newport Beach site, previous to that having been the Fab Manager of Migdal HaEmek Fab 2, has recently gone to Japan to become the TowerJazz Japan CEO.

What is the benefit of that? Again, more cross-cultural colonization, bringing over the best of Israel, the best of what he learned from Newport Beach, bringing that into the Japan factory and again, learning the Japanese 5S system that is truly a way of life there and bringing that into our other factories.

Within the specific quality culture, it's an amazing benefit for Japanese to be able to work with Japanese as this culture does become cultural DNA. For a Japanese IDM to transfer something into a factory, it's easy to do it to a Japanese factory.

After the presentation, there was simultaneous translation during it, simultaneous translation after it. I was asked a question and it was a very good question. The first one, actually they were all good -- but the first question, the executive said, you have a good feel for our culture and you are correct, quality is intrinsic to all that we do. But there's a negative here and that is change. Change is very difficult to have in Japan. How do you implement change?

So I explained that you must really first look at the history of this factory. Initially it was set up as Kobe Steel Texas Instruments joint venture and then run solely by Texas Instruments. So the first 10 years foreign owned by TI, so the ability to work with foreign companies with foreigners, but as well, a great engineering capability of transferring inflows, staying on the updated flow and manufacturing them.

Then the TI memory was sold to micron. Micron was the owner for the next 10 years, a technologically advanced company, very aggressive company. Again, the ability of engineers to work worldwide, to work in 300 millimeter factories, very, very deep digital factories, but very importantly within Japan, to transfer many, many flows, an engineering capability to transfer to do things, no change was needed in Japan as far as engineering capability. It is there through their history, became part of the DNA, and the ability to work with foreigners very, very easy.

The English capability in the factory very high after over 20 years of foreign ownership and interaction with English speakers.

But what is the change that was needed? For the entire history of the factory, they didn't have to create any business. They were a manufacturing arm, a technology development and transferring arm of a foreign-owned entity. Now they are a foundry and the ability and need for a business culture is very, very clear, very critical.

So at the conference was very pleased to announce our recent hiring of Mr. Keiichi Kawabata, most recently the President of Novellus Japan. Prior to that, growing up in Tokyo Electron into senior management positions in Tokyo Electron, an amazing company in Japan, knowing how to do business and equipment company that knows how to do business with Japanese companies, very high market share there.

So Kawabata-san having again a different DNA although Japanese but a business DNA, and that was the change that we needed to do in the factory to bring up another side, not the technical capability, not the manufacturing capability, that is excellent, but to bring in a leader for the business that is Japanese but brings in a different business DNA.

By mentioning again the hiring of Kawabata-san, I do want to take a moment and recognize outstanding performance in operational integration and the driving of efficiencies. And in view of this, the Board and I recognized Ephie Koltin, the Executive VP of Operations, and have appointed him as Chief Operating Officer. We are now structured in the Senior Management with Oren Shirazi as Chief Financial Officer; Itzhak Edrei, President responsible for product business units and sales; and Ephie Koltin, Chief Operating Officer responsible for all fab operations and worldwide supply chain.

Moving on into the business aspects, in 2012, we had over 450 full mask set tape outs and 400 design wins both being at record levels and strong indicators for further growth. These tape outs and wins are based upon differentiating offerings and customer service. I will name a few by summarizing some of the activities in our business units.

In our CMOS and mixed sensor business unit, in 2012, the main focus areas were medical, dental, and nondestructive test, x-ray, image sensors, high-end industrial cameras, high-end photography, and near infrared sensors for 3-D gesture control applications. We successfully completed the transfer of our CMOS image sensor technology from our Migdal HaEmek facility to our US fab in Newport Beach. We also released a process design kit for an advanced heightened pitch metallization to enhance high-end small pixel illumination and have already won a major high-volume top-tier customer that will be using this technology. We are looking forward to further developing this technology platform in 2013.

We added 10 new CIS customers and more than 30 full mask set tape outs of new production in 2012. Of particular note, we won a potentially high-volume top-tier customer for gesture control near IR sensor application which we believe will move to volume production in 2013. In addition, we had two wins for high-volume medical x-ray sensors. Both are expected to ramp in 2013.

Finally, we shared in the excitement of two of our cinematography camera customers when they received the technology and engineering Emmy Award for 2012 specifically for improvements to large-format CMOS imagers for use in high-definition broadcast video cameras. These awards evidence our ability to partner with leading providers and support leading-edge performance developments.

In our RF and high precision analog business unit, 2012 was a strong year for innovation particularly in high-performance millimeter wave and wireless front-end module product lines as demonstrated in the latter, by having been awarded the Skyworks Supplier Innovation Award.

Within our millimeter wave product line, we released design kits of our newest process while delivering successful prototypes to several customers on our current generation process with the highest production performance silicon germanium device in the industry.

Within our front-end module product line, we've been supporting prototyping and preproduction activity and as well received over 25 customer full mask tape outs in our latest SOI switch process.

Also we have released design kits and tape out additional customer designs on our most advanced silicon germanium power amplifier process that includes options for through silicon via copper intranets and high resistivity substrates. The focus for 2013 for the RF high precision analog business unit is to execute on a strong ramp with several of these new technologies including our latest SOI process as well as to continue to innovate in each of our targeted market segments.

In our power management business unit, 2012 was a solid year for market share gains and innovation for both our low-voltage BCD and high voltage 700 volt product lines. 2012 was also the start of our 0.18 micron BCD process transfer from our Israeli factory to our Japanese factory to accommodate future growth and provide customers the ability to dual source on separate continents for risk mitigation.

In 2013, we will continue the ramp of new products particularly in our high-voltage 700 volt product line. We also plan to release a new lower RDS on version of this technology to help reduce customers' die size and begin a project to move this technology to one of our 8 inch factories to accommodate further growth.

In our low-voltage BCD product line, we intend to release a higher voltage fully isolated platform to address not only AMOLED drivers and more integrated power management ICs but also higher value applications in medical and industrial markets.

During 2012, we continued to expand our leadership in design enablement solutions. Our offerings include full design services, complete EDA reference flows, and the richest and most accurate PDKs in the industry. For each new technology, our PDKs were updated and released and we provided considerable support to assist our customers in their implementations. Our design services team continues to develop successful designs for our customers, augmenting their capabilities for our fast time-to-market solution.

This past year we enhanced our IP portfolio and added over 50 new IPs. Moving forward into 2013, we will focus on providing continuous support for worldwide customers. We will introduce a fully automated web-based tape outflow to reduce tape out cycle time and further enhance the non-volatile memory IP offering.

To speak directly to the Nishiwaki factory, in September we had announced an inter-technology agreement with Vishay-Siliconix, this being a multiyear agreement continuing until 2018 and representing the single highest revenue engagement that the Company has ever entered. We have had a long-term and very successful relationship with Vishay-Siliconix going back now eight years.

Based upon this new agreement, we will manufacture two Vishay-Siliconix product families at our Japanese facility as well as multiple Vishay-Siliconix product families at Fab 1 and Fab 2 in Israel and cooperate on a newly built epitaxial growth center in Migdal HaEmek Israel.

Specific to the Vishay transfer to Nishiwaki, at the Nikkei conference, I provided the following quote from Mr. Dieter Wunderlich, Executive Vice President and Chief Operating Officer of Vishay Intertechnology, Inc. The quote, "I am very pleased with the work done at the Nishiwaki Fab. We have transferred our most advanced platforms to TowerJazz. Their technical performance has met all our criteria while at the same time substantially accelerating our already aggressive schedule." Quite an achievement that the first transfer, in-depth transfer from a large US-based activity after the acquisition was not only done meeting all criteria but done while accelerating an already aggressive schedule.

I also presented another quote from a Japanese company, Citizen. "Our advanced micro display flow was developed at TowerJazz Japan. We have been very impressed by their technical and operational capability. They have not worked as a traditional supplier but rather as a long-term and strategic partner."

During 2012, we kicked off significant projects in Nishiwaki with Japanese customers, Asia-Pacific customers, as well as existing TowerJazz customers. Currently we have 12 technology transfer and development projects running in parallel including a leading Asian fabless company where they are transferring the largest volume flow and we received our first purchase order directly for automotive for epi-based power management flow at the very large Japanese integrated automotive parts manufacturer.

The projects are all in different stages of maturity. Some just kicked off recently. Some are in very advanced stages of qualification and will ramp into mass production by the end of the first quarter and throughout the year.

For these reasons, we are convinced that the Nishiwaki factory acquisition was business accretive. Firstly, by providing a very high incremental capacity at a low purchase price cost. Secondly, by enabling new customers that we otherwise might not have reached in this region. Thirdly, by being able to take benefit throughout the company of certain Japanese intrinsic quality values and procedures. And last but certainly not least, by adding valuable, experienced technical human capability to our employee base.

In December, we successfully hosted our first technical global symposium in Tokyo. This was our symposium, TowerJazz, and we had 98 customers, potential customers attending representing 74 companies. This is further evidence of the interest in Japan for a Japan-based pure play foundry.

Moving from Japan to Korea, our LED lighting products are ramping strongly in Korea. We are maintaining a good relationship there with three of the top six white LED manufacturers in the world. When it comes to LED lighting, as stated with the megatrend introduction, there is a strong need.

China has put out edicts of full conversion of all public lighting moving to LED lighting. European countries have done the same. The movement to LED lighting is not a question will a strong ramp happen, just a matter of how soon, and we have everything in place to do that ramp quickly.

We also have made great progress in Korea in other aspects of our power management business. We continue to remain attentive to our Korean customers' needs, providing many leading-edge reference designs for consumer, cellular, medical, and automotive products that are being developed by Korean companies.

Our success in Korea has been augmented by the geographic proximity to the Nishiwaki fab but is based upon a strong sales and technical support team in Korea itself. That being said, we are pleased to announce the promotion of Mr. Michael Song to TowerJazz Vice President and to TowerJazz Korea Country President. He and his team have done an outstanding job and we certainly wish them continued success.

Business continues to be robust in China. We have seen projections that expect over 50% of the total worldwide ICs will be consumed in China by 2015. This is reflected in our strong design win growth in China, which has almost doubled each quarter throughout 2012.

In India, if you remember last year, we formed with a very strong consortium to bid for a project where we would build and operate a 300 millimeter wafer facility in India. We remain very excited with this business opportunity to expand our presence in the Indian market through this initiative by the Indian government. If we win, it will enable us to build a long-term roadmap towards 300 millimeter wafer size analog technology and as well companion chips and deep submicron technologies. And it will give us a major revenue stream during the portion of fab build up and fab operation.

We with our partners were called to three days of meetings in Delhi with the Indian and Power Committee on January 15 through 17. I attended these meetings. We cannot commit to when or even if a final decision will be announced and if so, if we will be selected. However, we do remain confident in the strength of our consortium and our offering.

Shortly after these meetings on January 22, Indian Cabinet Minister, Mr. Kapil Sibal, gave the following statement to the press. Start of quote, "We have to set up a fab unit here this year. We'll have a proposal very soon in our office. We will take it for cabinet approval."

So looking into 2013, for the first quarter of 2013, we provided a revenue guidance of between $110 million to $120 million. As explained, this was a short-term reduction and within the plan of the Micron fab acquisition. We foresee growth throughout the year and based on record number of customer tape out and design wins and strong traction with direct customer flow transfers, we are confident in the ongoing growth and strength of the Company.

In summary, in 2012, we made significant progress in many areas. However as we look ahead, we are very aware that we must improve on all fronts to maintain our position as a number one specialty foundry and to cement our place as the preferred supplier to all our customers.

Yesteryear's good performances is next year's average performance. Such is the way of our industry and our goal of pursuing excellence requires a much higher degree of yearly refinement than just maintaining good status. Our substantial industry outperformance over the past years is by virtue of our customers choosing to give us an ever-increasing share of their business rather than our competition. We will continue to set ever higher goals for ourselves as well as for our customers working with us, to continue to outperform their expectations with our consistent and unwavering pursuit of excellence.

To close today, we have much work to do as we move into 2013 and our springboard as a business potential currently the strongest ever in our Company history. I continue to remain very excited with regard to our potential and our ability to fulfill it.

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

Thank you, Russell. Hello, everyone. Reviewing our 2012 results from a financial point of view, we see some significant achievement such as the following -- $164 million positive EBITDA for 2012, record revenue of $639 million for 2012, and EBITDA margin of 26% for the year. Our end of year cash balance, which has increased by $32 million during 2012, our current ratios, our debt to EBITDA ratios, and all other financial ratios improved when compared to the ratios at the start of the year.

We also improved our non-GAAP margin in 2012 and non-GAAP gross operating and net margin at 37%, 26% and 21% respectively for 2012 as compared to 36%, 25% and 20% in 2011.

Non-GAAP gross operating and net profit increased to $233 million, $165 million, and $131 million in 2012 respectively as compared to $219 million, $155 million, and $124 million in 2011.

This improvement demonstrates the success of the efficiency actions we undertook in 2012 across the board but particularly in Japan, reducing the work force in our Nishiwaki factory and improving our cost per layer and cost per wafer. We achieved $164 million EBITDA in 2012 and the EBITDA margin was 26%, which is stronger than $155 million in 2011.

We ended the year with $133 million of cash balance as compared to $101 million at the start of the year. Achieving positive cash flow from operations for the year in the amount of $95 million excluding $20 million one-time payment associated with the efficiency measures in Japan including the reduction in force of 300 employees.

I would like to move into a more detailed balance sheet analysis. We increased our current assets net of current liabilities from $36 million as of the end of last year to $129 million with a net debt to EBITDA ratio of 2.4X. The current ratio has improved from 1.2 times at the end of 2011 to 1.8 times at the end of 2012. We grew our shareholders equity to $220 million, up from $174 million at the end of last year.

Moving to detailed analysis of our cash flow report, showing the following main components, we generated the $32 million net increase in our cash balance. As stated, we generated positive cash flow from operations after interest payments for the year in the amount of $95 million excluding the $20 million one-time payment for the 300 employees reduction in force done in Japan.

We signed $50 million credit line with GE Bank in Japan, of which $14 million was utilized to date, carrying an interest rate which is the highest of either LIBOR plus 2.6% or TIBOR plus 2.6% from the GE contract signed in the middle of this year.

We completed fundraising of approximately $105 million in 2012 for a long-term bond issuance which bonds are due for payment in December 2015 and December 2016. Approximately $106 million were invested for CapEx net and approximately $56 million of payments were done for debt principal payments mainly to bond orders for the timely redemption of their bonds. An accounting item affecting our balance sheet explains the increase in shareholders equity and decreasing long-term debt despite the bonds issued during the year. The accounting literature for it is that in accordance with US GAAP, specifically rule ASC 470-20 formerly named as EITF 98-5 and EITF 00-27, a beneficial conversion feature named BCF exists for bond which have been measured in accordance with Fed GAAP at $110 million classified as an increase in shareholders equity with a corresponding decrease in the current value of the debentures presented as long-term liabilities.

The third amount will be accreted for the remaining life of the debenture to the non-cash financing expenses if not converted beforehand. Following the above BCF, shareholders equity increased as compared to the prior year to the amount of $220 million.

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

Moving into the P&L analysis, as I mentioned, revenue for the year was $639 million, a record high for us, with $148 million during the fourth quarter as compared with $155 million in the prior quarter. On a non-GAAP basis for the full year 2012, we achieved improvements in the gross profit, operating profit, and net profit. The full year non-GAAP gross profit was $233 million, representing 37% gross margin higher than the $219 million or 36% gross margin reported in 2011.

Earlier this year we took steps to increase the efficiency at our Japanese fab and bring the margin profile in line with what of the rest of TowerJazz and I can report that we are already seeing the positive results. Operating profit on a non-GAAP basis for 2012 was $165 million or 26% of revenues compared with $155 million last year representing 25% operating margin.

For 2012, we reported a non-GAAP net income of $131 million representing 21% margins compared with $1.24 million in 2011. This represents earnings per basic share of $6.08 for 2012 and on a fully diluted basis, we reported earnings per share of $2.68. This is compared with basic earnings per share of $6.16 and fully diluted earnings per share of $2.60 for 2011.

The weighted average number of shares for the diluted earnings per share for 2012 was $49 million and for 2011, it was $47.6 million.

We achieved $164 million in EBITDA and the EBITDA margin was 26%, which is 6% higher than the $155 million EBITDA reported for 2011, excluding the one-time gain from the sale of our investment in HHNEC in 2011 and the one-time gain from the acquisition registered last year.

On a GAAP basis, net loss for 2012 was $70 million versus $19 million in 2011. As compared to the previous year, financing expenses increased mainly due to the GAAP non-cash financing expenses resulting from the changes in the fair market value as part of our debentures and warrants which are recorded as fair market value per GAAP and from the effect of the Israeli shekel-dollar exchange rate, changes on our shekel-denominated debenture.

Excluding those financing expenses which are not cash and the one-time items in 2011 which was the gain from the sale of HHNEC and the one-time gain from the Nishiwaki acquisition and including the one-time Japan reorganization of (inaudible) net of taxes, the net loss on a GAAP basis for 2012 was $12 million as compared to $4 million in 2011 resulting in that the GAAP is only $8 million between the [yields].

For the fourth quarter of 2012, non-GAAP gross profit was $49 million or 33% of revenue. Similar to the gross margins in the fourth quarter of last year despite the revenue reduction and this is a testament to some of the good work we have done in increasing efficiencies across all our business units and geographies.

Operating income on a non-GAAP basis in the fourth quarter of 2012 was $32 million or operating margins of 22% and net profit on a non-GAAP basis for $22 million representing 15% net margins. EBITDA for the fourth quarter was $33 million compared with $40 million reported for the fourth quarter of 2011.

To conclude, our 2012 financial results include many significant achievements including our 2012 record revenue, our $164 million EBITDA, reflecting 26% EBITDA margins, our end of year cash balance, which has increased by $32 million during the year, our current ratios, our debt to EBITDA ratios, and all other financial ratios which have increased against the ratios at the start of the year.

That ends my financial summary and I would like now to transfer the call to Noit Levy. 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 fourth-quarter and fiscal year of 2012 financial results have 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 reporting requirements are established with the Securities and Exchange Commission as they apply to our Company. Mainly this release also presents 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 reported period.

Non-GAAP financial measures should be evaluated in conjunction with and are not a substitute for GAAP financial measures. The table also contains 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 release. EBITDA is not required GAAP financial measure and may not be comparable to a similarly tighter measure employed by other companies. EBITDA and the non-GAAP financial information presented today should not be considered in isolation or a substitute for operating income, net income or lost cash flow provided by operating, investing, and financing activities, per-share data, or other income or cash flow statements that are presented 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). Andrew Uerkwitz, Oppenheimer.

Thanks, Russell and Oren. I appreciate the update there. Good and thorough. Just a couple quick questions here. How should we think about -- you mentioned on the call revenue should -- earnings kind of tick up off this first-quarter low but can you kind of give us an indication at what rate? Will it be a snap back, will it be gradual?

I don't want to over commit or under commit. We are very confident of Q2 over Q1 growth, very, very confident of some substantial H2 over H1 growth. A snap back, I don't think it will snap back immediately to a $170 million level. There will be some work to get back up there but we are certainly looking at -- targeting a strong second half and propelling or propelled by the shares that we have won.

A lot of execution has to happen. The new entries that we have are very, very big volume potentials, but we have to execute pristinely and quickly. The reaching of a $200 million revenue quarter I think is certainly on the horizon. It's not a question of if it will happen, it's a question of how quickly do we execute and do the customers execute in their market?

That's the interesting thing about a growth in market share. If you are growing market share where the customers themselves already have the market and everything is qualified in that market, that happens quicker. If you are growing market share where customers themselves are getting into new markets, that happens more slowly.

Our growth is a combination of both, so some of it is very dependent upon us just really executing on all the qualifications and ramps and another then relies on our customers executing on the final application. So hopefully that gives you some more color. I know it's not a black-and-white answer, but --

It's very good. I appreciate that, Russell. On the execution side, on the expense side, you guys have historically done a very good job of managing expenses with revenue. So as we see revenue growth return here, should we expect OpEx to do the same at about the same rate or will you guys continue to kind of put a lid on that sort of thing and get some margin expansion along the way?

Andrew, it's Oren. Yes, OpEx meaning R&D, SG&A should be flat. I mean we reduced them. We did very good -- very reasonable work, so the levels of Q4 should be assumed pretty flat. There might be minor increase in the marketing side of the expenses because of some commissions which are resulting from increased revenue and apart from that, it should be pretty flat.

Okay, if I could just ask one last quick one here. On the balance sheet side, you guys have done a good job growing cash. What's the level of cash you need to operate and then with any excess cash, what are the plans there to do?

Well, I think I described the cash during the year. Basically if you will check out three of the last three years, 2010, 2011, and 2012, we are around $100 billion positive cash flow from operations. And the CapEx is around $80 million to $100 million, so we don't really need cash to operate the business, so we have always positive operating cash flow that even is enough to fund all the CapEx needs and leave us still some net cash flow. And now the only remaining item is of course the principal of debt or bond.

So if you will look at 2012, we actually find a new operated line with GE that gives us another credit line -- we are also have the credit line from Wells Fargo and looking forward if you will look, the coming two years are pretty much no bond principal payment above from a small Israeli series of $6 million a year and the Wells Fargo and GE loans are also not due in the coming period, so it's only the Israeli bank which is this year 25.

So if you sum all the total of the debt payable for 2013 principal, it's total of $31 million, $25 million for the bank and $6 million as a smaller part of one of the bonds, so $31 million and it's even less than the credit lines available to us by the banks, so I think it answered the question.

Yes, I appreciate that. Thank you, guys. I appreciate it.

Jay Srivatsa, Chardan Capital Markets.

Thank you for taking my question. Russell, I want to get your view at a macro level in the semi market. It looks like tablets and smartphones have been doing well but the rest of the market seems to be a little week. As you look at fiscal 2013, what's your general sense on the overall market in semis and when do you see -- when do you hope to see a nice recovery in that market?

That's a very, very difficult question to try to answer. In reference to our specific business, what we look at continually is to focus on growing market share and if you grow market share, then a bit independent of market trends, you can ensure yourself growth.

I had mentioned last year in our Q4 -- during Q4, when we did the Q3 release but one area that we had been seeing weakness was within one of the segments that we serve that we serve well, and that is within the discretes and MOSFETs. That market still appears to be somewhat weak. However, we are starting to see an uptick in the demand of our customers there. It's not an uptick that the orders are coming in for Q1 but it's an uptick that we are seeing right now coming in for Q2.

If you have the basic units of MOSFETs in discretes that are going up, they are very rarely the core of any system. They are needed building blocks in every system, so the fact that we are seeing that going up gives us a positive indication overall in the market. But really stronger than that I wish that I did have a stronger crystal ball. But I don't.

I can certainly say that in the area of front-end module, the heart of our mobile platform communications, our growth within that is really a market share growth. It's the movement of the PM switch into SOI switch. It's the movement for certain applications of a gas powered amplifier to a SiGe power amplifier and there we see very, very strong potential and opportunities.

Now this is already within the area that you said remains strong, but that's an area that we see great strength because of what we are doing there. I certainly see a huge amount of activity happening with everyone. To be moving into PMIC, into the Power Management IC, and I think a lot of that is driven by tablets and form factor and the fact that it's very difficult at this point to put a lot of conventional discretes within much smaller form factors.

So we see a big movement there and a lot of activity, design wins that we have had, joint projects that we have within the overall PMIC market. I think that's one area within power management that is definitely very strong.

And as mentioned in the call, we see a lot of activity happening with the 700 volt LED driver activities. Is it right now a question of different suppliers seeding the market? Is it a question that it's a very, very big market growth? That's a little bit hard for me to determine. I think it's more of the former, however, to where they are more seeding the market and the big demand is very close on the horizon.

But the overall semi market, that's a little bit hard for me to talk to. I know that there is certainly a lot of work going on with IGBTs and MOSFETs outside of the tablet area and really in the white good area and white good area seems to be growing very, very strong especially as more money is going into Third World and it becomes more industrialized, economies grow, white goods are a very good area to be in. That's where I think possibly the drive is for the increase that we are seeing or starting to see within MOSFETs and discretes, possibly not PC is the demand right now but more white goods.

So hopefully that gives you some color in the answer. I know it's not a complete answer but if you talk to any five different people about what's happening in the market, you will get five different opinions at any given time and I don't want to try to be a market sage. That's not my role.

But I think the biggest thing of our business again is trying to focus on areas that we know are strong within those three megatrends that I talked about. Those are areas that for any given quarter, who knows -- but definitely it is the focus of the industry. It's the focus of growth and if we are cemented in there with leaders, then we have to grow with the leaders. Does that make sense, the answer I gave you, Jay?

Yes, fair enough. In terms of the guidance for Q1, I want to try and understand what -- is it just purely the drop off in Micron volume or is there any seasonal decline in your core business?

We typically see a seasonal decline in Q1. That is something that is there but the major impact of what we are seeing is -- I wouldn't again call it a drop-off of Micron business. I would call it the forecasted supply agreement that we had, so there's no surprise in it.

We didn't buy the Nishiwaki factory for the sake of having Micron as long-term customer. It's Micron is a good customer and the fact that we have been able to supply to them and truly we get excellent supplier report card from them, it's a very good thing. There's maybe other opportunities in the future that's because of how well we have performed in having integrated a factory that they owned and supplying to them maybe it will help on some other activities in the future.

But we did buy the factory for the sake of being able to meet our multiyear plan on customer demand. And as mentioned, the advanced platforms that have gone there from [Vishay] really did need to go to Japan.

The activity that we have with a very, very well known and large fabless in Asia to move their highest technology flow -- it is an existing customer of ours -- but we could not have competed on this flow if we didn't have the Japan facility. We just didn't have this type of capacity to get us a guarantee at any of our other factories over the long-term.

So I believe that the -- as stated, the purchase of the Nishiwaki factory was a very, very good event for the Company. The decline presently, that is just the reality. It takes time to transfer, it takes time post transfer to qualify the parts, and for some instances, it takes time after the parts are qualified for a customer to develop their market.

If I look -- I mentioned the fact of having really a very large automotive integrator that we have received POs from. That's a type of business that really never goes away once you have it, but to get qualified on that, you're looking several years. So all of that incremental business is built on top of doing these initial transfers.

So yes, the biggest part of what we are seeing is related to the agreement of volume reduction, but it was not unknown and it was not something that right now is outside of our plan. I think the factory has produced very well. It has created good cash for us and it's in a good position to continue to do well.

Can you help us understand the Micron agreement one more time? Do you expect the steady-state starting Q1 to be lower than what it was previously or does it terminate at some point?

The agreement was a pricing agreement based upon the trailing 12 months before we bought the factory plus some uplift in margin. That for the first portion of time allowed us to be cash flow positive in and of itself. And then after 18 months was more or less a monotonic decrease for the next 18 months until three years. There is no agreement at all after three years are over.

Okay.

By agreement, what I mean is a formal commitment to buy wafers per month.

Understood. You talked about Japan and some of the positive things that you are seeing there. Can you help us understand when -- what is your sense on when do you expect revenue contribution from Japan to start to become material for you as a company?

Within the second, third quarter. We mentioned that we have a major activity that's ramping, starting to ramp this quarter and it will be now measurable within the second and third.

And then come the fourth quarter will be the -- when we execute on it, will be the start of the ramp of this very, very high volume transfer from an Asian customer, so that's my target. That should by target qualify in the middle to the end of the third quarter. Qualified meaning complete qual tests, not the flow being qualified but the parts being qualified. So that should start ramping in the fourth quarter.

Then there's other customers that are already in there I mentioned Citizen, the quote from Citizen. I never stated nor do I just have approval to state what or how much or anything of the sort but Citizen is a big company and you have a flow that was developed in the factory for them.

All right, last question, Oren, there was a request in the middle of the year by one of your larger shareholders for a filing with the SEC. Can you give us an update on where things are with those two large banks?

Yes, there is actually no update in that front. What you said is correct that in May of this year, we filed a prospectus that they asked to register point -- a portion of their notes. However, there is no evidence of anything of that and there was no update there.

Okay, thank you.

Phelps Hoyt, Principal Global Investors.

Thanks. I've got a few questions. Just hitting back on this guidance theme, it sort of seems like the market wasn't really aware of kind of a step function change in the demand. But if I am looking back at your financials, it seems like the last time you posted sub 120 sales was early in 2010. So can you just give us any more color on business away from the Micron contract that's off?

The color that I gave is pretty accurate and that is the fact of having the discrete and MOSFET business being down. That is very real and that's a reasonable portion of our business. From the 2010 timeframe that you are talking about, we've really had to refresh during this period of time and rebuild a lot of our activities. In 2010, the biggest portion of business was off of RF transceivers and that business has totally moved away. The customer that we were supplying that to at that time, that was our biggest single customer. The customer that we were supplying to at that time no longer makes RF transceivers and so that's many, many tens of millions of dollars of revenue that dropped out.

So the activities to replace that was really the different areas in the front-end module. And that's what's ramping presently. So if you were to compare to the baseline in 2010, I think the core business has grown quite substantially if you compare it to core business in 2010.

From 2010, we have non wafer business that was also fairly substantial. So --

I appreciate the color. That's good. Can you give us an estimate of cash usage in the first quarter? (multiple speakers) Cash usage in the first quarter. Do you have any estimate you can give us? You have a healthy position now and used some in the fourth quarter. Do you have an expectation for the first quarter?

Yes, so like I mentioned before, in the last three years, the average per year is a generation of $100 million positive cash from operations after paying interest, which is more than the CapEx requirements and Q1 should not be any different than that although the revenues are indeed lower. But still we are collecting the customer collection from Q4 revenues.

And in regards to bond payments or bank payments we have nothing on Q1, so only the principal payments that I mentioned, $31 million is total. This is due of that. $26 million is in Q4 and $5 million is in Q3, so for Q1, there is nothing from that. So a pretty good environment.

Okay, and then the last question is is there any information you can give us on the US Sub Jazz Technologies in terms of how they ended the year or any general information you can provide?

Yes, sure. Jazz of course will publish its separate financials very soon. We are filing voluntarily. Jazz ended the year with more than $40 million of cash on hand, positive cash flow very nicely at more than $25 million, CapEx much lower than that. Wells Fargo credit line is $45 million that we drew down approximately $20 million so it's still available.

Overall started the year with $19 million, ended the year with more than $40 million, so free cash flow net after everything grew $20 million net, so very good situation. And no maturities of bonds or banks in next year.

Thank you.

Paul McWilliams, Next Inning Tech Research.

Thank you for taking my call. On the Citizen deal, Citizen bought the micro-display division from Micron, so is that really just a transfer of business Japan plant was doing for Micron and Micro Display?

It was a business that was developed at the Japan factory for Micro Display, but it is correct. That was an activity that had been existing and was completed during the time of acquisition or since the time of acquisition.

Okay. SO is there new business coming in from Citizen in addition to what is transferring that was Micron business and is now Citizen?

I'm not exactly sure as to the question. There was nothing being produced at the time of the acquisition. So it's not that there was production that was shipping out of Nishiwaki to Citizen at that time.

Okay but what I'm saying is Citizen bought the Micron product line and the Micron product line was being built in Nishiwaki prior to Citizen acquiring it, so now it just transfers from being a Micron piece of business to a Citizen piece of business or is there new Citizen business in addition to what's transferring via the acquisition?

I'm not trying to skirt your question at all, Paul. I am a little bit leery about saying too much about Citizen because I have a press release from them but that's all, but I can say that this business is all new business.

Okay, I won't press on that. In your front-end module business, are you just doing the semiconductor content there? In other words just doing the fabrication or are you doing something beyond fabrication, chip stacking, assembly tests, does it extend beyond fabrication?

It's a very, very good question which you are asking. At this point we are producing controllers. We are producing silicon germanium power amplifiers and we are producing SOI-based switches. We do have activities right now to where we are sampling integrated passive devices and we are having activities where we are evaluating inter-posers. Presently everything that we do is selling wafer level on PAs and switches and controllers. We are doing nothing of the packaging. We are doing nothing on 3-D stacking, I think, what you are referring to or reality presently is 2.5 G. In that, we are presently doing nothing.

But we are having activities looking at inter-posers and the value that we could add in doing inter-posers.

Very good. So the TSV is a technology that you developed with your partners that can be leveraged for the stacking?

The TSV is a critical component of the silicon germanium PA.

Okay, got you. (multiple speakers) It sounds to me -- you will have to excuse my voice. I'm dealing with the flu today. It sounds to me and correct me if I'm wrong or elaborate if there should be some elaboration here that possibly in the transition from the take or pay that you had with Micron to refill behind them as it would logically be assumed they would be moving capacity out, that there's maybe a bit more air gap there than you anticipated some time ago. Would that be an accurate way to view that?

I don't think that there is an air gap as far as the amount of time we thought it would take us to qualify and fill customers with our technologies. I don't believe so. If there is, it's fairly small. It's possible that we had thought that there would be ordering above the minimal amount that was contractually committed. And there were periods where that was the case.

Okay, that is very understandable. Now help me understand -- and I know there's a lot of variables here, so I'm not trying to pin you down. I am just trying to get a general feel and we could use this large Asian fabless company as an example, if you'd like, or you could speak more generically.

But about what is the time period from when you book a deal that is a transfer deal of an ongoing product line into a book to order before you start seeing revenue? I'm not including here how long it takes a customer to get market share. We are going to assume this is a deal where the customer has -- already has market and flow?

In most cases for the time to it, I'm not talking about the -- what we would call risk production, which is customer placing orders before it's fully qualified. Risk production will usually happen a quarter before the big volume orders come in but sometimes risk production is fairly significant if they see very strong demand, then they will take the risk and put in big orders depending let's say for example you need a $1000 HDOL, they will put in a risk order and ask you to complete the wafers when it reaches 500, things of that sort.

But I think in our case a very good rule of thumb is probably one year, not from the time you start talking to the customer but from the time that you actually start the work until you really start the production ramp.

Okay, that was about what I would've assumed but I just wanted to get it from the guy that's in the field. I've got one more question. This goes to a rumor that I read. It was voiced as being more than rumor in the Israeli press about you negotiating with Micron Israel to buy the old pneumonics fab. Can you comment on that?

Of course not.

You understand that it was -- I had to ask. Thank you again for your time. I better give my voice a rest and let you go on to the next one.

Thank you very much, Paul. It's always fun. Thank you.

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

Certainly. So again we really thank our customers for their trust in us as a long-term partner. The model that we have whereby our mission statement to provide unique value really means that we are the sole supplier for most of the products that we make and that takes a lot of trust. We are thrilled with that and we are very, very happy that we continue to grow market share and have earned our customers' trust.

Very thankful for our investors, their belief in our business model, belief in the management, our employees for their capability, dedication, and passion, which has driven us to be number one specialty foundry in the world and which we believe will continue to drive us. We look forward to continuing to update you on progress over the coming quarters and again, thank everyone for continued interest in our business.

I wish you all a wonderful Valentine's Day. It's now 6.30 p.m. here and I look forward to get home and celebrate with my sweetheart, my wife of 33 years. Thank you very much. Goodbye.