高塔半導體 (TSEM) 2013 Q2 法說會逐字稿

Thank you, and welcome to TowerJazz financial results conference call for the second quarter of 2013. Russell will open the call, followed by Oren with a discussion of our results. After management's prepared remarks, we will open up the call to the question-and-answer session.

Before we begin, I would like to remind you that some statements made during this call may be forward looking and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected. These uncertainties and risk factors are fully disclosed in our Forms 20-F, F-4, F-3, and 6-K filed with the Securities and Exchange Commission, as well as filings with the Israel Securities Authority. They are also available on our website. TowerJazz assumes no obligation to update any such forward-looking statements.

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

Thank you, Noit. Welcome, everyone, to our second-quarter 2013 results conference call. During today's call, I will review our business performance in the first quarter of -- second quarter of 2013, look ahead into the rest of the year and beyond. Oren will then provide a detailed financial summary and 2013 financial results.

Our revenue in the quarter came in at $125 million, in the mid-range of our guidance, an increase of 11% over the previous quarter. This represents a 26% decrease against Q2 2012, which period had a high Micron M&A-based contractual revenue. However, the $125 million is an increase in core business wafer revenue, which will increase further in Q3.

The second quarter had several noteworthy achievements. The second quarter, as well as the first half-year, saw a more than 15% increase in design wins against the same period in the previous year. As stated in previous calls, the design win is the first stage of bringing new and additional customer products into our factories with an average two-year horizon to reach volume levels of production.

The entrance of a custom mask set is the last step to enable a production ramp and typically takes an average of one year to reach volume with a one- to maybe two-year lifetime from that point.

We realized a record 7,500 masks entering into our factories during the first half of 2013, this being 30% higher than the same period in 2012.

Design wins and the number of masks entering the factory are the most important indicators for continuous revenue growth during the years to come, the latter being closely tied to revenue and utilization performance one year from now.

Looking at the individual business units, each and every one saw strong achievements in the previous quarter. In our CMOS Image Sensor unit, our focus remains medical, dental, nondestructive test x-ray, image sensors, high-end industrial cameras, high-end photography, and near-infrared sensors for 3-D gesture control applications.

We are seeing strong growth from our leading European customers. There is interest for new high-resolution and high-speed global shutter products for the industrial camera market, as well as the high-end video market, which utilizes high frame rate capabilities. Numerous customers which we have gained over the past few years with a variety of products have moved into high-volume production.

In parallel, we have many new tapeouts of next-generation products, including dental and medical x-ray, that enable our customers to maintain a roadmap and execution, keeping them at the forefront of the respective technologies and applications. We are, as well, gaining traction in the Japanese market from customers who are looking for very high-end, CMOS Image Sensor foundry capability.

Our high-volume gesture control project that I mentioned in the last conference call is moving along very well and has met all its milestones. We expect the product to start ramping at the beginning of 2014. We are seeing additional traction in this space, having started a new project with another customer in this area. These gesture activities are with name-brand, top Tier 1 customers.

Our backside illumination roadmap has solidified through a partnership, and customer tapeouts are planned for the end of this year after full qualification.

During the course of the past quarter, we announced a ramp to volume production for CMOSIS, 12-megapixel chips under its CMD product line. Since its introduction, the CMD product family has been very successful in gaining market share. The sensor's excellent performance is based on CMOSIS collaboration and co-development with the TowerJazz R&D experts. The sensor offers high sensitivity and low noise, global shutter, and a frame rate of 150 frames per second, providing best-in-class performance serving various markets, such as industrial inspection, broadcasting, motion analysis, as well as others.

As an acknowledgment of our imaging capabilities, TowerJazz was selected and awarded to develop a prototype and manufacture a very high-end space sensor, which project is receiving full external funding. The sensor will include state-of-the-art noise and sensitivity figures of merit.

Moving on and looking at our RF and high-precision analog business unit, we continued the ramp of our industry-leading SOI technology for front-end modules. We announced a collaboration with Cavendish Kinetics, bringing MEMS antenna solutions to the market, enabling more efficient antennas and smart phones. The solution will allow the support of a broader range of frequency bands demanded by the fast-growing 4G smart phone segment, resulting in more signals and fewer dropped calls.

During the quarter, we announced an important collaboration with Nujira to bring to market envelope tracking chips. Envelope tracking is a technology that reduces power consumption in 4G smart phone power amplifiers by as much as 50% through an intelligent control of the power supply to the power amplifier that tracks the envelope of the signal being transmitted. It provides just enough power to amplify the signal so it reaches the base station, without providing excessive power at any given point in time.

In our power management business unit, we had a number of important achievements. We successfully transferred our 0.18 micron BCD platform from Israel to Japan and were able to demonstrate a 98% yield from our first production lot, enabling a dual-source capability between Israel and Japanese factories.

In the 700-volt LED lighting product offering, we have begun volume ramp. While I was in Korea last week, a major customer shared with me a press article of that day stating major business growth for Seoul Semiconductor and LG within the China market for LED commercial lighting. The article continued and forecast extreme growth in the China market, stating that as of last year no Edison bulbs over 100 watts were allowed to be imported to China; this year, no Edison bulbs above 60 watts; and next year, no Edison bulbs above 15 watts.

This is all to be replaced by LED lighting, which has a 4X to 6X reduced power consumption for the equivalent wattage.

The integrated LED makers that were mentioned, Seoul Semi and LG, are customers of our major customers in this specific field. We expect this line to ramp to many thousands of wafers per month and we continue to improve the offering.

During the quarter, we announced an improved 700-volt RDS(on), which leads to significantly reduce die size for LED commercial lighting and AC/DC conversion.

If we look at the transfer optimization process services business unit, specific integrated device maker transfer, what we refer to IDM transfer, during this quarter we extended our business relationship with International Rectifier. International Rectifier, being a world leader in power management technology, by entering into a seven-year agreement under the terms of which TowerJazz will manufacture multiple product families for IR.

As part of this latest collaboration, IR will use multiple fabs from TowerJazz throughout the world. This is the second largest pure wafer commercial contract we have ever entered into. This new deal with International Rectifier will add yet another layer to TowerJazz multiple IDM deals with which it is currently engaged.

In our CMOS business unit, we continue to develop our high-voltage CMOS platform targeted for various analog applications, such as LCD drivers. Prototypes based on this platform for a leading manufacturer in this market have been shipped. Tapeouts for lower power platforms is now in progress, targeted for the consumer electronics market in Asia.

Also continuing, the process of transferring existing customer products to our fab in Nishiwaki, Japan. We have started the development of specific customized CMOS flows that will be unique to the fab in Nishiwaki.

In Korea, we delivered samples for an LCD drive integrated circuit using high-voltage CMOS to a specific customer, and we received very positive feedback on functionality. This is a demanding project, using up to 20,000 wafers per month, and we expect this to move to this high-volume production in 2014.

In May, we announced a collaboration with TLi, Technology Leaders & Innovators, for an acceleration sensor control IC and proximity illumination sensor IC based on our advanced 0.18-micron CMOS technology, which enabled TLi to provide local offerings to mobile phone suppliers in Korea where the market leaders are located.

The proportion of smart phones with these ICs is expected to grow, and TLi is targeting this fast-growing market with two of its products utilizing TowerJazz's process. Mass production is expected to start in Q3 2013.

Looking forward, we will continue expanding our offering for the flat-panel display, portable wireless, audio and analog markets with new voltage combinations, as well as efficient high-rating ESD solutions which are now in development supporting the most advanced RF modeling.

We are specifically focusing on the automotive market needs and are planning to work with key customers, implementing the highest-quality standards.

We had a significant achievement in this space and activities with the US aerospace and defense realm. Jazz Semiconductor received trusted foundry accreditation from the US Department of Defense. Jazz Semiconductor, being a fully owned subsidiary, within this we have a segregated line and activity that enables the trusted foundry, which allows future growth and very high security segments of the aerospace and defense market of the United States, which will be served solely from a Newport Beach facility.

We see this as another means of supporting the local governments in which we have our factories, as well as a way of growing very high-value revenue through serving special needs that can only be served through the local factory.

In terms of a few other developments in this quarter, we announced a major breakthrough in a disruptive magnetic technology that has been co-developed with Crocus Technology, offering SRAM performance in terms of speed and power with non-volatile memory capabilities and targeting a volume release in December.

We additionally announced a licensing and joint promotion agreement for the use of Crocus magnetic logic unit process technology for embedded system on chip applications. Products under this agreement are expected to hit the market before the end of the current year, and we already have a few customers engaged with other specialty developments, including the following -- including several activities for which we are the only pure-play foundry supplying such solutions.

In June, we announced that we will manufactured full flow infrared sensors for camera devices, a market that Maxtech International expects to be in excess of $5 billion by 2015.

In addition to traditional infrared applications, we will facilitate expansion into other consumer markets, such as gaming, personal security, and application-driven platforms. We will be the first and only large-scale pure-play foundry capable of producing fully integrated sensors, and thus enabling this product to enter into and create new commercial market segments.

The application space is expected to grow substantially, enabling a new and additional significant revenue stream to the Company.

There was a press article early last week in India stating that the planning commission was rejecting a bid and the recommendations of Minister Kapil Sibal, communications and electronics and technology ministry, to move forward on the building of a semiconductor fabrication area in India. We did not and still do not have a specific detail of the significance for the reality of that press article; however, in the past days there have been quotes in the past from Mr. Ajay Kumar, joint secretary of Minister Sibal's department, as well as from Minister Anand Sharma, Minister of Commerce & Industry. These quotes appear very supportive of the project moving forward.

On June 18 in Israel, I had a meeting with Minister Sibal, at which time he had told me that all hurdles had been gone through, the finance department was backing the project, and that within the short term he would be submitting the project proposal into the full Cabinet for approval and that we would be hearing in the short term a response as to the movement of the project.

We have not heard anything else of a formal nature, other than the project is going forward. Of course, the project going forward does not mean that we won the project, although we remain very, very positive that our consortium with Jaypee and IBM is very strong and in very good position to receive the bid.

Earlier today, I spoke with the head of the financial part of the consortium, who remains extremely optimistic of the project going forward, as we and, I believe, IBM does as well.

More about India, I really cannot say at this point; however, we do expect one way or the other to hear a decision within the short term.

To summarize, and looking forward, we guided Q3 with a mid range up to $135 million, or 8% quarter over quarter. In consideration of the reported growth in design wins and tapeouts, tapeouts being the new masks entering into the factories, we're optimistic that we will have continued growth into Q4, into Q1, and beyond that throughout 2014.

In summary, the second quarter of 2013 from a business and strategic perspective, we continued to progress strongly. We have a consistent focus on improving ourselves in order to better serve our customers and in order to better have -- to better perform in bottom line, not just top line.

As Mr. Shirazi speaks on the performance of this area, you will see that for the revenue increase, a very strong portion of it dropped directly to the bottom line, demonstrating the efficiencies that we're bringing into the Company as we continue to grow our technical capabilities. Thank you. Oren?

Thank you, Russell, and hello, everyone. I would like to start my financial review by providing a balance-sheet analysis as of the end of the second quarter of 2013.

We have significantly strengthened our balance sheet during 2013. Our net current assets, which is the amount of our current assets, less amount of current liabilities, increased from $129 million as of December 31, 2012, and $141 million as of March 31, 2013, to $157 million as of the end of June 2013.

Our current ratio, which has improved from 1.8 times as of the end of 2012 to 2.0 as of March 31, 2013, now stands at 2.1 as of the end of the second quarter of 2013.

It is important to bear in mind that following the close of the quarter, in July we added a further $18 million to our cash position from the exercise of warrants from the rights offering, which I will discuss in a few minutes, and this is not yet reflected in the net current asset figure I just mentioned.

Our short-term debt was reduced from $50 million on December 31, 2012, to $35 million as of June 30, 2013. Our shareholders' equity was $184 million at the end of the second quarter. Our cash balance as of June 30, 2013, includes $117 million of cash and deposits, again excluding the additional $18 million we received from the recent warrant exercise in July.

Cash from operations, excluding interest payments, was a positive $25 million in H1 2013, or a positive $9 million net after payment of all interest. CapEx investments during the quarter were $19 million.

Our loan extension agreement with our Israeli lending bank, signed in 2013, further strengthened our balance sheet and reduced the principal maturities due in 2013 and 2014 by $75 million to be $30 million.

In June 2013, we executed an equity rights offering to original TowerJazz security holders. As a result of the rights offering, we received aggregate proceeds of approximately $40 million, comprised of $20 million in June and $18 million in July. The remaining Series 8 warrant, which has not been exercised, have been expired on July 22, 2013.

Following the rights offering process, our issued and outstanding ordinary share count is approximately 48 million in ordinary shares, of which approximately 18 million are held by the Israel corporation, reflecting an approximately 39% shareholding. The amount of capital notes still outstanding is approximately 8 million, and this is significantly reduced from the 26 million outstanding capital notes at the beginning of the year. And this is following the conversion of about 70% of the capital notes into shares, which was done mainly in the first quarter of 2013. As a result, the ratio of capital notes to shares today is 17% versus 100% two quarters ago.

With regard to the Israel Corporation, it is a long-term shareholder and a strong believer in TowerJazz' strategy, as evidenced by the public declarations according to which they stated they do not intend to trade also any of our shares in the market, as well as by their participation in the rights offering exercising 100% of their rights.

I will now go into the P&L analysis for the second quarter of 2013. Revenues were $125.2 million, compared with $112.7 million in the previous quarter, approximately 11% growth quarter over quarter.

During the quarter, we improved our gross operating and net profit and margin on a non-GAAP basis. On a non-GAAP basis, gross profit was $44 million, or 35% margin, as compared to $34 million, or a 30% margin, in the prior quarter. Operating profit on a non-GAAP basis for the quarter is $26 million, or a 21% margin, better than the $15 million, or 13% margin, in the prior quarter.

Net profit on a non-GAAP basis improved to $18 million, or 15%, as compared to $6 million, or 6%, in the prior quarter. Non-GAAP basic earnings per share was $0.47 for the quarter versus $0.26 in the prior quarter. The weighted average number of ordinary shares outstanding as of the end of the quarter was 39 million.

Our EBITDA for the second quarter was $27 million. We achieved a $12 million improvement in EBITDA as compared to the first quarter of 2013, with almost 100% incremental EBITDA margin as compared to the $12 million incremental revenue.

On a fully diluted basis, we reported non-GAAP earnings per share of $0.36 with the fully diluted weighted average number of share count at 49.7 million. Fully diluted, this number excludes an additional 23.2 million securities that carry an exercise price or conversion ratio which are way above the average current price of the Company's stock.

On a GAAP basis, the Q2 2013 net loss was $23 million, similar to the prior quarter. Net loss for the prior quarter included a one-time financing income due to the arrangement signed with the banks in Q1 2013 to extend loan maturities. Excluding this one-time income effect, last quarter we improved our GAAP net income in Q2 2013 by $6 million, compared with the previous quarter.

On a GAAP basis, our loss per ordinary share was $0.59, as compared with $0.94 in the prior quarter.

To conclude, comparing Q2 2013 to Q1 2013, on a GAAP basis revenues were $13 million higher, with $10 million higher in gross profit and $11 million higher in operating profit.

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

Thank you, Oren. Before I will open up the call for the Q&A session, I would like now to add the general and legal statements to our results in regard to statements made and to be made during this call.

Please note the second quarter of 2013 financial results have been prepared in accordance with US GAAP, and the financial tables in today's earnings release includes financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as 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 tables on a non-GAAP basis after deducting, one, depreciation and amortization; two, compensation expenses in respect to option expense; and three, finance expenses net other than interest accrued, such the non-GAAP financial expenses net includes only interest accrued during the resources period.

Non-GAAP financial measures should be evaluated in conjunction with and are not a substitute for GAAP financial measures.

The tables also contain the comparable GAAP financial measures to the non-GAAP financial measures, as well as the reconciliation between the non-GAAP financial measures and the most comparable GAAP financial measures.

EBITDA, as presented, is defined in our quarterly financial release. EBITDA is not a required GAAP financial measure and may not be comparable to a similarly titled measure employed by other companies. EBITDA and the non-GAAP financial information presented herein should not be considered in isolation or as substitute for operating income; net income or loss; cash flows provided by operating, investing, and financing activities; per-share data; or other income or cash flow statements that are prepared in accordance with GAAP and is not necessarily consistent with the non-GAAP data presented in previous filings.

I would now like to turn the call over to the Operator. Operator?

(Operator Instructions). Jay Srivatsa, Chardan Capital Markets.

Yes, thanks for taking my questions. Russell, as you look at the macro conditions reflected by your Q2 results and guidance, are we to conclude that we might be in the beginning stages of a recovery in the semiconductor market? And if that's not the case, could you help us clarify what your view is in terms of the overall sector?

I try not to make prophetic statements about overall sector and what's happening the general industry for the blanket semiconductor.

For the specific segments that we are involved in, we certainly see good demand at this point. The discrete market has come back pretty strong to the levels that we had been seeing in the past. Part of that is seen through the contract that we had done with International Rectifier.

Certainly, the whole realm and range of power management is a very big focus everywhere right now. And I think the demand that will be seen overall on the LED lighting will drive a lot of activity.

The RF side, I think, has been strong for a long time. There is -- even in a relative slowdown of mobile phone demand, it's a huge market. And for us specifically, it is a market that our share is growing immensely in. We have talked about it for, I think, the past three quarters, but the movement of the antenna switch from gallium arsenide PHEMT to SOI and our positioning and capability with the SOI for that, we are poised for very, very strong growth in this area, from a market that we didn't serve at all to a true share of market that we're going after of $150 million to $200 million.

And I think the activities are in place for us to ramp into that and to achieve that, growing into it in 2014 and achieve it in 2015.

And so in those specific areas, we really are doing very, very well. Power Management, our platforms are growing nicely. I was, again, in Korea last week. I met with a variety of customers, and in our case, all of it is really new substantial market entrants and market-share growth.

So how is the overall semi industry doing? I can't say that it's popping out. There are some reports right now that it is slowing down. I think some of the other foundry growth and guidance from Q2 to Q3 isn't necessarily overly strong. Our guidance, I think, is very nice at the 8%, especially if one considers that that is still substantially back-filling reductions in the Nishiwaki Micron contract. So for us, we are doing very well.

Is the overall industry doing well? Certainly the discrete market, I think, is looking strong, from the demand that we are seeing. And the Power Management market is flourishing. The demand that we are seeing and the excitement from customers within the RF module, and not just the SOI switch, but our capabilities with the silicon germanium-based power amplifier, this is all, I think, going very, very nice.

So I know that didn't 100% answer your question, Jay, but it is really what I could state.

No, that gives good color.

In the last quarter, you have had a lot of design activity and agreements, you know, the Nujira, the International Rectifier, and the Crocus. Help us understand when do you expect some of these agreements to really start to materially impact your top and bottom line as you look ahead for the next, say, year or so.

Nujira, I expect very nice ramps within 2014. From what we are seeing there, that should be going up in that realm.

The International Rectifier has been strong revenue. It is continuing to grow in strong revenue. We have transferred platforms in the past. This contract, as stated in the PR, and I don't want to state beyond the PR, is for multiple platforms. So we would see that continuing to grow, but the International Rectifier activity has been substantial for us, top and bottom line, for a while.

And the Crocus you mentioned was another one. Crocus is targeted for volume release for us in December. And the forecast there -- again, it's a little bit specific for me to be talking about a customer's own forecast, and -- but I think from everything that we are talking about and that we see with [vertrond], his market looks very strong. So we would expect that to be ramping through 2014 and 2015.

The area that you didn't ask about is probably one of the bigger incremental areas for the Company. And that's where we are building an annex to be able to do a full flow infrared detector, infrared sensor. So in that case, there can be very, very large revenue. The activity is a very new activity for us. It's an activity that's aligned with and partnering with a customer. But I would see that as having some portion of revenue coming in in 2014, but then very, very substantial incremental market and upside in the 2015, 2016, and 2017 regions.

And really talking substantial numbers. I mean, very substantial, at very nice margins.

So I think that if you look at the activities that we announced in the last quarter, many of them were very powerful. The IR contract I mentioned is the second wafer-based -- second largest wafer-based commercial contract the Company has ever done. The activity that we are doing with the IR sensor is also promising to be extremely large. I mean, it's just a question of the traction and the commercial environment.

Okay. Your comments on the India project seems to suggest some uncertainty in terms of timing and when it should come to fruition. Realistically, what is your read on it, on when do you expect to be able to proceed on this project and start to see material revenues from this?

I can only state what the Minister Sabil stated to me, and that was that they would be bringing it -- he would be bringing it to the cabinet in July and we would be hearing shortly after.

I think it has been going around long enough. If you look at the amount of press there has been India in the past week, it is a huge amount of press, quoting and citing many, many different officials. I think from the amount of activity and emotion that is around it, I would expect to hear something one way or the other in the very short term, meaning within the next one month to six weeks. But that is just my expectation. I certainly cannot speak for a government announcing the decision.

All right. Last question, Oren, looks like there was a nice job in gross margins. As you look at Q3 with higher utilization and revenue run rate, would it be fair to expect margins to expand?

Yes, generally speaking for each $10 million increase in revenues, which is the mid-range of the guidance, you should expect 50% to 60% incremental margin. This quarter, actually, it was better with 100%.

The reason was that on top of the fact that we had more revenue than quantities, we also had more inventories in the line, in finished goods, because we saw Q3 coming, so accountingly when you have more inventory WIP, or finished goods, it is, of course, improves your margin, and we expect the same thing on Q3.

So I wouldn't expect 100% incremental margins. You cannot do this every quarter, but 50% to 60% is a conservative assumption, yes.

Thank you, good luck.

Ken Nagy, Zacks Investment Research.

Thanks for taking my question. Just assuming you get the India plant, can you explain why the margins would be so high on that?

One more time the question?

Assuming you get the India plant, can you just explain why the margins would look so high on that?

Sorry, I don't know what you are referring to as far as anything reported about what the margin would be on the India plant. I don't know that we've ever spoken to that. But I could explain why they would be very high margins.

Sure.

The activity that we are doing there for the first year is a service activity. Most every dollar that we would get for the first three years is very close to 100% gross margin.

It's activity against a headcount that isn't a huge headcount. It's not an activity against any COGS. It's just against a headcount.

Maybe -- our role is not here to build a fab. We're not investing any cash out or we are not participating in the investment. We're just providing managerial and (multiple speakers) logic management, international property, and other services across, as Russell mentioned, so our only cost is some headcount that we will put on that, and therefore all the margin -- all the cash in that we will get doesn't have against it cost or investment in the fab.

After the factory is completed, we would also be involved and we would have some portion of the factory for our own sales, our own capability. And then, we would come more into a standard fab model on the margin that we would be selling off of the usage in the factory. But we would have a capacity in the factory that is a very expensive factory off of having enabled the factory to be built, rather than off of a capital investment.

Great. Thank you.

[George Berman], J.P. Turner & Company, LLC.

As always, a great presentation. I have a couple of questions. Number one, explain to me the acquisition that you made in Japan, in the [Narita] facility, and the current fluctuations downwards guidance in Japanese yen. How does that, if at all, help us going forward and how are you looking at the switchover from the Micron revenues to your own revenues? How is that going?

You should mention the exchange rate. I will talk about -- Oren will talk to you about the exchange rate, how that -- we're working that, but I will answer on the transition.

During the script, I had mentioned several activities, one of them being the previously announced contract with Vishay-Siliconix and some of their flow families being brought up and qualified in the Nishiwaki facility. And the International Rectifier contract that we just announced, it was also stated that some of that will also go into the Japan factory.

In the script that I just read, I talked about qualifying for a Korean customer that has the potential of being a 20,000 wafer a month. So those are the three big activities to drive the volumes in the factory.

In addition to that, I had mentioned that our power management platform is qualified there, with the first lots coming out at a 98% yield. So at this point, we have the ability to cross-qualify and allow ourselves, as we see and forecast our revenue ramp throughout 2014, to move products into the Nishiwaki factory and to have that added capacity for us. So that's the other area there.

And then, there is a variety of Japanese customers themselves that have been brought into the factory, as well as some Japanese customers that are brought into other factories, for example, into Newport Beach for some silicon germanium and SOI switch technologies.

So that's the methodology to fill the factory. At present, the factory's at about 40% utilization, which was within our plans when we bought it, meaning that we bought the factory with the idea that we truly needed to have added capacity. It is now the challenge and the task to fill the factory within the next year and to get up to a point of utilization that the factory becomes breakeven in and of itself. The first several years of running a factory, the factory has produced a good amount of cash for the Company.

Great, so the advantage of having qualified personnel on hand, the logistical positioning right across basically from China, close to Korea, should also help in gaining additional contracts?

Yes, the big Korean customer that we are talking about, the deal was specific for Japan. So you are 100% correct.

So the -- according to press reports, one sees the Japanese yen dropping further in the value. That would all be additional gains for us?

Well, so far until now and also for the coming year, we have the major customer in Japan is Micron and the contract prices with Micron are in yen.

And on the other hand, all the expenses -- almost all the expenses in Japan are in yen. So, actually, we have a natural hedge that all our revenues are hedged against all our expenses because everything -- not everything, but 90% of the expenses and the revenues are in yen, so it actually does not affect us at all. For the future, actually, if the yen is becoming like [100, 105, 110], it is an advantage for us because the revenues will be in dollar and expenses will be in yen.

It's important to know that our initial business plans and all the forecasts were down when the yen was [75 to 80], so now we have an upside of 20% compared to those plans.

Right. Next question, explain to me the reasoning for the recent rights offering. It looks to me like you had even before this rights offering ample amounts of cash. The Company's generating positive cash flow. And I think the only sort of roadblock between a significantly higher valuation and the current price is the extraordinary amount of depreciation and amortization you have to carry every quarter, but even that seems to be reducing quite nicely by about $9 million from a year ago.

Yes, well, we wanted -- I mean, we have in our corporation our strategic -- our major shareholder that really knows our plans and our strategic direction, and we present from time to time to the Board, and we were in the mindset that an equity investment -- I mean, an investment by this other corp was something that we'd want to pursue and we also want to pursue an equity -- to strengthen the equity.

So basically, we had two reasons. One is a lack of desire to invest, and invest in equity; the other, we wanted to give the entire shareholders the opportunity to participate in the same terms. And the third reasoning for that was strengthening the balance sheet. So you're correct, George, that we had -- we have enough cash and the balance sheet is strong, but still if you check like the ratio of shareholders' equity and the balance sheet to total balance sheet, so it is maybe 0.2, 0.25 the ratio of shareholders to debt -- shareholders' equity to debt.

Also, we believed before the rights offering that it should have been strengthened, and this is why we chose an avenue which is, on the one hand, an equity fund-raising, on the other hand not dilutive because it enabled all the shareholders to participate in the same terms, and everybody that participated maintained his percentage. So this was the initial idea behind that.

Yes, we participated 100% in the two rights offering so far.

The depreciation amounts, there is many companies that have depreciation exceeding -- it's exceedingly high. For some reason, it seems to me like Tower Semiconductor gets especially punished for having the GAAP loss versus the non-GAAP income. If you earned $0.35 for the last quarter, as you state today, I am certain your stock would not be trading at below $5.

Yes, I agree with you on the depreciation we are like a special case, and you can really see it is not the entire TowerJazz. It is specifically fab 2. I mean, if you will even look at how much it cost us to buy fab 4, which is the Nishiwaki fab, so about $40 million cash and 20 million shares, so 60 million. To purchase the Jazz facility fab 3 cost between $20 million to $30 million, but to build fab 2 cost us $1.5 billion. So actually, this huge cost of establishing a fab from scratch, fab 2, creates for us now such a burden of accounting of reflecting the historical expensive investment, so it is really something that we believe we should show to the investors, also the numbers excluding that.

And this is why, really -- and you'll really see that -- that the CapEx ongoing -- I mean, the CapEx for this quarter, I said it in the script, was $19 million -- 1, 9 -- so it is an annual outlet of $76 million, but the depreciation on [ratings] is double that amount.

Yes, yes.

So it is really a specialized item. We believe that -- we forecast that within two years, the numbers of the depreciation will go down to the level of the numbers of the CapEx, and then we can really be much more profitable and we don't need to show the non-GAAP anymore because the GAAP will reflect the operational efficiency.

Yes, all right. In the meantime, you just need to educate investors about the strength of your Company. Thanks for your time today and we will be continuing to follow you.

[Ziv Gill], [Ramont].

Hi, Oren; hi, Russell. Russell, I have a question. I am trying to get an indication of the future capital allocation decisions. So when you look at your business, the business that you see in, say, 2014 and 2015, given the design wins that Matthew described, how far are you from your desired portfolio? I'm not asking about specific customers or specific segments, but when you try to think about the portfolio, how far are you and what do you think is needed in terms of additional capacity, perhaps?

Portfolio, you mean the portfolio of our product offerings?

Right, right. You know, the combined revenue, which you give a certain breakdown, but it is not easy to see the whole breakdown, of course.

We mentioned in the scripts having had a partnership for backside illumination. The backside illumination for image sensors is a technology that some companies have right now, very few foundries, but a few foundries have it.

To enter into it, a very high investment and especially because the first few years of the backside illumination you're not going to have very, very high volumes. So the ROI on the CapEx is long coming.

The first line for backside illumination itself -- and I apologize that this was a detailed answer -- but it's -- this is just an example, and then I will get into maybe a more generic overall answer. But the CapEx to get involved in it for the first capability is maybe somewhere on the order of $18 million.

Now if we do CapEx investment for expansion, we typically target at the worst a nine-month return on the investment off of the utilization on the capacity increase. This wasn't always the case in the Company. It is the case for the past years.

As Oren mentioned, the initial investment for the Company is still being depreciated and very difficult to handle, but as long as every incremental investment we do on CapEx, new CapEx, for expansion or for capability, if it's targeted on a nine-month ROI, then I think it's a very good model and very justifiable.

The backside illumination would probably be on a three- or a four-year ROI because you first have to do the development and then get the customers qualified on it and then drive the activity.

So in those areas, we are building a portfolio by trying to generate a partnership with somebody that has that capability where we are buying the service at first as we build up the customer base, as we build up the module itself as part of the bigger flow to then buy the CapEx at the point that it has a return.

But right now, I would say if you're looking at a portfolio, that is not something that we have within our organic capability for next year. I would believe that as we really ramp the backside illumination within the image sensors, we would want to have that in house.

There is other capabilities that we do now -- for example, one of our power management platforms that is a very, very differentiated platform requires an extremely thick epitaxial growth. We also do not do that in house. We outsource that. But that itself is something we would most likely continue to outsource because that layer in and of itself does not add great differentiation. The flow and the knowledge of the flow adds the differentiation.

And I hope I'm answering your question here. So for the bulk of what we do, I think more or less on capability CapEx, we have what we need with one major exception, and that single exception is MEMS. For us to really grow strong into MEMS, it will take some substantial amount of CapEx.

And that is the one area that we would be looking at to go after in some variety of ways, be it through an acquisition, be it through buying more tools and bringing them on internally, whatever it might be, but we have had good success with certain MEMS projects.

The Cavendish Kinetics that we announced we think is a really a -- a one-of-a-kind differentiated flow. We are very, very excited about the relationship we have with that company and very excited about the demand that the market has for their product. It is a very, very demanding flow, and at this point even for that flow, although we are able to produce it, we don't have huge volume capability at this point. That is something that will take more investment to get to.

But we do have good capability within MEMS. We have strong engineering capability and strong R&D capability. How do we want to grow ourselves in that market, and we do believe and the Board believes that it is a market that we want to go into, is the best thing for us to go after an acquisition or is it best to try to develop it organically?

So that would be the one area, if I answer your question right now very specifically, that is not as strong within our portfolio as it is within our strategic plan. I hope that answers your question. I tried to answer it as detailed as I could.

It does and I appreciate the detail. Thank you.

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

Yes. Firstly, again, I really do thank everyone for their interest in the Company. We held today in Migdal Haemek a middle management meeting. We talked about where we are at, where we're going, certainly some information that are nonpublic, that we wouldn't share with the public at this point.

But the Company is in a very strong trajectory. I think the directions we're in, the things we're doing, are for everyone that is within the Company and sees it quite exciting.

We held last week -- or I am sorry, the week before last -- in Japan a very large technical symposium for a variety of customers. We had 130 customers at the conference, some existing customers, some people that were looking and interested, but it was really an atmosphere that was so exciting. During the reception after the conference was completed, I had given the opening keynote, and I was so thrilled at customers that came up to me and just being proud of the fact that they had just taped out into the Nishiwaki factory. They would be taping out shortly into the Nishiwaki factory.

So we are making an impact there. I think that the activities are strong. Now I'm not saying that these activities and these 130 customers that were there are tens of thousands of wafers per customer. It is not. I mean, Japan moves slowly, but the organic capability in Japan is moving steadily. And that is an exciting thing to see.

I was in Korea last week, as I mentioned, and boy, the relationships there, the excitement there, our capabilities there, customers talking about our platforms. You look at it, an [Amaled] driver, and a customer explaining to me how our platform was absolutely differentiated for an application that they had, a design that they wanted to do, above any other platform that anyone else was providing. And when you have customers that are that excited about your offering, that makes any leader in a company extremely satisfied with where we're at.

So if we look at the present, we have come a very long way. We see Q3, as we guided, with a nice piece of growth at 8% mid-range. Q4 is pretty visible at this point. We see continued growth in Q4. Q1, maybe a little less, but visible enough that we would see growth in Q1. And then, as stated, with these amount of mask sets entering our factories, with all the things going on with SOI, we would believe that targeting continued growth throughout 2014 is very realistic.

So that's my summary. Thank, everyone, for involvement in the Company. I want to thank all the shareholders for a very, very successful rights offering. We are very excited about the subscription there and the belief that you have in the Company. Thank you very much.