Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz fourth quarter and full-year 2014 results conference call. All participants are currently present in a listen-mode. Following management's prepared statements, instructions will be given for the question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded, February 23, 2015. Joining us today are Mr. Russell Ellwanger, TowerJazz's CEO and Mr. Oren Shirazi, CFO. I would now like to turn the conference over to Ms. Noit Levi.

Hello. Thank you and welcome to TowerJazz financial results conference call for the fourth quarter and fiscal year 2014. Before we begin, I would like to remind you that some statements made during this call may be forward-looking and are subjected 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 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 very much, Noit. We welcome all of you and thank you for your continued interest. 2014 was extremely significant for the company. We executed very well on many fronts strategically, tactically and financially. I will use the next minutes to describe the significant activities of the past year and what potentials they enable us for the next years. We began 2014 with non-GAAP gross profit of $44 million. Upon announcing the creation of TPSCo, second quarter showed immediate increase to $62 million. Our strong organic growth and operational consolidation continued to increase our margins to 36% of non-GAAP gross profit for a total of $84 million in the fourth quarter of 2014, having almost doubled gross profit since the first quarter of the year. Our design wins in 2014 were 20% higher than those of 2013. We also reached new quarterly run rate records and during the fourth quarter achieved 150 new design wins. I note that design wins are a longer term metric taking from six months to one-and-a-half years from the design win until the product or mask enters into the factory and then three to six quarters to reach volume production. These figures are therefore a good indication that we will continue to make growth for the mid to longer term. Our shorter term indicator for growth is the number of masks entering the factories. We recorded an all-time corporate record of new masks entering organic non-TPSCo factories. The number grew by 41% in 2014 versus the previous year and this growth was represented by all business units. Q4 2014 was our highest quarter with about 6,700 masks, representing a 64% increase over Q4 2013 and about 10% over the previous Q3 record quarter. These growth parameters are a solid demonstration of the effectiveness in…

Thank you, Russell. Welcome everyone. We announced today the full-year and fourth quarter 2014 results demonstrating an excellent gross and operating margins increase, achieving net profit under GAAP as well as stronger balance sheet and improvement in our financial ratios. On the revenue side, we achieved a quarterly record and an annual record with $235 million for the quarter and $828 million for the year, reflecting 64% increase year-over-year, including substantial organic growth of 34% for the top 10 customer, excluding Micron and Panasonic and a 23% average growth among all other customers, excluding Micron and Panasonic. This excellent revenue growth indicator resulted in 36% non-GAAP gross profit margins in the quarter as compared to 30% in the previous quarter and a GAAP gross profit of $64 million for the year or $259 million non-GAAP as well as an annual EBITDA of $154 million for the year. Our record revenues for the year of $828 million represents a 64% increase over the $505 million of 2013 and for the quarter represent 75% increase in revenue. On a GAAP basis, we recorded $4 million net profit for 2014 and $624,000 for the fourth quarter. GAAP net profit for the year included the following three main special items, A, non-cash cost item of $55 million recorded in the P&L report resulting from the cessation of operations of Nishiwaki fab in Japan reflecting mainly non-cash fixed asset impairment cost; B, a gain from the acquisition of TPSCo net in the amount of $166 million derived from the high value assigned to Tower's stake in TPSCo; and C, a non-cash other financing expenses of $55 million net, comprised primarily from amortization and accretion including accelerated accretion related to debentures and calculated in accordance with GAAP. On a non-GAAP basis, gross profit for the quarter…

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 regard to statements made and to be made during this call. Please note that fourth quarter and fiscal year 2014 financial results have been prepared in accordance with U.S. GAAP and the financial tables in today's earnings release include financial information that may be considered non-GAAP financial measure under Regulation G and related reporting requirements as established by the Securities and Exchange Commission as they apply to our company. Namely, this release also presented financial data which is reconciled as indicated by the footnote below the table on a non-GAAP basis after deducting one, depreciation and amortization, two, compensation expenses in respect to options grants and three, finance expenses net other than interest accrued such that non-GAAP financial expenses net include only interest accrued during the reported period. Non-GAAP financial measures should be evaluated in conjunction with and are not substitute for GAAP financial measure. The tables also contain the comparable GAAP financial measure to the non-GAAP financial measure as well as the reconciliation between the non-GAAP financial measures and the most comparable GAAP financial measures. EBITDA is presented is defined in our quarterly financial release. EBITDA is not required as a financial measure and may not be comparable to a similarly titled measure employed by other companies. EBITDA and the non-GAAP financial information presented herein should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, sales share data or other income or cash flow statements data prepared in accordance with GAAP and is not necessarily consistent with the non-GAAP data presented in previous filings. I would now like to turn the call over to the operator. Operator?

[Operator Instructions]. The first question is from Cody Acree of Ascendiant Capital. Please go ahead.

Thank you very much, and congratulations guys on the performance. Maybe if we could start with the gross margins. Obviously well ahead of expectations. I think you said $300 million at least and nearly $600 million delivered. Oren. I guess, how sustainable are these margin trends? And how much do you expect these will fluctuate with revenue?

Yes. So actually indeed we had 27% gross margin in Q2. We achieved 30% in Q3 and we guided that we will not be below 33% for Q4 and indeed we overachieved it with 36%. So obviously the factors that helped for that are both the Nishiwaki closure, which is of course sustainable, so we will continue, also the organic growth we will continue. Just because the fact of the revenue that next quarter should be 225, I would assume something like between 33% to 35%, maybe 34% going up towards the Q4 very aggressive target that Russell took on the press release, which is 40% in Q4 2015. So I would assume starting the year with 34% and reaching towards achieving this target of 40% in Q4, is a linear improvement towards that, I would assume, is a reasonable assumption.

And is this utilization driven? Is this mix driven?

Yes. It's mainly the organic growth of the fabs that we have. It's not a TPSCo revenue. We don't expect their increase from the Panasonic business or all the other business, which is foundry.

Okay. So we exit this year at about 40% [indiscernible] Panasonic's organic business or their additional business then to drive gross margins higher. Is that correct?

Yes. That's what I had said as far as the 2017 model of 48%. So we’ll have some small amount of TPSCo third party in the second half, maybe we will realize a point of margin from that. But the 50% of the 2017, that is a continuation of the organic growth, the offloading of some of the Migdal HaEmek capabilities into TPSCo and the very strong growth of TPSCo third party revenue. So again -- please go ahead.

And Russell you gave very significant increase in the contribution you expect from Panasonic. I guess, what's driving that? What's giving you the improved visibility that you think that now the TPSCo [indiscernible]?

Cody, I apologize. The second half of your question got muted somehow.

The TPSCo guidance. You said $200 million to $250 million and now you are saying $300 million plus. What's driving the increase in your expectation?

No. That is really based off of having analyzed the capacity. So in looking at, knowing what's going on there, the past quarter's understanding, the capacity, really going through it, we have enough capacity to provide that and we have gotten first customer engagements in every one of the factories. So off of the customer engagements in each of the factories, we have a good feel at this point for each of the factories with the offerings and what the midrange sales price would be, what is the price per layer for an offering in Uozu, what is the price per layer in Tonami, price per layer in Arai. We know how many layers are there. So it's really just an integral of the price per layer forecasted into the future and the amount of layers we know are available. And that comes out to be at 90% utilization, about $300 million of third party revenue.

And there is room from here as you look for the next couple years of doing those factories at ways to expand capacity?

I am quite convinced that as we build especially high-volume customers will find efficiencies in both how to run the tools and in reducing layer counts to increase what we believe is the capacity at this point. There is always projects that a good company has to increase capacity through efficiency programs with no new CapEx for capacity. So that's a very strong belief that I have. We haven't guided what that would be but the same as we had said $200 million to $250 million, we want to be conservative in the numbers that we give, at least to know that we can assuredly hit them. Now the $300 million, again that's what the capacity is. I think from the capability that we have so far, as far as customer engagements, we have right now the ability to hit $200 million run rate in the 2017 timeframe. But that's from engagements that have happened in the first 10 months of the activity. There is many new things happening. Those engagements have to be realized, maybe some will fall out, others will come in, but I think the ability to get to the $300 million at 90% utilization is within our hands.

And then lastly, Russell, obviously there has been some recent negative articles that have impacted your stock price. A lot of that being reversed today. Any responses that you would like to make? Any comments you would like to make?

In general, I think there's basically two types of people, right. There's people that like to see things grow, that get excited about growth. Those are the people on this conference call now that have believed in the company, have invested in the company, have stayed in the company with long positions. There's other people that take joy out of destruction, like to see decay. Fundamentally someone that has a sole short position, they want to see things decay. I think the articles that you refer to is from someone that self professedly had a short position. A short position in this company over the past year was not beneficial. So it would make sense then to try to dig, to look, to sling mud, but one should expect that what's being slung is at least accurate. And in this case, it's not accurate. No substantiation really in most anything that's being said. So all I can say is, someone with a short position, they take joy in decay. We take joy in growth and we are very happy for our shareholder base that is enjoying growth.

Very good.

The next call is from Jay Srivatsa of Chardan. Please go ahead.

Thanks for taking my questions and congratulations on the quarter and guidance. Russell, if we step back a little bit, could you address the landscape of the fabless light model that you alluded to last quarter. It mentioned that maybe if the IDM start looking to either go fabless or fablight, can you expand on that? Are you continuing to see the trend? And how do you expect that to play out in 2015?

Certainly. So one of our business units, we entitle it TOPS and it stands for transfer optimization process services and some of the capability is moving IP and flow capabilities outside of the factories. But the bulk of activity is taking customer flows from integrated device makers, that are either discontinuing existing fabs or not willing to invest to increase their internal capacity. They have flows that have a lot of intellectual property within the flow itself and those flows are then transferred into our factories. The press released customers that that has been within that business model are, our Vishay Siliconix, International Rectifier, Fairchild. We have multiple others, but that are not press released. If you look at Fairchild, they announced shutting down some of their organic factories and obviously moving that into third party and that is a bid that we won from them. International Rectifier has consolidated over the years. We will see what happens now that is International Rectifier is part of Infineon, what their trend is there, but really don't know at this point. But certainly, we have a lot of business that had been not just a transfer but onsite developments of flows that don't necessarily exist elsewhere within all of the IDM transfers. Has that trend continued? I think it has. How much of it do we want to take on is another question, but do we have opportunity continually in that arena, we definitely do. We have, for all new opportunities, I commented to the factory of any major event we have an evaluation on the amount of resource, the ROI, is it the right thing strategically for us at this point or not, many of these IDM opportunities come up in front of that committee and some we accept, some we don't but the trend is certainly there.

In terms of process transfer, where are you at with the India project? Any update there?

No. We haven't heard anything from the governments since the last call. The government did announce that they have reestablished what they call an empowered committee, that they are moving forward and we will see what happens in the next weeks or months as far as getting more information or a call for a meeting or whatever. But we have received no official notification from the government.

Okay. In the past you have shared some of the mask activity related in a number of masks entering the fab. Can you give us an update on what you saw in Q4? And what do you expect in Q1 this year?

Sure. So in Q4, we had a record quarter on top of the previous record quarter of 6,700 masks entering the TowerJazz factories. That was up 10% over the Q3 number and 64% up over Q4 2013. I would expect the trend to continue because the market share is continuing to grow. I don't really have an internal guidance on the amount of mask entering the factories. We have a lot of projects and as those projects reach the final stages, the customer tapes out, but I expect it will continue. We have stated that we believe continued growth through the year, driving 40%'s non-GAAP margin in Q4 and that will only happen through more tape outs.

Okay. Last question from me. In terms of the competitive landscape, you said there may be some opportunities you might take, some you may not. So help us understand, are you looking to grab some of the smaller process geometry type opportunities and walking away from some of the other processes? Or is it more SOI related opportunities that you really are looking to take and walking away from something else? Help us understand how the landscape looks and how you see yourself playing out rest of the year?

As far as opportunities, as a foundry there is fundamentally two types of opportunities that you can have, at least within our business model. One is where you have a process flow that you developed and you own. You deliver a process design kit to the customer and they design tier flow. In that case, we are rarely turning down any opportunity because it's within core flows all of the wafers that you bring within those flows are accretive in utilization and beneficial in return on investment. The other opportunity where I say that we are a bit judicious is the IDM transfer. In that case, we have certain strategic customers that we will continue to grow with, will grow their platforms, will grow other things, but in those cases, your doing a lot of work in order to bring up a flow that you cannot open up to other people. The flow itself belongs to the company you are working with. So to do an IDM transfer on something that's very small, you have a lot of resource you are putting into it, very difficult to get a return because it cannot be opened up to anybody else. So if you are going to do flows, you want to make sure number one, that the volume that it will be generating will give you an ROI and if that one specific activity doesn't give you a very high volume, that it's part of an overall big activity with a certain customer. So the part of being judicious on the IDM transfers really deals with that. It's not a flow that you can go after multiple customers with. It's really restricted to the specific integrated device maker that you are working with. Does that answer your question, Jay?

Yes. Thank you very much.

Sure. Thank you.

The next question is from Richard Shannon of Craig-Hallum. Please go ahead.

Russell and Oren, thank you for taking my questions and may I add my congratulations for a solid quarter and a year.

Thank you.

A few questions from me. Russell, I wanted to hit on your comments in your prepared remarks regarding the RF and SOI market share. I think you talked about, I believe, you have roughly 25% share of that market. You can see it going to 50% share. Was there a timeframe associated with that?

I neither put a timeframe on it, nor did I say I see it going there. I said we target 50%.

Target 50%. Okay. Fair enough. And what do you see as the competitive dynamics there? Obviously IBM is in the process of selling the GlobalFoundries. What do you think is there? What kind of activity would you need to happen to see that getting towards 50% share?

The absolute best salesperson you have is a good yielding wafer that ships on time. We have good engagements, strong engagement with many of the leaders. We just have to continue to perform. Now in addition to that, if you want to, on top of having this great salesperson, which is Mr. and Mrs. Wafer that yields and ships on time, you have to have a strategic partnership that you are working on something that's two or three generations in the future. So both of those fit within what we have focused on. I have mentioned early on that within our top 10 customers, every business group has strategic relationships and programs or every business group is represented within the 10 top customers with strategic relationship and programs. That's very important to grow share. So that's really what we are focused on. We want to maintain shipping good wafers that ship on time, always improving operational capability and having very, very good strategic partnership where customers work with us on next-generation capabilities. Now my sister was in, I think it was Brownie Scouts and there was a song that they sang that said, make new friends but keep the old, one is silver and the other gold. It takes a lot of effort and energy to gain a customer and to gain trust that they are giving a lot of their future to your hands. To maintain that you really have to perform. So that's our major focus. It's performance. As we perform, we get more opportunities. As you get more opportunities, you have opportunity then to go into strategic relationship and if you perform both operationally and to deliver strategically, you can then move forward. In the case of the SOI based switch, I noted that we had delivered samples to customers of our RF-CMOS [ph] of 122 femtosecond with the high-voltage platform. Those are very, very forward-looking capabilities. I honestly believe the best in the world foundry metric that will deliver the lowest insertion loss. So as long as we continue to drive a roadmap that meets next generation or two generation of needs and customers trust us, they can rely on us, I think that the market looks good.

Okay. Perfect. Appreciate that update. Second question for me. If I recollect your comments correctly, I think you said you are shipping a CMOS image sensor out of TPSCo fabs to a high-end smartphone customer or engagement. Can you give us a little more clarity on that? And is that with an announced customer or unannounced?

We did press release to Himax.

So it is Himax then?

I am not giving a statement as to what we have done or haven't done as far as the status of the program, but we did press release Himax as a high-end smartphone customer and multiple additional customers that we are dealing with in that factory.

Okay. Do you expect to be able to announce other potential partnerships here in the next quarter or two, with these image sensors coming from TPSCo then?

From my standpoint, I love joint press releases for many, many reasons. It certainly gives a lot of visibility and transparency to yourself as an analyst and to the investor base. Many customers do not like listing who their supplier is and for a variety of reasons there as well. Some for the fact that they have another supplier that they are moving away from and hence if they announce a new supplier, they are afraid of a lowered service from the existing supplier and in other cases it's because the capability that they think is unique, they don't want to alert others to in their competition that they would come to them. And some customers just have a policy of not press releasing with suppliers. So I honestly, at this point, cannot commit other customers to press releases. Our press releases that I think would be very valuable for the investor base to know about, but I can't do it unilaterally and mention their name. I have to just mention capability without mentioning names, it doesn't mean a lot. So I honestly can't commit to that.

Okay. That's fair. I appreciate the update there. Maybe two financial oriented questions for Oren. What are your expectations for CapEx this year? And then how much of that do you consider maintenance? And then, within your revenue guide, what's your assumptions for Yen to dollar exchange rate?

The Yen assumption to dollar is 120, which is now that Yen is at 119. So we have a small upside. Averagely, in Q1 it was 118. So a small upside we have to that. On the CapEx, last year we performed average for the quarter is almost $25 million a quarter. We believe it should be this way, it can maybe a little bit higher to $28 million to $30 million a quarter, pending future revenue growth that we see. We may increase somehow the new CapEx mainly in maybe a little bit in TPSCo. But in Jazz, where you know that we are almost fully utilized. But certainly to not to go up from $25 million to more than $30 million. A reasonable assumption should be somewhere in the middle, maybe $27 million. Did you ask another question?

Just how much the CapEx numbers for this year do you expect to be maintenance oriented?

Maintenance is about $17 million to $18 million a quarter from this number.

Okay.

Including certain debts.

Those were all my questions. I will jump in the line, guys. Thank you very much.

Thank you very much.

The next question is from Lisa Thompson of ZACKS Investment Research. Please go ahead.

Hello. Good morning. Good afternoon. Whatever it is over there. Could you talk a little bit more about the imaging business? Is that the highest growth business? Is it a big part of what you are selling now? And is that something that 3D will be important to smart phones and mainstream products? Or is that kind of a specialty?

It's a core business that we have. It's a high-margin business. It's an important business. It's also one that for almost everything we make we are the sole source. So it's very strong customer relationships. As far as the 3D sensor, it's probably, at this point, more focused on gesture than it is on, per se, a cell phone, but I am not saying that there wouldn't be 3D cell phone applications as we move forward. There is a lot of discussion around it. But a big portion right now is focused on gesture control. I think the -- well, I don't think, at the beginning of the CES conference, the Intel CEO keynote, his first demonstration that he gave dealt with gesture control on a PC. So gesture control, I think, is a very big thing, but there's multiple, multiple applications on 3D. Again it's something that really will change the user experience in dealing with the digital world. So I see it as being a very, very big growth area, but there's many other things within image sensors that are outside of gesture. Now there's many sensors for industrial, there are sensors for health, there is high-end studio. So the CMOS image sensor has many, many applications. One of the areas that we are the strongest in is very large die for medical applications, in specific for dental X-ray.

Okay. So the product that you sell to the smart phones, why have they come to you and what does that do for the phone?

I am sorry, please?

The product that you are selling to the smart phone manufacturer? Yes.

So if you are going to very high pixel count, you want to try to keep the form factor relatively controlled. To do that you have to reduce the pixel size. So we released the fact with Himax that we are doing, I think, a 1.12 micron pixel. There's very few suppliers that can do a pixel of that size. We have that capability at extremely low dark current, extremely high quantum efficiency in the 300 millimeter Uozu factory. A fundamental Panasonic flow that with a lot of our pixel IP is becoming a very strong foundry flow. But the major reason on that one is moving from a VGA or a one meg, two meg type of a sensor to getting to an eight meg or a 16 meg, 14 meg and at that point, really wanting to make sure that you can keep the form factor small and not decrease in performance.

So who are you stealing business with that?

Well, I would never like to turn to stealing anything, but who are we gaining business from, for the most part, I think the largest foundry supplier of sensors is Sony. And I think there is many people who rather than by Sony off-the-shelf would rather come to a real pure play foundry.

Okay. I would say you see this product being for high-end phones but then moving down to mainstream, right, as cameras get better?

No I see that the high-end phones will continue to need high-end performance. They will need smaller pixel size. And I think the high-end phones are mainstream.

Okay. All right. Great. Thank you very much.

Thank you.

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

Certainly. Firstly, truly appreciate a very, very strong investor base. Appreciate analysts that have taken on covering our story. We have many, many investors that have been with us for a lot of years and we just thank you for your partnership. We had a very good year in 2014, serving as a base and a springboard into 2015. Our target of the 50% margin in 2017 timeframe is a function of the increase in TPSCo third party business, the continuation of our core business growth and additional specialty products coming into the core business. We are very excited about. We are looking forward to get there to keeping you updated on our progress towards that point. So thank you very, very much.