Tower Semiconductor Ltd. (TSEM) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz's First Quarter and 2015 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, May 13, 2015. Joining us today are Mr. Russell Ellwanger, TowerJazz's CEO and Mr. Oren Shirazi, CFO. I would now like to turn the call over to Ms. Noit Levi. Vice President of Investor Relations and Corporation Communications. Ms. Levi, please begin.

Thank you and welcome all to TowerJazz's financial results conference call for the first quarter of 2015. Before we begin, I would like to remind you that some statements made during this call may be forward-looking and are 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, Noit. And welcome all for joining our call today. This is a very significant quarter for me personally. This month marks my 10th year anniversary at Tower now TowerJazz. In today's conference call I would like to take a look back over the past decade and what we have achieved and how these achievements will springboard us into the future. In joining the company in May 2005, the status was as follows. Operationally one 6-inch factory at partially utilization and new 8-inch factory of low capacity and that at low utilization. There was an annual run rate for revenue of approximately $100 million, EBITDA was negative $20 million, and cash from operations was negative $55 million and a net debt of $550 million. In my interview rounds I saw motivated and capable workforce and in particular felt an immediate bond with Oren Shirazi, at that time Acting CFO now CFO and Senior Vice President of Finance. Dr. Itzhak Edrei, at that time Vice President, R&D and now President. And Ms. Dalit Dahan, at that time Vice President, Human Resources, now Senior Vice President, Worldwide Human Resources and Information Technology. As well as I had strong interactions with Mr. Idon Ofer, at that time Chairman of Israel Corporation, Tower's largest shareholder. Mr. Ofer and I aligned quickly given mutual long-term commitments which we have both strongly held to. I took the job and our journey began. The first step was to correct the base financials. To do this, firstly we structured the organization from essential R&D and essential sales and marketing into business units. Each was its own general manager, research and development headcount, product marketing and customer support. Secondly, now with the structure that allowed group by group financial accountability, we gave each business group targets and communicated to the market that we would achieve positive EBITDA in six months namely Q4, 2005 and positive cash from operations in 18 months namely Q4, 2006. Both were achieved and have been sustained ever since. In 2005, 2006 we were predominantly a second or third source of digital technology provider with the exception of having started the CMOS image sensor business group in 2005 under general management of Dr. Avi Strum. During this time, we reviewed and revamped our strategy and capabilities. It became quite apparent that our staffs in Israel cannot compete successfully head-to-head with the major global digital foundries which invest steady state billions of dollars on technology notes following Moore's law. We looked out alternatives. Semiconductor innovation improves either, one, an ability to process more information in a given square inch of silicon through digital transistor scaling and new software algorithms EG, digital Moore's law or two, an ability to communicate sense, power, hear, see and display information through specialty semiconductor development. An innovation and specialty analog semiconductor is fundamentally different than innovation in the digital world. Since those are not rely on a predictable scaling of the [Technical Difficulty] driven by Moore's law but rather on a deep understanding of problem faced in each unique application, coupled with burst of creativity that enable breakthrough solutions to these problems inside the silicon rather than simply scaling the silicon devices. It is a model that is economically based upon equipment reuse with a few tens of millions annually spent on capability CapEx rather than digital roadmap multibillion dollar annual investments. We saw that this alternative that is unique specialty analog semiconductor markets was great demand and we have the internal capabilities and human intellectual property to serve and grow to this demand. We took a most important strategic decision and shifted our company's focus on analog specialty components and technology offerings. This was not an easy change. It meant substantial shift in customer base and moving away from some large digital customers. But it has proven successful. Since then our focus has been driving innovation and engineering solutions to the problems of interfacing the real analog world through vast array of specialty semiconductors such as wireless RF power management imaging and other sensors, all being analog devices to digital systems and back again to the real world. In 2008, first with Jazz Technologies, a California based company which was an RF analog specialty leader and we had the added strong benefit of bringing into our management team Dr. Marco Racanelli, now Senior Vice and General Manager of the RFI precision analog and power management business units. The addition of Jazz positioned us for accelerated growth and gave us a leap up becoming a top five foundry, expanded our global reach, provided us with a broaden and expanded process portfolio and enabled us to leverage significant cross selling opportunities. On top of all this, it enabled us to make significant cost savings without harming our ability to grow. In addition, in 2008 we had a big change in the governance of the company. I met with Mr. Amir Elstein, at that time he was Executive Vice President, Office of the CEO and a member of the Board of Directors at Teva Pharmaceutical. Amir began his career at Intel, at which he spent 23 years. He served as R&D process engineer, grew through multiple technical leadership position of fab operations manager and then became a corporate officer at Intel to Co CEO of Intel Israel and Managing Director of the Intel Electronics Group, driving the strategy and technical roadmap of the micro controller business unit. He has silicon in his blood. We appreciate each other's talent, experience and capabilities and for opportunities for enhanced success. Amir joined the Board. In 2009, Amir became the Chairman of our Board of Directors and revamped the Board to the specific needs of the company. As a semiconductor expert he has been a partner in the strategy and tactics of the company. In 2010, we crossed a big milestone of a $0.5 billion in revenues with commensurate bottom line. This revenue level provided us with other major achievement. Based on the ranking by revenue of all specialty foundries, we move from position number 12 in 2005 to 6 in 2008 to 3 in 2009 and we finished 2010 as a number one global specialty analog foundry. We became acknowledged global analog leader with best in class RF and image sensing capabilities. Fast forward to 2014, we formed TowerJazz Panasonic Semiconductor Corporation. This is among the most important and strategic events to date. It significantly enhanced our leadership in the specialty analog space, and brought us multiple world leading analog platforms of the highest quality together with advanced 300 millimeter capability and technology nodes and the capacity to allow us to well serve our organic growth and go nicely beyond a $1 billion annual run rate. I look back over the past 10 years and I am truly pleased with what we have accomplished at TowerJazz and I am very invigorated to begin the next 10 years. To look at the present and then into the future, our first quarter 2015 revenues were $226 million, which represents an increase of 71% over those of the first quarter of last year. Excluding TPSCo and micro, there is a 33% year-over-year organic growth in the company, nicely distributed over all of our business units with 31% growth from our Top 10 customers. Our design wins in the first quarter was 30% higher than those in the same quarter last year. We also recorded an all time corporate record for the number of mask entering our factories. Mask grew by 37% in the first quarter versus Q1 last year and when including TPSCo third party business we recorded a 45% increase in mask growth as compared to Q1, 2014. Specifically in regard to TPSCo, we continued to increase the production volume. In Q1, we had a new product tape-out on average every three days. A significant milestone considering that this sensor has only been in existence for one year. These tape-outs come from a broad range of new customers at multiple technology nodes from 65 nanometer up to 0.3 micron. TPSCo is seeing strong activity in our power management and CIS process flow technologies as well as customized embedded MBM solutions. Additionally, our first 65 nanometer RF SOI devices have been measured and samples have been received by our strategic advanced roadmap customer. More on that in a few minutes. TPSCo has completed the transfer of all the significant components of the TS18 power management platform and has begun to offer tape-out to customers for qualification. This provides us additional flexibility and capacity planning and it allows our customers added business continuity assurance. Some large and important end users require from their suppliers, global diversity manufacturing. At TowerJazz, our customers can have this at a one stop shop. Finally, TPSCo continues to collaborate well with our partner Panasonic on many projects that benefit both Panasonic Corporation and third party foundry customers. By providing our customers with both TowerJazz and Panasonic process solutions, TPSCo is gaining rapid traction in the foundry space and provides the only viable pure- play foundry service in all of Japan. Looking at the other business activities. I'll focus a bit on the specific growth of the markets in which are playing as well as how each of our business units maintains and plans to extend their competitive leadership. Beginning with Radio Frequency High Position Analog Business unit which is our largest business unit by revenue, our RF market is sub divided into two high growth segments that being driven by the handset RF front end module and that being driven by the data infrastructure market. The RF front end module market continues to grow at rate that outpaces overall handset growth, due to the fact that the latest 4G long term evolution smartphones need to support multiple more bands than older models. This increase in the front end module component counting complexity translates for us into more silicon area per phone and hence higher wafer sales. In terms of the data infrastructure market we serve with our high performance silicon germanium technology, using component to make high speed fiber optic connections. These connections are used in the internet backbone supporting the world exponentially growing data traffic needs. From use in data centers to supporting the growth in cloud and server farms. As well as delivering high speed services to our homes and businesses. We are the only pure- play foundry that has made consistent investments in silicon germanium technology since the 1990s. And have thus built a technology barrier that is difficult for any competitor to overcome. This together with our continued investment in technology, customer service and capacity, promises to secure strong market share as this high value market continues to grow. To update with some of our activities during this quarter. We recently released samples of our latest SOI technology that leapfrogs the performance of our current highly successful technology for handset RF front end module. With this technology we have secured design win at lead customers and expect to see the initial product tape out for this platform this quarter. The technology will substantially reduce insertion loss and wireless front end module component, improving connectivity and battery life. As mentioned, we also produced our first 300 mm SOI wafers in our TPSCo factory. The RF performs of these samples are unrivaled and were provided to a leading advance roadmap customer. Our platform performance and roadmap combined with our 300 mm new capacity, in addition to the two 200 mm factories already qualified for RF SOI technology, offers our customers substantial opportunity to stay with us and grow with us in the long term. We also successfully prototype several products on our newest low power high performance silicon germanium process intended to reduce power consumption for high speed fiber optic connections. We continued to win significant market share in high performance silicon germanium fiber optic market where our technology offers customers unparallel performance. We are also presently supporting a production ramp of our first RF MEMS components for the handset front end module. Cavendish Kinetics and ZTE's Nubia just press released the adoption of this tunable antenna technology to enable our new borderless screen advance smartphone. This specialized component marks the performance that cannot be matched with non-MEMS solutions. And we are perfectly positioned to take advantage of growth in this area as it plays out over the next years. In our TOPS business unit led by Ms. Zmira Shternfeld-Lavie, we transfer large customers' specific flows into our factories that are then used exclusively for those respective customers. This quarter, we began aggressive ramping of several large transfers in TPSCo. This is on top of the big activities within the rest of the company that have been previously press released. The CMOS image sensor business unit continues to be strong and with the addition of TPSCo we have generated new businesses in several areas that we previously did not serve. Our advanced improvement CMOS image sensor technology is target for high end still and video imaging, machine vision, dental and medical, security, automotive and 3D gesture control. Our long-term extensive experience in the imaging field combined with our inhouse knows how enables us best in class customized design. We do have the best in class 1.12 micro pixels at TPSCo tha allows us to compete very well in high mega pixel smartphone camera. Himax is moving towards mask production and we have one another large Chinese customer in this area. Since there is a shortage of such sensors in China, the timing is just perfect for us to take major market share in this region. Successful design wins of Himax and the other Chinese customer can bring us in a very short time to 300 mm senor orders of several thousand wafers per month. In the 3D gesture control market we continued to grow and now one addition to Intel which we recently announced, we have two major time-applied customers having demonstrated very good performance of their sensors based on our flow. This enhances our presence in the high growth 3D gesture control market. This technology is also going to other markets such automotive. We see this technology as very fast growth. Shifting to our power business. Our power platform have been designed in major product serving mobile, computer consumer and automotive markets with strong customer presences in North America, China, Korea and Japan. The demand for power management in mobile device is constantly grows and requires continued improvements in power efficiency. Similarly, LED general illumination lab market is predicted to grow at 31% CAGR for the next year. And demands intelligent, efficient LED lighting controls. Our power platform offers maximum flexibility, enabling customers great cost effective product at any desire level of integration and achieve first off success for faster time to market. The integration of our low mask count non-voluble memory IP blocks provide also significant differentiation and cost effectiveness for enhanced power management solutions. We've realized a 50% increase in demand for our power products as compared to 2014. This activity is becoming a significant portion of TowerJazz revenue. Lastly regarding our business units. Through our Newport Beach facility, we supply strategic, onshore foundry services for critical US aerospace and defense applications through industry and segment expertise. We have extensive capabilities and we bring a broad range of commercially viable technology and services to the A&D community. We see trends and three dimensional integrated circuits silicon based MEM switches, migration of visible near-IR image sensors to silicon CMOS and solid state platforms. And very large wafer scale phase arrays, all of which are A&D technologies are well positioned to support. To close, we target Q4 of this year to achieve $1 billion annual revenue run rate and 40% non-GAAP gross margin. Our second quarter of 2015 guidance is $235 million in line with this target and with our previously stated target of quarter-over-quarter growth throughout the year. Most significant in this past quarter we strengthened our balance sheet reducing net debt to $160 million, yielding a net debt to EBITDA coverage of 0.8x. This will enable us the correct financial structure for sustainable GAAP net profit going forward. With that I'd like to hand the call over to our CFO, Oren Shirazi. Oren, please.

Thank you, Russell. And welcome everyone. Earlier today we announced our result for the first quarter of 2015. The first quarter demonstrated a significant turning point on all our balance sheet metrics and other financial indicators including our total gross debt reduction by $293 million year-over-year, our net debt reduction by $244 million and net debt to EBITDA ratio reduction to below 1x. This coupled with shareholder equity increase to its record level since inception. In addition, we achieved very good P&L performance with non-GAAP gross margin of 36% and EBITDA run rate exceeding $200 million on an annual base. I'd start with the detail analysis of P&L report. On the revenue side we achieved revenue of $226 million for the quarter reflecting 71% year-over-year growth as compared to $133 million for the first quarter of 2014. The strong organic growth of 33% which excludes revenues from micro and Panasonic and 31% growth from the Top 10 customers. Non-GAAP gross profit for the first quarter of 2015 was $81 million, and 81% improvement from the $45 million reported in the first quarter of 2014 representing a very strong gross profit margin of 36%. EBITDA which is akin to non-GAAP operating profit was $51 million for the first quarter, 86% higher than in the first quarter of 2014, reflecting an analyzed EBITDA run rate exceeding $200 million. Non-GAAP net profit for the quarter was $50 million or $0.78 per share, representing 22% net profit margin. This is an increase of 2.5x compared to the $20 million or 15% net profit margin reported in the first quarter of 2014 and higher than the $46 million or 20% net profit margin of the previous quarter. Gross profit on a GAAP basis for the first quarter of 2015 was $33 million, a significant increase when compared to $4 million in the first quarter of 2014. Net loss on a GAAP basis for the quarter was $73 million as a result of $85 million of non-cash other financing expenses. This was primarily due to the successful accelerated conversion of our series F debentures of $162 million which otherwise would have been recorded as financing expenses throughout 2015 and 2016. Please note that such accelerated accretion and motivation expenses are recorded only in accordance with US GAAP and are not impacting our results under IFRS which amounted to $10 million. Looking forward the $162 million bonds conversion which accrued in the first quarter of 2015, with resulting a cost reduction in our future P&L report of approximately $14 million on average per quarter in the coming three quarters of 2015, which comprised of greater than $3 million of interest saving and $10 million in other financing cost. And would result in cost reduction of approximately $8 million on average per quarter in each of the 2016 quarter, which comprised of $1.6 million interest savings plus $6.4 million in other financing cost. All these supporting our results to achieve sustainable GAAP net profit going forward. Moving to share count analysis, fully diluted earning per share calculation and presentation are not required under GAAP for the first quarter of 2015, when reporting a GAAP loss. However, in order to maintain transparency and providing information of the complete share count and in light of the fact that we target GAAP profit in the coming quarter, the shares underlying the following securities may potentially be added to the 77 million outstanding shares as of the date of this release. Approximately 13 million possible shares underlying options and warrant, 3 million underlying debenture series S, 3 million underlying capital note and 6 million underlying Jazz notes which are due December 2018 unless repayable with cash. Moving to currency exposure analysis. I would like to mention again the currency related effects on our revenue and P&L which as you will see have no material impact on the bottom line. A, with respect to the euro currency we have no impact and don't expect any impact for me last financials. B, with respect to Israel shekel, the impact is not material and is limited to above 250 k per quarter gain to the P&L on any 1% devaluation in this currency against the dollar and C, with regard to Japanese Yen, our revenue from Panasonic in TPSCo is denominated in the Japanese Yen currency and since most of the expenses of TPSCo are in Yen, this create a sort of financial hedge hence very limited impact if it all to our P&L. Moving to the balance sheet analysis. During the quarter we significantly strengthened our balance sheet to reduce debt level and improved all financial ratios. As previously stated $162 million of series S debentures were converted to shares. This reduced the principal amount of debenture F that is payable in 2015 and 2016. From $232 million as of a year ago and $197 million as of December 31, 2014 to only $35 million as of March 31, 2015. This is an important turnaround point at which we are facing a clear balance sheet and debt structure and have an amount of debt that is reasonably servable amounting less than $296 million of gross debt compared to $589 million a year ago, or $162 million of net debt as compared to $406 million net debt a year ago. During this quarter we also completed $45 million voluntary transaction to earlier redeemed Jazz notes and saved future interest accruals in payment. The conversion and early voluntary redemption not only significantly improved our balance sheet but also improved our financial ratios, resulting a 49% increase in shareholders equity to a record of $292 million as of March 31, 2015. Reduced short-term liabilities from $300 million to $203 million. Reduced net debt from $406 million to $162 million. And net debt to EBITDA ratio of only 0.8x which is improved significantly against previous period and current ratio of 1.7x as compared to 1.3x as of December 2014. Also this enables us to improve our future profitability by financing expenses cost reduction of approximately $14 million I specified before for the remaining quarters of 2015 and $8 million average three quarter in the quarters of 2016. During the first quarter of 2015, the main cash activities were resulted -- which resulted in cash on hand of $134 million as of March 31, 2015, we have positive cash generation from operations of $44 million or $40 million net of interest payment. Profits from exercise of warrant and options of $6 million, investments in fixed asset was $28 million, debt principal payment including the early redemption of Jazz notes of $47 million and $25 million for an issue our key employees retirements related payment. In summary, we had another excellent quarter in all financial aspect. We significantly strengthened the balance sheet and improve the financial ratios as well as very meaningful year, year-over-year growth in revenue and gross and operating profit coupled with the huge debt reduction of greater than $200 million just during this quarter. And now I wish to turn the call back to Noit. Noit?

Thank you, Oren. Before we open up the call to the Q&A session, I would like now to add the general and legal statement to our own results in regards to statements made and to be made during this call. Please note that the first quarter of 2015 financial results have been prepared in accordance with US GAAP and the financial tables in today's earnings include financial information that may be considered non-GAAP financial measures and Regulation G and related reported requirement for the established with 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 option grants, and three, finance expenses net other than interest accrued such that non-GAAP financial expenses net include only interest accrued during the resulted period. Non-GAAP financial measures should be evaluated in conjunction with and are not substitute for our GAAP financial measure. The tables also contained comparable GAAP financial measure to the non-GAAP financial measures as well 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 GAAP financial measure and may not be comparable to a similarly titled measure and provided by other companies. EBITDA and the non-GAAP financial information presented herein should not be considered in relation or as a substitute for operating income net, income or loss, cash flows provided by operating, investing and financing activities, per share data or other income or occasional statement 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] The first question from Cody Acree of Ascendiant Capital. Please go ahead.

Thanks guys for taking my questions and congratulations on another good quarter. Russell, maybe if we could start with new revenue contribution to this quarter. And then for your guidance, you went through -- and thank you for the details on the different divisions. But could you just go through the magnitude or rank order of strength that you are seeing from each division? How are you -- did you see that contributing margin? And what are you expecting for June?

So as we stated before we don't breakdown the revenue of Panasonic into the specific business units that would serve -- that we would break up into as it gets too specific to what we have from one single customer. As far as the overall revenue in the company and the breakdown of that ex TPSCo it is still pretty much the same as the last time we spoke in the last conference call. Somewhere about 35% is related to the RFHPA and somewhere about 16% -18% as the CMOS image sensor, probably about 16% -18% is also the TOPS business that we have, power management is somewhere about 10%, mixed signal CMOS activities are up about 12% and then we have scattering of small activities including the A&D.

Let me ask that a different way. What I guess I'm trying to get at is a level of activity not necessarily revenue generation. But you talked about new customers, new designs, mask sets coming in. If you just had to put a growth rate on that or a trajectory on activity, are those rank ordered in the same versus revenue contribution or are you seeing some standout?

On absolute dollars, the RF SOI is the biggest driver on dollars itself. On percentage and probably everything is pretty much on par with each other. The 30% that we see in the organic growth I think it is pretty well averaged over all the business units. But obviously if one of them is 35% of the revenue the absolute dollar is higher. But as I stated and I tried to point it out strongly the growth itself is pretty well shared over both of our business units which are something that we are actually very, very pleased with. That we are not as far as the growth engines of the company over leveraged in one area versus another.

And Oren you made pretty good progress on gross margins, couple hundred basis points outside this quarter. What were the drivers of that gross margin upside and then contribution expectations for the next few quarters?

Yes. So indeed as compared to the 27% upon establishment of TPSCo in Q2 last year, 27% non-GAAP gross margin that we achieve the 36% in Q4 and this quarter again 36% indeed we were expecting to start this year with 34% and reach to Q4, 2016 with 38% and then Russell even made it a target to be 40%. So from 34% to 40% and indeed Q1 was better than expectation than we over achieved to the 36% in Q1. One of the reasons is that slightly better mix in terms of profitable business over less profitable business that we had mixing in the revenue and the other thing is high utilization than expected. So we really see increased demand as one also can see the forecast for Q2 the guidance is better than maybe others expected. So this means that Q1 had more utilization than expected more activity so that we at the end of the line and middle of the line is higher, which means that more cost can be attributed over the wafers which means that it creates better gross margin of course.

And then lastly, Russell, you mentioned Intel and gesture recognition and then another couple customers that you are working with. Do you have any other color that you can give us on just expectations for how big of a contribution that kind of business might end up being for you? And any color on expected timing of not maybe one customer but just those customers that you're dealing with as a whole?

We believe that the gesture business itself is a very large business. And that we are well positioned to be able to take a major portion of it. I am slightly sensitive to give a real number right now as we press release only customer and that's Intel and I wouldn't want people to think that I am correlating and I certainly wouldn't want Intel to think that I am correlating their forecast into what I am telling the Street. But certainly the gesture market is large; I think that in the end it is possible for us within the whole gesture market to have a reasonable share. And I don't know somewhere $100 million, $150 million of market; I don't think that's unreasonable for us to have within gesture market.

$150 million of the market --

$100 million to $15 million

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

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

The next question from Jay Srivatsa of Chardan Capital Markets. Please go ahead.

Yes, thanks for taking my question. Congrats on good numbers and guidance. Russell, there has been some reports that the Chinese smartphone market is slowing down. And there's also some concern about the wireless infrastructure market over there. I know some of your customers have some exposure there. Are you seeing any drop off in activity in terms of orders from those customers, or is this more of a temporary phenomenon that you think will pass? What is your read on that market?

I can only state what we are seeing on the demand and our demand had stayed strong is actually getting stronger. So I don't see that we have any tail off at all. And as far as the specific end customers that our customers are selling to, that isn't 100% granular to me. There are certain models that I know would be going into some major branded companies. But overall again our demand is not slowing down whatsoever. If anything it is increased in the infrastructure demand, has increased very, very strongly.

Okay. In terms of Panasonic, where are you at in terms of transferring process flows into the fabs? Meaning have you been able to get them new customers or existing customers transferred from other fabs into the Panasonic fabs? Or are you still running purely the Panasonic product? And if that's the case, what are the some of the steps you are taking to get more products or more customers into the existing fabs at Panasonic?

So we press released maybe four months ago or so Fairchild and so Fairchild is a press release customer that we brought up in Panasonic. I mentioned during the call that on average we had a new product entering to the factory every three days. So obviously there is a lot of activity going on there. The platforms that have been transferred itself are the power management platform so we have the -- what we call TS18 and stated that allows us flexibility as far as where we load products. We have very, very high demand for RF SOI that gives us flexibility than to have the power management not in Migdal HaEmek fab2 but to have it in TPSCo factory and to be able to allow customers now greater capacity with Newport beach fab3 and fab2 supporting the RF SOI beat. So that certainly is a place that we are tapping out going, others additional capabilities that we've take out to for third party. I mentioned Himax very specifically that was a PR. And that's moving and in addition to Himax we has acquired I mean other four highly integrated smartphone cameras. We have another customer that is tapping out to us as well. So there are a lot of activities happening in the 300 mm. But yes we have I think very substantial amount of activity going on in TPSCo. I had stated that we would expect to see several tens of millions of dollars of third party revenue in the second half of this year. And I believe we are still on track with that.

Okay. That's very good. Help us understand where things are with the Indian project. Any update there?

Not really. The project has been moving along or not moving along for over three years. There was a change off government in the meantime. New empowered committee was formed from the first time that the consortium got together and agreed to be working together; a lot of time has passed. A lot of things have changed. The only update is possibly that one of the members of the consortium has sent a letter to the government and possibly will be having face to face meeting with the empowered committee over the next month. But there is nothing specific to report on other than -- it is really -- it is something if and when it happens would be an accretive event for the company. It is certainly not something that is within our annual plan; it is not within our multiyear plan. But it would be an additional benefit especially on the bottom line as the money would be coming in a very high margin.

Well I guess the question is, is there delays just due to political issues there or is the government not planning on proceeding with the project anytime soon? Or are they still undecided on who the providers are going to be? What level -- where is it in terms of the status of the project?

Again Jay from what we've heard there have been consortiums that have been selected. I don't believe that there is any question in their minds about who is being selected. I believe as far as what is the status and where things at, how are quickly does the government move, that's really not something that I could answer. I have not been informed of any major stumbling block from the government but not been informed, that we are moving forward either.

Okay. Switching topics, just -- if we take a high-level view here in terms of your future growth, where do you see that coming from? Are you seeing more integrated device manufacturers going fabless or fabless light? Or are you seeing more customers coming away from your competitor to your fabs? Where are things at in terms of where you see the future growth of the business going?

Our TOPS business is 100% driven off the fact of IDMs going fab light, that was the press release from Fairchild where they were consolidating internal capabilities and moving capabilities outside of Fairchild in a fab light type of format. So certainly that business is a fab light type business. In the case of our RF SOI and as well the silicon germanium, those are capabilities that maybe some IDMs never had, if you were to consider front end module makers as IDMs to the fact that they have their own gallium arsenide, they have their own filters but they did not have RF CMOS, so is it a fab light model for them or is it fabless model it depends how you want to define it. But I would not see any of them at this point spending the billion plus dollars to bring up a factory but they themselves might not be able fully utilize. So again is that a fab light or is it fabless model I really don't know. But the RF space is from a most part served -- we serve customers that do not have the RF CMOS capability themselves. So that's now in the case of the imaging, in all cases we are dealing with fabless companies or companies that maybe have a few fabs but not in that area. I mean that is just a market itself that is growing. I think one of the big trends that they are, I mean people call the internet things but I am not sure that term is used properly. But for the internet of things it is not just the fact that seamless connectivity, it is really the fact of smart systems. So you have to have internet of things that everything truly is connected. Their systems become more self diagnosing and that really is done through sensors, so that's basically a huge drive. The whole wireless, seamless connectivity is the big drive. So that's why that's growing. And our portion of that isn't from people that are making their own devices. Power management is a place that there are very, very strong IDM, are we gaining from that from IDM, I don't think our growth there is from IDM at all, I think IDM have been in most stayed as IDM. Our growth within the power management is really from a lot of fabless companies. And maybe in a few cases of fab light model but for the most part it are fabless companies.

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

Yes. So it is a good question. I related to it in my script basically if you compare to previous model or expectations, we would have recorded an average of about $13 million every quarter in the coming three quarters of 2015 and about $8 million in each quarter in 2016, comprised from in 2015 for example the $13 million from $3.2 million from interest payable on those bonds that will converted plus about $10 million in non cash financing. So this is a $13 million saving that we'll accrue. And based on that indeed the model show that one may expect nice profit. The only specific issue about you like mentioned is possibility that the remainder of bonds will be converted which is of course were reasonable and since only $35 million remaining, the impact will not be big but it can be an amount of up to $12 million throughout the end of 2016. So if there will be no further conversion we will have about $2 million every quarter now of non cash financing. And we can overcome that and be net profitable like we said. At a specific quarter that it will be converted this can be again an accelerated conversion, we accelerated the pulling of the expenses which is a good thing for the future. So if I can repeat it up so it means that if in Q2 for example this quarter, there is no more conversion and so far there was no conversion, and it will enable to --from that-- it will not be converted before Q4 and then in the scenario and Q2 structure is possible to achieve net profit. And also Q3 and only Q4 if indeed there will be conversion it can be the opposite direction. However, if conversion we look over in Q3, 2015 or Q3, 2015 will have these effects. And Q2, 2015 will be profitable, four will be profitable. And same goes for 2016. So basically the structure excluding any one time impact enables sustainable net profit and what we said, it was stated, excluding of course one time event.

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

Russell and Oren, thank you for taking my questions. And I will echo the congratulations on a good start to the year. I guess my first question regarding your RF HPA segments -- probably a little bit more detail on that RF and SOI versus more optical -- I guess the silicon germanium there. Can you give us a sense of the split between those two basic buckets there? And are the growth profiles for those going forward? Are they markedly different?

I think at present the growth of the RF SOI is very strong and very big. And a very accelerated and aggressive roadmap. Is the growth profile similar? I'd really have to look at and see, I have not done the breakdown. I would think that RF SOI probably has a bit higher growth profile than does the optical switch; optical switch however is going strong. And I think over the next year has a very trajectory. The optical switch is a very, very high margin part. It is very advanced, very difficult to duplicate. But I'd really have to get back with on the specific growth of the silicon germanium versus the RF SOI. I don't have that off the top of my head.

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

I can back get on; I would think it is probably somewhere 65:35, 60:40 in that range.

Okay. That's fair enough. Just a rough guess is great. Let's see a couple of questions on the TPSCo fab. I didn't -- unless I missed it I didn't hear any update on any kind of revenue potential you see in 2016 and 2017. As I recall I think you said upwards of $200 million for 2017 specifically. Can you give us an update on those estimates please?

Others did not change. What we've said is that we have at these opportunities that have been worked on design wins that we have had. That could be running $150 million to $200 million on incremental revenue in the 2017 timeframe. And we are still sitting with that. It could be accelerated. There are a lot new activities that are come on board. But $150 million to $200 million is I think a very good number for the 2017 timeframe of third party revenue.

Just perfect. And just a follow-up question on the topic of TPSCo. You mentioned in your prepared comments about some -- some exposure and interest level coming from Japan. I wondered if you could segment the interest level here a couple different ways related to that JV. One is Japan versus outside of it. And also if you can give us a sense of any of your end markets that you are getting materially more interesting contributions from like Matt said for design win activity perspective than others.

As far as the biggest interest that we have and that we have been driving is within the CMOS image sensors. It is not solely coming out of Japan. But it is the CMOS image sensor activity that we have -- they have very strong capability on the technical platforms. The most recent activities incremental to that have been in the order of TOPS where we take the customer flows and bring them into the factories. Now I stated before that we are very selective on the customers we choose for that because it takes lot of work and those flows are really-- and isolated to proprietary to the customer itself. So every IDM flow that we take on into a factory be at the Migdal HaEmek the new port be should be now in TPSCo. We really want to make sure that it is strategic customer that it makes sense. And that it will be viable as far as the volume. But we have a lot of demand in -- a lot of growth is happening there within the TOPS groups from in particular two large customers. One of them having them press released and that are Fairchild. The other area that I mentioned that we are driving growth in is that of power management where we have a platform that is now in the final stages of qualification and then qualifying customers into that platform for dual sourcing from Migdal HaEmek into TPSCo. In addition, we have very high volume activities going on in TPSCo in the RF space from Japanese customers.

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

I just wanted to clarify on the interest expense on the converts. How much interest did you pay for the converts this quarter, so that we can do fully diluted earnings per share?

We didn't pay any coupon payment on the bonds that were converted and also will not pay because whatever bond order that chose to convert lost the right to get the coupon. So we paid no payment.

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

No. There are two numbers which are $3.6 million, $3.6 million that I mentioned in the script is the future saving and also was the saving already in Q1, that we don't need to pay this as coupon to bundle the F that converted and this is really zero, it is not -- was not paid, that's a future cost reduction. The $3.6 million reported as payment this quarter is semiannually coupon for the Jazz note holder for the notes that are due December 2018.

Okay, so that's all the convert. The Jazz notes, the convertible. Right?

Yes.

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

Yes.

Okay. And then next quarter, that should be zero?

Next quarter for the Jazz notes it will be zero because it is semi annual payment. There will be though our payment to the bond series B and F which are remaining the small amount, that's remain which is $2 million total of interest payment. That's all.

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

No. On the Q3 we have only the $3.6 million of Jazz, again so maybe I'll clarify. Jazz notes which are due December 2018, they are paying the coupon semiannually in Q1 and Q3. And that is really bond DNS are paying also semiannually but in Q2 and Q4. So it means that under the new more simplified structure of debt that we have, we have extra $4 million interest payment in Q1, $2 million in Q2, $4 million in Q3 and again $2 million in Q4.

The next question from David Duley of Steelhead Securities. Please go ahead.

Thanks for taking my questions. You mentioned you moving the SOI business to your Panasonic factories of 300 millimeter. What kind of capacity increase do you think this represents? Or is that the wrong we look at it? You are just managing your capacity. It seems like that's a very rapidly growing market and it appears that you are putting a lot more capacity on -- added.

Actually the 300 mm capability is one that isn't presently needed. The performance that we are getting out of it is also not presently needed. The point of having done the activity is really providing very strong customers with a long-term roadmap. And assuring them that they can stay with us not just on this breakthrough technology that is being tapped out to presently but on something that gives significantly better performance for the future. The TPSCo 300 mm factory is small to mid size 300 mm factory that we will probably really focused on for the fact of the CMOS image sensors. The fact of having that factory enables us to develop platform customer need for an advanced roadmap. And then probably would allow us to look at that and get into other 300 mm factory prior to the time that we would see the demand for the SOI. But if we move forward and customers move forward and the roadmap to be several years down the road, we would be bringing on additional 300 mm capacity for that specific technology. But the point of doing it now is as I state to show customers our capability, allow them to stay with us long term because of that capability and then should there be additional demand to be able to, through whatever type of the business model move into additional 300 mm capacity with the ability to load it quite quickly. And we did have independent of TPSCo an opportunity few years back to get involved in the 300 mm facility. That would have loading agreement. But we had no internal 300 mm capability and our customers that were driving that. So beyond the time of loading agreement we would have been very much hurt by having a running cost that we would have been needed to pay for out of the company because the fab itself wouldn't have been able to be cash positive. At this point the drive and the growth of 300 mm for SOI would really be that at the time that we would have another opportunity which may or may not been looked at any given time. We would be in a position to be able to take that opportunity but not have a fear that after whatever loading agreement you would have from the seller that you would run into a strong cash negative due to running cost. Is that understandable answer?

Yes. Maybe just in that segment of business now though it's a rapidly growing segment. There have been some capacity issues with one of competitors. Could you just give us a commentary about what you see the trajectory of that business for you guys and perhaps an update on the overall size of the market and your market share?

I think the market is somewhere on RF SOI about $400 million, maybe $500 million in that range. Probably, presently by shipments or maybe 25% of the market share. And we would like to bring that up nicely into major portion of it, 40%, 50%, 55%, 60% whatever it might be, so that's what we would be targeting to bring our share of that business too. I did mention that we have put out a new platform where three lead customers are involved, and two of them have tapped out into it and other one is -- we call we have design win, we don't have masthead yet. But so I think we have a long-term roadmap there. I don't think I know we have a long-term roadmap there. And customer interest to continue to grow with it. We are building out capabilities for additional 200 mm capacity. And part of that is through the off load of the power management and other technologies into the TPSCo to be able to maximize the footprint of Migdal HaEmek in factory to be able to do more and more SOI. And we've had -- we've made some strong commitments to customers for SOI capacity for 2016.

Okay. And switch gears a little bit on the image sensor business. There's been a lot of chatter with on the vision being purchased and Sony and Samsung selling some stuff outside but mostly using their capacity internally. But this kind of a stores in that business now, particularly for a lot of Chinese customers. And I was just wondering how that industry dynamic is impacting you guys. You've talked a lot about image sensor business but I was just wondering if you get a little bit more specific and dig into some of those details.

Certainly. The sensor business is very interesting because there are a huge, huge variety of applications. We have a very strong market share within for example dental x-ray, these are stitched dye, they are very large dye, it is bigger than the photo field itself, so you are stitching fields together. We are looking at engagements for removing more directly into medical systems and medical panels. Since we had had some customers and activities there but we are now looking at a much stronger engagement into medical panels themselves. Those markets are strong markets as it is change with maybe a better performance against TFT type solutions presently. You have the high end camera area, studio cameras that I think we have a good market share in presently. And there is as well, if you look at the smaller point and shoot cameras, that market is really diminishing fairly strongly and why because the cell phone camera itself has very, very good performance. So the high end cell phone camera, the 14 mega pixels and beyond, that's the area that we are engaged now through the TPSCo 300 mm 65 nanometer flow this 1.12 micro pixel. And I think that we are in a very unique position there in order to gain market share. And that is our major focus dealing with the 300 mm factory is to be able to do these smaller pixel very advanced cameras. So we are driving that very, very strong. There are other areas such as industrial and cameras there, many, many different readers for industrial and global pixel cameras and we are in strong position there. So the overall image sensor market has many, many diversified applications. And I think the strong growth ones were pretty involved in with leading customers and aligned on meeting customer roadmaps.

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

I am not sure that I've seen in directly from the handset provider itself. I've seen it from the camera module maker for the handset suppliers.

Okay, excuse me. I didn't ask the question right way.

Yes, definitely. I mentioned that in China the advanced cameras for smartphones, the high end camera, high mega pixel cameras, we are seeing a lot of demand for that presently.

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

Certainly. Firstly, thank you very much for your interest, your time. I personally have very much enjoyed this past decade at TowerJazz. And as I look back on what we've achieved we really have a lot to celebrate together. As I move into my second decade with the company, I think we are standing now at the strongest point that we've ever been. And I really believe that 2015 will begin a very fruitful harvest of the effort of the past years. I look forward to continually updating as we move forward to closer to the target of the 40% non-GAAP margin in Q4, $200 million quarterly run rate. This will be very exciting update on. And then the really the mid term target of 50% non-GAAP margin in 2017. So I really look forward to this and to continue to update and speak. I believe we are having a pretty good presence at difference conference in the US. We have participation tomorrow May 14 in the B Riley Conference in Los Angeles. Dr. Racanelli will be presenting and meeting with investors. In addition on May 28, I'll be participating in the Craig-Hallum conference in Minneapolis. We would be very pleased to meet anybody there. In the meanwhile obviously any question time that you like to have with Ms. Noit Levi, the VP of Investor Relations or Oren Shirazi or myself, please email and we will set up the time and spend time with you. I think that more that you as investor base and analyst understand our business and where we are going, the more excited you will be about the company and we look forward to keeping you update in that. So just lastly really thank our customers for their trust in us as long-term partner. Our investors who believe in our management business model. And very specially our employees for their capability, dedication and passion. And that's really what's driven us to be the number one specialty foundry in the world. Thank you very much.