Tower Semiconductor Ltd.
Q4 2014 Earnings Call Transcript

Published: 23 Feb 2015

[Operator:]

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.

[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.

[Russell Ellwanger:]

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 realizing customer projects and needs while providing a very positive indication to organic revenue growth and utilization performance in 2015 and beyond. The growth in 2014 was driven by ongoing strong market demand from customers being served by our top four business units. In 2014, our top 10 customers, excluding Micron and Panasonic, grew by 34% in revenue year-over-year. All of our business groups have sales and roadmap activities within the top 10 customer base. Record design wins and masks entering the fabs and consistent growth of such numbers can only be achieved by serving customers who one, are giving us a major portion of their market, and two, that market share is within strong industry growth application spaces. Based upon the very high increase in masks entering the non-TPSCo factories and the forecasted TPSCo third party production revenues for the second half of 2015, we target to achieve by the end of the year a non-GAAP gross margin of 40% with an annualized non-GAAP gross profit in the fourth quarter of about $400 million. Specifically looking at TPSCo, Panasonic remains a stable and supportive partner and the collaboration that has already existed is progressing excellently. As of January 1, I was appointed the Chairman of the TPSCo venture. This open and trusting relationship has yielded an activity that has produced no negative surprises since its inception at the start of Q2 2014. Within only the first nine months, we had signed significant contracts and began business engagements with multiple image sensor companies and top-tier integrated device manufactures. The signed agreements and engagements we entered into in 2014, having announced leading companies such as Himax and Fairchild, can lead to an annual revenue run rate of $200 million in 2017 of high margin revenue. Based upon careful study of the operational capacity of the TPSCo factories and considering our first engagements in each of these three factories, we have notably increased the third-party foundry sales opportunity from a previously stated $200 million to $250 million opportunity to an opportunity of $300 million at 90% utilization. This is on top of the base of $360 million forecasted TPSCo annual revenues from the ongoing Panasonic business in these factories. I would now like to talk about our overall manufacturing strategy and how that is aligned to support our business and financial objectives. We continue to see very strong demand in our front-end module offerings and specifically large growth for our SOI-based platforms. To enable this growth, we announced that a second factory, namely Migdal HaEmek Fab 2 was qualified for SOI flows and RF-CMOS for power amplifier control in addition to the core technical capabilities in our Newport Beach factory. We have shipped thousands and started double-digit thousands of SOI wafers that will have shipped by the end of Q1 from Migdal HaEmek Fab 2. According to the Q4 2014 run rate at Newport Beach and Migdal HaEmek, we believe we have about 25% market share in the SOI switch and tuner foundry supply and target to increase that number to achieve 50% of this market. By sourcing the SOI at Migdal HaEmek, we will create capacity for very high-end silicon germanium applications in Newport Beach and additionally create the flexibility to supply high volumes to new highly specialized applications such as the announced manufacture of commercial infrared cameras for FLIR. This new smartphone feature could be a bonanza for iOS and Android applications benefiting society in applications such as health monitoring, personal security and safety, as well as in the gaming industry. This flow is strongly accretive on top of the present CMOS capacity at Newport Beach due to the addition of a customer partnered annex build out for specialty layers. The increased number of value add layers produced in the annex on top of the required CMOS layers will add about 50% to the baseline peak revenue that otherwise our Newport Beach fab is capable of providing. Being that in IR sensor wafer, first a non-IR higher sensor wafer will provide about 50% incremental revenue to the company. This flow, namely the bolometer is ITAR restricted and State Department regulated requiring that a U.S. company must manufacture in the U.S. We are the only pure play foundry with this capability. Migdal HaEmek is our center of excellence for CMOS image sensors and power management development. With the strong front-end module activities, we have also begun an R&D team in Migdal HaEmek as part of Dr. Racanelli's Newport Beach business unit. The activities continue not only to be dual source for Newport Beach, but also to develop next-generation platforms that drive industry best performance. We have just delivered samples to our lead customers, demonstrating 122 femtosecond RF-CMOS [ph] on high-voltage platform. This platform provides the lowest insertion loss figure of merit of all worldwide foundry offerings. Most all of us have seen the excitement of 3D imaging. The Intel keynote talk at the CES Conference in Las Vegas, Microsoft Kinect, Google, et cetera. 3D imaging is certainly an application enabler that will redefine the user experience. We expect to be a big player in this field. To enable the expected higher growth in 3D cameras with the market now in its infancy, in addition to the strong and growing demand in industrial, medical and high performance studio cameras that we are experiencing, we are in advance stages of dual sourced qualification of our power management flows to TPSCo. This activity will as well give us flexibility, give our customers assurance of supply and will allow us to maximize cash creation as we grow the SOI capability, the imaging capability in Migdal HaEmek and continue to grow our power management capabilities with the added capacity of TPSCo factories. For both the CMOS image sensor and RF-SOI, we are expanding our technology using the 300 millimeter capability in the TPSCo Uozu factory. We have already shipped image sensor samples for a high-end smartphone and will ship our first DSLR samples within the next two months. 300 millimeter SOI switch samples will fab out this month. In summary, 2014 was a very good year for the company. We enter 2015 stronger than ever before with many new product qualifications that are completed and now starting to ramp and many others in different stages of qualification, all promising high utilization of TowerJazz worldwide factories and hence forecasted revenue and margin growth. We guide first quarter with a midrange of $225 million, a 70% year-over-year growth and target continuous growth throughout the year with the year-end non-GAAP gross margin target of 40%. Our longer term financial models targeting 2017 with the inclusion of TPSCo third party revenue is about a 50% non-GAAP gross margin. With that, I would like to hand the call over to our CFO, Oren Shirazi. Oren?

[Oren Shirazi:]

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 was $84 million or 36% gross margins, reflecting a six percentage point improvement as compared to the previous quarter and nine percentage point improvement as compared to the second quarter of 2014 in which we had 27% gross margins. This $84 million is an increase of almost two X year-over-year. EBITDA which is akin to non-GAAP operating profit was $56 million for the fourth quarter, which is an increase of two X year-over-year and a 51% increase over the $37 million of the previous quarter. Net profit on a non-GAAP basis for the quarter was $46 million or $0.83 per share, 140% higher than the $19 million or $0.40 per share reported in the fourth quarter last year and higher than the $31 million or $0.58 per share reported in the previous quarter. Net profit margin increased from 14% in the previous quarter and in the fourth quarter last year to 20% in the current quarter. Non-GAAP gross and operating profit for the full year were $259 million and $154 million, respectively, a 59% and 71% increase over $163 million and $90 million reported for 2013. Non-GAAP net profit for the year was $128 million or $2.46 per share, representing a net margin of 15%. This is an increase of 127% versus net profit of $56 million or $1.41 per share. Following a few questions we have recently received from a few analysts, I would like to briefly discuss why we publish our non-GAAP numbers in our detailed results table as attached to the press release also released today. Over the past several years, we have received many requests from investors and analysts to provide our P&L report in a format which shows the cash creation and payments that our ongoing operations create. We responded to these requests by adding non-GAAP information in addition to the full-year financial statements on a quarterly and annual basis including a full reconciliation between each component of this financial report. We do it to better serve the financial community, analysts, shareholders and investors. So all get a better understanding of the real operational performance of our ongoing operations and mainly we note to the readers the large depreciation amounts that we have which are associated in large part due to A, the $1.5 billion cost to establish Fab 2 in the previous decade in Israel whose depreciation cost are not reflecting the current maintenance CapEx run rate and also these large depreciation cost are associated to be the high valuation granted by third party appraisal company experts to TPSCo's assets, which as you remember is $250 million CapEx being depreciated while we purchased our entire share in TPSCo for a net payment in stock of $7.5 million. Our depreciation expenses, therefore dwarf all other expenses and it does not make for a clear understanding of the ongoing operations of the business which is strongly cash flow positive. Our non-GAAP figures allow investors to see the results on our P&L on a more focused cash basis and are actually a presentation of the P&L on a cash basis and should be only seen as such. The non-GAAP figures do not include CapEx since the CapEx is a balance sheet item and not a P&L item. All the information as to what our non-GAAP numbers include or exclude as well as our reconciliation from GAAP of non-GAAP is publicly disclosed in every financial release over the last several years and can be find also in today's press release. We are only doing this to be a transparent company as possible by providing as much information as possible in order for the reader of our filings better understand our company its operations. I would also likely that reiterate, all the currency results and resulted possible effect on our revenue and P&L currency related, which as will see are not material to the bottomline. A, as far as the Euro currency goes there is no impact for the Euro on our results and we don't expect any impact from it in our financials. B, as far as the Israeli Shekel goes, the impact is not material and is limited to about $250,000 per quarter gain on the P&L for any 1% devaluation in the Israeli currency against the dollar. And C, with regard to the Japanese Yen, since our revenue from Panasonic and TPSCo are denominated in the Japanese Yen currency and since most of the expenses of TPSCo are in Yen, there is almost no impact from any Yen fluctuations on the P&L. The only impact is on the revenue line with the same impact being offset within the expenses line, resulting in no material impact and a natural hedge for us against any fluctuations in the Yen. This quarter, we also detailed our net profit under IFRS, which is the International Financing Reporting Standards rule, as opposed to the U.S. GAAP. And this was because there was a material difference this quarter between IFRS and U.S. GAAP net profit. Net profit, based on the IFRS for 2014 was $25 million positive, mostly include during the fourth quarter of 2014, which is even $21 million better than we had under U.S. GAAP. And earnings per share under IFRS where $0.48 per share as compared with $0.08 per share under the U.S. GAAP. The main difference between the U.S. GAAP and the IFRS accounting principles as far as relates to these period of reporting is the different treatment of financial instruments affecting only the non-cash financing expenses line. During the competitor year ended December 2013, net profit and EPS were similar under those two accounting methods. This concludes the review about the P&L. I will now go over the balance sheet analysis as of the end of 2014. The main changes in the balance sheet as compared to the December 31, 2013 are the results of the first time consolidation of TPSCo and the cessation of operation of the Nishiwaki fab in Japan. As of 2014 year-end, we had $187 million in cash and deposits, $34 million higher than the $123 million we presented at the end of 2013. The increase in cash balance during 2014 was attributed mainly to the following, $159 million positive cash from operation activities excluding interest payments of $34 million, investments of $99 million in fixed assets net, repayment of $51 million of debt to reduce our debt, proceeds from the exercise of options and bond issuance of $20 million, $58 million receipt of cash in relation to the TPSCo acquisition and a receipt of $86 million loan for TPSCo from JA and Bank of Tokyo, their banks, that was used to repay a bridge loan previously received from Panasonic. In addition, funds received from Nishiwaki asset sale, net of Japanese employee retirement related payments, amounted to positive amount of $30 million. During the fourth quarter, we generated $41 million in positive cash flow from operations excluding $30 million of interest payment. We received $6 million from exercise of options and warrants. We paid $16 million of debt to reduce our debt on account of principal and we invested $27 million in fixed assets and CapEx. Total assets, as of the end of December 2013, was $884 million versus $706 million at the end of 2013. Our shareholders' equity increased this year by approximately $54 million to $195 million at the end of the year as compared to $141 million at the beginning of the year. In summary, we had an excellent year in all financial respect, including the strengthening of the balance sheet, debt structure, financial ratios, cash flow as well as a 64% revenue growth year-over-year to $828 million achieving GAAP net profit for the year and for the quarter, while increasing all our GAAP and non-GAAP margins. And now I wish to return the call to you, Noit. Noit?

[Noit Levi:]

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:]

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

[Cody Acree:]

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?

[Oren Shirazi:]

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.

[Cody Acree:]

And is this utilization driven? Is this mix driven?

[Oren Shirazi:]

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.

[Cody Acree:]

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?

[Russell Ellwanger:]

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.

[Cody Acree:]

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]?

[Russell Ellwanger:]

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

[Cody Acree:]

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?

[Russell Ellwanger:]

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.

[Cody Acree:]

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

[Russell Ellwanger:]

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.

[Cody Acree:]

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?

[Russell Ellwanger:]

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.

[Cody Acree:]

Very good.

[Operator:]

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

[Jay Srivatsa:]

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?

[Russell Ellwanger:]

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.

[Jay Srivatsa:]

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

[Russell Ellwanger:]

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.

[Jay Srivatsa:]

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?

[Russell Ellwanger:]

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.

[Jay Srivatsa:]

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?

[Russell Ellwanger:]

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?

[Jay Srivatsa:]

Yes. Thank you very much.

[Russell Ellwanger:]

Sure. Thank you.

[Operator:]

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

[Richard Shannon:]

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

[Russell Ellwanger:]

Thank you.

[Richard Shannon:]

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?

[Russell Ellwanger:]

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

[Richard Shannon:]

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?

[Russell Ellwanger:]

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.

[Richard Shannon:]

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?

[Russell Ellwanger:]

We did press release to Himax.

[Richard Shannon:]

So it is Himax then?

[Russell Ellwanger:]

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.

[Richard Shannon:]

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?

[Russell Ellwanger:]

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.

[Richard Shannon:]

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?

[Oren Shirazi:]

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?

[Richard Shannon:]

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

[Oren Shirazi:]

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

[Richard Shannon:]

Okay.

[Oren Shirazi:]

Including certain debts.

[Richard Shannon:]

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

[Russell Ellwanger:]

Thank you very much.

[Operator:]

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

[Lisa Thompson:]

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?

[Russell Ellwanger:]

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.

[Lisa Thompson:]

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?

[Russell Ellwanger:]

I am sorry, please?

[Lisa Thompson:]

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

[Russell Ellwanger:]

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.

[Lisa Thompson:]

So who are you stealing business with that?

[Russell Ellwanger:]

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.

[Lisa Thompson:]

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

[Russell Ellwanger:]

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.

[Lisa Thompson:]

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

[Russell Ellwanger:]

Thank you.

[Operator:]

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

[Russell Ellwanger:]

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.

[Operator:]

Thank you. This concludes the TowerJazz fourth quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.