2007.08.15 Tower Semiconductor Q2 2007 Conference Call

8.15.2007 Tower Semiconductor Q2 2007 Conference Call
Russell Ellwanger, CEO
Oren Shirazi, CFO

Welcome and thank you very much for joining us today. I am very pleased to report that for the second quarter of 2007, we reported record quarterly revenue of $57.1M representing a 28% YoY growth and meeting our previously stated guidance.

Also we generated positive EBITDA for the 7th consecutive quarter and positive cash from operations for the third consecutive quarter. We expect to continue to report positive results of EBITDA and cash flow from operations throughout 2007.

Revenue for the first half of 2007 was $113M, representing a 40% growth when compared to the first half of 2006. This is to be compared to the foundry industry weighted average decline of approximately 5%.

Driving our financial results is our continued focus to be aligned to our customer needs and the resulting strong customer demand specifically within Fab 2. While Fab 2 is experiencing very strong increase in demand we are experiencing a softened demand in Fab 1.

Predominantly as a result of this softening in Fab 1, which we see as short term, we are guiding Q3 to a mid-range guidance of $58M representing modest growth over Q2 07 and an approximate 12.5% YoY growth which according to current third quarter guidance from other foundry participants, significantly exceeds YoY foundry industry average.

With respect to Fab 1 demand, Fab 1 large customers serve specific segments of the consumer market. These segments are subject to industry cycles, market share shifts as well as product generation cycles. Due to these factors several of the product families that Tower produces in Fab 1 are experiencing a reduction in demand.

We believe that this situation is temporary and that during Q4 2007 we shall return to the high utilization rates that we experienced in Fab 1 for all of 2006 through Q1:07.

Will (?) be a result of Tower increasing its market share with existing large customers as a result of multiple new tape-outs which we have shipped and then these tape-outs becoming qualified and reaching production volumes as well as the projected need for inventory replenishment of existing high volume products.

As you may recall we are organized into three product lines along distinct business and technology segments. I’d like now to share with you our market perspective on Tower’s Q2 achievements and upcoming quarter activities for each of these product line segments.

The CMOS product line serves several market segments primarily in consumer, general purpose logic and analog switches markets. During Q2 we continued the steep ramp of the .13 micron volume production and we are shipping several thousands of wafers each month. In Q3 we forecast to ship approximately 10,000 .13 micron wafers until our customer demand exceeds our present capacity.

We will speak to the capacity expansion plans a bit later in this call.

As stated in prior quarters, we continued the volume manufacturing of customer products in the standard .16 micron process which provides a 10% linear shrink or 19% aerial reduction in comparison to the standard .18 micron process. To help enable a tier one customer in the area of mobile applications, we further developed our advanced .16 micron by providing a low-leakage version that consumes about 20 times less current than the standard .16 platform. The first product on this new platform is already taped out and we expect to ramp to high volume production in 2H of 2007.

We also developed a low-leakage variant of the standard .18 micron platform to address the needs of portable applications. These first products will also ramp in Q3:07.

In Fab 1 we released to production several voltage translator products that were designed and manufactured by Tower’s team from data sheet through silicon verification on Tower’s advanced 4.5 volt .35 micron process. These products obtain (?) very fast propagation delays, approximately 2 nanoseconds, with up to 200 mhz data rate, very low power consumption, and a wide operating voltage range. We expect very strong volume from this platform.

Through collaboration with the industry leader in ESD protection we improved 20 kV ESD performance with very low capacitance on our advanced .35 micron process. Several of our customers require such ambitious ESD protection performance.

In the CMOS image sensor market Tower serves primarily three segments. Cell phone cameras, high end cameras, and dental and medical x ray sensors. This is a highly specialized, high to very high average wafer selling price segment.

The cell phone camera market is continuously growing and the supplier market is consolidating to several large IDMs. Tower however has a unique position in this market due to superb technology especially in the Taiwanese and Chinese markets. Therefore we see nice growth in the CIS business in the cell phone camera market.

During Q2 we had a major technological breakthrough that enabled us to reduce the dark current by a factor of 20 as well as to drastically reduce the number of defective bright(?) pixels and thereby obtain excellent picture quality, surpassing most all of our competitors and putting us on par with the leading IDMs on pixel performance.

This achievement has allowed us to ramp to mass production with some of our major customers in China and compete well within the Chinese market.

The high end cameras consisting of digital single lens reflex for still image photography, cinematography, and high end HD video of 1080 pixel format experienced nice growth for Tower. These products require excellent performance and advanced technology.

Tower again with unique technology and especially with low dark current performance is well positioned to serve them.

During the last quarter we started our steady ramp to production with one of our major customers with really excellent results.

In the x ray CMOS sensor market, where Tower has a large market share in the dental x ray segment, we have also see steady growth and a technological shift to smaller pixels. The high resolutions are supported by our new developments of stitching and pixel technologies in Fab 2 .18 micron technology.

We see great opportunity in the medical market where very large sensors are needed. Our CMOS sensor technology has performance and cost advantage over other technologies currently used in the medical market. We see a trend of moving to digital imaging from the film x ray which can bring substantial business to Tower.

Our stitching development technology in Fab 2 allowed us to prototype three different new products with major customers and additional ones are lined up for taping out their new products, mainly for dental x ray in Fab 2 in Q3 and Q4 of this year.

Looking into Q3 and Q4 of 2007 we see the following developments in our image sensor business. We will continue shipping thousands of wafers to the cell phone market in China, where our lead customer is projected to produce more ambitious products based on our 2.2 micron pixel technology as well as combined with excellent dark current performance. Our approach of supplying our pixel IP to our selected customers is proving itself. We expect to see production with 2.2 micron pixels in Q4 of this year.

In the high end market we continue the steady ramp of a very high end video sensor, 12 megapixel and in parallel are developing a future generation of pixels that will allow global shutter with very low noise. In addition we started a joint development program with one of our major customers for the next generation pixel development for highend dslr (?) market.

In the x ray market we already have three tape-outs of new products in Fab 2, two of which utilize our unique stitching technology allowing us to produce dies much larger than the rest (?) of the field. We are expecting at least 3 more products to tape out in the second half of this year which we expect will ramp to mass production in the first half of 2008.

Moving forward to the mixed signal and RF domain where Tower specializes RF CMOS, RFID and power management segments, the wireless market is growing fast with RF CMOS overtaking SITI (?). .18 RF CMOS demand is very strong. We observed some migration of .13 micron for lower cost. We expect Tower’s revenues from RF products to more than double in the second half of 2007 when compared to the first half. During the last quarter we continued to ship at rates of several thousands wafers per month to the two largest RF customers in Fab 2. Several additional customers are ramping nicely.

In the RFID domain Tower has proven its leadership by being the sole supplier for a leader in this industry. There is tremendous interest in RFID in China with several customers in the first stages of our customer design funnel. This past quarter, Tower delivered a keynote presentation at the 2007 AFID (?) conference in China acknowledging technical expertise in this emerging growth segment.

The power management market is very diverse and growing fast. Tower is focussing on applications that require voltages below 55 volts that may be served by its extended .18 micron platform.

For Fab 1 TSEM engaged in a new mode of operation of assuming responsibility for the product porting design. This resulted in fast and smooth migrations and facilitated to prompt ramp to production. Looking into the Q3 and Q4 of 07 within this RF and mixed signal product line Tower will launch .18 micron power management chip for breakdown voltage of about 55 volts or less in Q3 07. The kit includes state of the art offerings in LDMOS (?) devices on non-EFI (?) wafers with 23 low e OHM per sq mm which competes with the best of breed EFI-based offerings of other foundries and provides a lower cost of being non EFI. The platform also offers a unique combination of 3 micron copper interconnect layer on a .18 aluminum back end to allow for extremely low resistivity for power management applications.

In the past year TSEM recognized the extreme importance of technology and product transfers from integrated device makers that have a major drive to outsource some or all of their products outside of their own product lines. Hence we established a special product line to focus on and work with customers in the area of IDM transfer. The international rectifier program was one such program that we engaged with and executed on in 2006. The program is progressing according to the agreed plan. To date all technical results meet or exceed all expectations and should result in production volume ramp in Q4:07.

As observed from the above discussions the demand for our product is increasing in Fab 2. In Q2 Fab 2 shipped on the average above 17,000 wafers per month, achieving in June a peak with an overall shipment exceeding 21,000 wafers.

During Q3 we expect at least an additional 10% increase in shipments.

In order to support the growing demand of Fab 2 products we’re in the middle of efforts to increase the Fab 2 capacity. The prior announced tool acquisition is almost complete. We’re currently at 23,000 wafer starts per month. Actually having achieved, in the present month over 24,000 wafer starts in Fab 2.

We’re focussed presently on increasing the capacity beyond the 24,000 and to do this by going after used tools within the market. There is presently several 8 inch copper Fabs that are downscaling or closing or converting to 300mm.

This is putting into the market much lower cost advanced technology tooling capability that we could bring into Tower at about 1/3 the price of new tools. We are actively pursuing the acquisition of these tools for advanced technologies of 130 nm and 90 nm aiming at a capacity of above 30,000 wafer starts per month by mid 2008.

Our current customer line-up and product pipeline supports the demand for the increased capacity. As a result, of the tool low cost, we expect a high return on investment, and an 18 month payback period on the equipment.

We anticipate that the ongoing increase in capacity backed by present customer demand will result in a significant increase in our sales, cash flow, and overall operational results.

In order to fund the additional expansion, we have signed letters of intent with our lender banks and Israel Corporation to provide credit lines up to $60M to secure the funding for the purchase. And in addition, we raised approximately $40M of long bonds from Israeli institutions. The financing approach is made with the target of not diluting our current shareholder equity.

In summary, driven by high utilization rates, ongoing increases in our wafer shipment capacity, and the growth of our customer base, and in particular large customers, Tower has consistently reported revenue growth over the past two years which outpaced the foundry industry.

From the bigger picture perspective, Q2:07 marked the two year anniversary of the new management team at Tower. During this time, we tripled our revenue, having posted eight consecutive quarters of revenue growth, seven quarters of positive EBITDA and three consecutive quarters of positive cash from operations.

In Q3 we reached 24,000 wafer starts in Fab 2 with additional funding in hand to continue the ramp to beyond 30,000 wafers per month at advanced technology node capacity with customer demand in place to consume the added capacity.

We hence target continued growth with a 2008 revenue target of above $300M. With that I will turn the call over to Oren.

Oren Shirazi:

Thank you Russell and hello everyone. Let me begin by stating that similar to the last quarter, we added non-GAAP results to our press release and to this analysis which excludes depreciation amortization costs as well as stock paid compensation costs.

We believe this additional format will be useful for investors and shareholders to better analyze our financial metrics including our significantly improved gross and operating margins in recent years which excludes GAAP expenses.

These exclusions which mainly relate to the depreciation of Fab 2 which began operations over 4 years ago are fully reconciled in the release itself.

For Q2 of 2007, we reported sales of $57.1M, meeting our previously stated guidance and representing YoY growth of 28%. For the first 6 months of 2007 sales totaled $112.7M representing 40% growth when compared to the first 6 months of 2006.

Non-GAAP gross profits for Q2:07 was $19.2M, representing a GM of 34%. Non-GAAP operating profits for Q2:07 was $11.5M, representing a 20% operating margin. Non-GAAP Profits for the first six months of 2007 was $40M and non-GAAP operating profits for the first half of 2007 was $23.4M.

In Q2:07 we improved our loss in accordance with GAAP by $9.2M to $34.4M or $0.28 per share. This is compared to a GAAP loss of $43.6M or $0.55 per share for the second quarter of 2006.

For the second consecutive quarter we achieved positive cash flow from operating activities and for the seventh consecutive quarter we achieved positive EBITDA of approximately $13M. This means that excluding depreciation and amortization we have a positive P&L.

Other indicators for the efficiency of our cost structure are the following metrics. The ratio of our total non-GAAP operating expenses to our sales was reduced YoY 118% to 13%. For Q2:07 our operating expenses on a non-GAAP basis were $7.6M representing 13% of the revenues. This is compared to $7.8M or 18% of the revenues in Q2:06.

Turning to the balance sheet, we are starting Q3:07 with approximately $60M of cash on hand including the proceeds from our recently announced long term bonds funding. Our $60M in cash is compared favorably to $41M at the end of Q2 (?) 2006.

Shareholder equity was a positive $92M at the end of Q2 as compared to a negative number at the end of June 2006. Our current ratio which is our current assets divided by our current liabilities as of the end of Q2 2007 was 1.30 vs 1.6 at the end of the same period in 2006.

And now I will discuss sales by major customers. During the first half of 2007 we continued to expand our customer base. We had a total of over 50 customers to whom we shipped wafers. Out of which seven customers that each contributed at least 4% of our consolidated sales as compared to having only three such customers in the comparable period in 2005.

Our leading and largest customer in 2007 continues to be SanDisk Corporation to whom we shipped .18 and .13 micron wafers. And in addition we had six customers in 1H:07 to whom we recognized revenues of between 4% to 12% of our consolidated revenues.

In Fab 1 it was Vishay Siliconics and ON semiconductor and in Fab 2 Zoran Corporation, Macronics International including its affiliates, Zitel (?) and Atheros Communications.

Now we will be happy to take your questions.

Q&A

Q: Unterberg Towbin: Good evening gentlemen. My first question was in regards to pricing for .13 wafers. Pricing and profitability? Russell can you talk about how that compares to product out of Fab 1 and also out of your .18 micron products?

A: Ellwanger: One more time. How it compares to products out of?

Q: Unterberg Towbin: Fab 1 in terms of profitability and also compared to .18 micron products?

A: Ellwanger: Why doesn’t Oren speak to the GM there?

A: Oren: So we didn’t refer directly to selling prices of our wafers, but generally in the market .15 wafers are selling around $1100 to $1200 per wafer and the GM on that, selling price over value of the expenses is 75% GM which is of course better than the margins in Fab 1 or the .18 which are generally are between 50% to 70%.

Q: Unterberg Towbin: In regards to the capacity expansion. Of of the additional 6000 wafer starts per month, can you provide us a breakout of how much will be additional .13 how much will be 90 nm and what is the plan on 90 nm there?

A: Ellwanger: Everything that we buy will be initially started up at .13. So the toolset is .13 and 90 is predominately the same with the exception that with the 90 we would need to add to the low k (?) dialelectric. But the the initial tools that will be coming in will be started up at .13 as we have at present very strong demand at .13. [SanDisk] And that is what, where we would be bringing it up at.

Its not 6000, though, the initial target of we are looking at right now is at least, I would say, it is more on the order of 8000. Greater than 30 [000]. We would be looking at bringing in probably about 8000 wafer starts, minimum.

Q: Unterberg Towbin: OK. Russell when do you expect this first equipment to start showing up in Fab 2?

A: Russell: We are presently in negotiations with suppliers of the used equipment. What our target is is to be bringing it in really in the first half of Q4. What we would like to target is to have installed capacity on the order of several thousand wafers additional .13 going into Q1:08.

Q: Unterberg Towbin: OK. So by Q2:08 do you expect your initial product production runs or at that point do you actually expect production wafers to be running?

A: Ellwanger: In Q1 we would already expect to start incremental so it is not that the 6000 or 8000 wafer starts or whatever the actual amount turns out to be. Its not that it would be digital. It will be ramped up tool by tool. In areas of about 2000 wafer starts. I would expect that in Q1 we’d already start seeing additional revenue from the capacity increase that we would be bringing in in Q4.

We would expect that at the end of Q3, we would see the full impact of it as far as production qualified wafer starts.

Q: Unterberg Towbin: Ok. So in terms of profitability, Russell, what does this do to the timeline for that?

A: Ellwanger: It probably pushes it off about two quarters. Where we might have targeted previously the end of 2008. The fact of the incremental additional depreciation and that you have on the books, one to two quarters of depreciation before you would see the revenue. So it would push it off probably to the beginning of 2009.

But the degree of profitability, obviously will be higher because of having the increase in the depreciation. The return on the depreciation is quite good. The tool cost is as we have mentioned for several of these sources of the used tools is on the order of 30 to 35% of that of a new tool. So on whatever the capacity is that we would be installing the period of return is about 18 months from first production run.

The second part of that, depending on ultimately on how much we bring on board, if we bring on 8000 wafers starts what we would see is somewhere close to a doubling of the cash flow that we presently have.

Q: Unterberg Towbin: In regards to the competitive landscape, how would you view your 130 nanometer product portfolio vs the rest of the products? Another way to put is there’s lots of capacity on .13 and does increasing your efforts on .13 and smaller geometries, actually put you on a head-on collision course with the larger players in the market?

A: Ellwanger: What we mentioned in the call, as well as from the 15 to the 24,000 and now by adding additional .13 capacity is customer driven. If it wasn’t purely customer driven, I would say yes we would be competing with some of the larger foundries at the advanced technology nodes to try to get business. But the fact that it is driven through customer contracts that we have or will shortly have, I would say that it is a very secure avenue for tower to go with as you have a higher selling price and to bring in the used tool at this technology node, is not so different from bringing in used tools at .18 micron technology. So the return on the capital investment is substantially better because of the ASP of the wafer.

There are two ways that we can get the nice ASPs. One is to go to more advanced technology nodes on the core CMOS platform. The other is through the specialization. For example that we have in the .18 micron when it comes to the image sensor products and some of the power management products that we are driving. So I think what we are doing here with the capacity expansion has a very good return, but really driven from the fact that its lined up with customers.

Q: Unterberg Towbin: OK, so can you talk about these customer commitments? Over a longer term what kind of a lock do you have with these customers that are driving this capacity expansion?

A: Ellwanger: The capacity expansion that we are looking at right now is not off a take-or pay agreement if that’s what your question is. Its off of customers that we have strong relationships with, that have given us within their forecast that if we have “x” amount of wafer incremental capacity they will buy that wafer capacity from us, because of pleasure with the performance that we have with them to date. So I think that is what the lock is. So I think that is a much stronger lock than a contract. Because ultimately the only thing that you can really go on in any business relationship is trust between supplier and customer. Do I think that there is a very strong lock in it? Yes. Is the lock something that is on paper? No. We don’t expect that it is going to get there.

Now that is on the immediate capacity. We have several very very interesting projects. That maybe will be announced in the next month. That can maybe also clear up why it is that we are focussed on some .13 capacity expansion. That is not yet released.

Q: Unterberg Towbin: Ok. And the processes that you will be, potentially, looking at going forward. Like your Fab 1 processes. Are these going to be specialized? Are these going to be tailored to the customer that will make them difficult to transfer to other customers?

A: Ellwanger: There are really two avenues that make it very difficult for customers to transfer to somebody else. One as you say is technology platforms that are very tailored to your customer, that are very unique to the customer. A lot of that is what we have, again, within the image sensor portfolio, the high end video cameras, the high end cell phone cameras to where the customer has used our pixel IP. They have very very high barriers for exit. The other area where there is a very high barrier for exit is the IDM transfer itself to where the customer has put quite a bit of energy into working with you to take on their process flow. In that case the customer is an integrated device maker. And the IDMs themselves also have a very high barrier for exit because there is tremendous cost involved and commitment for them to do the transfer with you. Once you run their flow in your Fab, its very difficult for them to go elsewhere with that same flow and it is difficult for them to do that in multiple multiple different foundry sites just because of the costs of trying to transfer their process. So in the case of the IDMs, I think there is also a very very high barrier for exit and the nice things about IDMs is that they are on long term contractual agreements on pricing, so you really know where you what you are going to be out on the volume. Does that answer your question?

Q: Unterberg Towbin: Yes it does Russell. Thanks very much. One last question and then I will get off and let others get in as well. In Fab1, as you mentioned Vishay and ON are your largest customers right now. Where does International Rectifier figure on that list and when do you anticipate them to move into the top few positions in the next few quarters?

A: Ellwanger: IR is a Fab 2 customer. Its not a Fab. It is .35 micron flow more or less that we have brought into the Fab 2 process line. For IR, that should be going into volume production in Q4. We would see them being in the top several handfuls of customers as far as revenue in 2008.

Q: Unterberg Towbin: Ok thank you very much Russell and Oren.

A: Ellwanger: Thank you.

Q: Needham and Company: Hi, a couple of questions. In ramping up this additional capacity you had mentioned, about being able to get second hand tools on the market and such. It seems like a fair amount of memory capacity though not necessarily copper and 8 inch may be coming available soon. Have you identified sources of the equipment and can you give us a little more granularity as to when you see the the equipment rolling in and time to ramp it up? I thought I heard the beginning of next year, but perhaps you can give us a little more granularity on where you are in that process?

A: Ellwanger: Sure. So, to begin with here, you are absolutely correct, there is quite a bit of 8 inch memory capacity that is coming into the used tool market. For the front end of the process line, the eight inch tools, it doesn’t matter if it is a copper flow, a memory flow, an aluminum flow. The front end tools at the advanced technology nodes are pretty much compatible and the same, including the lithography. So for that all of the capacity that is coming into the market is beneficial for Tower or for anyone else that wants to expand capacity in eight inch.

The backend right now as far as copper. There are two specific large volume manufacturers that have put their copper back end tools into the market at eight inch. Both of these are very large manufacturers. Where are we within the process? Actually really as we speak, the VP, for which procurement rolls up under, is in the US in negotiations with the tool suppliers of these used tools.

What we expect to have is, as I mentioned, about 2000 wafer start capacity installed and qualified toward the end of Q4. An additional 2000 for copper, it may be very aggressive, but certainly installed and well under way towards being qualified and we would expect to see an incremental revenue from that in Q1:08. And then we believe that the entire package will be fully installed and in route to qualification at the end of Q2 2008.

Q: Needham and Company: So in terms of the purchasing effort you are just about finished with the negotiations and once that is concluded you could probably be in receipt of the equipment a month or two down the road.

A: Ellwanger: Some of it will be staged over some period of time. One of the companies that is moving away from 8 inch lines is de-facilitizing piece by piece over several quarters. The other is coming in more or less in one shot.

Q: Needham and Company: Are there any other facility changes that you have to make in terms of clean room space or other stuff or is that essentially set to go currently.

A: Ellwanger: The clean room space itself, probably doesn’t have to have any work done to it. There is certainly some facilities work that you always have to do if you bring in new tools, but it is not a prohibitive amount of money. Without doing any upgrades, we can take on any additional filtering. We can take on about another 5 or 6000 wafer starts, and beyond that we have some minimal amount of money that has to be spent on facilities upgrades. But it is upgrading systems, scrubber systems etc, it is not making more clean room space itself.

Q: Needham and Company: Understood. In terms of the demand side, it seems that generally in terms of consumer and wireless devices and cell phones and such that inventory remains relatively low in demand and it is in pretty decent shape and most of the larger foundries are reporting fairly significant utilization rates. Do you have any guidance from you customer base going out beyond Q3 and Q4? Or a sense as to how sustainable the current demand cycle is? Or if some of this is obviously seasonally driven? or any further input from your customers as to longer term views.

A: Ellwanger: We certainly do. Most of our customers will give us their one year plan or 18 month plan. How close do they hit the plan? Some are very good at it. Some are less good at it. Certainly we have seen very very big growth with our large customers. And probably one of the benefits that Tower has been able to realize over the past, lets say, 6 to 8 quarters is that some of these large customers that we have engaged with are very large. And even if the industry is weak, we have the ability to grow market share. So that’s why our Q4, Q1, Q2 of this year were very strong compared to the industry. It was lets say half to two thirds the fact that we were growing market share with customers and the other 40% of the business was because we are engaged in non-cyclical markets as well. Does that answer your question Robert?

Q: Needham and Company: Yes it does. That was great and excellent. In terms of pricing out there, any comments as to ASPs? I’m assuming because of your answer that ASPs have been relatively steady and given utilization rates, any uptick in ASPs or any other changes that you have seen over the last quarter?

A: Ellwanger: We do not see an uptick in ASPs. Since I’ve been at Tower I have never seen there be an increase in ASPs independent of utilization or capacity needs. I think ASPs will always decline. It’s a question of getting into the technology node at the right time so that you can continually reduce your manufacturing costs at a rate faster than your ASP reduction. Whoever is the market leader entering any technology node, will realize huge decreases in ASPs now they have the initial benefit of an 18 month very very high ASP. Most ASPs if you look at any of the charts, no matter what the technology node is, they all more or less over time will go down to the same asymptote within a 15%, 20% band.

Q: Needham and Company: I guess I shouldn’t say increasing, but depending on the seasonality and utilization you are seeing, [Ellwanger cuts in]

A: Ellwanger: The rate of decrease does depend on the rate of utilization and the market. Right? If you have people being put on allocation, then they don’t really drive for lower ASP. Within all our models, we have seen some decrease in ASP. Within Fab 1, our ASP reduction has been very stable and that deals with the fact that we have a good amount of specialty products and customers that are very tied into the Fab.

In Fab 1 let’s say we average over the past 8 years a 2 or 3% ASP decline per year, we have been able to reduce the operational costs at a rate higher than the ASP decline. We are seeing at .18 an ASP decline. If I look at 18 months ago vs now there has been a not overly significant, but certainly not insignificant decline in ASPs at .18. But where we have been capturing the benefits(?) that comes into this is the .18 platform continually drives into more advanced technologies that demand very very high wafer prices. We have some wafers at .18 micron that are selling for $2600 and that deals with having very specialized products. That does help the average ASP at the Fab. So no matter where you are within these technology lifetime cycle the more specialty you can add to the platform, the more you can move away from approaching the asymptote on ASP decline.

Q: Needham and Company: Ok. And one last question if I might In terms of pixel counts on image sensors we’ve all seen a fairly steady increase both in cellphones and in other devices, can you tell us where you are currently in terms of your average devices going out the door and where you see that going and [check wording] how does that impact pricing?

A: Ellwanger: As far as cell phone right now we still sell a reasonable about of VGA, but we also have a nice 3 megapixel. But even the VGA is high end as far as performance. It is very low dark current. So we have very nice ASPs there. As far as the high end cameras, the 12 megapixel that we are shipping now.

Q: Needham and Company: So average continues to go up and up on a relatively constant basis here?

A: Ellwanger: On the high end, yes. On the cell phone I think that 3 megapixel right now is becoming the standard of the good manufacturers. They are all more or less starting to produce a 3 megapixel and there is a big demand for that. But VGA is still a very strong demand. Most cell phones now have two cameras, They have the VGA facing the user and that is being used for the video conferencing and then you have the 3 megapixel that is being used for the still frame pictures.

Q: Needham and Company: And how has that impacted ASPs? It seems almost like megapixel count has gone up faster than ASPs have declined on a per bit basis? Is that accurate? or not really.

A: Ellwanger: We see a premium on the 3 megapixel vs the VGA, but both are still selling for very good prices. I wouldn’t say that you’d see a ratio, you know, if you go from VGA to 1.8 or a 2.2 to a 3.0, it doesn’t ratio as far as the ASP. You do get a premium for having more advanced megapixel but it doesn’t ratio directly. But a very good VGA chip still demands a very nice price.

Q: Needham and Company: OK great. Thank you very much.

Q: [another guy] Needham and Company: Hi Russell thanks for taking my question now. There was a report of SanDisk investing in you guys during the quarter. Can you make any comments on that?

A: There were rumors that SanDisk [45:30] was going to be investing. There still are rumors that SanDisk would be investing in Tower. I don’t think that there was ever any report that they actually did invest, because that is very easy to track. But as we have stated previously and I’ll state the same now. SanDisk is a very good customer for Tower. We have very strong relationships with them. We value them as a customer. If and when it becomes public, everyone will be the first to know. Until then I really don’t have any comments.

Q: Needham and Company: Ok thanks. [Inaudible question about Sandisk]

A: Ellwanger: I’m sorry I didn’t hear the second part of the question please.

Q: Needham and Company: Are you guys working on other opportunities with SanDisk besides flash controllers?

A: Ellwanger: Everything we make with SanDisk are controllers and we make .18 and .13 controllers for them. We make controllers on .18 technology and on .13.

Q: Needham and Company: Great. Thats all. Thank you.

Q: Lehman Bros: Thanks for taking my question. I have a brief question on the GMs in Q2. It seems when I look at your results it seems that the GMs went down from 38% to 34%. Can you walk me through what caused the decline? Especially given that Fab 1 has lower incremental GMs and my understanding was that in Q2 more revenues were coming from Fab 2 than from Fab 1?

A: Oren: You are correct. Basically as Russell mentioned we had a very good quarter in Fab 2 and in Fab 1 we had a slight decrease in utilization. In our industry, our process is characterized with the fact that we have very low variable expenses. This is why I mentioned before that we have between 50 and 70% margins on any incremental revenue. So when we had this softening in Fab 1, it reduced the utilization rates of Fab 1 and that is why it caused this reduction that you mentioned. Still 34% is much better than what we used to have in the past which was negative numbers or last year it was around 20% GM. So 34% is still very nice. Also in Q1 we had some specific sales with high gross margins so the 38% was indeed a specific achievement. But the 34% looks very much reasonable now.

Q: Lehman Bros: OK great.

Ellwanger: Concluding statement: So first of all thank you very much for participating in the conference call. Overall our long term outlook is stronger than it was a quarter ago with substantial large customer demand. New projects that have been announced and will be announced shortly, and the ramp-up plan that we just presented. Look forward to meeting with you and speaking with you individually. We will be presenting at the Citigroup technology conference in New York on September 6 and I invite you all to attend and as I mentioned we look forward to sitting down with you one-on-one at that time if you have further questions or any time in the interim, please contact us and lets get into a dialog. So thank you very much again for the interest in Tower and for your support.

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