Tower Semiconductor Ltd. (TSEM) Q4 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz Fourth Quarter and Full Year 2015 Results Conference Call. All participants are currently present in listen-only 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 24, 2016. 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 Corporate Communications. Ms. Noit Levi, please begin.

Thank you and welcome to TowerJazz financial results conference call for the fourth quarter and full year of 2016. Before we begin, I would like to remind you that some statements made during this call may be forward-looking and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected. These uncertainties and risk factors are fully disclosed in our Forms 20-F, F-4, F-3 and 6-K filed with the Securities and Exchange Commission as well as filings with the Israeli Securities Authorities. They are also available on our Web site. TowerJazz assumes no obligation to update any such forward-looking statements. Now, I’d like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.

Thank you, Noit. Welcome to all of you and thank you for joining us today. 2015 has been a significant year. We recorded our highest annual and quarterly revenues crossing the $1 billion annualized revenue run rate in the fourth quarter of 2015. This was a lofty target for the company when we said it several years back. I congratulate all the TowerJazz employees for this notable achievement. According to the big clean report comparisons and our actual revenue, we reported leading year-over-year growth versus all other foundries at 16%. Our 2015 results demonstrate continued execution in both our operational and business strategies with record revenue, record EBITDA, strong margins increase and continued strength across all of our financial ratios. In the second quarter of 2015, we became GAAP net profit with a business and operational model that is allowing us to achieve sustainable and growing net profits. In addition, in the fourth quarter of 2015, we surpassed the 40% non-GAAP gross margin target that we announced a year ago with a 41% performance. I stated a foundry leading revenue growth of 16%. The organic year-over-year growth realized in 2015, meaning non-Panasonic and non-Micron revenues, was 27%. This type of organic growth is demonstrative of serving the right customers within growing markets especially when considering consecutive years of similar organic growth. Now, I’d like to discuss the end markets that are served within each of our main business units giving color to the revenue of each of the major groups as a percentage of the 2015 total company revenue, and which of the sub-groupings within these groups are our strategic focus. We are dividing our 2015 961 million corporate revenues into four groups; RF, power management and image sensors. All other products that do not fall into the three groups are grouped as mixed-signal others. We will continue to present for annual summaries in this fashion. Our RF group represented 31% or approximately 300 million of our 2015 revenues versus about 24% or 200 million in 2014; hence, 50% year-over-year increase. Within this group, we served the following two major sub-groupings; RF infrastructure and RF wireless. First, RF infrastructure. Our high-performance silicon germanium technology serves the wireline communication market. The wireline communication market includes all aspects of the data network from backhaul to communication within and between data centers and cloud computing centers to the connection between wireless base stations and the wireline network as well as high-speed wire connections to business and the home. Most of the products we manufacture are used in high-speed fiber optic connections within these end markets. Second, RF wireless. RF SOI and silicon germanium technologies that serve these wireless communication markets include all mobile platforms such as smartphones, tablets, wearables and IoT devices. This subgroup is a bit less than 20% of the corporate revenues. Our technology is used in the frontend modules used to receive and transmit wireless signals in these devices. The specific components we have built within these modules are RF switches with our RF SOI technology as well as low-noise amplifiers and power amplifiers with our silicon germanium technology. Thirdly, within the RF space we serve many RF and millimeter wave applications outside the infrastructure and wireless markets including applications such as television tuners, GPS receivers, automobile radar for collision avoidance, point-to-point microwave communications, as well as RF components used in anything from smart meters to garage door openers. Looking at these three subgroups I’ve just mentioned, the highest percentage revenue and the highest growth subgroup is the wireless. Due to the importance and growth of this group, it remains strategic with multiple generation roadmaps and new innovative technologies. In addition, we remain strategically focused on the silicon germanium-based infrastructure market, which provides higher end businesses. Moving to the power management, this group represents 28% of our 2015 corporate revenues or 265 million approximately versus 27% or approximately 220 million in 2014; hence, 20% year-over-year growth in revenue. Within this group, we mainly produce power ICs and discrete products. For power ICs, our BCD power technology enables power management and power driver ICs. Power management relates to power ICs that control the flow of voltage and current from the source, be it battery or an external power supply to the various other ICs in electronic systems such as processers, memories and analog components. Power drivers relates to the power ICs that provide the large voltage and currents that are required to drive external components such as displays, speakers or motors. The end markets of these applications is very broad and includes computing, enterprise, consumer, mobile and automotive markets. Our discrete business is divided between a foundry offering, for example, within our Tonami factory and our TOPS business whereas explained in previous calls customer flows are transferred into our factories and in any instances are jointly developed within our factories. These flows do not become a generic foundry offering but remain restricted to the specific customer. Most of the TOPS business has a long-term sole supplier status for the flows that we provide and/or take or pay agreements providing stable revenues and long-term assurance. The end markets are similar to the power ICs with an additional strong presence in white goods. In some instances, the discrete and IC are packaged together for specific novel applications and our marketed as a module with enhanced performance and reduced costs. Every electronic system contains power management units with ever-increasing requirements for green efficiency. Hence, we are strategically focused with customer aligned power efficiency roadmaps focusing on RDS(ON) figure-of-merit. Our recently released advanced 0.18 micron power management process offers best-in-class RDS(ON), which translates directly into efficiency improvement, lower power consumption or reduction in the size of the circuit. This platform targets more than 40% of today’s power market including computer, wireless, industrial and automotive applications. For the discrete business, we remain strategically focused on alignment for next-generation higher functionality and higher integration co-developments having generated partnerships with the industry leaders. Our image sensor group represented 17% of our corporate revenues in 2015 or 166 million versus 15% or approximately 125 million in 2014, representing 33% year-over-year growth. On the CIS front, we focus on high-end sensors for the following markets; high-end photography for still DSLR and mirrorless cameras as well as high-end video such as broadcasting and cinematography cameras. High-end industrial sensors, which is a broad and fast-growing market covering sensors for monitoring production lines, food, industry and even traffic control. Intra and extra-oral dental x-ray large sensors as well as medical large x-ray panels made up very large 1 die per wafer sensors. Automotive sensors for rear and forward-looking auto driving assistance cameras as well as side cameras replacing conventional mirrors and even internal cameras for gesture control; high-end security cameras, HD and full HD moving to superHD and even 4k, a very fast growing market; 3D sensors for gesture recognition and 3D rendering for use in 3D printing and high-end cellular front cameras. The largest subgroups for us currently are the medical and industrial camera. Our market share in the dental x-ray market is higher than 50%. There is now a strong opportunity for growth in the direct medical business with advanced CMOS tiling versus more of a silicon TFT panels. In 2015, we began several strategic activities in the medical x-ray market, one in particular with the CMOS leader. Our strategic focuses are firstly next-generation platforms for industrial cameras including global server capabilities for small pixel size, in which case an advanced platform is being developed presently with four customer partners. And secondly, using our 65-nanometer 300-millimeter wafer size capability to create most advanced and highly integrated security sensors. Lastly, the mixed signal others group represented 24% of the 2015 corporate revenues or approximately 230 million. This is compared to 33% or approximately 280 million in 2014, including Micron or approximately 27% or 220 million excluding Micron, which DRAM products is not a flow we provide or a market we serve and hence was not replaced upon contract fulfillment. The products within this group include microcontrollers, A6, ID tags, logic standard cells, certain special CMOS-embedded memories and advanced sensors. These products serve computing, industrial, consumer and automotive end markets. A second grouping is our Aerospace and Defense business in the U.S. providing ITAR and trusted access to our commercial technologies for military and space applications in our Newport Beach, California facility. In the mixed signal others group, we are strategically focused on advanced sensors including magnetic sensors and infrared bolometers. To summarize, our business units and markets that we serve, these markets and technologies focuses are well diversified between the different groups end markets and products. Our single largest end market, namely RF wireless communication, does not exceed 20% of our total revenue. In addition, we had strong growth in all of our chosen technology groups which were dominantly those driving the three main trends in the industry, namely seamless connectivity, green everything, power efficiency and smart systems, sensors and cameras. These are the backbone of the Internet of Things. Our customer demand remains strong with our present offering while we work together producing platforms, which will create next-generation products for future market needs. The strong customer demand we experienced is reflected in the utilization levels. We define utilization in the following way. 100% is the maximum possible wafer per month of the bottleneck took, which is typically photolithography being the most expensive tools in the fabrication area at 100% availability. However, photolithography capability is not always the capacity constraint for any given flow type or combination of flows. Availability is calculated by deducting schedule downtime and historical non-schedule downtime. Hence, our 100% is the absolute maximum that a manufacturing facility can potentially produce. Our operational model is to run at 85% utilization. Utilization levels above 85% may have negative impacts on cycle time, especially if maintained over long periods. The following were the utilization rates for the fourth quarter of 2015 against total available photolithography layers. Fab1 Migdal HaEmek, Israel 6-inch factory, 65% utilization; Fab2 Migdal Haemek, Israel 8-inch factory, 91% utilization; Fab3 Newport Beach, California 8-inch factory, 91% utilization and the three TPSCo factories had similar utilizations with an average of about 41%. Fab2 and Fab3 are both running above the 85% operational model. Therefore, we are actively increasing the capacity at both of these factories. As compared to the first half of 2015, the 2016 capacity of each of Fab2 and Fab3 has increased by 15%. And as well, we will enable a higher mix of more advanced technologies driving higher selling prices and also better operational efficiencies. We have qualified our TPSCo Fab5 with two high-volume BCD power platforms and additional high-volume specialty platforms to enable offloading from Fab2. The Fab5 offload ramp is happening over this in the following quarters and will drive continual utilization increase in Fab5 while maximizing Fab2 performance to match the high customer demand for its specialty flows. All three TPSCo factories are running at measurably higher utilization rates and at the time of acquisition and will increase over this year targeting to reach incremental third-party revenues of 25 million quarterly within this year. It is notable and a verification of our analog model that Fab1 having been built in 1984 is profitable with truly immaterial new CapEx for capacity capability having been added in the last decade, and several new and exciting projects being ramped and additional projects being pursued. The free cash flow breakeven for Fab1 is approximately 50% utilization. Finally, at the beginning of this month, we announced the expansion of our worldwide manufacturing capabilities with the acquisition of an 8-inch wafer manufacturing plant in San Antonio, Texas for Maxim. We are thrilled to expand our existing long-term partnership with Maxim with this incremental business. The 15-year supply agreement will allow us to manufacture products for Maxim in the San Antonio facility in a quantity enabling a gradual ramp and hence increase availability of capacity for additional foundry customers, be they new and/or existing. In addition, this approximate 28,000 wafer per month in the San Antonio factory will provide us with additional manufacturing flexibility and cost efficiencies. This brings our overall capacity at TowerJazz and TPSCo to a level of over 2.3 million wafer per way according to the present mix of our production flows. We are already well underway in qualification of three of our advanced RF flows and have begun transfer of one of a substantial TOPS business flow from Fab2 into the San Antonio factory. To summarize, operations for 2016, our focuses are firstly, timely capacity increase realization in Fab2 and Fab3 with the associated efficiencies. Secondly, continued offloading to TPSCo and San Antonio factories, balancing the loading in our worldwide factory and hence an optimal increase in wafer manufacturing. And three, successful integration of the San Antonio fab into the TowerJazz family with associated flow, customer product qualifications to serve our increasing customer demand. Looking now at our guidance, we expect revenues for the first quarter of 2016 to be 276 million with an upward or downward range of 5% representing approximately 22% year-over-year revenue growth as compared with the first quarter of 2015 and 8% growth as compared with the fourth quarter of 2015. To summarize, in 2015, we realized multiple goals some having been established as visionary milestones such as the target to cross the $1 billion annual run rate and also some that were short-term, tactical targets such as to reach 40% non-GAAP gross margin, which we surpassed and having achieved a business and operational model for sustainable and growing GAAP net profit. We have also strategically enabled capacity at a model where the fixed costs is predominately covered and the equipment in place with the potential to achieve about 1.5 billion of annual revenues. With that, I would like to turn the time to our CFO, Mr. Oren Shirazi. Oren?

Thank you, Russell, and welcome everyone. Thank you for joining us today. We are very proud of the outstanding results we released for the fourth quarter of 2015 and the full year. We achieved record revenue of $254.6 million in the fourth quarter, a record EBITDA of $75.5 million representing $300 million EBITDA run rate and then increased net profit of $22.1 million for the quarter resulting in an EPS of $0.28 per share. We are excited to start 2016 with an additional revenue of guidance $276 million a quarter having midrange guidance reflect a 22% increase year-over-year. We present as of year-end record cash and short-term deposits totaling $206 million, strong balance sheet financial ratios, approximately $200 million lower debt year-over-year and a record shareholders’ equity. I will now provide our P&L results highlights for the fourth quarter and full year 2015 and then discuss our balance sheet and cash flows. Revenues for the quarter were a record of $254.6 million as compared to $235 million in the fourth quarter of 2014 and revenues for the year were also a record at $961 million, a 16% increase over the $828 million of 2014. GAAP gross profit for the fourth quarter of 2015 was $65 million reflecting 25% gross margins and representing an increase of 69% as compared to $38 million gross profit in the fourth quarter of 2014, with 16% gross margins and an increase of 17% as compared to $55 million gross profit in the immediately preceding quarter, with 23% gross margins. GAAP operating profit was $34 million for the fourth quarter of 2015 with a 21% increase as compared to $28 million in the fourth quarter of 2014 and a 43% increase as compared to $24 million operating profit in the immediately preceding quarter. GAAP net profit for the fourth quarter of 2015 was $22.1 million or $0.28 basic earnings per share, demonstrating increased sustainable GAAP net profit, as compared to $14 million or $0.18 a share in the immediately preceding quarter and as compared to $0.6 million or $0.01 basic earnings per share in the fourth quarter of 2014. On a non-GAAP basis, as described and reconciled in the tables included in today’s release, we achieved a 41% non-GAAP gross margin and recorded 41% gross margin as compared to 38.3% in the third quarter of 2015 and as compared to 35.8% in the fourth quarter of 2014. On a non-GAAP basis, net profit for the quarter was $70 million or $0.88 basic earnings per share, as compared to $58 million or $0.74 per share in the immediately preceding quarter. Diluted non-GAAP earnings per share for the fourth quarter of 2015 is $0.73 earnings per share as compared to $0.55 earnings per share for the fourth quarter of 2014 and as compared to $0.62 earnings per share in the third quarter of 2015. EBITDA for the quarter was approximately $75.5 million reflecting 30% EBITDA margin and 35% increase as compared to $56 million recorded in the fourth quarter of 2014 and reflecting 20% sequential increase as compared to $63 million EBITDA per quarter in the immediately preceding quarter. For the year, GAAP gross profit was $205 million, more than three times the 2014 gross profit of $64 million. Net profit on a non-GAAP basis for the full year of 2015 was $231 million or $3.11 basic earnings per share, which is 81% higher than the $128 million or $2.46 earnings per share in 2014. Net loss for the year, which was $30 million or $0.40 per share included $110 million of non-cash other financing expenses mainly attributed to accretion and amortization non-cash non-recurring costs associated with Series F. For comparison, GAAP net profit in 2014 was $4 million, which included non-recurring gains on TPSCo acquisition in the net amount of $166 million and the non-recurring $56 million in Nishiwaki fab restructuring and impairment costs. Since many of the company’s investors and analysts are located in Israel and in Europe and are familiar with the use of IFRS, which is the International Financial Reporting Standards rules, we are voluntarily providing certain financial information also on an IFRS basis. So net profit under IFRS was approximately $43 million for the year ended December 31, 2015, and basic earnings per share under IFRS was $0.58 per share. The main difference between U.S. GAAP and IFRS accounting principles as they relate to the company’s statement of operations for this reporting period is the different treatment of financial instruments affecting financing expenses, net. For the comparable year ended December 31, 2014, net profit under IFRS was approximately $25 million, and basic earnings per share was $0.48 per share. I will now go into the balance sheet analysis. Shareholders' equity as of December 31, 2015 was $386 million, nearly two times higher as compared to $196 million as of December 31, 2014. This is an increase of 19% as compared to $325 million as of September 30, 2015. Current ratio increased to 2.1x as compared to 1.3x as of December 31, 2014 and as compared to 1.6x as of September 30, 2015. Net debt amounted to $105 million as of December 31, 2015, reflecting a net debt to EBITDA ratio of below 0.4x. This is compared to net debt of $318 million as of December 31, 2014. In regards to our cash flow report, cash and short-term deposits on December 31, 2015 amount to $206 million as compared to $187 million as of December 31, 2014. The main cash activities during the year were comprised of the following. $208 million positive cash generated from operations, excluding interest payments of $12 million; $14 million received from exercise or warrants and options; a receipt by TPSCo of $71 million long-term loan from JA Mitsui bank and Sumitomo Mitsui Trust bank; investments of $166 million in fixed assets, net; $25 million Nishiwaki’s employees termination payments in connection with its cessation of operations; and $70 million of debt principal payments we made to our banks and bondholders. Cash and short-term deposits balance during the quarter increased from $155 million as of September 30, 2015 to $206 million as of year-end. The main cash activities during the fourth quarter of 2015 was comprised of the following. $55 million positive cash generated from operations, excluding interest payments of $1.6 million; $4 million received from exercise or warrants and options; a receipt by TPSCo of $71 million long-term loan from JA Mitsui bank and Sumitomo Mitsui Trust bank; investments of $58 million in fixed assets, net; $18 million of debt principal payments to banks and bondholders; and $1.6 million dividend payment to Panasonic by TPSCo. Now, I wish to turn the call to 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 the fourth quarter and full year of 2015 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 a 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 measures. The tables also contain the comparable GAAP financial measures to the non-GAAP financial measures as well as the reconciliation between the non-GAAP financial measures and the most comparable GAAP financial measures. EBITDA is presented is defined in our quarterly financial release. EBITDA is not a required GAAP financial measure and may not be comparable to a similarly titled measure employed by other companies. EBITDA and the non-GAAP financial information presented herein should not be considered in relation or as a substitute for operating income, net, income or loss, cash flow provided by operating, investing and financing activities, per share data or other income or cash flow statement 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?

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions]. The first question is from Cody Acree of Drexel Hamilton. Please go ahead.

Thank you guys to let me take a question and congrats on the results and on the progress. Maybe a few questions for Oren. Oren, obviously congratulations on the gross margin progression. Can you just talk about how you get to 41% this quarter? That must have been an extremely high incremental margin and can you just talk about the components of that? And then what are your expectations for incremental margins going forward in your trends through 2016?

Thank you, Cody. Yes, indeed it was a very aggressive challenging target we put a year ago to achieve the 40% and we achieved 41%. As one can see from the analysis in the tables, from Q3 '15 that we had 38.3%, we grew the revenues by $10.5 million and pretty much this $10 million contributed to the bottom line and this is how it was done. The explanation of that is that from the one hand, we did some cost reduction measures and savings. And on the other hand, the mix of the revenues was more in favorable of more high margin products that we sold. If you go back to our basic model, usually we assume that any incremental dollar revenue brings about a 60% or 50% to 60% to the bottom line to the gross profit. So it means that the additional $10 million, as I spoke about, to the additional $5 million or $6 million of the gross profit. Actually, it broke 10 million, which is $4 million better, which we achieved. This extra $4 million out of the 104 that we present was achieved partially by savings and partially by the improved mix of a higher margin business.

Congrats on that, great progress. On the Series F debenture conversion, can you just talk about where that stands, what’s left, what was done during the quarter?

Yes. This is actually 99% done. We issued many years ago, it was six years ago these bonds. The total outstanding amount per value amount was $230 million. This amount was an outstanding amount until June 2014. From the third quarter of 2014, those bonds which are also traded in Tel Aviv Stock Exchange, because they were in the money when converted into shares. And from the entire amount of $230 million, $228 million were converted into shares. It happened in the second half of 2014 and in 2015, mainly in the first quarter of 2015. And as of December 2015, we were left with $2 million. Those $2 million are due for payment 50% December '15 and 50% December '16. So the December 2015 part was paid. And whatever is left is only $1 million of those bonds, which are due for payment in December 2016, so it’s of course a very small amount which is left. And that’s the end of that.

And then on TPSCo and that Japanese loan, can you talk about why you took that $71 million Japanese loan? And then can you also talk about the relationship between your dividend paid to TPSCo and the non-controlling interest payment, what is the relationship between those two?

Okay. The TPSCo loan is basically a loan to be used only for TPSCo purposes, which is in this case to pay down upon accounts of the previous loan. If you remember TPSCo, their origin got approximately $70 million loan. This loan is starting to be repaid in Q1 '16, meaning right now. It’s about $20 million a year. So we got the new 70 million and these amounts will be just used in order to pay down for all the loan according to its original schedule. And at the end of the day, we don’t want to increase the debt or the cash of TPSCo, so it’s just our full replacement of the old loan. In regard to the other question about dividend; good, it’s the first time we have this. Under our shareholders’ agreement with Panasonic and also as permitted by the bank contract in Japan that gave the loan, the policy is to allocate up to 50% of the net profit of TPSCo to the shareholders. And of course we have 51% share and Panasonic have 49%. So as of – and business profit, it’s a good question that you asked, business profit is measured according to Japanese GAAP. This is according to the agreement. So, basically for 2015, it came out to be that – sorry, for 2014 it came out to be that the net profit under Japanese GAAP for the TPSCo was $6 million, which means that according to shareholders’ agreement, up to $3 million, a small amount but still up to $3 million can be if the shareholders want distributed between Tower and Panasonic and the shareholders voted for it. So we distributed the $3 million; $1.6 million to Panasonic, $1.6 million-something to Tower, $1.7 million to Tower. And also for the future, this sum exists, so any net profit from TPSCo can be distributed up to 50% of the net profit as dividends. The amount as you’ve seen in the consolidated segment is of course under GAAP is only the amount that was paid out to Panasonic because the amount that was paid into Tower is of course intercompany, and that is not counted.

And is that just once a year calculation?

Yes, every year in the end of the year. Also, for 2015, after the year will end, which is pretty much – I mean the year ended but after we have the final approved financial statements standalone TPSCo, we see what is the net profit of TPSCo under Japanese GAAP. And up to 50% of that can be distributed as dividend to Tower and to Panasonic. And Tower and Panasonic sit in a meeting. Russell is the Chairman of – both of TPSCo and is a Japanese partner and decide if they want to allocate any amount up to 50%.

And then lastly, Russell, for the San Antonio factory, can you just talk about what your expectations are for a ramp? It sounds like qualifications are going well. What about third-party revenue and the ramp expectations for the second half of the year and into '17?

So, I stated and we had already begun prior to the actual completion of the contract to transfer flows into the San Antonio factory. The beauty of this transaction as far as getting started early was we were buying a facility that belonged to Maxim not interfering with the Maxim business per se through a merger, and hence there was no cold period of activity, so to speak. We were able to, with Maxim’s approval, begin transfers earlier than the completion of the contract. So back in the fourth quarter of 2015, we began two RF SOI flows and an RF control flow, which the first results came out very, very good. We’re completing the qualification of these flows and we’ll be approaching customers probably in Q2 to start getting qualified. By an aggressive target, we would expect to see some small millions of revenue in Q4 of incremental revenue on top of our contract with Maxim. As had stated, the agreement with Maxim is really for most intents and purposes a growth and continuation of a very, very strong business relationship that we have. So this 15-year contract with them we look at as not something that in and of itself is a momentous digital activity but a derivative of a strong activity we have within a supplier-customer partnership. Obviously, there’s some degree of capacity that’s available right now for third-party revenue and we’ll be taking advantage of that as quickly as we can. We have not established any targets or – that’s not true. We have not announced any targets for 2017 as far as the revenues that we would be seeing for third party or not. But fundamentally, we don’t look at the San Antonio factory as a function of a third-party revenue or anything of this sort. This is a fully owned factory of TowerJazz to where all revenues coming out of it we look at as organic revenue. But the fact of building up additional customers to Maxim is just a normal foundry model. Does that make sense to the answer, Cody?

It does. Thank you very much, Russell, and congratulations on the progress.

Thank you very much. Thank you for the question.

The next question is from Shawn Simmons of Oppenheimer. Please go ahead.

Hi, guys. I’d like to add my congratulations as well. I guess, Russell, first question is for you. In terms of the guidance, obviously there’s going to be about two months of contribution from Maxim. I guess, how much is coming from Maxim? And kind of my math sort of suggest that your core business should still grow sequentially in sort of a seasonally weaker quarter. So, I guess out of your four business groups, where are you seeing that growth sequentially into the March quarter?

I gave the specific breakdowns of the year-over-year growth for the end markets that we serve. There’s no major difference of what we see in Q1 versus what we saw in 2015, as far as the areas of growth. We certainly have growth within RF, we have very strong demand within CMOS image sensor, we have very strong demand within power management. The first, second, third, fourth quarter, the predominance third-party revenue that we’ll be getting out of the TPSCo factories deals a lot with the offloading of power management activities, the BCD flows that I mentioned that we had qualified at TPSCo, the offloading of those activities which is very, very easily substituted in Migdal HaEmek with other flows that the company want to keep within Migdal HaEmek. So the incremental revenue really it sits very strongly within the RF, within the image sensor demand and within the power management demand as the power management customers continue to qualify and grow in the Tonami factory.

Okay, great. And then I guess just to Oren, real quick on CapEx. I think it kind of came in a little bit higher than I would have expected this quarter. Are we starting to see that CapEx number start to come down to a more normalized level this quarter, or should we expect some CapEx associated with the Fab2 and Fab3 build outs? Any help there as we progress through 2016.

Yes. So we stated in the past that out of the CapEx, I’m talking about the total CapEx for 2015 plus '16, we have in addition to the baseline of 120 million a year $45 million funded by customers prepayment. So the cash in from the customers’ prepayment comes into the cash flow operations and this is one of the reasons that you see very nice numbers under cash flow operations. And the cash out spending is for buying CapEx machines, hence this is under CapEx. So this is one of the reasons you have to consider in the CapEx. So you have the 120, you have the 45 baseline – the 45 total amount from the prepayment. And in addition to that, we said 15 million to 20 million to each of Fab2 and Fab3, so 45 plus 15 or 20 to each of the fabs, it’s about $80 million in addition to the baseline of 120. Now this extra $80 million are spread more or less from Q3 '15 until Q2 '16. So indeed one shall expect that Q3 '15, Q4 '15, Q1 '16 and Q2 '16 reflects additional CapEx totaling 80 million, so its average should be 20 million a quarter. If you look at Q3 '15, it was a small amount. It was only 9 million on top of the 30 million run rate, it was 39 million, so only 9 million was spent in Q3 '15. And indeed like you mentioned, Q4 '15 was maybe 28 from that because we have 58 as compared to 30. So 29 plus 9, we have 37, which means that there is additional $43 million to pay during H1 '16 on top of the existing baseline level of 30 million a quarter. And this will be spread pretty much linearly between Q1 and Q2 '16.

Okay, great. And then I guess I have follow up on gross margins. In terms of taking on Maxim, obviously that business is going to come in at a substantial lower margin. Where should we think about gross margins in Q1 on a non-GAAP basis and how should that progress through the year? And then is there any step-up associated with D&A with the acquisition of Maxim?

No. First, the second question’s answer is no. There should not be a – you asked about D&A, I was thinking you asked about --

Yes, correct, depreciation and amortization.

Okay, so from the Maxim acquisition, we – first, what I said no is that I mean there should not be any step-up of the R&D and MSG&A, okay. Maxim financials are COGS-related, so there should be an increase in revenue and an increase in COGS but not an increase in R&D and MSG&A. There is something that we are doing with our existing resources or the R&D, marketing, sells, administrative, so it’s really an effective acquisition. On the depreciation, yes, we will do the same thing, which is required to do with any acquisition. We will need in Q1 to give to do and operated by a third party expense of the fair value of the assets of San Antonio. And the fair value will be determined by the third party independent operator that we will except it and we will have to depreciate it over the year. I don’t think it will be a material amount of the depreciation because whatever – I don’t want to say the amount because I have no idea what will be the amount, because we didn’t start the work, we just acquired it. It shouldn’t be a material amount of additional depreciation. In regards to your margin question, so really we don’t feel comfortable because of our partner Maxim to disclose the exact incremental margin from this transaction because whatever good margins it is for us, it means that they have – this is what they are paying, right, to cover maybe cost. So, of course, it will be a positive margin and really we don’t feel comfortable to say it because of the request of our partner.

Okay, great. Thanks, guys.

Thank you.

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

Hi, guys. Thank you for taking my questions. I’ll echo my congratulations on a very good finish to last year. Maybe I will follow up on the last question kind of taking the logical next step here and talking about the gross margins as you add in Maxim. Can you tell us whether you expect the contribution of Maxim to be neutral or accretive or dilutive to EPS? And if it’s dilutive when does that get to a breakeven level or a neutral level?

Of course, Richard, this is accretive to the EPS. I mean this as incremental net profit in dollars, incremental gross profit in dollar, incremental EBITDA and incremental EPS, which is more than the amount of the shares that we issued to them. But it goes back to the answer to Shawn earlier because we cannot say the exact number, because this will reveal the contract terms and the prices and we promised Maxim not to do so.

Okay, fair enough. I certainly understand the confidential reasons for that. Maybe if I can ask you a couple of questions about looking out through the year and as we see both your organic business progress as well as whatever may happen to Maxim here. Care to give any quantitative or perhaps even qualitative thoughts on where your gross margins can go this year and also what kind of revenue growth do you think is a good bogey to think about for either on organic or including Maxim? Those will be great to hear your thoughts there, Russell, please.

So, we have not set previously other than stating that we would break the $1 billion run rate last year and stating in 2010 that we would break 500 million, we’ve never given annual targets. It was just for those two big milestones. We haven’t set a target for this year. It’s possible that we will still announce a target when we release Q1, but we haven’t yet. If you just look at the actual Q4 results, look at the Q1 guidance, certainly there will be growth over the 2015 revenue level. If you look at the fact of hitting a 25 million quarterly run rate target at TPSCo sometime in the year, then you could say also that there will be a revenue increase that you don’t see right now within the Q1 guidance. But we haven’t set the exact target, Richard.

All right.

We haven’t announced an exact target.

Okay, really look forward whenever you can give that to us. We know you gave us an aggressive target last year and you exceeded it, so we’ll look forward to hearing that when you can. Russell, to follow up on one of your last comments regarding TPSCo and hitting that $25 million quarter run rate at some point this year. To be clear that does not include any transfers from other fabs within your system. That’s purely third party new customers coming into TPSCo, is that correct?

No, not at all. That third-party increase, there was two reasons for acquiring the majority ownership of the Panasonic semiconductor factories. One was capabilities that we wanted to have that would allow us to bring on new customers that we didn’t have those capabilities within our organic factories, namely the 300-millimeter 65-nanometer. So that certainly will be part of the growth of this year. And the other was the flat out capacity. Capacity for us really deals with bringing up flows that we sell as foundry flows. So every flow that was in Panasonic, there’s a few that we’ve worked on to make a previous Panasonic flow, a foundry compatible flow. And then there’s other flows that we have transferred in there for our own desire to continue to grow, for example, the power management BCD. The incremental growth in the TPSCo is both new customers for new activities that we didn’t previously have capability to do as well as growth with existing customers, maybe new tape-outs, maybe new products but on flows that were transferring into TPSCo. There are as well growth this year from customers that we maybe have elsewhere in the company. But within the TOPS business, we have brought up specific customer flows within TPSCo. So that’s a combination of all three.

Okay, I appreciate the clarity on that one. I guess my last question just very quickly for Oren on the cash flow operations. Can you give us a quick breakdown of those components, the prepayment contribution and working capital changes on interest?

Yes. Our working capital is not affecting us at times like that in the last three years actually that we are in. In a regular company, maybe indeed working capital has a negative impact because it first purchase the material and then only it chips the wafer, then collects the money and so there is a time gap. But in our case, the payment terms from customers are better than the payment terms we get – not better, I mean shorter than the good payment terms we get from our vendors, which help us in times of ramp up to the fact that there is no impact. In terms of that, there is nothing in the let’s say $207 million of positive cash flow from operations this year, excluding interest, there is no component of working capital. If you indicate to that, a component of a customer prepayment, okay. So those customers’ prepayments that you forecasted, there is an amount of approximately $30 million from the 45 that we announced, $30 million from that we received already in cash during 2015. So this is part of the 207. So the other part of 177 is really the regular cash from operations, nothing special.

Okay. And Oren, I apologize, I asked an imprecise question. I actually asked you specifically about the fourth quarter. I guess very specific just to the fourth quarter, so you were saying there weren’t any prepayments built into that $50 million, $55 million number for the fourth quarter then?

Yes. From the $30 million that during the year, about $15 million were included in Q4. So without the 15, it’s $40 million.

Got it. Okay, that’s enough questions from me guys. I appreciate the time. Thank you very much.

Thank you.

The next question is from Marc Estigarribia from Chardan Capital Markets. Please go ahead.

Thank you and congrats on the results. I just wanted a clarification, Russell. I think you mentioned on your report that there was 27% organic growth but I read in the release it’s 21%. I just need a clarification if it’s 21% or 27%?

27 was year-over-year, 21 was quarter-over-quarter.

Okay, great. Thank you. So I guess looking at that number, I think there was a question already asked with regards to looking at the next quarter and sort of incremental growth going forward. Looking at the core business of what’s going on with Maxim already, is it safe to say that we’re still looking at that contribution from Maxim of around 20 million per quarter as a sort of underlying growth for Maxim’s contribution? Is that around the right number for that if we look at the guidance for first quarter and pull that out to give organic?

To begin with, we have never stated a number for the contribution from Maxim and we have an agreement that we shall not. However, whatever the number would be, it would only be two-thirds of that number because the deal culminated on February 2. But we’ve never given a number of what that would be and we will not be splitting that number from any of our revenues. As I stated, the Maxim San Antonio facility is a fully owned facility to where we have some revenue in it of Maxim as a customer and we’ll be building up revenues of other customers in that same factory. But the specific Maxim contract we have not discussed.

Okay, that’s fair. And there’s also the question asked about the gross margins going forward --

I just want to clarify something because I hope that I didn’t mis-word. The 21% is Q4 year-over-year, right, so it’s quarter-over-quarter but it’s Q4 quarter versus Q4 quarter. And the 27 is full year, year-over-year.

Okay, great. So the fourth quarter was 21% and the full year was 27%, okay.

Yes.

Thank you. The gross margins going forward the first – I think there was a question already on the Maxim ramp up and I know there’s incremental growth here on every line item because of San Antonio. But should we expect sort of a ramp up in the margins going forward from second half being better than the first half? Is that sort of the way we should model it out?

Yes, of course. This is assuming that you assume an increased revenue quarter-over-quarter, which we didn’t give the exact guidance but of course if there is increased revenue quarter-over-quarter continued, it will be very nicely attractive in a much improved gross margin.

All right, thanks. And congrats on hitting a guidance on fourth quarter 250 and a guidance on the 40% of fourth quarter. And if you could just comment, because I know we’ve spoken about this in the past, but just wanting a clarification on that long-term gross margin number of 50% by 2017, if there was an update there on that guidance. I know you made a couple of comments on that. But if you can just clarify going forward what we should expect in terms of that long-term gross margin guidance? And also on the OpEx for 2016 if that should remain flat year-over-year. Thank you.

Sure. Firstly, just to be very specific on language, the 250 actually wasn’t the guidance. The guidance was higher than 250 and we gave that guidance when we released Q4. We had set a target to break $1 billion at the beginning of the year but that was our target. The 40% we never guided, it was target that we gave a year ago tonight. And at the time that we gave that target, we set another target to work towards the 50, achieve 50% in 2017. So I just want to state that in my mind there’s a difference between a guidance and a target. But I think we’re pretty good about working towards our target. The 50% is to a big extent, I mean the incremental margin increases is to a very extent the third-party revenue build up in the TPSCo factories. And some of the offloading that we’re doing I mentioned in the script that we have against the first half of 2015 somewhere about 15% more capacity in Newport Beach and more capacity in Migdal HaEmek. So the incremental revenues coming out of those two factories providing that, it’s fulfilled in demand. And then the growth of the third-party business will grow good incremental margins. I had stated the average utilization in the three TPSCo factories being slightly above 40%. That gives a lot of free capacity there for growth and that growth is a big factor of what will drive up the margins over the next years. Achieving the 25 million quarterly target of third-party revenue is a step towards that this year and we had established a higher target in 2017, which was to achieve an annualized 150 to 200 in the latter part of 2017. So all of that is incremental to it. That’s I think a fairly accurate answer to you.

In regards to the OpEx question, no, we do not focus any increase in the OpEx. I mentioned before that the Maxim acquisition, we don’t expect any increase in OpEx. So the lever that you see now in Q4 '15, which actually as you can see, the OpEx are even lower than it was a quarter ago trying to do savings and we don’t intend to increase the OpEx at all.

Thank you. Thank you for the clarification, Russell and Oren. With the interest rates going forward or the payments, I should say, I think last year it was around $40 million per year or in the past and now it’s closer to $15 million and $20 million. Is that sort of – now with the refinancing or the new loan from TPSCo, is that sort of a level that we should expect on the interest rate payments?

Yes, like this year, because like I mentioned the new 70 million is reflecting all the 70 million eventually. And we have much lower debt and much lower bonds, so it should remain the same level like this year, very low compared to previous.

All right, I appreciate it. Thanks for the questions.

Thank you very much for the questions.

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

Hi. Just a couple of quick questions. I was wondering if you could tell us what the revenues were for TPSCo in 2015 only because that way we can back out the 49% you don’t own to do valuations?

Yes, so we initially said at TPSCo one should expect an amount per quarter of 92 to 105 per quarter. 2015 averagely, the quarter was 95 million, so exactly in the middle of the guidance of the target that we’ll see, whatever we gave forecast.

Okay, great. That helps. And as far as your breakdown of sales, what did it look like geographically in 2015 and what do you think it will look like in 2016 with Maxim in there?

Geographically, so 45% of our revenues are today United States; 41% to Japan customers not only Panasonic; 11% to Asia, meaning China, Korea and some other things; and 4% Europe.

Okay. And this year, what’s it going to look like?

We expect it will be pretty much the same, maybe an increase in the U.S. On account of Japan, Asia and Europe should be the same just because that Maxim is a U.S. corporation and the growth of sales out in TPSCo is mainly U.S. customers, so the ratio of 45 U.S. to 41 Japan will grow in favor of U.S. less Japan.

Great. Thank you very much. That’s all I have.

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

Yes, thanks for taking my questions. People have been asking this a couple of different ways but I think one of the questions that I’d love to understand is, what would be the total corporation’s gross margins in Q1? Can you help us with a guide there? You want us to just guess what it is based on layering in the Maxim revenue. I’m not asking what the Maxim gross margin is but I’m asking what the total gross margin guide for the company could be?

All right. If we say the total, so everybody can know of Maxim because the baseline everybody knows, but --

It’s not that easy to point that number, so you can tell us now or you can just wait until the quarter ends and then we’ll back into it.

Actually, we always in the past were consistent to give quarterly revenue guidance but never gave quarterly gross profit except for the one target of 40%, which was a really important milestone stretch target for us and we wanted to achieve it and we achieved it. So we don’t give guidance on that. Russell, if you want to add something.

We prefer also not to start a precedent.

Well, I guess I’m not really asking for a precedent but you got tons of moving pieces, right. Your drop rate fluctuates from 70% to 100% on incremental revenue. You’re layering in I guess some revenue from Maxim that comes at a lower gross margin. There’s lots of moving pieces. I was just curious if you could help us with some goalposts.

Just get excited.

Okay. Is you core business going to grow sequentially in Q1?

Yes.

Okay, great. And did you have any 10% customers during the quarter or the year and if you could for the year help us understand what the percentages were?

Yes. So for Panasonic, which I mentioned before, 95 million a quarter; if you calculate it, about 40%. And there was another one, which is above 10%, which we didn’t specify. It’s part of the financial details reported. We will file but I can say it’s 13%, but from a confidential point of view, we don’t want to mention his name. So this is one at 13% for the year and then there is nobody above 6%. So the others are 6% or lower.

Okay. For 2015, can you help us – what was your average selling price in 2015?

I don’t know that that’s a very relevant number and I mean sincerely because we have many, many different products. We have some set products that are only four layers. We have other silicon germanium products that go up into 41, 43 layers. We have some MEMS that are at 60 layers. We have 300-millimeter, we have 6-inch, so the average wafer price is maybe not so critical. It really isn’t very related.

How many wafers were produced in 2015 then?

So I believe Russell you said the utilization, so one can couple it. It’s public domain that we have two mainly on capacity of about 2 million before San Antonio, 2 million capacity wafers there a year. And we had the utilization numbers that Russell said, so 90% [indiscernible]. And about 40%-something EPS growth, so you can calculate that. We never talk about selling price to wafer.

Okay. And could you take a guess at what you think your cash flow from operations might be in 2016?

I missed your question, sorry.

A guess as to what your cash flow from operations might be in 2016?

Well, it depends of course on the revenue, which we didn’t give. But you can look and see that the baseline of about $200 million a year this year refers to an EBITDA this year of about $249 million. So whatever assumption you make on the revenue, you should add 50% to 60% of that incremental to the EBITDA and to the cash flow from operations.

Okay, thank you. Congratulations again on a nice quarter and nice year.

Thank you very much, David.

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

I’d love to. Thank you. So I thank everybody for their interest, I thank for the very good questions. This is really for Oren and myself a very, very exciting time. We’re now entering our third five-year segment working together. We began the second half of 2005, so our first five years was 2006 to 2010. We went from negative to positive EBITDA, from negative to positive cash from operations, from 100 million annual revenue to breaking 500 million of annual revenues. But most successfully during that period of time and most importantly, we did complete the merger with Jazz Technologies creating TowerJazz as not just a specialty foundry but as a leading analog foundry. In these past five years, 2011 to 2015, we created a partnership with Panasonic adding substantial capacity. As stated during the call, the average 40% utilization there by photo layers shows the amount of capacity we have to build for third-party revenues. We added incremental 300-millimeter advanced analog capabilities, become a lead supplier to many first tier customers over multiple and diversified groups with the TPSCo creation significantly increased overall capacity as well as organic investments into Newport Beach fab and the Migdal HaEmek fab. We greatly strengthened our balance sheet creating net debt EBITDA ratio below 0.4 and improved all ratios. And very importantly, we ended the year having hit our target of breaking $1 billion annualized run rate. Now, at the very beginning of 2016, the start of our next five-year venture, we began it with a very, very strong deal, a very good partnership extension with Maxim with the San Antonio factory. We’re extremely excited to be in a position right now that we have approximately $1.5 billion of revenue capacity and that capacity for the core portion of it is paid for under a model where the financial fixed cost of it is predominately taken care of. So to be in a position now to start 2016 with a very nice sustainable GAAP net profit that has grown over 2015 with 300 million EBITDA run rate and really for intents and purposes the core portion of the capability already paid for to get to $1.5 billion, we’re extremely excited. We invite all of you to our Investor Day on March 8 in San Antonio. It will be a very exciting day. I would look forward to you seeing the facility there, seeing the grounds there, mingling with the workforce there, a very excited, extremely capable workforce. You’ll hear from our different business units from the President of the company that I don’t think many of you have seen who runs the business units of the company. You’ll hear from the Chief Operating Officer at the facility itself. You’ll hear from Oren in great detail and also have the opportunity to speak more with me. So I hope that you avail yourselves at this opportunity to visit us in San Antonio on March 8. The invitation, everything, is posted on our Web site and please sign up. So with that, I thank all of you for – those that have been with us the entire journey so far, those that have joined later on, really it’s been exciting, it’s been fun, it’s been rewarding. And I think right now we have so much in front of us, I look forward to sharing with you. Thank you.