Tower Semiconductor Ltd. (TSEM) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz Third Quarter 2017 Results Conference Call. All participants are currently present in a 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, November 7, 2017. Joining us today are Mr. Russell Ellwanger, TowerJazz’s CEO; and Mr. Oren Shirazi, CFO. I would now like to turn the conference over to Ms. Noit Levi, Vice President of Investor Relations and Corporate Communications. Ms. Levi, please go ahead.

Thank you. And welcome to TowerJazz financial results conference call for the third quarter of 2017. 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 authority. They are also available on our website. 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 all of you to our conference call and thank you for joining us. We reported another strong quarter with record revenues of $355 million or $1.42 billion annualized run rate with incremental net profit margins strongly outpacing the revenue growth, demonstrating added value being provided to our customers and to our shareholders. We reported record EBITDA for the quarter at $109 million, up 12% over last year. GAAP net profit for the third quarter was $55 million, representing an increase of 8% year-over-year or 24% on an adjusted basis. For the fourth quarter of 2017 our guidance is $358 million plus or minus 5%, resulting in annual year-over-year growth of 11% of which 20% of that is organic business unit based growth. Oren will cover our financials in much more detail in a few minutes. Excluding the Panasonic and Maxim long-term contracts, which are committed and stable, another words considering only our business unit driven growth we recorded year-to-date organic growth of above 20% year-over-year. I’d now like to review the main activities in these various business units that will ensure mid to long-term growth and further cement our leading position in the relevant markets. In RF and high precision analog we’re investing in technology to address the next-generation of connected and smart devices. For wireless, we are focused to bring to market technology for upcoming 5G standards that will substantially increase mobile data transmission rates. This includes continuing our aggressive roadmap in RF SOI, but as well augmenting this with RF MEMS which promises to leapfrog RF SOI performance with switching speeds down to 50 femtoseconds or less to address the most demanding switching and tuning applications in smartphones and IoT terminals. 5G also includes a much higher frequency band 28 gigahertz versus less than 6 gigahertz which is used in today’s wireless communication systems. We are working with partners to demonstrate full chipsets with our high performance silicon-germanium technology that can achieve high data rates in this band. As we recently announced with UCSD we reach data rates of up to 12 gigabps. In infrastructure, we’re working to support the strong growth in global data traffic with continued roadmap in silicon-germanium technologies and fiber-optic communications networks and data sensors. We continue to see strong strength in the SiGe market and based on our customers forecast, we expect continued strong growth. This was driven primarily by data centers and cloud connectivity requirements. We expect this well through 2018 and beyond. Last quarter we announced initial developments of a silicon photonic platform that can augment our silicon-germanium offerings and increase our TAM in this growth area. We are making good progress. This quarter we demonstrated all components of the system including photo detectors, waveguides and modulators, and have initial customer prototype products taped into our factory well ahead of initial plans. In RF sensors we announced a very important partnership with DENSO Corporation in Japan, which is delivering RF radar systems built with our silicon-germanium technology for the Toyota Camry which was released earlier this summer in North American market. We see automotive radar as a good additional growth factor for our advanced silicon-germanium technology over the next several years has more vehicles or adopting the safety technology and the number of sensors per vehicle will be increasing from the three to seven today to perhaps as many as 12 which is predicted for a fully autonomous vehicle of the future. We are emphasizing all such partnerships. As we stated coming into this year, our RF focus is to engage in deals on those platforms we supply high value to our customers and hence will reduce the quantity of lower volume products where price rather than technology becomes a differentiator in favor of high end high value mix. Moving to power management and beginning with automotive segment. Most new cars include a wide variety of new technologies such as ADOS 48-volt battery architecture, headlight LED, advanced safety features, power savings and charging capabilities. Also the aggressive CO2 emission reduction targets in many countries are driving the need to develop more hybrid and EV vehicles. Examples can be the stop start systems, electric power steering and more which are using 48-volt operating voltages enabling the potential 10% to 15% gain in fuel economy. Our 0.18 micron 200-volt SOR power management platform serves the automotive power management needs with a very high breakdown voltage up to 200 volts combined with very high immunity to noise. This platform is qualified for consumer grade during the past quarter and automotive qualification is ongoing with very high overall market interest. To increase our footprint in the power management SOI market we continue to invest in development of next generations to include extended voltage ranges, reduced Rdson for better efficiency and die size, and a variety of different isolation options. Our second platform that we’ve invested in for automotive power management market is our [ph] reserve (7:27) technology that offers the best-in-class Rdson for voltages up to 80 volts. This technology will include also advanced isolation schemes allowing high current capabilities and negative voltages, while still maintaining smaller die size. The platform will be released by the end of this current year with customer designs in Q1 ‘18. The low-voltage 5-volt market mainly needed for consumer applications covers about 50% of the overall power management IC market and amounted to about $22 billion in product revenue in 2016 according to Markets & Markets reports. To address this highly competitive segment, we’ve recently introduced our 5 volt 65 nanometer technology at a 300 millimeter wafer size enabling a significantly better value proposition for our customers than our competitors 110 nanometer to 180 nanometer 200 millimeter platforms and is already in mass production. We are expanding the 65 nanometer 300 millimeter offering to support also higher voltage up to 20 volt operations and will benefit from best-in-class Rdson for improved efficiency, as well as a suite of low mass count embedded solutions at an overall low mass count flow, also supporting high-frequency switching speed. In parallel, we continue to maintain our leadership position with best-in-class Rdson across wide voltage ranges to support increased consumer and industrial markets needed for more efficient solutions. In the CMOS image sensor market we are investing today in technology for three main directions; next-generation global shutter technology for the industrial sensor market; Backside Illumination and stack wafers for the high-end photography market; and special pixel technology for the automotive market. In the industrial sensor market we are working with several leading customers on the development of the 2.5 micron state-of-the-art global shutter pixel on the 65 nanometer 300 millimeter wafer size platform. As you may recall, we previously announced the availability of our 2.8 micron global shutter pixel and 110 nanometer platforms, the smallest global shutter pixel in the world. This is still the case and our 2.5 micron pixel on the 65 nanometer 300 millimeter platform will continue our leadership in this area, providing an even smaller pixel and being then again lowest pixel size in the world and thus allowing higher sensor resolution for any given sensor size. The first tape out in this new platform is expected to happen by the end of this year. One of the most important parameters or figures of merit of global shutter pixels is the shutter efficiency. Our shutter efficiency gets to 100 DB, which is several orders of magnitude higher than the competing 3 micron pixel in the market. This combined with our stitching technology allows us to take a large portion of the high industrial market, as well as even use this technology for high end photography, especially for video applications. We believe that our current generation of global shutter technology on both 180 nanometer and 110 nanometer will continually grow, but will gradually be augmented and eventually replaced by this next-generation 300 millimeter technology enabling us to maintain our market edge for many years to come. In the digital SLR market we engage with one of the leaders in the world in the development of their next-generation sensors. And in parallel on track with our 300 millimeter Backside Illumination stack wafer technology development with outstanding pixel performance. Our first silicon runs of full stack wafer flow for the circuits on the bottom, CMOS wafer and the pixels are on the top CIS wafer show improvements of more than 2x and quantum efficiency with only slight increase of dark current in the 2.4 micron pixels. We expect to bring the dark current to the same outstanding level we already show in front side illumination about 10 electrons per second at 60 degree Celsius in the next silicon run. This technology will be ready for customer tape out in Q1 next year so customer designs are going to start very soon on this platform. Lastly in the automotive area, we have developed both SPAD Single Photon Avalanche Diodes state-of-the-art technology, as well as ultrafast global shutter pixels for automotive solid-state light hour based on time-of-flight principal. Our SPAD show very large dark -- very low dark signals at the same level as discrete SPAD devices, but with the advantage of full integration with CMOS circuits, allowing low-cost, low power consumption and system on chip capabilities. We have engaged with several companies among them one of the most promising in this area in the development of automotive light hour and expect to be a major player in this market in the future. In autonomous vehicle we will require multiple sensors or if you will sensor fusion, combining the capabilities of radar light hour and standard albeit advanced CMOS image sensors to accurately identify and enable real-time classification of all images within the field of view of interest. Our expertise in these three areas puts us in the strong position to take advantage of this anticipated high growth market. With regard to our TOPS business unit, the discrete power semiconductor industry is seeing the highest growth rates since 2012 and most likely we will continue to see a pronounced growth led by automotive applications in particular inverter powertrains used in electric and hybrid vehicles, as well as the need of power devices for 5-giga IoT base stations. Currently there are shortages of 8-inch diameter silicon wafers with discrete power devices. Our partners in TOPS projects Infineon previously International Rectifier, On Semi previous Fairchild and Vishay Siliconix are the leaders in the market and continuously widen their device portfolio with the state-of-the-art products, many of which are transferred from 6-inch to-8 inch wafers and have long-term high demand. Our success in discrete power device transfers to high volume production is due to our high level of engineering capability, enabling fast transfer in first time flow success, within an environment of process flow IP protection. This also attracts additional potential customers interested in the fabrication of state-of-the-art diodes and transistors, and joint development of novel device waivers with enhanced performance, including switching times, voltages, low dissipation and high voltage. These products include best in the world deeply scaled vertical high power MOSFETs, including integration and trench aspect ratios well beyond 10 to 1, advanced super junction diodes and transistors and also includes the most advanced protection devices in the world. Our strategy in discrete power devices is proven itself, namely to co-develop with leading strategic customers, their next-generation platforms, with intrinsic flexibility enabling numerous designs focused on the most challenging applications. In the sensor field TOPS activities are focused on the development of diverse sensor platforms also targeting automotive and mobile application. This includes a variety of the best-in-class magnetic field sensors based upon magnetic tunnel junction technology and using a novel principle of sensing enabling best-in-class sensitivity developed with Crocus Technologies. We are currently in the production ramp of these sensors including engagement with the Tier 1 automotive customer. High sensitivity radiation sensors, gamma rays, X-rays are being productized in radiation measurement systems by our partners and are employed in prestigious academic circles for medical and environmental studies. The obtained experience in sensor science is applied to other sensor fields, in particular to low-power sensors and sensor systems for environmental control, for example, gas sensing, temperature sensing, including devices suitable for operation in harsh environment. The developed production platforms employee novel device configuration and principles protected by TowerJazz intellectual property. As part of our sensor hub activities, a leading Israeli academy posted for us a Sensor Cubation Seminar where over 40 companies enter dialogue and showed strong interest in our sensor offerings and capabilities. Regarding current utilizations, as previously stated, our operational model is to run it around 85% utilization, which provides us with the best balance between line flow and wafer out. Utilization rates for the third quarter in Fab 1 Migdal Haemek, Israel our 6-inch factory we are at 91% utilization. Once again this is a very strong testimony to the long-term viability of our analog business and operational model as this Fab was built in 1983 and is running at even above the design utilization model. Fab 2 in Migdal Haemek, Israel our 8-inch factory was at 86% utilization. Fab 3 Newport Beach, California, another 8-inch factory was at 81% utilization. This is a bit lower than the usual utilization level of the Fab due to maintenance activities that were held during the quarter. The three TPSCo factories as a percent of total photo layers was about 58% utilization, 8% higher than the Q2 utilization with year-to-date doubling our third-party revenue in 2017 over 2016. Fab 9 our San Antonio factory was at 60% utilization. Turning to China, for our standard foundry business, China is our highest growth region, with over 80% year-over-year revenue growth against the base of multiple tens of millions and a continued strong growth forecast. With over 20 strong active customers being served with activities from all of our business units and in all of our Fabs excluding our 6-inch Fab 1 and as well many more Chinese customers in the sales funnel, China growth has both tactical and strategic importance to the company. Considering the government-backed semiconductor initiatives and the Chinese stated goals to develop a complete semiconductor infrastructure to serve their growing needs of IC manufacturing and IC integration we view it a strategically important to take part in this infrastructure build out as we had previously presented. Therefore we have been and continue to be active in exploring multiple opportunities to expand our presence there. In August, we were pleased to announce the framework agreement with Tacoma for new 8-inch semiconductor fabrication facility in Nanjing, China. As part of this project we will provide technological expertise together with operational integration consultation. To-date we’ve been paid $18 million, additional payments will be flushed out in the definitive agreement. With this opportunity, we can gain a strategic footprint in China, while extending our offerings and manufacturing capabilities. In addition, we recently announced a partnership with Yuanchen Microelectronics, a manufacturer for advanced CMOS image sensor backside elimination process for manufacturing in Changchun, China. This partnership allows us to provide our customers with advanced BSI technology in mass production for high end CMOS image sensors starting in mid-2018. This is the first time BSI will be offered by a foundry to the high end photography market, including large formats requiring stitching. The new BSI technology will be utilized for high end photography automotive, augmented and virtual reality sensors, as well as other growing CIS markets. We are excited with the potential from this partnership, which further enhances our leading CIS offerings. To summarize, we continue to focus on full circle value creation for our customers, partners, employees and shareholders. As we continue our lead in the analog semiconductor space, we are taking significant strides to increase our activities and capabilities and look to further our market potential and competitive advantages by investing and focusing on additional high growth high margin markets, as well as several disruptive technologies partnered with lead customers that can take a major share of new and emerging needs with these new breakthrough technologies. We look to provide our customers with the right platforms to support their needs to capitalize on the trends that are prevalent now, as well as those that are emerging, which are driving and will continue to drive the world for years to come. With that, I would like to turn the call over to our CFO, Mr. Oren Shirazi. Oren?

Thank you, Russell, welcome everyone. I will start my review by providing the highlights of our P&L results and then discuss our cash flow reports and our balance sheet. For the third quarter of 2017 we reported today a year-over-year increase of $28 million in revenue to a record $355 million as compared to $326 million in the third quarter of 2016, resulting in a record EBITDA of $109 million net profit of $55 million, record cash generation from operation of $104 million and record free cash flow of $62 million. Both gross and operating profit for the quarter increased year-over-year and were at $89 million and $55 million, respectively, as compared to $81 million and $49 million in the third quarter of 2016, respectively. With EBITDA for the third quarter of 2017 of $109 million, which is $12 million higher than the third quarter of 2016. Net profit for the third quarter of 2017 also increased and was $55 million or $0.56 in basic earnings per share and $0.54 diluted earnings per share as compared to $51 million or $0.58 basic per share and $0.52 diluted earnings per share in the third quarter of 2016. As our TPSCo foundry business and revenue continues to grow, we reached a profitability level entailing royalties to TowerJazz and Panasonic. This results in a higher cost of revenue, proportionally yielding a lower gross margin, creating a lower tax expense and lower non-controlling interest, which in turn generates greater net profit, greater cash and greater free cash flow to the company. This is seen in the 55% incremental net profit margin increase as compared to the second quarter of 2017. Our adjusted net profit for the third quarter of 2017 was at a record of $61 million, 24% increase as compared to $49 million in the third quarter of 2016. I would like now to give the results for the first nine months of 2017, revenue for the first nine months were at a record of $1.03 billion, as compared to $909 million for the same period of 2016 reflecting 13% year-over-year growth. Gross and operating profit for the first nine months of 2017 increased year-over-year and were both at a record of $265 million and $165 million, respectively, as compared to $215 million and $120 million, respectively, for the same period of 2016. EBITDA for the first nine months of 2017 totaled a record of $318 million, representing 22% increase as compared with $261 million in the first nine months of 2016. Net profit for the first nine months of 2017 was $151 million, or $1.57 in basic earnings per share and $1.49 diluted earnings per share. Net profit for the first nine months of 2016 was $156 million, or $1.81 basic earnings per share and $1.61 diluted earnings per share, which net profit included $51 million net gain from the acquisition of San Antonio fab recorded in 2016 end. On the balance sheet and cash flow report, so during the first quarter of 2017 we achieved record free cash flow of $62 million, with a record $104 million cash from operation and invested in fixed assets $42 million net. The cash flow for the first quarter -- for the third quarter of 2017 included $18 million net cash received from Tacoma as announced by us in August 2017 with respect to the new China fab. The other main cash activities during the third quarter of 2017 were $16 million loan repayments and $50 million investment in marketable securities. Debt, as of September 30, 2017, our total gross debt was $335 million comprised of outstanding principal amount of $155 million of bank loans and $180 million in debentures. Cash including marketable securities and net of gross debt, as of September 30, 2017, totaled a record of $195 million as compared to net cash of $37 million as of December 31, 2016. The strong growth in our cash position was mainly due to the positive $147 million of free cash flow that we generated during the first nine months of 2017. Our net current assets or current assets less liabilities increased to $599 million as of September 30, 2017, from $451 million as of December 31, 2016. Current ratio as of September 30, 2017 increased to a record 3.4x as compared to 2.8x as of December 31, 2016. Shareholders’ equity as of September 30, 2017 was also at a record of $874 million, as compared to $683 million as of December 31, 2016. Share count as of September 30, 2017 included 98 million ordinary shares and a fully diluted share count is 108 million. Our fully diluted share count as of September 30, 2017 included 10 million maximum potential shares to be issued comprised of 5.8 million shares underlying convertible bonds, 3 million warrants is of related options and RSUs and 1 million shares underlying capital note. This ends my summary and I would like now to turn the call to Noit Levi. Noit?

Thank you, Oren. Before we open up the call to the Q&A session, I would like now to add general and legal statements made and to be made and with regards to our results. Please note that the third quarter of 2017 financial results have been prepared in accordance with U.S. GAAP and the financial tables in today’s earnings release includes financial information that may be considered adjusted financial measures and non-GAAP financial measures under Regulation G and related reporting requirements as established with the Securities and Exchange Commission, as they apply to our company. Namely, this release also presented financial data, which is reconciled as indicated in the table or in the call on an adjusted basis, after deducting; one, amortization of acquired intangible assets; two, compensation expenses in respect of equity grants to directors, officers and employees; three, gain from acquisition net; four, non-cash financing expenses related to bank loans early repayment; and five, other non-recurring items such as acquisition-related costs and Nishiwaki Fab restructuring costs and impairment. Adjusted financial measures and non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for GAAP financial measures. The tables and the earnings release also contained the comparable GAAP financial measures to the adjusted financial measures, as well as the reconciliation between the adjusted financial measures and the most comparable GAAP financial measures. EBITDA is reconciled in the tables from GAAP operating profit. EBITDA is not a required GAAP financial measure and may not be comparable to a similarly entitled measures employed by other companies. EBITDA and adjusted financial and the non-GAAP financial information presented herein should not be considered in isolation or as a substitute for operating income net, income or loss, cash flows provided by operating, investing, and financing activities per share data or other income or cash flow statements that are prepared in accordance with GAAP and is not necessarily calculated or presented on a basis consistent with the same or similar data presented in previous communications. And now we will open up the call for Q&A. Operator?

Thank you. [Operator Instructions] First question is from Cody Acree of Drexel Hamilton. Please go ahead.

Thanks guys for taking my questions and congratulations on the progress. Russell, maybe if we can start -- I’ve got a couple for you and couple for Oren. Russell, going back to your statements about China kind of I think you said multiple initiatives and multiple opportunities you are exploring. Could you just maybe provide any further color is to maybe kinds of projects or the kinds of engagements that you’re looking that, I know there is only such detail, but if you could at least maybe provide color on the types of things you are looking at?

Certainly, Cody, to the degree of that that I can. So we have announced the partnership on a technology capability, where we are doing the Backside Illumination. We had announced the engagements in a certain amount of RIPs as in-kind investments for which we would also get paid and gain capacity with Tacoma and Nanjing. We are pursuing other such opportunities, not necessarily identical to that of Tacoma, but where you would have other municipalities that are interested in creating semiconductor manufacturing capability and aligned maybe with a different funding structure from the central government or the municipality, one such where in very strong discussions with, but nothing to a appoints that there is a definitive agreement or even an MOU or a binding MOU, so nothing at the level of presenting. But the overall drive and incentive that we have is to continue our growth within China from the pure foundry capability, operational capability that we have in our other sites and there we have been doing extremely well. As I mentioned, about -- a bit over 80% year-over-year growth against the base of multiple tens of millions of dollars to begin with, also extremely good application support team, very, very good sales and country manager. So those activities continue. We believe to have more local presence there with manufacturing capability would only accelerate our growth rate within China and the very fact that there is so much government initiative, at some point we believe that certain technologies, for example, excuse me, those that would have embedded memories with specific encryptions might need to be manufactured in China and that if we didn’t have the capability there we might not have that manufacturing. We might lose the business that we already have for example. So our desire is to continue to grow and if we can take advantage of helping municipalities with their stated goals under a model that’s very advantageous to our shareholders and supports our customers with the regional benefit, it certainly falls into where we are going and what we want to do.

Okay. Thank you for that Russell. And then, just congratulations on pushing above the $1.4 billion annualized revenue rate and but if you look at even just a 10% growth annually from here, you start to get very quickly into that maximum capacity that you have talked about, the available capacity about a $1.6 billion. And I guess what do you see as your opportunities for either organic capacity growth or organic capacity expansion from here within the timeframe that would be able to address customer growth within the next two years plus three years?

So a three-pronged question and then I’ll give a stronger answer as I can for each of the three-pronged. The organic growth for the most part is within our hands. We have talked about the fact that San Antonio we can build out another 50%, 60% with a reasonable amount of infrastructure costs and then on top of that whatever the equipment cost would be at this time candidly the 200 millimeter used tool market is not so readily available though a lot of that at this point is dealing with OEMs that are using some used content and manufacturing tools, with a little bit longer lead times. But we have within our hands the ability to trigger the facilities work in San Antonio at any time. In addition, we have a substantial amount of build out that we can do at the rose 300 millimeter factory in Japan and had just personally with our Chief Operations Officer visited there, worked with the facilities group and looked at the opportunities of growth there. So from the present capacity we could probably increase that by a factor of three. Now that again will not be necessarily inexpensive to do to the facility work won’t be prohibitive, but the tools are expensive. The beauty of organic growth is that’s you already have a certain amount of fixed cost that’s covered, so the incremental fix is very, very small against the full wafer revenue that’s coming in. So, although, you do have some increase in fixed cost will have some additional depreciation, the incremental margin off of organic growth I think is a very, very good model for us to have. And I have stated, I believe it was in Q2 in the conference call, certainly stated in Q1, that at our Q4 release we will be very clear on our organic growth roadmap and that’s what we still plan on doing is announcing to the markets in the beginning of 2018 where and how we will grow organic capabilities, which makes sense in general to do that, because the incremental margin that comes in off of it is very, very good, albeit there is some investment. Now the other side comes into deals that we’ve done, such as Maxim or such as we had done with Panasonic. There are multiple opportunities that are on the table right now that’s maybe will happen, maybe won’t happen, which is one of the reasons for not triggering the organic growth until a point that you must trigger it, because the ability to take on a factory that’s fully paid for under a model that you are getting very, very high capacity at very small money. If you look at the Maxim deal and you say, in a dollar, I guess, $12 million to $14 million for 1000 wafer capacity. You’re looking at an organic build out of somewhere about $350 million for what we are able to get there at if all in pretty much net zero investment. So the model that we have had in the past is a very, very good model for continuous growth and that’s a model that we are pursuing and we are looking at with again multiple opportunities at the moment. But difficulty with that is it’s obviously not 100% in our control does such a deal happen or not, but certainly we are active on it and that’s why we had stated that for our fourth quarter release we will give a very concrete plan about organic growth, because the opportunities that we are looking at on this inorganic capacity acquisition would take preference and priority for us over the organic until a time that we really need to trigger. Now even if we do trigger organic growth and announced that the first portion of it will be the facility build out that at sometimes makes sense, because we will fill it with equipment and once the facility is build out you have then a little bit more freedom to trigger the equipment purchase. So, hopefully, that gives you a very complete answer there, Cody. I believe that’s the complete answer.

It does. Thank you very much, Russell. And then just one for Oren, Oren, if you could maybe help us with the Panasonic royalty payment, I think this is the first time that we’ve seen this addressed in the cost of goods sold line, if you can just kind of walk through, if is this the structure of how you’re going to be paying Panasonic going forward and you had a credit in your non-controlling interest line and so, I guess, I’m just asking, is this a new baseline for kind of gross margin and royalty payments for cost of goods sold and then what are your future expectations for that non-controlling interest and any `-- just help you can give us there?

Yes. So, like stated before, so basically there is a trigger point called which is a very nice improvement in the TPSCo business, revenues and net profit. These trigger that will entailed, like mentioned a royalty the TPSCo is starting to pay to Tower and to Panasonic. The impact of that is on the one hand increase in the -- from the consolidated P&L point of view increase in the expenses. These are of course tax deductable. So enable to the consolidated financial statement a benefit in the tax and also a benefited in the non-controlling interest and all those three components result in a net benefit to the net profit which you consider that in the bottomline, I mean, very well that, for example, if we compare Q3 2017 to Q2 2017, we have almost the $10 million improvement a betterment. In the revenue line, which by model or by our 15%, 20% net profit margin incremental today resulted maybe $2 million better net profit, but it resulted $5 million better net profit. So that impact -- that positive impact is these $2 million, $3 million. And to your question, yes, you should expect it going forward the same continued benefit and in order for modeling or for focusing point of view I suggest to actually look at the nine months year-to-date P&L which shows in our reports $1.4 million income expense and $2.2 million non-controlling interest and this is a run rate that pretty much should sustain and that’s very good news to our investors. I believe that actually in context expenses are the order of maybe $0.5 million per quarter instead of previously much higher and the same for the non-controlling interest.

Well, that’s definite improvement. So thank you for that all that detail. And so just to be clear, structurally our taxes are likely to be in this kind of $0.5bmillion a quarter, $2 million-ish run rate and that non-controlling interest is going to be significantly low then going forward?

Yes. Yes.

Okay. Good. Thank you.

You bet.

The next question is from Quang Le of Credit Suisse. Please go ahead.

Hi. Thank you for taking my questions. If I could come back for -- to that TPS revenue and how you got a profit out of that, if you could explain to me, because I believe you grew revenues in TPSCo and then it resulted in higher cost of sales, right. And for some reason I believe your margins -- gross margins are lower, but you still ended up in profit. Could you explain it in more details, I am still confused of that, sorry about that?

Okay. So from a consolidated point of view our payments by TPSCo of royalty are about the COGS expenses, right, in the cost of revenue. So obviously an expense in the cost of revenue line is reducing the gross profit, reducing the operating profit, on the one hand. On the other hand this is our tax deductible expense for TPSCo in Japan. Now the amount that is an expense in the COGS line, let’s call it 1x, okay, which is the amount payable to Panasonic is actually half of the total amount TPSCo is paying, right, because TPSCo is paying let’s say, 1x to Panasonic and 1x also to Tower. So those 2x are now in expense in TPSCo P&L. Now assuming that the tax rate in Japan is 30%, so this gives a benefit to the tax line of the group of 2x time 30% which is 0.6x benefit on the tax line.

Okay.

And now you have a 2x less 0.6x, so after tax it’s 1.4x times the minority share which is 49%, you have a 0.7x benefit to the non-controlling interest, so all-in-all you have 0.7x benefit to the non-controlling, 0.6x a benefit to the tax line, so together it’s 1.3x less the 1x of the expense in TPSCo books to Panasonic, so you have a net positive impact of 0.3x. So the benefit in tax line and in non-controlling interest line is higher than the downside of the COGS and this brings what I indicated to Cody’s question $2 million to $3 million net impact this quarter.

Got it.

That’s the 0.3x -- 0.3x, yes, is the $2 million, $3 million.

Is the 0.3x is it $2 million basically.

Yes.

All right. Thank you.

Thank you.

Thank you for explanation.

The next question is from Rajvindra Gill of Needham & Company. Please go ahead.

Yes. And congrats as well on solid progress. Just a follow-up question on the capacity, the internal versus external, I know you are going through detail in Q4. But I’m kind of wondering in terms of how you think about at least qualitatively return on investment versus, say, the incremental gross margin or the incremental margin that you would get from expanding capacity organically, did you kind of balance the two in terms of how much CapEx is needed to expand capacity internally versus, say, buying capacity through a -- through one of these kind of innovative joint ventures that you’ve done in the past? How do we think about that? How does the Board think about that as well?

Yes. So basically like, Russell mentioned, for example, purchasing of the Panasonic three Fabs and Maxim San Antonio Fab, it actually cost us a very minimal amount 1000 wafer, because even if you consider Panasonic was 8 million and Maxim 40 million, so divided by 25,000 wafer demand for San Antonio or a higher of course the amount in Panasonic, it come out to be a very minimal amount of less than 1 million to 1000 also -- if you also consider what we got. But when you need to now buy new -- not new used equipment in the market from the OEMs or even from other dealers, you usually in the history if you check our financials it cost us between $3 million to $5 million the 1000 wafers and created an ally over the 12 years to 18 years. So, obviously, it’s a good -- it’s good to buy CapEx for $3 million to $5 million for 1000 and have ally of 12 months to 18 months, but it’s even better to buy it at almost zero, which is the deals that we did for the capacity expansion. Now, Russell, also now mentioned about two possibilities that to buy not that we need not the capacity tools, we also need to invest a little bit in facility which is for San Antonio expansion and for Uozu and then it will cost a little bit more than -- on of little bit but more than $3 million to $5 million per 1000 could cost like you mentioned between $5 million to $10 million. Still it is very good ally of a 18 months to 36 months. But of course the best is to buy it through an acquisition of an existing fab with our long-term take or pay commitments from the seller. So this is the first priority of what we are trying to do and like, Russell mentioned, if we see that it doesn’t happen we may consider these internal capacity expansion, which is higher cost.

Yeah. Thanks for that. And just a follow up and I know that you have more detail…

Rajvi I can sense something, Rajvi.

Yes. Go ahead, sorry. Yes. Go ahead.

So what I’ll refer to with our history, we’ve been able to in the past do bulk deals of buying tools. So we bought almost an entire factory of tools at one point, which greatly reduces the cost. Now that really is very, very conducive to organic growth. If you can buy tools that you’re going to buy 30, 40, 50 tools at one time, you can then buy them at a very, very good cost and then the organic growth makes very, very big sense. If we are buying everything through OEMs then it’s a bit higher cost, so it really depends a little bit on to availability and what the deals are. And what I stated was that, in all instances the triggering would be a two prong triggering that first we would go ahead and build out facilities, normally it would be done in a modular way and then you would upon need bring in the equipment, while you still have the ability to possibly take advantage of a big sale of a different fab. I am sorry to add that I just wanted to put a little more color there.

No. I think that’s very good. And I am just trying to put some numbers around it, I think, in the past you had mentioned for San Antonio that it would be capped at maybe $10 million per 1000 wafer, so if you were to increase capacity 20,000 wafers that would be $200 million and if say you sell that those additional 20,000 wafers at $700 a wafer you might get a $200 million revenue opportunity, but at 20% free cash flow margin it would take five years, six years to recoup the initial CapEx that we acquired?

Yeah. Everything you said, it was true and correct until the 20%, because you have to know that this will be an incremental free cash flow and the incremental -- our incremental free cash flow is the same like our incrementally EBITDA or a gross profit margin which is about 50%, 55%, maybe.

50%. Okay. So then it would cut in maybe in half.

So it’s in two year, so the $200 million additional revenue that you calculated will result in $100 million additional free cash flow also.

Free cash flow and so the -- to recoup the CapEx might be two and half years to three years.

Yes. You’re right.

Okay. All right. Very good. And that’s it for me. Thank you.

Thank you, Rajvi. Good questions.

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

Hi, Russell, Oren. Thank you for taking my questions. I apologies I am just boarding a plane now, so background noise could be high, I am going to keep my question short here and get in the queue. I guess, my first, Russell, you gave us some good detail on all power management initiatives going on. I wonder if you could help us understand the cycles here. How long the designing cycles are, looking by markets and by voltage levels and whether we are going to see an acceleration in growth in that power management segment you are doing so well right now, any detail you can provide looking to few quarters that would be great?

It really depends a bit on if the customers -- an existing customer that’s designing in something in addition or if it’s a brand new customer. Our platforms have been very modular platforms and in fact modular allows person that’s familiar with our designs to without a lot of work add certain features to the PDK that they’re very familiar with. So for an existing customer it’s basically for their first tape out, however, long to order the mass set, it’s a number of weeks to run it through the factory you are dealing with three months, so you are basically from the start of the design until they see wafers for prototypes and can start seeing the market you’re dealing probably on the five-month, six-month type of the timeframe. And that’s with an existing customer that’s familiar with you that has the market that they want to be serving. If you’re dealing with someone that doesn’t know you at all then the typical from a design win until you really have something out on the prototype you are adding anywhere from three months to six months to it in the area of power management. The power management flows for the most part not very heavy layer flows so they move through the fab fairly quickly, you’re dealing somewhere between that the 300 millimeter it’s 17 also very, very low mass count and with some of the mix signal power now up through at most 30 layer. So you’re not dealing with a very, very long flow, so the cycle time and the fabs are fairly quick. On power management it has been a very, very big growth market for us and I believe it will continue that way. We have stated at the beginning of this year that all of the business units, absolutely we’d be seeing above 25% year-over-year growth and with the RF we started by saying, we would mid single-digit which we changed to say that structural optical markets of the power management did grow at that type of rate and we haven’t given any guidance for -- spoken about ‘18. And I would invite is and we will talk about this in a little bit, have our Investor Day coming at the end of this month, we will get into some very strong specifics on all of the offerings and maybe then you’ll share a great amount of the excitement that we see in our offering.

Okay. Russell thanks for those details and since I am getting in the plane the sound is getting bad. I will jump out of line and maybe call you later. Thanks for the time.

Thank you. Bye-bye.

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

…for taking my question.

Hi, David.

First question is, you mentioned that you received an $18 million payment from Tacoma, could you give us an idea about what you think the -- how many more payments that you might receive or what the total payment might be or when you might receive further payments?

So what I stated in the, as I talked about the quarter, hasn’t changed, the next payments will be defined in the definitive agreement. How much would we expect that’s -- I don’t know I really want to put that out into the market. But you could say that we are transferring licensing certain technologies and then we’ll have a certain capacity in the factory. The $18 million is the first payment. You would think that other payment would be on that same order of and that there would be multiple.

Okay. And as far as your revenue guidance goes for the fourth quarter, I think, it was up $3 million or 1% sequentially roughly last year, I think, you had like 4% sequential growth and perhaps $12 million or $14 million worth of revenue growth. I was wondering what you were seeing in the marketplace as far as why this year’s growth in the fourth quarter a little bit less than last year?

I’m not seeing much difference in the marketplace. We have customers that are very excited and things that are moving. On any given quarter you have some certain inventory corrections. We have still very, very big demand within the -- especially within the optical markets. We are changing mix the Newport Beach to be able to have more silicon-germanium capacity. So I don’t think there’s anything specific about Q4. It is very difficult to look at a 4% versus 1% and think that there’s a difference year-over-year especially against a different base of revenue. But I don’t see anything specifically different in the atmosphere, in the environment and if anything I see tremendous excitement going forward, because of a lot of new initiatives maybe more than we had coming into this year. So I don’t see anything specifically different other than, as I stated, we are by design moving from what would be price pressure lower value products within some of our RF portfolio to our higher margin value add a mix and that’s the only difference and that’s a cognitive decision from ourselves.

Okay. And could you just give us an idea roughly what the size of your silicon-germanium business is now as far as the base goes? What would you expect the growth rate to be over the next year or so?

Sure. We have a demand right now that’s probably if I look at the -- at our forecast the demand is presently sitting at least 30% to 40% higher than our capacity. So that’s why we’re increasing that. We’ve said before that our optical business was about -- what we said -- we said we announced 30% plus minus was RF and of that circa 10% was the infrastructure, so you could -- now there is some mobile that’s silicon-germanium as well. But if you were to look at that and you would say that the 5G is sitting then somewhere about 140 just from previous numbers.

140 million annually?

That’s from previous numbers. Again, I haven’t broke it down just from what we have said in the past, we talked about 30% was RF and about 10% of it was infrastructure.

Okay. Thank you very much.

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

Certainly, so, again, thank everyone for your interest in the company. We should extremely exciting -- excited about where we are, where we are going. We have on November 29th an Investor Day at the NASDAQ market site in Times Square at New York. We really invite everybody to come there. We will have more time to share and what we’re excited about. You will have presentations there from the President of the company responsible for the BUs, from Marco Racanelli responsible specifically for the RF and HPA but he will talk about a variety of different platforms, operations, Oren will speak, obviously, I’ll be speaking there, but you also have opportunity to hear from and interact with our Chairman, Amir Elstein that is our semiconductor veteran having been an executive at Intel Corporation. So I think it will be a very good day and we will have much more time to interact, a good portion of time for Q&A and we will be able to get into details there. That’s nominally we will be able to share our excitement for our future, which we really have. The activities we are doing and I’d mentioned I believe in the PR about really certain activities that we are doing that are very, very strong disruptive technologies with leading partners. These technologies again when you work on something like that you don’t have 100% surety that it is going to pan out but the fact of having leading customers partnering with us on disruptive technologies, it does work and it will take off like crazy and if you have a standard roadmap that is customer partnered for advancement, multiple disruptive technologies, a new initiatives to increase your served market, it is a very, very exciting future forecast. So, again, in closing, thank you very, very much and look forward to see everybody that can possibly be there in New York at the NASDAQ on November 29th. Thank you.

Thank you. This concludes the TowerJazz third quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.