Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz First Quarter 2018 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, May 7, 2018. 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 first quarter of 2018. 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 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, and thank all of you for joining us today. Our first quarter of 2018 revenues were $313 million, within our guidance range. EBITDA for the quarter was $84 million, with a net profit of $26 million. Our cash from operations was $75 million, generating a free cash flow for the quarter of $35 million. Looking at the second quarter, we guide growth with midrange guidance of $335 million, representing 7% quarter-over-quarter growth and a 3% year-over-year decrease. In power management, we have high demand for discrete products with power ICs having softened in the first quarter due to inventory corrections, and being presently stable to Q1 levels with orders forecasted to pick up in the latter part of this quarter. In RF, we continue to see high, even very high demand for infrastructure being met [ph] incrementally as additional silicon germanium capacity continues to come online and be qualified in Fab 3. The mobile sector continues to see weakness. However, customer-based activities remain strong. And for high-end image sensors, we see stable demand after a strong first quarter. As about 20% of our business serves the mobile RF market, we are seeing an impact of mobile demand weakness, and have received more conservative forecast from much of our customer base. With that in mind, we see the year more conservatively and target year-over-year mid single-digit organic growth. Within 2017, we reset several business strategies and tactics to enable greater value production shipments over those offerings which were starting to become commoditized. We begin to see the benefit and for the rest of the year based upon customer forecast, we target sequential quarterly revenue growth resulting in organic business unit growth of above 25% for the fourth quarter versus the first quarter of 2018. We remain committed to…

Thank you, Russell, and welcome everyone. Thank you for joining us today. I will start by providing the P&L highlights for the first quarter of 2018 and then discuss the cash flow and balance sheet. Revenue for the first quarter of 2018 was $313 million, resulting an $84 million EBITDA, $26 million net profit, and free cash flow of $35 million, comprised of positive cash operations of $75 million and $40 million investments in fixed asset net. We reached the record net cash of $247 million and our record showed the equity of $1.07 billion growth and operating profit for the first quarter of 2018 was $66 million and $32 million as compared to $89 million and $54 million in the fourth quarter of 2017 representing a decrease of four and five percentage points respectively. It is important to know that our profit before tax is lower by $19 million as compared to fourth quarter of 2017 against the $45 million reduced revenue reflecting a net $26 million lower expensive level mainly due to our cost saving initiative. Gross and operating profit for the first quarter of 2018 was $66 million and $32 million respectively compared to $85 million and $53 million respectively in the first quarter of 2017, representing year-over-year in operating margin decrease of five percentage and six percentage point respectively. And also the first quarter of 2018 was $84 million as compared to $101 million in the first quarter of 2017. Net profit for the first quarter of 2018 was $26 million or $0.26 diluted earnings per share as compared to $46 million or $0.45 diluted earnings per share in the first quarter of 2017. I would like to discuss now other applicable tax rate. Our U.S. affiliates GaN TowerJazz Texas, which own our Newport Beach facility…

Thank you, Oren. Before we open up the call to the Q&A session, I would like now to add general and legal statements to our results with regards to statements made and to be made during this call. Please note that the first quarter of 2018 financial results have been prepared in accordance with U.S. GAAP. The financial tables in today's earnings release also include certain adjusted financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as established with the Securities and Exchange Commission. The financial tables include the full explanation of these measures and reconciliation of these non-GAAP measures through the GAAP financial measures. For the Q&A session, we are pleased to have with us today from our Newport Beach facility, Dr. Marco Racanelli, our Senior Vice President of RF/HPA and A&D business unit as well as our Newport Beach Site Manager. And now, we will open the call for Q&A. Operator?

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

Thanks for taking my question, and maybe Russell to start off with a bit of a miss this quarter, and a little bit of a light guidance, just tell me how long it takes to run a wafer three-year fabs? How much of your revenue is on turns basis, so that we can kind of get a sense of variability versus where your smartphone [indiscernible] predictability?

Probably somewhere about a third to two-fifth is an actual turn business.

And some of your comments…

See, in the case of discretes, probably more 70% or so is turn business.

Oh, is that right? Okay. And remind us how much of your business is discrete?

Power discretes sits somewhere probably close to $200 million.

Okay, very good. And some of your customers in the RF segment have been penalized, because of the regulatory or the ban against shipping into ZTE. Do you have any sense of what that may have impacted your order rates?

Certainly, those that have released and have been inferred to have an impact on the export regulations to ZTE are among our customer base. So, although we wouldn't have a 100% SKU-by-SKU identification of what percent of products go to ZTE, I imagine that it would have some impact on us. If someone is down 3%, 4% on the shipments, and mobile is 20% of our business, it would have some impact. It wouldn't be necessarily huge, but it would be an impact that would show up in the quarter possibly. But I think it would not even be a midterm impact, because it would be made up of whatever will be down for ZTE, and ZTE would hence not be able to manufacture on a phone would be taken up other people that our customers who could ship into shortly, so the market itself would level out. But I would assume that it would have some small impact in us. How much? I don't think it is huge, but again all of the customers that are mentioned as shipping into ZTE that have an impact sit among our customer base.

Sure, okay. And lastly, just Oren, if you can maybe speak to the gross margin decline this quarter. Was this all related to the revenue shortfall, or was it something else?

Yes, it's -- the reduction in revenue is quantity-based, it's not -- the average selling price stay the same. So, like I mentioned in my part before, actually from margin point of view, we are accepted [ph] by the model, which as you remember when we have incremental revenue growth, we see 50% to 55% to 60% of the incremental revenue upside reach the bottom line. Actually, this quarter was better in terms of this aspect, so the revenues were $45 million, the profit before tax under GAAP is $19 million lower. So, actually 40% of the reduction went all the way down, so slightly better than the model. And this is why I said in my part that once we come back and exceed the previous revenue levels, of course, you should expect the same model being accomplished of 50% to 60% incremental revenue growth -- from the incremental revenue growth to each of the bottom lines.

All right, very good. Thank you, guys.

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

Yes, thank you for taking my questions. Russell, just want to get a better sense of the seasonality of the business kind of a follow-up from Cody's questions. In the past, you've been able to somewhat mitigate the exposure to Apple or other smartphone vendors through share gains or through customer repayments [ph]. I think this time around the order cuts were probably too great to offset that, but there clearly is seasonality in the business, and given the 20% of smartphone, I want to get a better sense of how you are kind of looking into, or managing the seasonality? And how we should be thinking about the RF business on kind of a quarter-by-quarter basis, specifically the smartphone component of the RF business?

We see right now orders picking up within the smartphone business, and still it's not at the levels that it had been in a steady run rate, but it is picking up. And the seasonality usually dies down quickly after Q1, and that's the -- or is built up for end of year purchases for SM [ph] for Chinese New Year. So, the overall demand on smartphones right now maybe itself is little bit weak, which is little bit different than seasonality, but that will level out and even out. For us, the major focus is to continue to drive wins with customers that add value to them on high-end platforms, and that we're being very successful in. So what I mentioned in my script that although we are seeing weakness within the mobile sector presently, we really are not seeing weakness within our activities. And I think that that's a very strong point. It certainly will come back. Now, the additional activities driving into 5G become very, very important, are integral in very, very high speed data transfers, but let me go ahead and ask Marco to say a few words there as that's his specific business unit.

Yes. So short-term, it's very difficult to control the situation. As Russell pointed out, there is a little bit weakness that we are seeing. But what we can do is ensure that we have a bright longer-term future or even medium-term future. And that's what we are focused on doing with our activity. Specifically with 5G, we talked about the fact that we are involved in some RF switch technologies beyond -- that go beyond RF SOI. So, RF SOI as you know is primary growth engine for us in this market. And we now have some MEMS technologies that go beyond and will address some of the high performance 5G market going forward, so just focused on making sure that we invest in R&D and technology and improve our situation in the medium and longer term. On the other side, complementing the mobile market as we stated, the infrastructure in particular right now high speed routings within data centers has very, very high demand. And I think was -- part that we invested in a long lead machine for silicon germanium [indiscernible] position in beginning of 2017 to put us in a position to be able to take advantage of the very, very big uptick in data center requirements, but the big thing I think, Raji, is that to be diversified enough within each of our business units and as a company that should not overly leveraged by any single movement within the market. Certainly, our Q1 for seasonality it wasn't anything of a big negative impact on the company. The quarter created a very, very nice free cash flow. So, cash was abundant and allows us to be in a position to look at other opportunities of increasing our served market both organically where we might have to invest for certain capability CapEx or inorganically where we would be looking at purchasing new served market capabilities. But I think that that becomes the big thing as to be diversified within the business units as well as to have diversification from business unit to unit that any certain industry trend or the sector base does not overly impact you. And I think we are pretty good position for that.

Yes, thank you for that. And just my follow-up question, at the Analyst Day you talked about kind of these long-term revenue targets of $3.5 billion, $520 million of net income. And there were some specific discussion around expanding capacity organically through the Uozu fab and the fab in Israeli, San Antonio. Given the fact that we are kind of approaching somewhat level of that $1.6 billion probably next year in terms of full capacity, what are kind of the specific timeline that you have in mind for expanding capacity organically? And the revenue potential for that and when is that going to start to hit the model in order for us to see kind of revenue expanding beyond the current capacity that's kind of built in? Thank you.

On the organic base, there are two major drivers that we are looking at for growth organically. The one deals with 300-millimeter where we have stated that one of our growth engines for the second-half of the year is the platform qualifications that were truly organic developments in our 300-millimeter fab that includes RF products to where we have very strong customers as early adopters for our 300-millimeter RF platform, RF SOI. And it is very strong within power management, both the five-volt CMOS and the up to 16-volt BCD that we just released and very long-term within the image sensor. So, the capacity of that factory probably is sufficient as it sits right now to enable the ramp that we'll be doing in 2018, and the ramp through 2019. Depending on how things look on the forecast at the beginning of 2019, we will decide to invest to increase capacity in that factory which organically can probably grow a factor of 2.5 against the present capacity. However, some of that is infrastructure cost that is not necessarily overly expensive, but it's not cheap to build that out. So, during this period of time we are aggressively pursuing opportunities to acquire 300-millimeter capacity similar as we have done in the past with 200-millimeter capacity. Now, for the core capabilities that we have, for the silicon germanium, which we see will continue to grow datacenter needs, continue cloud computing, cloud storage continues, so for that we have the capability to continue to build out San Antonio and our first investments there have been done with both the silicon germanium capabilities and additional very high-end implantation capabilities that are needed within the silicon germanium flow. That we focus on qualifying by the fourth quarter of this year, and then we have an…

Great. And just a clarification, so you talked about organic growth kind of mid single-digit year-over-year, and so I think in the last earnings call you had talked about maybe double-digit organic growth…

That was double-digit in the last call, and that's why I said that we are a bit more conservative now from…

Okay.

-- a conservative nature of our customer's forecast.

Okay, got it. Thank you.

Thank You.

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

Hi. I have a couple of questions, so firstly, regarding your guidance; sorry, can you hear me?

Yes.

Yes.

Thank you.

Yes. So, regarding your guidance, so obviously you expect the Q4 units to be over 25% higher than Q1, and just to be clear on this, this does not refer to constant FX, it actually refers to organic excluding Panasonic and Maxim…

Correct.

Yes. And if that's the case, according to my calculation if there is no price increase, you could end up -- FY'18 says lower than FY'17, am I correct to say that if there is obviously no price increase?

We have not talked about what the Q3 revenue would be. We said it's continuous growth. And I also stated greater than 25% organic growth. So I didn't give a specific number. Greater than 25% sets the bottom line number for the fourth quarter, but it doubles at the top-line, and also doesn't talk about Q3.

So you would say that your full-year '18 revenues will still be higher than '17 then?

Our target is to be accompanied always as growth in the full picture as well as organically. Organically is the more important part for us, because that's really the growth engines of the company, and -- but yes, I would say that we are still targeting growth 2018 over 2017.

And that is the single-digit growth that we talk about before, is the correct?

Yes, sir.

And maybe coming back to that, because you say over 25%, what gives you the confidence that the orders will be that high, is it based on confident unit orders of customers already or is it more of your estimate?

We have a certain portion of business that's really on a take or pay contract, but it's not a huge portion of the business. The bulk of what I refer to and I stated throughout the call was it's based upon customer forecast. Now, the customers for the most parts have pulled back their forecast from how we started the year. And with the pull back forecast and what we know of our business in our judgment on the customer's forecast, that's why we have the confidence of the greater than the 25%. But it's really based on what the customers are telling us and our judgment of the reliability of the customer, and their own markets and their position in their own markets.

I see. And in Q1, in your statement you said that obviously you are moving to higher value products offerings, if you were to quantify in terms of percentage-wise versus pricing in Q1, were would you estimate your aimed pricing to be?

So, the big change of mix that we were talking about really dealt with doing lower-end RF SOI versus high-end silicon germanium in Fab 3 in Newport Beach. Now, one could say, why would you not take on lower-end -- are meeting lower margin products, when you have fabs that aren't 100% full? The reason is because you don't necessarily have total discretion of what fab to run it in. You have certain flow that are qualified and certain fabs, and Newport Beach was the initial flagship for all of the RF SOI products, also is the remaining flagship for silicon germanium is where Dr. Racanelli is located, it's where the major portion of the BU activities takes place, although there are existing RF groups reporting to Dr. Racanelli, both in Japan as well as in Migdal Haemek. But the big change will be from lower margin RF SOI and some power amplifier controllers to that of high-end silicon germanium. Now in Q1, we wouldn't have seen that yet, as was indicated by the utilization levels of Q4 from the Newport Beach factory as were installing and moving production capability to the silicon germanium, the utilization in Q4 I think was about 75%. Presently it's gone up in Q1 on the average and then in Q2, Q3, Q4, we will see the higher percentages of utilization as well as the mix having changed to the silicon germanium. But the silicon germanium is a substantially higher margin product than is the RF SOI. The thing that becomes sometimes maybe slightly misleading is that the RF SOI has a very extensive substrate. So the selling price of the RF SOI in and of itself has a very good price and it's almost half as many layers as silicon germanium. So the silicon germanium one-on-one maybe doesn't look like it's a very difference than the RF SOI, but on the margin side, it's a very big difference.

Okay. I see. And maybe my last question is regarding your effective tax rate going forward. Obviously you spoke a lot about your tax benefits in U.S. and also tax loss carried forward in Israel. So I were to estimate for modeling purposes, what is your tax rate going forward, what would that be?

Well, it depends in which region you believe that we will see…

Overall.

-- growth. It depends on the mix. Whatever ramp is done, for example, in the Uzou factory the 12-inch in Japan, the profits will be taxable 30%. With the U.S., it's 21. Overall, I think you can do a model and reach no more than 2 million -- 2.5 million cost. Third quarter if you are talking about full utilized $1.6 billion model, and since we are not there you can do the linear from current point to the -- like 1 million this quarter.

I see.

So really very small amount.

Thank you.

Thank you.

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

Hi, guys. Thanks for taking my questions as well. First couple of question is related to 300-millimeter. One of the prior questions, Russell you had talked about ability to expand your capacity I think 2.5 times in the current levels, can you remind us what that current level is, either quantify or describe that please?

It's just somewhere depending on the actual mix of wafers of 8,000 to 9,000 300-millimeter wafers a month.

Okay, any way that you can translate it in dollars for us, or kind of at the midpoint of those -- of the typical pricing?

Yes.

Okay…

Yes, somewhere probably about 180 million to 220 million.

Okay, perfect. Thank you for that. Second question also on 300-millimeter topic, Russell, any kind of milestones that we can look for as you ramp up new products in that Uzou fab over the next -- you know, over the course of this year? I'm not sure if you have any specific areas to ask about, but anything you can offer to us as we can judge you on your performance over the next couple of quarters?

As far as customer releases or as far as…

Customer releases, products, et cetera, yes.

I believe that we will have within the RF sector a customer release about something that we are doing with our platform there, but I think probably the strongest way to measure us is just on the continuous quarter-over-quarter growth and what we will be updating on the revenue and the adoption of the power management, the RF SOI and to some extent image sensors. For the most part, lead customers really don't like to give out what they are doing, and somebody that's working on it in that platform is not necessarily that straightforward to do a joint press release. So that's a little bit hard for me to commit to that. Although I think there is one customer that has desires to press release with us, some of them are doing 300-millimeter, but for the most part I think it's just to track the revenue and listen to the calls, less the numbers.

Okay. Next question from me, as we go from the first quarter revenue levels here up to the fourth quarter, how would you rank the growth drivers here, and I think more in dollar terms and a percentage terms, you have talked pretty positively about silicon germanium, I think potentially at least some sequential growth in your ethanol to the streets, I know there are some contribution from 300-millimeter products I think that's spread across multiple product lines. Can you help us understand what you see as the relative rank of those drivers?

Dollar-based, I think number one is silicon germanium. And then kind of tied in the second position will be power management, discrete, and RF. I'm talking RF other than silicon germanium.

Okay. Okay, fair enough. And then my last question before I jump out of the line here, you talked about the fourth quarter of '18 growing organically in 25% from the first quarter. Can you help us understand what that sounds like on a year-on-year basis, I mean to the fourth quarter '17?

It's certainly higher. And I'd say greater than 25%, so without giving a specific guidance on the fourth quarter, which I don't want to do, I couldn't give you the exact percent, but it's arithmetically patients straightforward to calculate what 25% would be. It's been released by us what the quarterly revenue is from Panasonic. There're many people speculating what the quarterly revenue is from Maxim. So if you take the 313, and you subtract those two, then whatever you are left with, you grow by 25%, and that would be the minimum of the fourth quarter.

Okay. I guess also my question was not from the fourth quarter of '18 to the first of '18, but the fourth quarter of '18 to the fourth quarter of '17. That's what I was asking.

No, that's what I'm talking about. So there is growth from the fourth quarter just on that calculation. The fourth quarter of '18 will be higher than the fourth quarter of '17. But again I would say greater than 25%, and I really don't want to be in a position right now to give guidance for the fourth quarter. But if you look at just the 25%, against the math that I just gave, the arithmetic I just gave, you would see that the fourth quarter of '18 is higher revenue than the fourth quarter of '17.

Okay, fair enough. That's all the questions from me, guys. Thank you very much.

Thank you, Richard.

The next question is from George Brennan of Raymond James. Please go ahead.

Good morning and good afternoon. Thanks for taking my question.

You are very welcome.

I'm looking for maybe some visibility quick update on the ongoing joint venture that we announced last year with respect to the China semiconductor manufacturing facility there.

I did state that nothing material happened in the quarter to be announcing. For us, the major milestones with China deal with monetary receipts. And that really triggers milestones for us. Has progress been made? Yes, it has. We've had very good discussions with several parties. We've had good interactions with multiple people within the government and I think that there is a lot of excitement to move forward, but the next milestone has not been hit yet.

Okay. And just to remind us of the terms, I believe that you provide the consulting services day, and we will receive capacity if and when the facility is being build, correct?

There is some consulting that's done, but it's mainly not consulting. We are basically transferring certain flows, certain technical capabilities, training on those technical capabilities. So I suppose that you could say that that's consulting. And then correct what -- we get paid for certain milestone, but we are discounting the transfers, the value of the transfers against having capacity at some cost-plus model. And the capacity that should be given to us is 50% of the capacity in the factory.

Okay. And the next -- the milestone payments, are they coming annually or quarterly? How that was worked out?

Well, so far this year it didn't come, but it's really based upon hitting milestones. So there is a payment and a milestone on a technical transfer, upon a payment technical activities are done. And it's really -- it's just based upon the technical activity that we do. Now, there is other payments that are for certain management fees et cetera, et cetera, that's on an annual basis. But for the establishment of the fab, it's based on technical milestones.

Okay. And you are still working with several different parties there?

For the factor in Nanjing, we are working with Tacoma and the Nanjing Development Zone and the city. We are in discussions with other opportunities at different levels of discussions, but no money has changed TAMS with any of these other opportunities in China. There has been money that has changed TAMS meeting come from Nanjing to TowerJazz with regard to the Tacoma facility and the Tacoma activity in Nanjing.

Okay, great. Thank you very much.

You are very welcome. Thank you, good questions.

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

Yes. Firstly, as always, our great thanks for your time, for your interest, for your support, and confidence in the company. Against the first quarter, we are very, very excited and optimistic of a continued organic growth. Organically, we have expanded the served markets of each of our business groups with very strong indication of our share growth within each of these new served markets. And of course, we remain focused to protect and grow the share of the high value offerings within our present served markets. We look forward to update you on our progress on both of these fronts throughout this year and over the coming years. Over the next two months, we will be presenting at the following conferences, and look forward to seeing you at any or at all of them, on May 9, the Jefferies 2018 Technology Conference at Montage, Beverley Hills, California; on May 13, Oppenheimer 19th Annual Israeli Conference in Tel Aviv; on May 30, 15th Annual Craig-Hallum Institutional Investor Conference in Minneapolis; on June 4th, Second Annual Needham Automotive Tech Day in New York; on June 5th, Baird's 2018 Global Consumer Technology and Services Conference in New York; also on June 5th, Jefferies Tech Trek 2018 in Herzliya, Israeli; on June 12th, NASDAQ 38th Investor Conference in London. Most of these are one-on-ones, and all of them are presentations. Thank you.

Thank you. This concludes the TowerJazz first quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.