Tower Semiconductor Ltd. (TSEM) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz Fourth Quarter and Full Year 2018 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 19, 2019. 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 fourth quarter and full year 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 website. TowerJazz assumes no obligation to update any such forward-looking statement. Please note that the fourth quarter and the full year of 2018 financial results has been prepared in accordance with U.S. GAAP. The financial tables and data in today's earnings release and in this earnings call also include certain adjusted financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirement as established with the Securities and Exchange Commission. The financial tables include a full explanation of these measures and the reconciliations of these non-GAAP measures to the GAAP financial measures. Now, I'd like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.

Thank you, Noit. Welcome to our conference call discussing our fourth quarter and full year 2018 results. Firstly, I thank you for your continued interest, trust and support in our business. Our fourth quarter results were within the guidance at $334 million, a 3% increase over the prior quarter. For 2018, we reported revenues of $1.3 billion, generating a net profit of $136 million, with continued strong positive free cash flow for this year of $143 million. This profit generation continue to strengthen our balance sheet, contributing to record shareholders' equity of $1.24 billion. We're in the strongest financial situation TowerJazz has ever been in opening new doors. We look forward to leveraging our strength and potential, Oren will provide a detailed analysis of our financial shortly. For the first quarter of 2019, our guidance is $310 million, with an upward or downward range of 5%. Although, current macroeconomic uncertainties are driving tighter inventory management, the core behind our business activities remains strong. We see increased Tier 1 traction across our various business units, many of which are partnering with us on diversified and differentiated technological platforms. Beginning with our RF Group, we'll now go and discuss business performance and strategies. Our total RF business including wireless and mobile communication and infrastructure represented 27% of 2018 corporate revenues, or $356 million down from approximately $400 million in 2017, representing a decrease in mobile platforms. Infrastructure alone, served by our silicon germanium technologies represented 11% of our corporate revenues, up from approximately 8% in the previous year. Silicon germanium revenues in total were approximately $160 million, including automotive radar and mobile representing a 30% year-over-year growth and a 50% increase Q4, 2018 over Q4, 2017. SiGe continues to be a source for future growth driven by datacenter, 5G infrastructure, automotive radar, mobile handset and IoT markets. We are qualifying San Antonio additional 5G capacity and have as well purchased additional tools for Newport Beach presently in early installation stages, which should increase the SiGe revenue capability by approximately 40% in Q4, 2019 against the $50 million achieved in Q4, 2017 or $200 million annualized run rate achieved in that quarter. In addition, to our SiGe offering, we began production shipments of our silicon photonics platform, which add content that we previously didn't observe in the optical fiber transceiver market. Our platform integrates optical detectors, waveguide and modulators on a single die eliminating the need for costly assembly of discrete components. While this is presently small in production volume, we believe that the size and cost advantage of silicon photonics over discrete will lead it to become the central technology of the future. Looking ahead, we aim integrate lasers and other features that will help increase the silicon germanium market share versus existing discrete solutions. Wireless represented 16% of our corporate revenues down from 21% in 2017. This 2018 decrease was in accordance with our announcement of moving away from lower performance SOI platforms in order to ramp higher margin silicon germanium in Newport Beach. 2019 mobile revenues should be predominantly flat to 2018. However with a big move to higher margin advance platforms sub-130 femtosecond platforms are forecasted to double from about 30% to 60% of the RFSOI mix, including the recent and continuing volume ramp of our most advanced 90 femtosecond RFSOI 300-millimeter platforms supporting all standards including the most stringent 5G standards. Our present wins with higher performance, high margin platforms should enable growth trajectory in 2020 and beyond as the 5G families gain foothold in the market. Moving to power management in 2018 this business containing both power ICs and discretes, represented about 34% of our corporate revenues or $438 million as compared to 30% in 2017 or $420 million. In 2018 we released two new power management IC platforms, which are strong differentiators. In May, we announced our 300 millimeter 65 nanometer BCD platform, which support power management ICs upto 16 volt operation. This platform as previously stated is very well received by leading market players. We are well positioned as a technology leader in this multi-billion dollar market of upto 16 volt operation power management targeting a very wide product and market range. This includes mobile PMICs and load switches, battery management ICs, DC to DC converters with end applications, spanning automotive, mobile, consumer and computing. A second technology differentiator is our reserve technology, supporting the increasing demand for higher voltage, which is used for 48 volt architectures such as automotive and data centers. We are engaged with large IDMs planning to use our reserve technology for industrial and automotive applications. We have continued to grow our customer partnerships within our captive discrete businesses, with 2018 increases in capacity and capability CapEx fully aligned to our customers’ present capacity needs and next generation roadmaps. These developments include it’s state of the art P column superjunction for upto 800 volts and very high density of charge balance split K [ph] technology for the lowest RDS(on) and intense switching performances. Moving on to the sensors business, which includes both visual CMOS image sensors and non-visual sensors. In 2018, these revenues represented 18% of corporate revenue or approximately $230 million compared with 15% in 2017 or approximately $210 million, with majority of revenues related to industrial, medical, security and high end professional markets. We have made significant investments over the past few years in developing unique and outstanding platforms. In 2019, we will begin to harvest from the previous year’s efforts as many of these are customers excellent products ramp into mass production. We provide the most advanced global shutter pixel platform, posting a 2.5 micron pixel size, built on a 65 nanometer platform. These sensors are geared toward both industrial and commercial markets, covering applications such as machine vision, facial recognition, 3D mapping and augmented and virtual reality. We expect our global shutter platform to drive increased sales volume in 2019 and beyond and with the strong related market growth we see this as a key revenue driver from our industrial sensor customers. In the medical X-ray market, we are continually gaining momentum working with several market leaders on large panel dental and medical CMOS detectors. These are based on our one-die per wafer sensor technology using our well established higher margins stitching with best in class high dynamic range pixels providing our customers with extreme value creation and high yield both in 200 millimeter and 300 millimeter way for technology. We presently have strong business with market leadership in this segment and expect substantial growth in 2019 on 200 millimeter and with 300 millimeter single die per wafer initial qualifications that will drive incremental growth over the next multiple years. In terms of upcoming growth drivers, there is now a major trend in the market, terms time of flight and structured light 3D sensing technologies. Markets driven by these technologies are generally mobile mainly facial recognition, but also front looking 3D mapping, commercial and augmented reality and virtual reality. We're well-positioned with our unique global shutter pixel technology to address the structured light market and have developed single photon avalanche diode for direct time of flight. In particular we are progressing well on two very exciting opportunities in the augmented and virtual reality markets one for 3D time of flight based sensors and one for silicon based screens for VR head mount displays. For mid to long-term accretive market growth, we have completed development and are releasing highly differentiated and distinctive technologies for non-visual sensors for temperature, ultraviolet, magnetic, gas and radiation sensing. In the neural network field, we have made some substantial progress in partnership with AI Storm, demonstrating the unique building block for full onboard analog AI that can be embedded into our sensors to make smarter sensors. The remaining 21% of corporate revenue approximately $275 million is comprised mainly of mixed signal products serving aerospace and defense, industrial, IoT, computing and consumer. We gave a corporate revenue breakdown according to our main technology platforms, we do not have total granularity on end market applications. However within our ability 2018 main end market applications were about $135 million for infrastructure revenue, $135 million for automotive with a very strong strategic pipeline, with multiple opportunities including Tier 1 automotive players, wireless $220 million, industrial $80 million, aerospace and defense $50 million, security $70 million, high end photography $50 million, medical $40 million, consumer including computing $80 million. Additional power management device revenues were $325 million which we don't have exact end market use, but would serve multiple above mentioned segments such as automotive, industrial, IoT, wireless and consumer and as well a grouping of mixed signal devices of about $120 million where we don't have exact end market application, but which serve again consumer automotive, wireless and a variety of IoT applications. Looking at utilizations, we ended the fourth quarter of 2018 with the following utilization rates. In Migdal Haemek, Israel, Fab 1 our 6-inch factory was again above 90% utilization. Fab 2 our 8-inch factory was about 76% compared to 80% in the previous quarter. At Newport Beach, California Fab 3 another 8-inch factory we were at about 90% utilization versus 85% in the prior quarter and due to the added capacity, this is the highest wafer loading in that Fab’s history. Our San Antonio factory, Fab 9 was about 55% utilization, a 5 point reduction from previous quarter mainly due to some mobile related foundry weakness. Blended TPSCo factories had an average of about 50% utilization, but very notably we were 12 points up in Uozu [ph] foundry, 300 millimeter utilization. To update right now on our TPSCo partnership and long-term supply agreement, we continue to progress with our TPSCo partnership, including a targeted extension for three years for the next phase of TPSCo beginning the second quarter of 2019. We expect similar loading as present run rate, with some changes to the pricing tables, resulting in some revenue reduction from our partner. This is expected to be mitigated by core business growth mainly 300 millimeter, which is presently ramping, strong efficiencies and TPSCo specific cost reduction activities already in place, all of which should enable margins growth. Looking at China and specifically the Nanjing project, as previously stated, the government has taken major ownership on the project. We recently received a $10 million milestone of payment for services within the project scope. We are now in further discussions to move the project forward. In summary, despite a slightly weaker 2018 from a full financial perspective, our business is in the strongest position it has ever been. From a customer engagement perspective, our business is in the strongest position it has ever been. I am truly excited to continue into fuller potential in 2019, 2020 and well beyond. With that, I would like to turn the call over to our CFO, or Oren Shirazi. Oren?

Thank you, Russell and welcome everyone. Thank you for joining us today. I will start by providing the P&L highlights for the full year of 2018 and for the fourth quarter and then discuss our balance sheet. During 2018, the company generated revenues of $1.3 billion EBITDA of $362 million, net profit of $136 million, basic earnings per share of $1.35, cash from operating activities of $313 million and free cash flow of $143 million. Gross and operating profit for 2018 were $293 million and $155 million respectively as compared to $354 million and $220 million respectively in 2017. EBITDA for 2018 was $362 million, reflecting 28% EBITDA margins, and compared to $425 million in 2017. Net profit for the full year of 2018 was $136 million or $1.35 basic earnings per share and $1.32 diluted earnings per share, as compared to $298 million, $3.08 basic earnings per share and $2.90 diluted earnings per share in 2017 whereby net profit included $95 million for specific tax benefits one-time item. These one-time items comprised of $82 million benefit from an income tax benefit resulting from an Israeli deferred tax asset realization following a valuation allowance release. And $13 million due to an income tax benefit related to the U.S. 2017 tax reform. For the fourth quarter of 2018, revenue as well as $334 million, $11 million higher as compared to $323 million in the third quarter of 2018. Gross and operating profit for the fourth quarter of 2018 was $76 million and $40 million respectively, sequentially higher as compared to $73 million and $39 million respectively in the prior quarter. EBITDA for the fourth quarter of 2018 was $93 million as compared to $89 million in the third quarter. Net profit for the fourth quarter was $38 million or $0.37 basic earnings per share and $0.36 diluted earnings per share. This is compared to a net profit of $34 million or $0.34 per share and $0.33 diluted earnings per share in the third quarter of 2018. Analyzing the margins we see $4.4 million incremental sequential net profit or 40% incremental sequential net profit margin resulting from the $11 million higher revenue. The incremental growth for the fourth quarter of 2018 gross margins was $3 million as compared to those $4.4 million. Due to the TPSCo royalty structure that we previously described, which replaced the TPSCo Tower Panasonic dividend structure, and according to which asset royalties are recorded as expenses that create a benefit to the net profit. As reflected in the $4.4 million or 40% sequential increase in the net profit and its margins during the fourth quarter. Compared to the fourth quarter of 2017 revenues were $358 million, resulting in $89 million gross profit, $54 million operating profit and $147 million net profit, net profit fourth quarter of 2017 included as I said before $95 million in those two specific tax benefit items. During 2018, we reduced the company's debt namely bank loans and bonds by $98 million, resulting in $7 million of financing expense saving per annum. The debt reduction included the following, a full conversion of $58 million of short-term notes to shares, of which $39 million were converted during the fourth quarter of 2018. In July 2018, we repaid early a $40 million loan initially borrowed in 2016 from JA Mitsui in U.S. in relation to the acquisition of the San Antonio fab and its ramp. In June 2018, TPSCo restructured its outstanding loans originally due 2018, 2019 and 2020, which carried variable interest rates varying between TIBOR plus 1.65% to TIBOR plus 2%. By an early repayment we did of these loans and obtaining a new approximately $100 million loan from three leading Japanese banks at better terms with longer duration. The new loans final maturity date is June 2025, including three years of grace period followed by nine equal installments from June 2021 to June 2025 and carries a fixed interest rate of 1.95% per annum. In April 2018, the company and our outstanding bond series received an upgrade from S&P rating agency from ilA+ stable to ilAA- stable. I will now provide the cash flow highlights for the full year 2018 and for the fourth quarter and our balance sheet analysis at the end of September 2018. Cash flow report components during the fiscal year 2018 were as follows. The company generated $313 million of cash from operating activities, invested $170 million in fixed assets, invested $158 million in marketable securities, short-term deposits and others, and repaid debt in the amount of $49 million net, which included mainly the early repayment of $40 million loan borrowed in 2016 in relation to the acquisition of San Antonio fab. As of year-end 2018, our total cash, short-term deposit and marketable securities exceeded our total debt as presented in our balance sheet by the amount of $374 million, which is $149 million higher as compared to $225 million as of December 31, 2017. For the fourth quarter of 2018, the main cash activities were cash from operating activities of $91 million, $49 million invested in fixed assets, resulting in $43 million free cash flow and $120 million invested in short-term deposits. Net current assets as presented in the balance sheet, namely current assets less current liabilities increased to a record of $784 million as of the end of December 2018, resulting in a record current ratio of 4.8x as compared to $571 million net current assets and at current ratio of 2.9x as of December 31, 2017. Shareholders’ equity at 2018 year-end reached a record of $1.24 billion or 69% of the balance sheet as compared to $1.03 billion or 62% of the total balance sheet at year-end 2017. I would like now to elaborate on two specific lines in our P&L report, the non-controlling interest and the tax expense. One, non-controlling interest line, while TPSCo’s operations are profitable, the non-controlling interest line in the P&L for 2018 is a positive $2.2 million increase in net profit, which is mainly due to TPSCo’s royalty structure. Under this royalty structure that we introduced during the second half of 2017, the royalties from TPSCo to Panasonic and to TowerJazz are calculated as a percentage of TPSCo’s profitability as calculated using TPSCo’s Japanese GAAP P&L. The Japanese GAAP net profit differs from the U.S. GAAP net profit. As far as TPSCo’s P&L is concerned mainly in regard to the amount of fixed asset depreciation, which is higher under U.S. GAAP when compared to Japanese GAAP. As a result of devaluation of those assets in accordance with the purchase price allocations used for U.S. GAAP at the time TPSCo was acquired. The lower depreciation expense under Japanese GAAP results in higher profitability at TPSCo under Japanese GAAP. And in royalties payment to Panasonic and Tower as compared to U.S. GAAP under which the non-controlling interest line is calculated from the lower profits. As a reminder, these royalty structure results in a higher cost in the P&L, lower profit before tax, lower tax expense, lower non-controlling interest and higher consolidated net profit and higher EPS. This royalty structure replaced the previously established dividend structure, under which TPSCo paid to TowerJazz and to Panasonic dividends in 2015, 2016 and 2017 from its net profit including the $4.4 million dividend paid from TPS to Panasonic in 2017, which is quoted in the cash flow statement just published. The second item in the P&L is the tax line in the P&L. I would like to describe our applicable and effective tax rate. Our U.S. affiliates Jazz and TowerJazz Texas, which own our Newport Beach fab and San Antonio fab, respectively are taxed in 2018 at 21% tax rate, following the U.S. Tax Reform as compared to 35% prior to the U.S. Tax Reform. TPSCo’s profit from its Japan operations are subject to an approximate 32% tax rate. Our profits in Israel from Fab 1 and Fab 2 operations, while subject to a 7.5% statutory tax rate are not expected to result in any tax payment in Israel for the foreseeable future. Since we have more than $1 billion in historical NOLs, still to be utilized which can be carried forward indefinitely. Considering these and since we have certain tax exemptions, discounts and credits, our all-in worldwide weighted average effective tax rate was 4% for 2018. In 2017 the tax income included $90.5 million [ph] income tax benefit as discussed earlier. In 2017 prior to the fourth quarter the all-in effective tax rate were also lower than in 2018, mainly because we commence including the 7.5% Israeli statutory non-cash tax for the Israeli operations after the fourth quarter of 2017 due to the realization of the tax deferred asset recorded in 2017. I would like to describe now our currency hedging activities in relation to the euro currency there is no update we have almost zero business in euros, hence no exposure to euro. In relation to the Japanese yen, since all Panasonic revenues are denominated in yen and the vast majority of the TPSCo’s cost is in yen, we have a natural hedge of most of our Japanese business and operations excluding the portion in which the yen denominated variable cost related to the third party foundry business exceed the yen net gains from the Panasonic business. In order to mitigate a large portion of these net yen exposure, we executed zero cost cylinder hedging transactions these zero cost cylinder transaction hedge all currency fluctuation to be contained in a narrow range as compared to the spot exchange rate. Hence, while the yen rate against the dollar may fluctuate, our margins are almost not impacted. In addition, in relation to the Japanese yen impact on the balance sheet, we have a natural hedge on cash and loans balances since the loans and the cash are both yen denominated. This helps to protect us from potential impact of yen fluctuation. And lastly in relation to fluctuations in the Israeli shekel currency, we have no revenues in this currency and while less than 10% of our cost are denominated in the Israeli currency, we also hedge a large portion of this currency risk using zero cost cylinder transactions. And the last note on our share count as of December 31, 2018, we had 105 million ordinary shares following the full conversion of the notes, which I described earlier, the fully diluted share count remained unchanged at 108 million similar to that of previous quarter’s and included 3 million maximum possible shares to be issued comprised mainly from ESOP related options and RSUs. That ends my summary. And now I wish to turn the call to the operator for the Q&A session. Operator?

Thank you. Ladies and gentlemen at this time we'll begin the question-and-answer session. [Operator Instructions] The first question is from Mark Lipacis of Jeffries. Please go ahead.

Hi, thanks for taking my question. On the -- so I guess I'm trying to understand the margin or the profitability profile as we go through the year, as Panasonic -- I understand the pricing is lower and so should we expect the margins to decline in Q2 and then start to increase as we go through the year is that a reasonable expectation?

Hi, Mark. Yes, thank you for the question. So indeed we expect from the Panasonic part of the revenue to have a decreased in -- I mean same quantities, but a decrease level of revenue and maybe margins. But this should be mitigated from the second quarter of 2019 by what we also stated in the press release, which is the ramp that we are seeing and also the organic growth of the revenue of the foundry in other areas. And specifically from what we said in the press release specific TPSCo cost reduction plan in Japan that we are doing to reduce the cost there in full collaboration with our partner.

So does that mitigation all happen in Q2 or is that something that takes through the year to happen and offset the lower margin that you would get with the lower pricing from Panasonic?

We target to fully mitigate it from Q2.

Okay, understand. All right, that’s helpful. And then is the -- and then the programs that you have ramping in Uozu right now is encouraging to see the utilization rates go up already. Can you kind of characterize the programs that are driving that increased utilization? And it sounds like you feel comfortable that that utilization has a good chance to continue to go up and I’m hoping that you can characterize are there kind of a handful of programs that give you particular conviction in that increased utilization as we go through the year? Thank you.

Yes, we’re quite confident in continued increased utilization as well we stated I believe at the last release call that come the third quarter of 2019 we would be giving further input about additional 300 millimeter capacity growth because we believe that we will need it. What are the specific areas of big growth right now, one very big growth is in the 300 millimeter RFSOI that family of 90 femtosecond switches combinations that you have with switch LNA, et cetera. So that’s a very strong driver at the moment. The other big driver that will be coming on is the 65 nanometer VCD and as I stated in the script the variety of the advanced image sensor activities that we are doing have a very, very big portion within the 300 millimeter factory. So we have a combination of all three of those activities, adding to the demand requirements and the capacity ramp throughout 2019 and throughout 2020.

Very helpful, thank you.

Very welcome.

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

Hi, can you hear me?

Very well.

Yes. So my first question will be on Panasonic, if you could provide more color on that obviously you’re just saying that the units or loading will be similar or the same and pricing will be affected. Could you provide more color in terms of -- could you quantify how pricing will be affected? And also if you could provide what was the percentage of revenues in 2018 from Panasonic and top one, two, and three customers of yours?

I'm sorry the question was what please?

So the second question was, what was the percentage of revenues in 2018 that Panasonic contributed as and your top three players, three customers?

Okay. I'll try to drive the second question right now. The first question, again I don't believe really that we can at this point or should give more color to the specific reduction that will be coming out of the TPSCo from the side of our partner. We did state that there will be a revenue reduction, which makes sense. The whole driver of the initial contract was to give runway to allow a third-party business to be built. And then a second phase of contract where the cost of the facilities would be better shared between both us and the partner. So that will be happening. The volumes as we stated will for any reasonable estimate stay about the same, but pricings will decrease. And that was known and believe from day one would be occurring. I think the very positive statement about it is what Oren said, is that, we target to mitigate the drop down to the bottom line within the first quarter of the decrease in the revenue by both activities that we're doing at TPSCo as well as third-party business growth elsewhere. But the specific contributions of the drop of revenue from the partner should be mitigated to some extent just by the cost reduction activities that have already occurred within the factory that will be realized on the financial base we shown as of the second quarter. More color than that again the contract isn't completed. What we said in the PR is that we are in agreement on multiple phases of the contract, but it still has to be signed and I really shouldn't say more than that. As to the second question, Oren?

Yes. So on the breakdown of the revenue by customers, obviously customers wouldn't be so happy if we give the exact amount per customer. But in terms of magnitude what you asked definitely we can say that of course Panasonic is the biggest customer and we previously said that it was between 360 to 420 and we didn't restate, so it's in this range. So it's obviously about 30%. And then we have three customers, which you would also see in the note with the financial statement after we’ll file them. So we have additional three customers that accounted for between 7% to 9% each one of them of the revenue. And then, we have customers of 4%, 4%, 3%, 3%, 2%. So very nicely, I mean there is a list of more than 300 customers.

I see. And if I can ask one more question about your growth…

Just -- I’ll add just one piece of more color to your first question, that I think was answered by Oren previously. But whatever revenue reduction would be noted in the second quarter we target to mitigate margin impacts of that revenue reduction. But we also in a very, very short-term expect to retrieve whatever that revenue reduction was through the third-party business. Okay, so I think that was stated by Oren, but I wanted to reiterate that.

Okay. And I wanted to come back to your gross margin in Q4. So obviously you're saying it was impacted by TPSCo royalty structure and this kind of distorted a bit your model that 50% of your incremental revenue would be felt in your gross profit. And now I see it's only 36% if I'm not mistaken. Going forward has this model change now, or are you still going to keep your 50% incremental revenue that will flow to your profit lines?

Yes, when we speak always about incremental model, incremental margins to the gross and operating indeed we are saying averagely 50%, 55% in average unless it is a 5G or it is an Uozu product. And this is excluding the royalties impact -- royalties you are correct, that if now there is royalties payment if TPSCo is hitting whatever threshold of a very nice profitability there’s royalties, which reduce this margin but we get full compensation and even more than that on the net profit line and this is the way you'll see even in Q4 that to justifiably are saying that it's below $4 million in the gross profit, but you'll see the $4.4 million improvements in net profit. So it's 40% of their net profit, which is way above the model. Because even the model should be like after minority and after minority share count -- not minority share. After non-controlling interest and after tax, it should be less than 30% to the net profit and we achieved 40%, so it's very nice. Going forward, yes, I mean, the royalties structure exist. But of course, payment under it whether they will be higher or lower than this year depends on the profitability level on the future profitability level of TPSCo. If we assume, it will be better, the royalties will be a bit higher. But the big impact that you see now is -- it’s not so big, it's $1 million it's because -- it compared to previous structure with no royalties. But in the future, it will be existing royalties, against existing royalties. So shouldn't be dramatic impact on the incremental margin.

I see. Thank you.

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

Hey, Raj.

Hi, thank you. And thanks again on this excellent colors, it's very, very helpful. So just to put it in another way with respect to Panasonic, because I think that’s some incremental information that's positive. So basically you will be able to offset the revenue impact from Panasonic through third-party and organic. And you will also potentially offset the cost impact from cost reductions in that factory and potential mix shift. But then at the same time, you are going to have a potential maybe positive on the net profit line, because you have a lower minority interest expense and lower tax rate. So just want to clarify that there's net-net this could be actually -- the impact to Panasonic could actually be positive on the actual bottom line without giving specific numbers related to Panasonic.

Well, it can be and we -- like I said we target that it will be fully mitigated and fully offset, but we didn't commit to that because obviously depends on the future revenue of the third-party which we see that it should grow. And on the success of the cost reduction, which there is no reason why it will not be successful in full force. But to put it into action and to succeed to realize all the cost benefit, from Q2 is a little bit nearby so we didn't commit that it will be fully mitigate. But of course what we put in place as we said in the PR, in the press release is enabling us to achieve it and we are targeting to achieve it.

Okay, that's helpful. And Russell, you had mentioned if I recall correctly that you expect the mobile revenue to be flat year-over-year in 2019 after kind of declining last year. Is that the case, your expectation?

Yes.

Okay. So the fact that you've -- the move away from the low performance SOI platform to the ramp of a higher SiGe that's been complete. So the assumption of flat revenue off that that lower base is that just kind of status quo in terms of your mix of RF product going forward? You have the right mix of products that you want in the smartphone segment. And it's going to be maybe based on units, or is there any potential market share gain or any kind of -- can maybe elaborate any assumption on the mobile revenue flat kind of comment?

Of course. So the fact that the 2019 is doubling in the mix of the sub -- what was it sub-130 asset femtosecond, so that's going from a 30% to 60% on the RFSOI mix and that's really for design wins that have occurred. I stated that we will see or should see again a growth trajectory in 2020 and going forward and those are for wins that we've had and are having. But those are for platforms that will not be coming out on new phones until the 2020 release or maybe we’ll start seeding the market at the end of Q4 this year. But it will be a 2020 growth and that’s just the latency of design wins within the mobile market. So the flatness right now year-over-year is really that the additional advanced platforms that were qualified last year do not come into the market at any strength this year. However, and what I had stated, I mentioned that we’re seeing a very, very big ramp in 300 millimeter RFSOI. From our initial forecast, it would be flat. It’s possible that it will not be flat, but that will see growth because of what’s going on with the RFSOI right now. But what we’ve committed to is the flatness as that’s what the forecast had commit at, but the ramp is going maybe a bit higher than expected.

Okay. Got it. And then the comment on the qualification of additional SiGe capacity in San Antonio and then you purchased new tools for the Newport Beach. Could you just reiterate you had mentioned that you could increase the SiGe revenue by 40% in 3Q against what metric again?

Sorry. Yes, maybe unclear there. In the fourth quarter of 2018 what we’re just releasing, we achieved the $50 million SiGe sales rate or a $200 million annualized silicon germanium. Off of that $200 million baseline, I said we would have capacity qualified in the fourth quarter. So that would be the ability to go from a $200 million to $280 million, I didn’t say that we would be selling all of that in the fourth quarter, they will be qualified to go. Right now I -- as a company, we don’t have total visibility in fourth quarter demand, a lot of this is data center. I think that you would have seen from releases of multiple people that are our customers some present weakness within data centers. Now some of that is being augmented a bit by base station build-out, but some of the base station build-outs are with much smaller devices. But the -- we do believe that the data center business is a very, very strong long-term growth business and we’re very well embedded in it with good market position and very, very strong customers. There are multiple analyst reports that state as well that the data center will rebound in the second half of the year very strong. But regardless of -- if it’s going to be third quarter, fourth quarter or if whatever weakness there is right now is really weak or if it’s just concerns and it pops back immediately. We’re quite convinced of the need for the additional capacity. Again, the capacity that we’ve added presently is truly off of customer forecast that we’re having in the middle of last year. And those customers, I mean they haven’t lost our market share and the data center build-out, the base station build-out, the infrastructure will continue. So installed capacity -- a long answer, installed capacity will it be able to achieve circa $280 million in the fourth quarter. The question of the customer orders I can’t commit to that at the moment.

That’s helpful, thanks.

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

Hey, Richard.

Russell, how are you? Oren and guys, how are you doing? Thank you for taking my questions.

Pleasure. Thank you.

Let me follow up on the silicon germanium topic, you mentioned a lot of growth particularly from the data center market which we can see from some of our other coverage, couple of questions on that topic. Wondering; A, if you have any visibility and understanding of how much your businesses run from kind of the mainstream 100-gig speeds versus the upcoming 200 or 400-gig speeds? And then we’re also seeing a lot of pricing difficulty in that market, I’m wondering whether that’s flowing through to you?

A good portion of our business was 100 gigabit per second. So it was 4 by 25. We see prototyping of 200-gig per second. I am honestly not aware that we’re doing anything at the moment other than prototypes at the 400. It could be, but I don’t know of that specifically, certainly know of discussions on it. The 400 gigabit per second will that then go to advanced platforms will be a 4 by 100 or an 8 by 50. There is still a lot of discussion there. So -- but certainly a big portion of the growth that we saw last year was also of the 100-gig demand and that remains very, very strong. If anything I think that there's some discussions and thought in the market that the move to 400-gig will be postponed a bit. But independent I mean where if it's 200 or 400 I think we are in with all of those players that are going there and we've most recently released a platform in combination with lead customers that will address that market very well. So that was the first question. I'm sorry what was your second question -- the second part.

Regarding pricing, we're seeing some tough pricing on the transceiver side, wondering if that's coming down to the component guys that you're working with? And is that -- are you seeing that as well?

I think that customer partnership is always a point of working together to add efficiencies and have we seen extreme pricing pressure, I would say no we haven't. I think you see much more pricing pressure on the mobile side than you do on the infrastructure side. But there's always not necessarily give and take, but an aligned roadmap and the more capability that you throw into a platform. That's how you keep your margins up, it's not that you hold strong to a point that would disable a customer from being competitive in a market. I think that's as much color as I'd like to give on that.

Okay, that's fair and that's very helpful. Thanks for that. Second question just regarding opportunities for adding capacity and you’ve taken a couple of big actions in the last few years, with Panasonic and with Maxim. Wondering what you're seeing out there in the environment and specifically I noticed I think that Vanguard was able to acquire a 200 millimeter fab earlier this year. Wondering if that was something you were interested in and maybe just comment more about the opportunities and what you're seeing in whether it's still favorable to be acquiring stuff or you are looking more to build organically?

I think it's very favorable to acquire things depending on the contract that you would be getting when you acquire something. The capacity acquisitions that we've done to-date have been acquisitions that have allowed us a runway to build a third-party business. And I'm not making a comment on -- specifically on Vanguard global foundry deal as I really don't know what they agreed to with each other. But you'd have to look at what is a loading agreement and a guarantee, are the customers staying in that factory or customers moving out. I don't know all of that comes into the consideration. Was that something that we were looking at, it was not. Was it a good move or not a good move, I honestly don't know. But it's not that we haven't or aren't looking at acquiring foundry -- the existing foundry capacity or existing foundry enterprises, we might be. But it always has to be something that makes sense as far as the stickiness of the present customer demand. And that's very, very important. And then comes the second question is beyond the stickiness of the customer demand. The platforms that are being run in those factories, do they demand margins that are accretive or decretive to you. So that's the big thing about buying any existing enterprise. But we are certainly and have looked at buying existing enterprises going concerns that make sense -- could make sense. Some haven't happened, some we're continue looking at. So I think that maybe answers the first part of the question. The second part, we are very, very excited about what we're doing with 300 millimeter and very excited to move forward in different models to expand capacity there. Some being organic capability as we've mentioned in the Uozu factory, we will be making a decision and announcing it in probably third quarter as to an expansion there because of what we believe is the present ramp and the continuation of that ramp. But we’re very desirous to look at additional 300 millimeter capacities and capabilities through a variety of models. And it’s not that we have anything against increasing 200 we think it’s a good place to be on the analog side and we have a lot of good products still at 200 millimeter, but we see 300 millimeter as equally important to us.

Okay, well that is helpful. One last question from me, probably again for you Russell, on the image sensor business both this call and I think the last couple of ones you talked about some interesting dynamics there, one of which is in time-of-flight type of image sensors. I’m wondering if you could provide a little more detail about what you’re seeing there. I think in your prepared comments you talked about two very interesting opportunities. Wondering if you could give us a sense of the scale that you see there? And then, maybe if you can describe the breadth probably more so on the mobile side, but any other applications that you’re seeing interested in time-of-flight?

Specifically on the mobile side, we’re looking at an interesting facial recognition opportunity. And I really can’t give too much color on that, honestly can’t. The other opportunities that we have there that are moving long are dealing with augmented reality and I think that’s progressing extremely well with a very notable force within that market and as far as on goggles as well we have activities happening. Additional activities for automotive on time-of-flight that I think is also moving very, very strongly now. But those are specifically where we’re focused. The mobile market is a very, very interesting one that it takes a combination of things for us to want to get involved in that. Mobile always in a sensor side is not the highest margin. So the way that we would do it has to be very, very efficient platform with good partners that would allow us not to become a provider of antiquate data DRAM factory that’s doing image sensors out of it on a fully depreciated very outdated equipment set.

And Russell, if I could quickly follow up on at lease with regard to the mobile opportunities in time-of-flight, do you see this being a notable material contributor to revenues in this calendar year. I don’t remember the numbers about mobile you gave us earlier in your prepared remarks, but is it something that can be noticeable or is it more 2020 opportunity?

For mobile time-of-flight.

Mobile time-of-flight, yes.

I see it as not a contribution whatsoever in 2019.

Okay, that is helpful. That’s all questions from me. Thank you.

The next question is from Cody Acree of Loop Capital. Please go ahead.

Hey, Cody.

Hey, guys. Thanks for taking my question. And Russell if we kind of go back to beginning and just talk about your comments on the macro demand environment obviously there has been a large inventory draw down across the industry you’ve also had faced significant headwind in the slowdown in smartphone market. So can you just maybe parse that out as to what you’re seeing today and are you expecting further draw downs in the inventory channel?

Are we expecting further draw downs, I would say we’re not expecting further draw downs, but I don’t know how important that is what we expect there. What we have from our customers, we have from our customers we certainly have had some customers that have decreased forecast over the past month. We have others that have increased forecast over the past month. If you look at the mobile market specifically, you know who we serve within that market, you know what they’ve released. So that is pretty straight forward what they’re saying. We don’t have any greater crystal ball than the customers that have released in the past three weeks and so and I don’t want to state what our customers have given as their guidance and their outlooks. But other than generically, they say that there's uncertainty in any market where there's uncertainty. People don't take risk on too much inventory. They keep inventory pretty close to the vest. Additionally, there has been some statements that there's possibly a consumer pull back a bit until 5G becomes a little bit more embodied in the market, that the present generation phone platform that the consumer has is good enough until the natural breakthrough when the 5G infrastructure and 5G content comes out on the phones and that might be the case, as well. So I think the combination of those two really tie into that. Beyond that again, I don't think I could add much more color than our key customers have said in the past three weeks.

Well, many of your customers or many of the analog companies have said that while they were seeing draw downs in inventory across the space. They have started to see better orders over the last several weeks. How long would that take to play through to your demand? Or are you starting see any of that already?

Yes, we've certainly seen upsides from a few customers and we've seen further pull downs from others. So I can't really give much more color than that, Cody.

Okay, thank you.

Okay.

Thank you.

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

Hey, David.

Hey, thanks for taking my questions. Just a couple for me. In the past, you've mentioned what your organic growth rate was. Could you give us that statistic for 2018?

Yes. Maybe give me a minute or two, can try to calculate it.

Then just a further question, you mentioned that, I think mid this year you'll have to add capacity a 300 millimeter factory in Japan. What's that factory is basically for, what will the utilization rates be of the overall Panasonic network?

Just to clarify, I didn't say that we would have to add capacity in the middle of this year. I said that come third quarter we’d be making a decision to add capacity. So the capacity wouldn't be added probably and come online until the middle of 2020 off of the decision point. If that factory is up at 90%, it depends on what the other two factories would be doing, at that point. We see utilization increasing in one of the two factories a 200 millimeter factory through the year. So what would it be on a blended basis? I would assume probably somewhere between 70% and 75%. But that's just an assumption.

Okay. And then, are you still taking customer deposits or has that -- maybe mention -- maybe you could help us in 2018 how much incremental customers deposits were taken in?

No, we had no new customer deposits in 2018.

Okay. And with the long-term customer deposit balance being stuck at this level I think for three or four quarters. That's indicative that the customer isn't using that deposit. So when will that balance be start to be drawn down on the balance sheet? When will that customer use that deposit that he has given you?

Yes, your observation is correct. Obviously, this customer deposits which were granted to us in 2016 and 2017 were at good times that from customer point of view they forecasted to need much more wafers than eventually they ordered. So, they gave us the deposits and it was supposed to be returned to them in -- by the rate of purchases that they will do. And obviously I believe also we said, who are those customers and in which field is most of that, which is in the mobile. Since this is lower than initially planned to generally in the market. Also those customers purchased less and so the cash stayed within the company. But as you mentioned, it's true, it's our obligation to fully pay it once the customer will -- by each customer has some thresholds that he needs to meet and above that we repay some of that. You may assume that it will be fully utilized in the coming two to three years according to current roll out this is what I see. But obviously if market will recover, we will return it quicker if not, it will be slower, but it's really pending future purchases from those customers.

And the rate of using those deposits, I think what I've heard you guys talk about is you have some new RFSOI at the 300-millimeter or at 65-nanometer, will the ramp of that product line be the key determinant to using these customer deposits?

No, no. If you’ll remember in 2016 and 2017, when we got those deposits, this was specifically used to increase the capacity specifically in Fab 2 and in San Antonio. So, only and this 300-millimeter is not in Fab 2 San Antonio. So only purchases from Fab 2 and San Antonio, which will exceed, maybe a little bit in Fab 3 also a Newport that will exceed threshold will trigger that repayments, but from Uozu factory has nothing to do with those deposits.

Okay. Final question for me is, for 2019, what do you think your expected CapEx level is going to be? And thank you.

Yes. I believe it will remain at the current levels of 2018. You saw a little bit of growth in Q4 to $48.5 million as compared to $42 million, $45 million before. But this was still within the $168 million, $170 million annual budget or plan. So we are in the plan and really achieve the numbers that we said. For 2019 should remain the same levels, excluding what Russell mentioned before, which we have a decision point in the second half of this year about Uozu, and maybe also about San Antonio. If there will be a need to increase the capacity in those places, it will be on top of that plan.

Thank you.

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

Certainly, thank you. Really, thank you everyone, and thank you for the very good questions. Just two things to close with, the TowerJazz 2018 business annual report is now available on our website. It contains further details of our business and operational strategies and tactics and really some very pretty graphics. I believe you'll enjoy it. Please, if you wish, download it, take a look and be very happy to follow-up with whatever questions you might have after going through that report. And on a very specific matter, Dr. Marco Racanelli, Senior Vice President of our Analog IC business group will be at the upcoming Susquehanna Technology Conference March 12 in New York, and there'll be a series of one on one meetings or what typically turns out to be one on six meetings, one on eight meetings. And please sign up for that if you're in the area. We'd love to follow-up with you. Other than that, there's always we're very happy to follow-up with anybody. Please reach out to Ms. Levi. And thank you very much for your interest. We look forward to updating as the year continues, a lot of good activities going on and we're really very confident of announcing and releasing strong milestone achievement throughout the year. Thank you.

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