高塔半導體 (TSEM) 2015 Q2 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz second-quarter 2015 results conference call. All participants are currently present in a listen-only mode. (Operator Instructions) As a reminder, the conference is being recorded August 5, 2015.

  • Joining us today are Mr. Russell Ellwanger, TowerJazz's CEO, and Mr. Oren Shirazi, CFO. I would now like to hand the call over to Ms. Noit Levy, Vice President of Investor Relations and Corporate Communications. Ms. Levy, please begin.

  • Noit Levy - VP-IR and Corp. Communications

  • Thank you and welcome to TowerJazz financial results conference call for the second quarter of 2015.

  • 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 risks factors that could cause actual results to be different from those currently expected. The uncertainties and risks factors are fully disclosed in our Forms 20-F, S-4, S-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 would like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.

  • Russell Ellwanger - CEO

  • Thank you and welcome to all of you. Thank you for joining us today.

  • Our second quarter recorded the highest quarterly revenue and the highest EBITDA to date. The margin performance surpassed the interim milestones we have set, towards our 40% non-GAAP gross margin Q4 target. The year-over-year organic growth was 35%, more than replacing the $41 million revenue from Nishiwaki factory, which was mainly micron, in the second quarter of last year. This growth dropped to the bottom line at approximately 60% or $25 million in incremental margin dollars.

  • Our top five customers excluding Panasonic grew 11% in revenue second quarter over the first quarter this year, with the next grouping of customers six through 10 having grown at 14% quarter over quarter. An extremely strong annualized rate.

  • We are currently experiencing very, very strong customer demand. In order to meet forecasted customer order demand, we are taking the following actions.

  • Firstly, we are qualifying TowerJazz Panasonic Semiconductor Company with additional specialty platforms such as our Power Management to enable offloading between our worldwide factories. As previously explained, we had established TPSCo for the ability to bring new customers, focus on the Asian area as well as specifically opening up 65 nanometer very high-end 300 millimeter capability for CMOS Image Sensor flows.

  • We continue to collaborate well with our partner Panasonic on many projects that benefit both Panasonic Corporation and third-party foundry customers.

  • By providing our customers with both TowerJazz and Panasonic profit solution, TPSCo continues to gain traction in the foundry space by providing the only viable pure play foundry services in Japan. We currently have a total of 60 third-party foundry customer development projects and we expect to past $10 million of accumulated third-party revenue in the third quarter, growing from (technical difficulty) 35 products at tape out stage just prior to production at TPSCo (technical difficulty).

  • The Power Management business unit is experiencing very strong growth. About 30% in revenue for 2015 over 2014 with a forecasted additional 60% increase for 2016 over 2015.

  • Secondly, we are investing in capacity at a level of $15 million up to $20 million for each Fab 2 in Israel and Fab 3 in California, mainly to address the growing RF SOI needs.

  • Thirdly, we have implemented a special model of customer-funded capacity which is based on prepayment and capacity reservation agreement in order to enable our customers to secure capacity for their longer-term needs.

  • And fourthly, we are examining M&A opportunities for additional capacity with committed revenues by the seller. At the current market provides an active environment for M&A, we are looking for the best possible opportunities which aim for the highest possible value creation for our shareholders, while enabling us to rapidly meet current and forecasted customer needs.

  • Our continued momentum can be seen by the design wins in masks, which entered our worldwide factories during the second quarter. Second-quarter and first-half 2015 were a record for both design wins and masks entering our factories as compared to the same period in all previous years.

  • Looking at our specific business units, our RF market is subdivided into two high-growth segments, that being driven by wireless connectivity in handset and Internet of Things RF front end modules, and that being driven by data transport through fiber optic connections in data centers and networks.

  • The RF end module market continues to grow at a rapid rate as both content per smart phone is increasing due to the larger number of bands in the latest 4G long-term evolution smart phone, and the promise of billions of connected IoT devices is beginning to unfold.

  • Building on our strength in this market, last quarter we announced initial design wins from Tier 1 customers on our latest SOI technology, which leapfrogs performance of prior generations of technology. And this quarter, we have received several tapeouts from these customers and have begun to deliver product prototypes.

  • This technology will substantially reduce insertion loss in wireless front-end modules controls, improving connectivity and battery life and will help us continue to expand our market share in this growth segment.

  • In the data transport market we built high-speed fiber optic front-end components for both the Internet backbone and data centers supporting the consistent growth in worldwide data traffic.

  • This high-volume market is served by our high-performance silicon germanium technology and continues to see strong growth. The same silicon germanium technology is now being adopted for advanced radar applications, such as those in automotive collision avoidance systems, and promises many complications in future higher frequency 5G wireless networks.

  • This quarter, for example, we demonstrated with University of California at San Diego a record-breaking 256 elements, 60 GHz phased array radar. Phased array radars can steer wireless beams and point them more precisely at their target and is a technology that promotes or promises higher data rates in future 5G wireless networks.

  • Our power business continues to experience strong year-over-year growth. We are happy to report on two significant accomplishments.

  • First, as stated, we have completed the transfer of our high-volume our platform to TPSCo and, as mentioned, are continuing to qualify multiple customers and expect to begin generating appreciable revenues from TPSCo on this platform in the coming quarters.

  • Secondly, we announced a major production ramp with N-trig, now part of Microsoft, for the Surface Pro touchscreen controller on our Power Management platform. For CMOS Image Sensor, in the last quarter we started mass production of 13 megapixel sensors at TPSCo based on our state-of-the-art 1.12 micron pixel technology. The 8 megapixel sensor with the same pixel technology will ramp to mass production in the next quarter.

  • First silicon is showing excellent picture quality. We have won another customer for the very high-end photography market in our 12 inch fab.

  • Overall, we have many design wins for the 12-inch fab that will materialize in mass production in 2016 and 2017. Not just in smart phone high-end camera market, but also in the high-end photography and the security market.

  • In parallel, we are moving very fast in the development of global [sugar] technology in the Arai factory, TPSCo's 8-inch 110 nanometer fab. We've already won three customers from this technology, which is a natural continuation of the roadmap of our state-of-the-art global sugar technology, presently running at 0.18 microns in Fab 2 in Migdal Ha'emek.

  • Our image sensor production in Fab 2 continues to steadily grow in all areas, expressly gesture control 3-D, high-end photography, industrial cameras, medical/dental X-ray centers. We have new projects coming from our existing customers as well as new customers from all geographies, including China.

  • Our focus for the next quarter is to support the very fast [wrap] expected in TPSCo 12-inch fab with our CIS customers, complete the development of our global sugar technology in Arai and support the ramp of our existing CIS products in Fab 2 that are expected to grow significantly in 2016.

  • In parallel, we continue to put a lot of focus on the development of gesture recognition sensors with several leading customers in both time of flight technology and structured like technology. We expect the gesture control segment to be a dominant part of our business in the coming years.

  • Finally, we had previously announced a partnership with Flir to build next-generation infrared cameras per smart phone applications. We have successfully completed the development and are now shipping production volumes of this technology, supporting Flir's new product ramp.

  • The TOPS business, where we transfer and do future development on customer-specific flows predominantly for discrete devices, remains very strong. This is vastly diversified in end market applications ranging from use in mobile systems to motor control and industrial systems, converting power into switches and routers that enable communications networks to home lighting, other home applications, battery management, smart meters, and medical systems.

  • The application even extends to electric bicycles specific to the Asian market. The wide range of customers and users of these applications makes this business strongly insular to multiple market variables.

  • To summarize, our radio frequency high precision analog business units, CMOS Image Sensor business unit, TOPS business unit and power management business units are all experiencing nice double-digit year-over-year growth with 2016 forecasts that only get stronger. We were well-timed in establishing the TPSCo venture for the added available capacity in order to fill our customers' growing demand.

  • Our guidance for the third quarter is $244 million plus or minus 5% and we continue to target a $1 billion annualized revenue run rate in the third quarter at gross margins of 40% with substantial GAAP net profit.

  • With that, I would like to hand the call over to our CFO, Mr. Oren Shirazi.

  • Oren Shirazi - CFO

  • Thank you and welcome, everyone. Earlier today we announced our results the second quarter of 2015. We achieved all-time records in revenue and EBITDA, as well as substantial increase in all our margins and shareholders' equity.

  • Our year-over-year profitability increased [to] $25 million in EBITDA and we also saw a significant increase in all the other main profit indicators, resulting in GAAP net profit. It is important to note that the strong financial performance over the past year has resulted from a financial model we put in place that we expect will continue to enable GAAP net profit on a sustainable basis.

  • The achievement of an approximately $25 million increase in non-GAAP gross and operating profit year over year was mainly due to the full replacement of Nishiwaki revenues that were mainly for micron with organically grown business with margin betterment and higher utilization rates.

  • Now I will go into a detailed analysis of the P&L.

  • As I mentioned, we achieved record revenue of $236 million for the quarter based on 35% organic growth which enables strong margin increase. We continued our quarter-over-quarter revenue growth trend with an increase as compared to the $226 million in the previous quarter and with guidance for continued growth in the third quarter.

  • Gross profit on a non-GAAP basis for the second quarter of 2015 was $87 million, representing 37.1% gross margin, a substantial improvement to our gross margins of 26.7% reported in the second quarter of 2014. And 35.7% in the previous quarter, demonstrating a 140 basis point improvement quarter over quarter. This is also a 40% increase from the $62 million reported in the second quarter of 2014 and an 8% increase from $81 million in the previous quarter.

  • EBITDA for the quarter was at an all-time record of $[59] million, 77% higher than the $33 million in the second quarter of 2014 and a solid increase as compared to $51 million in the previous quarter, reflecting an unrealized EBITDA run rate of almost $240 million.

  • Non-GAAP net profit for the quarter was $54 million or $0.70 per share, representing 23% net profit margin. This is an increase of 74% as compared to the $31 million or 13% net profit margin reported in the second quarter of 2014 and an increase compared to $50 million net profit in the [prior] quarter.

  • GAAP gross profit for the second quarter of 2015 was $52 million or 22% gross margin, representing an 8X improvement compared to $7 million in the second quarter of 2014 or 3% gross margin and 59% increase as compared to $33 million in the previous quarter, which was 15% gross margin.

  • GAAP operating profit was $22 million in this quarter as compared to operating loss of $28 million in the second quarter of 2014 and operating profit of $2 million in the prior quarter. GAAP operating profit margin for the quarter was 9%. Significant positive increase from the operating loss in the second quarter of 2014 and from the operating profit margin of 1% increase quarter.

  • GAAP net profit for the quarter was $8 million, achieved through the implementation of our financial model that should enable us to achieve GAAP net profit going forward on a sustainable basis. This is versus a loss of $16 million in the second quarter of 2014.

  • Basic earnings per share improved to $0.10 per share in the quarter as compared to a loss per share of $0.31 per share in the second quarter of 2014. For the six months ended June 30, 2015, revenues were $462 million, $95 million higher as compared to $367 million in the six months ended June 30, 2014.

  • Net profit on our non-GAAP basis for the six months ended June 30, 2015 was $103 million, 2X year-over-year improvement. GAAP loss in the six months was $65 million, mainly due to the $85 million non-cash other financing expenses recording -- recorded mainly in the first quarter of 2015, primarily as a result of the successful accelerated conversion of Series F debentures of $162 million, which was previously announced.

  • Moving to currency exposure analysis, following the recent developments in Greece and other European countries, I would like to mention again that we have no impact whatsoever from the euro exchange ratio and none of our revenues are denominated in euros. All the currency-related effects on our revenue on the P&L are as follows, which, as you will, see have no material impact to the bottom line.

  • A, with respect to the euro currency we have no impact whatsoever and don't expect any impact on our financials.

  • B, with respect to the Israeli shekel versus the US dollar, the impact of the change is not material and limited to about $250,000 per quarter gain to the P&L on any 1% devaluation in this currency against the dollar, or the opposite in case of evaluation.

  • And C, with regard to the Japanese yen, since our revenue from Panasonic and TPSCo are denominated in the Japanese yen currency and since most of the expenses in TPSCo are in yen, this creates a sort of natural hedge. Hence, there is very limited impact to our P&L.

  • Moving on to the balance sheet analysis, we significantly strengthen our balance sheet, increased shareholders equity, increased our cash balances and reduced debt levels. Shareholders' equity at the end of the quarter were $300 million, as compared to $196 million at the end of December 2014. And the current ratio, which is current assets divided by current liability, increased from 1.3X to 1.6X.

  • Net debt as of June 30, 2015 was $150 million, much lower than approximately $400 million as of June 30, 2014, reflecting a net debt to EBITDA ratio of only 0.6X. We ended the quarter with cash and short-term deposits of $143 million of compared to $134 million as of March 31, 2015.

  • In terms of cash flow, during this quarter we generated $51 million positive cash flow from operating activities, higher than the $40 million in the previous quarter and higher from the $31 million in the second quarter of 2014.

  • CapEx, capital expenditure investment in property and equipment, were $39.6 million in the quarter, which is above the usual level. And all this will satisfy increasing customers' demand that we are facing.

  • That summarizes my decent financial summary and now I will turn the call back to Noit.

  • Noit Levy - VP-IR and Corp. Communications

  • Thank you, Oren. Before we will open up the call to the Q&A session, I would like now to add the general and legal statement to our results in regard to statements made and to be made during this call.

  • Please note that the second quarter of 2015 financial results have been prepared in accordance with US GAAP and the financial tables in today's earnings release include financial information that may be considered non-GAAP financial measures under Regulation G and the related reporting requirements as established by the Securities and Exchange Commission as they apply to our conference. Namely, this release also presented financial data, which is reconciled as indicated by the footnotes below the table, on a non-GAAP basis after deducting (technical difficulty) one, depreciation and amortization; two, compensation expenses in respect to options grants; and three, finance expenses net other than interest accrued, such that non-GAAP financial expenses net include only interest accrued during the resulted period.

  • Non-GAAP financial measures should be evaluated in conjunction with and are not a substitute for GAAP financial measures. The tables also contain the comparable GAAP financial measures to the non-GAAP financial measures as well as the reconciliation between the non-GAAP financial measures and the most comparable GAAP financial measures.

  • EBITDA is presented (technical difficulty) financial releases. EBITDA is not required GAAP financial measure and may not be comparable to a similarly titled measure employed by other companies. EBITDA and the non-GAAP financial information presented herein should not be considered in isolation or as a substitute for operating income; net income or loss; cash flows provided by operating, investing and financing activities; [fair] share data or other income or cash flow statement data prepared in accordance with GAAP, and is not necessarily consistent with the non-GAAP data presented in previous filings.

  • I would now like to turn the call over to our operator.

  • Operator

  • (Operator Instructions) Cody Acree, Ascendiant Capital.

  • Cody Acree - Analyst

  • Congratulations on the very solid results, especially in this environment. Russell, maybe you can start. There has been a lot of data points over this earnings season, especially from some of your customers even pointing to the slowdown in smart phone activity in China and maybe to some extent globally. Your comments obviously don't point to those same trends.

  • I'm just curious if you could talk about the health of your visibility and maybe why you think your visibility or what you are seeing in activity is different from maybe some of your customers.

  • Russell Ellwanger - CEO

  • So, firstly, very specific to China itself, our sales activity directly in China are up about 2.5X year over year.

  • So, just specific China sales is going very well for us. We are growing market share. We are gaining opportunity after opportunity.

  • As far as I think you would be referring specifically to front end module activities, as I had stated before, the content in every new generation phone is increasing because of the amount of bands, because of diversity switch, carrier aggregation. So we have a very, very big increase in content.

  • I think even if the amount of front end modules itself was to stay somewhat constant year-over-year, which I don't believe would ever be the case, our business as far as the amount of units that would be provided for switching control would still grow very, very substantially.

  • So, the increase of content for us is a very, very big boon when you are supplying the specific devices that go into the modules.

  • Now, the entire smart phone market is still growing in its growing nicely. I don't think that any one specific region overrides the overall growth of this market and the need for mobile devices for data transfer.

  • So, if that answers your question, we truly do not see a reduction in the demand that we are seeing.

  • I could add that if there was some mild decrease, it would actually be maybe nicer for us to meet all of the demand that we have with the existing capacity that we are growing out. So the demand that we are seeing, the forecasts are extremely high.

  • And we don't see any downside in that, that would have any type of a market impact in the numbers that we see or the growth that we believe we will be seeing 2016 over 2015.

  • Cody Acree - Analyst

  • And Russell, with the increase in CapEx this quarter and your comments about maybe customer funded or specific reservations, could you maybe spend a little more time on the changes in spending? Maybe what monies might be dedicated from customers for that capacity, and how that may be extending and helping your current visibility?

  • Russell Ellwanger - CEO

  • We do have major customers that are moving forward towards reserving capacity. That is against advanced payments to make sure that a certain capacity would be set aside for them.

  • When customers are willing to do that, they certainly believe that they will need to use the capacity. So that was the reservations for a specific period of time and if the capacity is not used during that period of time, the reservation fee is then not refunded. If the capacity is used then the reservation fee goes against the cost of the wafers.

  • So when you have that type of a model, you certainly have customers that believe that they will indeed need the capacity. It's a very strong commitment on their side towards their forecast. We have other activities where possibly capital expenditure or capital expansion itself is upfront funding partially or to some extent through customer in order to, again, secure capacity for themselves.

  • Cody Acree - Analyst

  • And with that jump to $40 million, what are your expectations for CapEx going forward and how might that impact your cash flows given that you have some of this money that might be coming from customers?

  • Oren Shirazi - CFO

  • It's Oren, hi. Like Russell mentioned in the script, the plan is not to exceed $15 million to $20 million for each side meaning Fab 2 and Fab 3. So each one of those two, $15 million to $20 million sales were funded and you saw already in this record they already maybe $12 million from that, from that aggregate of $30 million to $40 million already invested in Q2. From the other average run rate that we were, like $27 million, to $28 million a quarter, to [39 point something].

  • And there is -- we will come over the coming few quarters and, like Russell mentioned, all these funded -- customer-funded plans will come in addition, but funded by the customer. So, we will not put out from our cash more than the amount that I mentioned, which are reasonable.

  • We have -- I described $143 million cash on hand, less than the EBITDA for the year, less than the maturities of debt. So of course, we are in a reasonable cash situation.

  • Cody Acree - Analyst

  • Just to be clear, then, you have not received those customer funds to date. But those are future opportunities.

  • Russell Ellwanger - CEO

  • We have received capacity reservation to date. Small amounts; we are not talking huge amounts of money, but capacity reservations and right now we are solidifying all of the plans for 2016.

  • Cody Acree - Analyst

  • And then lastly, you have the change in depreciation schedule and it is a little counter to what you might think about companies want to maximize their tax benefits with losses as long as possible. Maybe can you talk about why you changed the depreciation schedule. And you had an unusual movement in your tax basis quarter. What should we be thinking about for taxes going forward?

  • Oren Shirazi - CFO

  • For tax basis, the amount of years the CapEx is depreciated, this is only under the accounting GAAP. It has nothing to do with taxes. It does not change the tax payment or [silver bell]. It's not because from tax authorities point of view depreciation is -- CapEx is depreciated, whatever amount of years per country, for example. Just five years, we did not change that. We cannot change that because -- the tax authorities regulations, we did not tax it at all. It's only the booking accounting GAAP, which we did a benchmark study and we saw other companies, foundries like us, which do it this way.

  • So, it's like this is the current estimation. We explained in the numbers, in part of the press release and we said that the net effect was $6.8 million betterment. It did not change at all the tax effect associated with that.

  • In regards to the tax, we said and we can repeat it. The same situation in Israel for all the profit in Israel, we are exempt for any foreseeable future because we have $1.4 billion of past losses carryforwards. So we have liked this relief.

  • On the California-based operation, we are supposed to pay 35% from each taxable income. However, we have some NOLs there from even before the merger, and from other regulations in the US we have some relief.

  • So since Jazz is a public company I can relate to that and refer you to the financial statements of 2014, where Jazz actually paid -- it was exactly the breakeven amount to pay tax. So actually Jazz almost paid no taxes for 2014 at the revenue run rate of 2014, which was $217 million.

  • So if you assume a growth of -- in Jazz revenue beyond $217 million, which of course is a reasonable assumption; however you have to know that Jazz is limited to a max of maybe 2016 -- $260 million up to $280 million], so if you do a rough calculation you will come out that the tax can be maximum $8 million per year in Jazz and the minimum, of course, zero.

  • And on the TPSCo, final profits which was profitable actually this quarter also does not pay tax because we are enjoying the fact that we appraised it, the fixed assets to $240 million which are relevant for tax also. So we get like an accelerated depreciation for taxes in Japan, so in your model you should assume that we will pay extra taxes in Japan only from the last quarter maybe of 2017. Really, only from 2018 are the tax payments from the Japan profits.

  • Cody Acree - Analyst

  • Thank you very much for all the details. Thank you and congrats.

  • Operator

  • Jay Srivatsa, Chardan Capital Markets.

  • Jay Srivatsa - Analyst

  • Congratulations on the numbers and achieving GAAP profitability. Russell, in the past you have shared some data related to the number of [mask sets] entering the factory in any given quarter. I know you mentioned you have an incremental number. Can you share with the number was during the quarter?

  • Russell Ellwanger - CEO

  • For the Q2 quarter, the mask center in the factory -- the number of masks was 5,724. For the Q2 quarter 2014, it was 5,478. For the half-year it was 11,240 and for the half-year of 2014 the first half it was 9,281.

  • Jay Srivatsa - Analyst

  • Very good, thank you. In terms of the mix, at TPSCo, given some of the transition and transfer process you are doing, what is your expectation of the Panasonic versus non-Panasonic business that you are going to be running at TPSCo as you exit the year?

  • Russell Ellwanger - CEO

  • As we entered the year, so I mentioned that the third-party revenue will have accumulated to greater than $10 million in the third quarter. That will continue to ramp in the fourth quarter.

  • But the bulk of all the revenue sitting right now is from Panasonic. And we had announced that that was between [90 and 105] a quarter so the substantial portion of the revenue is still Panasonic.

  • Through 2016, the percentages will come up, most likely into the double-digit from third-party revenue and our target will be in the 2017/2018 timeframe, it would somewhat be equal.

  • Jay Srivatsa - Analyst

  • Okay, Oren, in terms of the margins, obviously you feel comfortable about the Q4 margin of 40%. Would it be fair to assume that if in Q3 you would see incremental improvement from Q2 towards the 40% number?

  • Oren Shirazi - CFO

  • Yes.

  • Jay Srivatsa - Analyst

  • Okay. Give us a little bit of update on where things are within the India project. In the past you talked about it and it has kind of been on the shelf. Any progress there? Any update there?

  • Russell Ellwanger - CEO

  • Progress is a little bit hard to quantify. It has been a very long-term activity. We have had ongoing meetings in regards to the project. I am currently working with the Department of Electronics and Information Technology with the Empowered Committee on some requirements for us getting the letter of commitment from the government. The next milestone is set for the end of September 2015, which is the latest date to submit all of the requirements and what they have claimed is the missing information.

  • As I've stated before, it's very important to note that the India projects is not included in any of our business plans or targets. And therefore if and when it happens, it will be pure upside. Margins of this project would be well above 80%, as our investment there is only human resources. There is no upfront cash investment.

  • There are certainly other areas where there are interesting projects similar to the India project. Any initiatives right now in China on things that are similar to the India project with governments that maybe move more quickly.

  • Jay Srivatsa - Analyst

  • Okay, and one last question for me. You mentioned a lot of your business appears to be running really well, given some of the market share shifts in market share gain. Can you help us understand? Are you getting new customers from other -- some of your competitors? Or are these IDMs looking to go fabless? Help us understand what the mix is in terms of some of your market share gains.

  • Russell Ellwanger - CEO

  • The market share gains predominantly in TOPS business is from IDMs that are going fabless or more fabless or more fab-like. That is that entire business model is customer-specific flows that we bring into our factories. We had specifically mentioned Fairchild into TPSCo in line with the fact that they had shut down factories and were transferring those projects.

  • In the case of power management, it's a combination of both integrated device makers that are designing to platforms that they might not have in their existing factories. Again, most power management is still at 0.35 microns. So the many that are designing right now to our 0.18 BCD as well as the power management market itself is such an integral part of the Internet of Things, green everything is so critical, that a lot of fabless companies have just come up into that market, period.

  • Several of our very, very big growth customers within that market were companies that started off from industry experts that started their own companies that are purely fabless and just driving it. So it's not an IDM at all. They are true fabless models that are getting into that market.

  • In the case of the RF, that is a combination of many things, and we are -- our biggest RF customers are truly integrated device makers. If you look at all the front end module makers, they are IDM. They have their own gallium arsenide capabilities.

  • But in the cases of what we are serving to these IDMs, therefore technologies, that they themselves don't have internal to their factories, so if not all, most all of the gallium arsenide IDMs or IDMs that have gallium arsenide that are using the gallium arsenide for the power amplifier or previously used gallium arsenide [PM] for the switch, they do not have RF CMOS capabilities. They do not have silicon germanium capabilities.

  • So in that case, it's not a fab like model for say, it is simply IDMs where the technology has shifted into technologies that we serve, and more strongly into technologies that we serve. So the market share gain, you can say it's a fabless or fab light model, we look at these customers as fabless customers because they do not have an internal factory competing with the technologies that we are getting them. But, they really are IDMs that have their own internal capabilities.

  • Does that answer your question? I hope it does. Although in the case of CIS, for the most part I think, yes, the bulk of all our CMOS Image Sensor customers are fabless customers.

  • Jay Srivatsa - Analyst

  • Thank you for the detailed answer. Good quarter.

  • Russell Ellwanger - CEO

  • Richard Shannon, Craig-Hallum.

  • Richard Shannon - Analyst

  • Thank you for taking my questions. I've got a few -- a few from me.

  • First, I just want to confirm; my line is a little scratchy, so just want to make sure I heard you that you are still reiterating your goal of [18] this year at the [$250 million] topline number in the non-GAAP gross margin over 40%. Did I hear that correctly?

  • Russell Ellwanger - CEO

  • Yes you did.

  • Richard Shannon - Analyst

  • Okay, good. You talked about -- detailed in your press release about depreciation change here. You've clearly got some different CapEx dynamics in here. With that 40% number be achievable without the depreciation change? Can you help us understand the puts and takes there that would lead to that?

  • Russell Ellwanger - CEO

  • It's unrelated. It was 40% non-GAAP --

  • Oren Shirazi - CFO

  • The 40% target was excluding any depreciation. Right? It's on the gross profit non-GAAP.

  • Richard Shannon - Analyst

  • Okay, all right, fair enough. Second, on the capacity reservations, are these specific to particular segment and types of technology?

  • And can you give us a sense of how much you expect in, say, a couple quarters for this cover and any particular quarter like 10% or 20% or even 30% of your revenue stream?

  • Oren Shirazi - CFO

  • The receipt of prepayment like Russell mentioned is not revenue. It is cash in that we get which will enable us to reserve capacity to maybe buy some CapEx, to fund some CapEx, but it is not revenue.

  • Russell Ellwanger - CEO

  • It turns into revenue when the wafers get shipped against the capacity reservations.

  • Richard Shannon - Analyst

  • Maybe I will ask it another way. Say you are making a reservation in the near-term for revenues are coming down the road here, looking down the road three quarters or whatever time is appropriate, how much coverage would these reservations be for? Can you give us a sense of the magnitude we are talking about here?

  • Russell Ellwanger - CEO

  • I can, but I will first just explain it to you a little bit more clearly. You have a certain amount of volume that you are giving a customer that is steady-state. They should expect that volume. If they now have a forecast that is for substantially more volume, how do you give them that volume? You either have to grow additional capacity or you have to take it away from someone else, or you had underutilized factories. \

  • It is never proper, I think, to say this is your run rate in the past. I am going to cut you off of that run rate unless you give me something to pre-reserve. We don't want to do that.

  • But for anything that is substantially above a run rate, you would say, okay, if I am going to reserve this to you, put upfront some certain amount of that incremental wafer revenue, maybe on the order of 30% of what that incremental amount would be, and then you have for those quarters of that 30% that you are saying is in your forecast, you then get that back over those quarters if you use that incremental capacity.

  • How much money is that? I really wouldn't want to specifically state because it ties into very specific customers. And there is not a lot of customers that we are doing that with. But it is the biggest growth customers, which tie into certain markets and isn't that difficult to deduce.

  • Richard Shannon - Analyst

  • Okay, fair enough. I think I know what you are talking about there. Thanks for the clarification.

  • Third question I have regarding your RF and specifically on SOI, I think you talked last quarter about trying to drive your share over the next few to several quarters towards that 50% level and maybe even beyond. I just wanted to get an updated thoughts on -- it sounds like you are still quite bullish on the trend there. I just want to make sure that is still an expectation.

  • And how much dollar growth can that really drive for Tower in total next year? Any way we can get a sense of that, please?

  • Russell Ellwanger - CEO

  • So, we are really looking at what is our present market share. And I would think presently, probably we are sitting somewhere in the range of 22% to 24% of the SOI foundry market share. Where we will be at the end of this year and Q4 run rate, I am not sure. I think we will be upwards of the 30%, 35%.

  • Our target would be to get to the 50% if we can get there. We will see how that really drives.

  • The overall foundry market, we think, is somewhere $400 million to $500 million, so if we are at 50%, and let's say that the market grows at whatever point next year, so 50% would be -- if it's $400 million, it's $200 million. If it's $500 million, it's $250 million. So that is the type of numbers we are looking at getting into.

  • If we are right now at 23% and it's $400 million to $500 million you can see what our run rate is presently.

  • Richard Shannon - Analyst

  • Okay, great, that is great clarification.

  • Last question for me, you mentioned you have talked about this in the past, in your prepared comments you talked about potentially adding capacity inorganically here. Wondering the extent to which there are other opportunities out there, whether they are the size and the financial attractiveness of Panasonic that you completed last year, and the extent to which you think you can manage something of anywhere near that size financially as well.

  • Russell Ellwanger - CEO

  • There is a whole gamut of opportunities that are out there. Would we wish to take on another activity such as TPSCo at present? I'm not sure. We've not announced something on that order. We've not announced anything.

  • We are always actively looking at opportunities. I mentioned that actually during the call that we are very active and looking at opportunities continually. Our model of looking at something is where it really is a win for us and a win for the Company that we are buying from.

  • Panasonic had a very strong benefit from what we did with them. If we were to do another acquisition, capacity-based acquisition, it would be something that we would make sure is a win for our partner and a win for us.

  • For us, the win is to say we have a very good ROI and that we, in all cases, have running costs that's covered through the contracts with the person that we are acquiring from. That is very important for us. We don't want to do an acquisition to where you can have, within a year, within two years, an accumulated many, many tens of millions of dollars of loss on running costs.

  • So those are the types of deals that we look at and I think that they are -- there are a good variety of them that are available at any given time. At the point that something is material, meaning that we would sign a definitive agreement, we would certainly press release and give an update.

  • But, does the Company need greater capacity in the coming years? It certainly does. Our forecasts are very strong. Our markets are strong markets. Will we need capacity? We will need capacity.

  • We still have available capacity in TPSCo and it was very fortuitous when we did that deal, because as I had mentioned, the movement of the power management, which is not just a substantial amount of volume but a very big growth volume, we and our customers need to have that growth capability which is in TPSCo, which then gives additional capacity in Migdal Ha'emek Fab 2 for some other spaces such as RF SOI.

  • But I would think that within the next year and a half to two years, we do need more capacity and this is the right time to start thinking about it in structuring deals to have the capacity online.

  • Richard Shannon - Analyst

  • Okay, I appreciate all the detail here. That's all my questions, guys, thank you.

  • Operator

  • Lisa Thompson, Zacks Investment Research.

  • Lisa Thompson - Analyst

  • Let's just talk a little bit more about the possibilities for M&A. If you were to do something, do you have current ideas as to how you would fund it? Or are you open to any possibilities?

  • Russell Ellwanger - CEO

  • If we were to do something in the immediate future, we would certainly have ideas of how we would do it. But, again, we have not announced something. As we say that, we are continually evaluating opportunities. Yes, there are certainly models of how we would do an M&A at this point.

  • Lisa Thompson - Analyst

  • So would you do it the same as TPSCo? Or is there other ideas at this point?

  • Russell Ellwanger - CEO

  • The TPSCo model was a very good model for us. Again, there is nothing that is of a point of materiality that we would need to release, so I would not want to commit or give an expectation of one model or another. But the TPSCo structure was a very good structure and that, I think, has been a nice win for both companies. So, another such deal could make sense, or such structure could make sense.

  • Lisa Thompson - Analyst

  • And when you look at possibilities, do you have any preferences for geography or what would be the criteria that is most attractive to you?

  • Russell Ellwanger - CEO

  • We do have preferences for geography, but we really shouldn't get into that at this moment.

  • Lisa Thompson - Analyst

  • Would it be more of a diversification thing, so you want it near where you have other stuff? Just kind of what's the logic, or is it physically (technical difficulty) make that plan?

  • Russell Ellwanger - CEO

  • In general, you would want to have a facility somewhat close if you could to the geography that you will be transferring the capability from, so that the transfer group could have close proximity to the activities. That makes things easier for everybody.

  • So that is -- you know, if you could have your absolute wish list, that would be the biggest wish list.

  • The other thing would be in a region that is amenable for the customers that you expect to fill in the factory.

  • So those are really the two things that you would have to think about is where is the technology coming from, where is it going to and where are the customers located.

  • Lisa Thompson - Analyst

  • Okay, so does that mean that you would be looking for something maybe in China or somewhere where you don't have a location that would be close your customers, would be like the ideal thing?

  • Russell Ellwanger - CEO

  • Actually, from what I said it would be more or less the opposite of China.

  • Lisa Thompson - Analyst

  • Okay.

  • Russell Ellwanger - CEO

  • Our main customers are not in China, although the China market is growing for us. But our main customers are not located in China. And we have no facility in China that we would be transferring technology from.

  • Lisa Thompson - Analyst

  • Okay, so it's where the current customers are, not future.

  • Russell Ellwanger - CEO

  • It would be where the customers are that you expect to serve with the technologies that you want to bring up in that factory.

  • Lisa Thompson - Analyst

  • Okay, great. That's all my questions right now.

  • Operator

  • Scott Haugan, Tygh Capital.

  • Scott Haugan - Analyst

  • I've got three questions. Can you just tell me what the mask set growth year over year was running this quarter and what that same growth rate was coming into the year?

  • Russell Ellwanger - CEO

  • The growth rate was -- I'm sorry. So I mentioned that Q2 was 5,724. Q2 a year ago was 5,473. So I don't know the exact percent but (multiple speakers) yes, maybe 6%.

  • Scott Haugan - Analyst

  • Wasn't --? That same number was running pretty high double-digit kind of coming into the calendar year, correct?

  • Russell Ellwanger - CEO

  • On a year-over-year basis, yes.

  • Scott Haugan - Analyst

  • Okay. And just on the CapEx, so how much do you guys figure that your maintenance CapEx is versus growth CapEx in any given quarter?

  • Oren Shirazi - CFO

  • It's about $25 million, $27 million was our -- if you look at the last five years, it is pretty much the average per quarter, which is including also some CapEx tools.

  • But that was a stable run rate and the only update from today is that what Russell said in his beginning that we will want to add to that in the coming year, $15 million to $20 million for new CapEx to expand capacity because we really face a very strong excess demand over our capacity, at least in Fab 2 and Fab 3.

  • Towards this end of $15 million to $20 million for each of those two fabs, we already invested actually $12 million or $13 million in Q2.

  • Scott Haugan - Analyst

  • And then lastly, on potential M&A, what is your debt capacity or what is your thoughts about what type of capital you use if it is an actual acquisition type formulation for a fab?

  • Oren Shirazi - CFO

  • I believe Russell mentioned that if we will structure such a transaction, it will be similar to TPSCo structure which actually did not involve any cash or amount of loans or something like that. Because it's like a commitment from the seller of the fab to buy product and we are committing to operate the place, and we are introducing -- bringing into the deal our customers, customer relations, marketing and business.

  • Scott Haugan - Analyst

  • So, let's just say hypothetically that one of the device manufacturers is selling their fab domestically and they are looking to sell it outright. Could you find a financial partner to buy the actual buildings and equipment as a partner to you? Or would it usually be one entity that would need to acquire the whole fab?

  • Oren Shirazi - CFO

  • No. It is us. We are the acquirer, exactly like in TPSCo.

  • Scott Haugan - Analyst

  • Okay, all right. Thanks.

  • Russell Ellwanger - CEO

  • For your question on specific percents, first-half 2015 versus first-half 2014 was 21% increase in the masks entering the factories.

  • Scott Haugan - Analyst

  • Thank you.

  • Operator

  • David Duley, Steelhead.

  • David Duley - Analyst

  • Just a couple of clarifying questions; the change in depreciation methods, how much will that change the quarterly depreciation? In other words, what do you expect depreciation to be in Q3 and Q4 and how much should it change because you extended the life of the assets?

  • Oren Shirazi - CFO

  • The depreciation this quarter is $35 million in COGS. You can see it in the press release plus $2 million in R&D and SG&A, so a total of $37 million. This is the expectation for the foreseeable future and that, I think, the good part of this issue now that now it will be flat and on this amount of $35 million to $37 million level.

  • David Duley - Analyst

  • And if you hadn't changed the depreciation, I am trying to understand the dollar impact through the change in depreciation on a quarterly basis.

  • Oren Shirazi - CFO

  • Yes so (multiple speakers)

  • David Duley - Analyst

  • In other words, are you saving depreciation from extending the life of the assets per quarter?

  • Oren Shirazi - CFO

  • Yes, if you will look at, for example, Q1 2015 was $47.7 million depreciation, going down now to $35 million. So it is a $12 million net reduction in depreciation.

  • However, due to the fact that now it is lower depreciation costs so the finished inventory for what is called [weep] is lower and also there is offsetting -- it is offset by minority rights and the tax provision and all that. So on the net effect of all this, it is only $6.8 million. But if you look only on depreciation to model the future depreciation, you see [237].

  • David Duley - Analyst

  • Okay, thank you. That is very helpful.

  • Russell, you mentioned I think your power management business was going to grow 30% to 35%. Was that in 2015?

  • Russell Ellwanger - CEO

  • Yes, I said that 2015 versus 2014 was 30%. By present run rate and forecast second half, and that by forecast it's actually 60% 2016 over 2015.

  • David Duley - Analyst

  • So there is a big funnel there, obviously.

  • Russell Ellwanger - CEO

  • Yes.

  • David Duley - Analyst

  • Okay. Could you maybe throw out an expectation or a goal for your RF SOI or your total RF business? What kind of growth rates do you think you will see this year and next year in that segment?

  • Russell Ellwanger - CEO

  • So the total segment this year, if you look at RF, CMOS, silicon germanium, etc., etc., I think for the year should be somewhere about 45%. Maybe even a little bit higher, maybe 50%.

  • David Duley - Analyst

  • That is the growth rate in 2015?

  • Russell Ellwanger - CEO

  • Yes sir, (multiple speakers)

  • David Duley - Analyst

  • Okay, yes, excuse me. Thank you.

  • And have you changed your medium-term goals for the third-party revenue in the TPSCo? Because it seems like you are transferring a lot of business there from your other fabs to free up SOI and silicon germanium and whatnot.

  • How should we think about the levels of revenue coming through that factory network now?

  • Russell Ellwanger - CEO

  • Actually, it's a very good question. As far as what we had said in the past on the amount of projects and what we believe those projects would turn into, those numbers stay the same. We should see incremental increase by the power management movement over there and of a relatively substantial number.

  • So for 2016 the TPSCo should be delivering on the third-party revenue basis and it's definitely third-party. It's transfers that have come out of Migdal Ha'emek. Multiple tens of millions of dollars, and -- really multiple.

  • And that is on top of the activities that we had talked about which were the TPSCo focused activities themselves.

  • David Duley - Analyst

  • Thank you.

  • Operator

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

  • Russell Ellwanger - CEO

  • Yes, please. Next week Tuesday, August 11, we'll be participating at the Oppenheimer 18th Annual Technology, Internet and Communications conference at the Four Seasons Hotel in Boston. Dr. Mark Racanelli will be present at 3:45, and he and the CFO from the Newport Beach facility, Ms. [Raneet Varti], will be attending and meeting with investors throughout the day.

  • We would really invite anybody to take advantage to meet with Dr. Mark Racanelli. He is the Senior Vice President of the RFI Precision Analog business unit. And also of the Power Management business unit. So I think a lot of the questions that people have on that specific segment would be very good interaction and you would have the opportunity to meet with him and as well just the overall finances and Company. Ms. Varti is, I think, very well versed to handle those questions.

  • So just to summarize, I really do thank all of you for your interest and support of TowerJazz. The coming quarters promise much good excitement and we look forward to updating you as things unfold. Thank you very, very much.

  • Operator

  • This concludes the TowerJazz second-quarter 2015 conference call. Thank you for your participation. You may go ahead and disconnect.