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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to the TowerJazz first-quarter 2016 results conference call.
(Operator Instructions).
As a reminder, this conference is being recorded, May 9, 2016.
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.
Noit Levi - VP of IR and Corporate Communications
Thank you, and welcome to TowerJazz financial results conference call for the first quarter of 2016.
Before I begin, I would like to remind you that some statements made during this call may be forward-looking, and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected.
These uncertainties and risk factors are fully disclosed in our Forms 20-F, F-4, F-3, and 6-K filed with the Securities and Exchange Commission, as well as filings with the Israeli securities authority.
They are also available on our website.
TowerJazz assumes no obligation to update any such forward-looking statements.
Now, I'd like to turn the call to our CEO, Mr. Russell Ellwanger.
Russell, please go ahead.
Russell Ellwanger - CEO
Thank you, Noit.
Welcome to all of you, and thank you for joining us today.
We entered 2016 following strong business, operational, and financial performance in 2015, having broken, in the fourth quarter, $1 billion annualized revenue and over $300 million EBITDA annualized run rates, with sustainable and growing net profits.
For the first quarter of 2016, we again achieved record revenues, this time of $278 million, with associated strong financial results of record EBITDA of $78 million and net profit of $66 million; or $25 million, excluding the one-time gain from the beneficial acquisition of the San Antonio facility.
We generated $77 million cash from operations, with free cash flow of $20 million.
This free cash flow includes, this quarter, of $15 million of customer prepayments, which was used for additional CapEx for increased capacity.
We continue to experience extremely strong customer demand, driving a second-quarter midrange revenue guidance of $300 million; and with the current rollup indicating quarter three and quarter four of 2016, each to be notably higher than our second-quarter guidance.
Enabled by this vigorous demand, our financial focuses for the year are margins, net profits, and free cash flow growth.
During the first quarter, we began operating our new 8-inch fab in San Antonio.
This facility provides us with added capacity and manufacturing capabilities, a highly technical and experienced employee base, and as previously reported, an increased or already growing business with Maxim via a 15-year supply agreement.
We have already qualified multiple RF flows, and taped out customer products numbering in the mid-teens.
In addition, we have manufactured first samples for two growing TOPS customers.
Of equal importance, the San Antonio facility and team is now included in the best practices benchmarking and transfers, driving further cost and productivity efficiencies within our worldwide manufacturing facilities.
With regards to the worldwide fabs, utilization of TPSCo remained at about 40% level that we spoke of in the fourth quarter, with Tonami ramping substantially at the end of this quarter in layers processed, and continuing to ramp through Q2.
Fab 1 in Migdal Haemek was up about 10% in processed layers, or 6 points, to 71% utilization.
Both Fab 2 in Migdal Haemek and Fab 3 in Newport Beach increased the capacity by about 6%.
And both fabs remain at about 91% utilization level; hence, 6% more layers processed as compared to the previous quarter.
We just mentioned San Antonio to where we mentioned that we began our transfers and prototyping to both our RF and TOPS customers, with the present utilization being a continuation of the Maxim previous utilizations.
Now I'd like to discuss the key achievements of our different business units during the first quarter and the main focuses and growth drivers for this year and years to come.
In our RF high-precision analog business unit, we ramped silicon germanium power amplifiers and low-noise amplifiers to significant volumes that have grown from very small levels in the second half of 2015 to volumes that are now already comparable to those of our traditional fiber optic silicon germanium market.
Growth in this area is anticipated to continue as SiGe provides clear advantage in LNA performance and PA cost versus competing technologies.
In addition, we announced our silicon germanium terabit platform, our advanced silicon germanium platform enabling high-speed data communications for the terabit age, with market leaders such as, in alphabetical order: Broadcom, Inphi, MACOM, Maxim, MaxLinear, Semtech, and others.
Within this platform, we announced availability of design kits for our S4 process, the most advanced silicon germanium BiCMOS process serving the segment, with transistor speeds in excess of 300 gigahertz.
We continue to grow our overall revenue for our industry-leading RF SOI process.
And this quarter successfully yielded initial products from San Antonio facility, and have as many as 15 RF products taped out and in various stages of qualification to enable enhanced growth, late this year and in 2017, by utilizing the available capacity of the San Antonio factory.
The main growth drivers for 2016 and 2017 for this business unit is, firstly, the expansion of our market share with RF SOI through qualifying additional capacity in San Antonio; and continuing to progress the roadmap to better Ron-Coff and linearity.
In addition, we are focusing our efforts to expand our market share in the LNA and power amplifier markets through continuous evolution of our leading silicon germanium technologies and RF SOI technology in cases where RF SOI can compete for this application.
We are gaining design wins in our silicon germanium terabit platform through our newest S4 process, and continue to enjoy a large market share and growth along with market wins in this high-value area.
Looking at our CMOS image sensor business unit, during the quarter we experienced very high demand in all fronts: high-end cinematography, machine vision, industrial sensors, x-ray, and gesture control sensors.
The market is growing, and our customers are winning more and more sockets, especially in the industrial market.
We also started to ramp a large x-ray customer to mass production.
For the upcoming year, we are focusing on completing a new platform of global shutter pixels for the industrial fast-growing market based on 110 nanometer technology with state-of-the-art 2.8 micron pixels.
This platform is developed in parallel with many new devices and product families' designs by our lead customers.
We target to increase even further our presence in the CMOS-based extra-oral and medical x-ray markets with our current customer base.
Additionally, we are working on lapping to mass production our high-end DSLR cameras, including full-frame stitch sensors in our state-of-the-art Uozu fab.
In power management business unit, last quarter we noted the release of our gen 4 power management platform with an industry-best Rds(on) figure of merit of 10 milliohm millimeters squared at 32 volts.
Along others, our Tier 1 power management development partner has begun designing to this platform.
We are also in advanced stages of the next-generation platform, providing a roadmap of continual device shrinkage which enables customer cost reduction whilst increasing our Company margins.
To note, the previously mentioned power management and mixed-signal cross-qualifying activities to TPSCo Tonami factory are now in strong production, numbering in wafers in the tens of thousands.
Our TOPS business unit is represented in each of our seven factories, most recently adding activities with two customers in San Antonio.
We are experiencing strong demand in growth from all TOPS major customers.
And in Q1, we added two contracts of an approximate $75 million customer committed revenue, one with a one-year duration and the other with a three-year duration.
To summarize, we are enjoying strong customer demand, traction in customer partnership for advanced platform development within all of our business units.
As previously stated, we guide Q2 midrange revenue to be $300 million, up 27% year-over-year and 8% quarter-over-quarter.
The second half of the year looks very strong, end promises continuous and notable performance in top- and bottom-line financial metrics.
With that, I'd like to turn the call to our CFO, Mr. Oren Shirazi.
Oren?
Oren Shirazi - SVP of Finance and CFO
Thank you, Russell, and welcome, everyone.
Thank you for joining us today.
I will start by providing financial highlights for the quarter.
For the first quarter of 2016, we achieved record revenues of $278 million; record EBITDA of $78 million; a strong net profit of $66 million, including the net gain from acquisition of the San Antonio fab, or $25 million, excluding it; a $20 million positive net free cash flow; and a record number of $77 million positive cash from operating activity.
Also our balance sheet as of March 31, 2016, is very strong, with a $245 million cash balance and $504 million of shareholders' equity, while reducing the net debt to only $65 million.
During the quarter, we completed the acquisition of the San Antonio fab from Maxim, which is now named TowerJazz Texas, or TJT.
TJT revenue and P&L results from February 1 to March 31 are included in the Company's P&L.
And TJT balances are included in the Company's balance sheet as of March 31, 2016, for the first time since the acquisition.
I will now provide our GAAP P&L results highlights for the quarter, after which I will discuss our balance sheet and cash flow highlights.
Revenue for the quarter was a record of $278 million as compared to $226 million in the first quarter of 2015, an increase of 23% year over year, and 9% quarter over quarter.
Gross profits for the first quarter of 2016 was $61 million, reflecting 22% gross margin, and representing an increase of 86% as compared to $33 million gross profit in the first quarter of 2015, with 15% gross margin, and compared with $65 million gross profit in the immediately preceding quarter, with 25% gross margin.
Operating profit was $31 million for the first quarter of 2016 compared with $2 million in the first quarter of 2015, and $34 million in the immediately preceding quarter.
Net profit for the first quarter of 2016 was $66 million, or $0.78 in basic and per share, or $0.69 per share -- diluted share price -- as compared with $22 million net profit or $0.28 basic per share, and $0.25 diluted per share in the immediately preceding quarter.
Net profit for this quarter included $41 million net gain from acquisition of San Antonio fab.
Excluding this acquisition gain, net profit would have been $25 million, a good sequential improvement versus the $22 million presented in the preceding quarter, and much better than the loss of $73 million we had in the first quarter of 2015, which resulted back then from the accelerated conversion of Series F debentures to equity.
The net gain from the acquisition of the San Antonio is $41 million and is derived from the fair value assigned to the assets and liabilities of TJT, based on a provisional valuation in accordance with GAAP to reflect the purchase price allocation immediately following the acquisition date.
This valuation will be completed in a period not exceeding one year, and therefore may be adjusted later in 2016.
The valuation was performed in accordance with GAAP, specifically ASC-805, which is net business combinations.
The fair value of the assets, net of liabilities, is $81 million and exceeds the $40 million paid as purchase price, resulting in a gain from acquisition, net, in the amount of $41 million that was recorded in this quarter.
The impact of the inclusion of the San Antonio assets, as presented in our March 31 balance sheet, is comprised from the following main components: one, increased fixed assets of $91 million, presented under property and equipment, net, in the balance sheet; two, increased inventories of $11 million; three, increased deferred tax liability of $21 million; four, increased shareholders' equity of $40 million; and five, increased [recent] earnings of $41 million resulting from the net gain discussed before.
EBITDA for the quarter was $78 million, reflecting 51% increase as compared to $51 million in the first quarter of 2015, and slightly higher than the $76 million in the immediately preceding quarter.
In order to better serve our shareholders, investors, analysts, and readers of our report, and coupled with our transition into sustainable GAAP net profit, in addition to the GAAP full financial statements we provided in today's release, certain data and information which is referred to as adjusted financial measures.
All these additional data and information, as far as adjusted net profit is concerned, is reconciled in the table attached to today's release and is calculated from the GAAP net profit, excluding stock-based compensation, amortization of acquired intangible assets, and nonrecurring items.
The adjusted net profits for the first quarter of 2016 is $32 million as compared to adjusted net profit of $26 million in the immediately preceding quarter, and compared to adjusted net loss of $8 million in the first quarter of 2015.
For comparison purposes only, I will also provide the non-GAAP measure [that were] calculated and included in prior quarterly results.
The non-GAAP gross profit and net profit for the three months ended March 31, 2016, are $108 million and $75 million, respectively, representing 39% non-GAAP gross margins and 20% non-GAAP net margin, respectively.
I will now go into the balance sheet analysis as of the end of the quarter.
As mentioned, TJT balances are included for the first time in the Company's balance sheet as of March 31, 2016, and [they drove inter sets] in many of the balance sheet items.
Shareholders' equity as of March 31, 2016, was a record of $504 million, an increase of 73% as compared with $292 million as of March 31, 2015, and 31% increase as compared with $386 million as of December 31, 2015.
This $119 million increase in shareholders' equity during the quarter includes mainly the $66 million net profit and $40 million shares issued for the purchase of San Antonio fab.
Net debt amounted to $65 million as of March 31, 2016, reflecting a net debt to EBITDA ratio of lower than 0.3X, and compared to $162 million net debt as of March 31, 2015, and $105 million as of December 31, 2015.
In regards to our cash flow report, cash and short-term deposits as of March 31, 2016, was $245 million as compared to $206 million as of December 31, 2015.
During the quarter, the Company generated $77 million in positive cash flow from operations, a record number, resulting in, after $57 million of CapEx investment, a net of $20 million free cash flow, which included $15 million of customers' prepayment used to buy machines that will further increase our capacity.
The other main cash activities during the first quarter of 2016 included $6 million proceeds for an exercise of warrants and options; $7 million loan received, net of debt principal payments; $9 million positive effect of exchange rates; and $2.6 million dividend payment to Panasonic by TPS.
Net debt, as was presented in today's release, is comprised of the outstanding principal amount of bank loans in the amount of approximately $245 million, $246 million, and $192 million as of March 31, 2016, December 31, 2015, and March 31, 2015, respectively; and the outstanding principal amount of debentures in the amount of approximately $65 million, $65 million, and $104 million, for the same periods, less cash and deposits in the amount of approximately $245 million, $206 million, and $134 million for those comparison periods.
In order to further enhance our balance sheet, we expect to replace our existing Israeli bank loans totaling $78 million with a long-term unsecured trade debt vehicle, which would enable us better financial and business flexibility by removing the extensive restrictions and covenants under the old bank contract in Israel.
As we announced today, we received an A rating from Standard & Poor's Maalot, which is an Israeli rating company fully owned by S&P Global Ratings.
So the Company got the A rating; and also for the [planned trade debt] vehicle, as well, an A rating.
In summary, we presented a record shareholders' equity, a record cash balance, record revenue and EBITDA level, a record $77 million positive cash from operations, and $20 million net free cash flow, all while maintaining and growing our net profit.
That ends my financial summary.
We will now turn the call to Noit.
Noit?
Noit Levi - VP of IR and Corporate Communications
Thank you, Oren.
Before we will open up the call to the Q&A session, I would like now to add a general and legal statement to our results in regards to statements made, and to be made, during this call.
Please note that the first quarter of 2016 financial results had been prepared in accordance with US GAAP.
And the financial tables in today's earnings release includes financial information that may be considered adjusted financial measures and non-GAAP financial measures under Regulation G and related reporting requirements, as established with the Securities and Exchange Commission, as they apply to our Company; namely this release also presented financial data which is reconciled, as indicated in the table or in the call on an adjusted basis, after deducting, one, stock-based compensation expenses in respect to option grants; two, amortization of acquired intangible assets; three, gains from acquisitions, net; four, other non-cash financing expenses associated with Bonds Series F accelerated conversion; and five, other nonrecurring items.
This release also presented financial data which is reconciled as indicated in the tables, or in the call, on a non-GAAP basis after deducting, one, depreciation and amortization; two, stock-based compensation expenses in respect to option grants; three, Nishiwaki fab restructuring and impairment, net; four, finance expenses, net, other than interest accrued, such that non-GAAP financial expenses, net, include on the interest that accrued during the reported period; five, gain from acquisition, net; and six, income tax expense such that non-GAAP income tax expense include only taxes paid during the period on a cash basis.
Adjusted financial measures and non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, GAAP financial measures.
The table in the earning release also contains the comparable GAAP financial measures to the adjusted financial measures; and to the non-GAAP financial measures as well as the reconciliation between the adjusted financial measures and the non-GAAP financial measures and the most comparable GAAP financial measures.
EBITDA is reconciled in the tables from GAAP operating profit.
EBITDA is not a required GAAP financial measure and may not be comparable to a similarly entitled measures employed by other companies.
EBITDA and the adjusted financial measure and the non-GAAP financial information presented herein should not be considered in isolation or as a substitute for operating income, net; income or loss; cash flows provided by operating, investing, and financing activities; per share data; or other income of cash flow statements that are prepared in accordance with GAAP, and is not necessarily calculated or presented on a basis consistent with the same or similar data presented in previous communications.
Now, we would like to open the call to Q&A.
Operator?
Operator
(Operator Instructions).
Cody Acree, Drexel Hamilton.
Cody Acree - Analyst
Congratulations on the strong progress, particularly I guess with a significant amount of your customers seeing so much volatility maybe not just in handsets, but in semis in general here seasonally.
As we look into some of your larger customers that have been suffering here December margin, even some that are still suffering in June, you seem to be completely contra to some of that volatility.
Can you talk about some of the order linearity you are seeing in SOI, how much of it is driven by silicon germanium, and really just your view?
How much of this is market share gains and your ability to do something that is so contra to what your end customers are seeing?
Russell Ellwanger - CEO
Sure.
Thank you, Cody.
It's a very good question.
So, in the area of the silicon germanium for the low noise amplifier for the Wi-Fi integrated PA, that's certainly for us a market share gain, as it was a market that we weren't strongly competing in, in the past years.
And it's also a market that itself is growing.
So there, there is definitely an increase of market share for us.
And as I noted in the script, this was really very low levels of revenue in the second half of 2015, where we were seeding the design wins to, at this point, very substantial amounts of revenue.
So that's one side of the business.
On the other side, and I think we've mentioned this before, we are very well diversified in who we serve within the mobile market -- I'll talk about the non-mobile markets in a second -- but with who we serve within the mobile markets.
And in that case, if one end user is up a little bit, or down a little bit, or up a lot or down a lot, we haven't seen any pull-back at all because we're then serving those through our customers that are up.
And we've really not seen any pull-back at all.
If anything, we see, right now, a lot of increased demand for products that are needed to have quick turns for upsides due to a mix change of some of our customers.
So our demand, if anything, as odd as this sounds, in the front-end module space, the mobile space, has increased.
It has not decreased at all; and it's not, if anything, it really has increased.
So, we're growing still very nicely there and we don't see any slowdown of demand.
In addition to the silicon germanium that I spoke of for the LNA and the power amplifier, we are seeing a very big uptick in what we normally serve in general for infrastructure, and that is growing very, very strong.
So that is one side of the business that's growing very, very nicely.
The other areas that have extreme demand is really the area of CMOS image sensor.
The industrial camera market is growing very, very strong for us; the medical market, intra/extra-oral dental x-ray, all of this has really very big demand and big backlogs at this point.
And then the other very big area of growth at this point for us -- we talked about the fact of the cross-qualification of our power management.
Although the power management is not our biggest segment of business, right now the amount of ramping that we're doing in power management is very, very big.
Had mentioned that in the Tonami factory we're running tens of thousands of wafers at this point.
The ramp in the utilization of that factory is very, very strong.
And we'll see in Q2, and very strongly in Q3, the impacts of that ramp within the revenue levels and the incremental margin coming out of that.
So, the one other area I wanted to mention as well is that of the TOPS businesses that we've been doing, which the demand is really additionally growing very, very strong.
I mentioned the two contracts: one for a bit more than a year duration; the other for a three-year duration.
Those are both TOPS businesses.
And that's where customers are very, very willing to work with us, and secure capacity over a period of time to make sure that they have that capacity secured.
So, our business looks very strong.
Did that give you enough flavor, Cody, I hope?
Cody Acree - Analyst
Yes, it did.
Thank you very much for that.
As we look at Q2, obviously seeing a lot of solid growth there.
Can you maybe just talk about the incremental contribution?
You've got another month of Maxim coming in.
I think you are getting some currency benefits.
It looks like a further strengthening of yen.
It sounds like organic growth across multiple regions.
If you can just maybe help layer in what is it that's giving you a better June versus a better March?
Russell Ellwanger - CEO
There's certainly an additional month of Maxim through the San Antonio agreement.
And again, the way that we look at the whole San Antonio deal -- it was really got very, very good business relationship, growing relationship with Maxim that we were able to work out something that was a win for both Maxim and ourselves, to where we have now a long-term supply agreement to Maxim and the ability to grow additional revenue.
So there's definitely an additional month from Maxim in the San Antonio factory that was not in Q1.
There's some benefit on the yen exchange rate of -- I'm not sure exactly, maybe $5 million or so -- that you would see in that.
But the biggest benefit that we're seeing in the growth in the second quarter is the Migdal Haemek Fab 2 increase in capacity, the 6% increase in layers that I spoke of.
A good portion of that will be shipping in Q2.
And the capacity is increasing still as we speak, where a good portion of that will continue to grow and ship in Q3, hitting a peak and -- meaning hitting the levels that we're believing it should hit at the end of Q3, stabilizing in Q4.
So Q4 would see all of the increase of capacity shipping in layers.
The other growth engine that we had talked about is that of having increased the capacity in the Newport Beach Fab 3. Of the increase in the activities, I said there was a 6% increase in activities in that factory, as well.
Some of that will be shipping in Q2.
But a lot of that increase of activities is within the silicon germanium mix change.
And the silicon germanium -- it's also very, very high price per layer, but it's more layers, so each wafer has much more value in it.
In the case of an SOI flow, it's somewhere, 21 to 26 layers; in the case of the silicon germanium flows, they are typically sitting about 40 layers.
So it takes longer to come out of the factory.
A lot of the activities that we're doing now with the wafer starts in Newport Beach, the incremental revenue portion we'll be seeing in Q3.
I think that answers your question, Cody.
Cody Acree - Analyst
Yes.
Thank you, Russell.
One last one in RF, and then one for Oren.
In the RF space, with this market share gain momentum, what's your visibility as to where you stand today, and as you look through 2016 and through 2017?
How much visibility do you have into continued share gains?
How much visibility are customers giving you, I guess, with this helping to offset -- I guess what I'm trying to get at is -- how long do you have share gains in front of you that might be able to continue to absorb volatility?
Russell Ellwanger - CEO
I think, at this point, we have very good visibility through the first half of 2017.
And I think that that's very real.
And for some customers, we have visibility throughout all of 2017.
Cody Acree - Analyst
Okay, thank you.
And Oren, a quick question on gross margins.
Could you walk through the change drivers, Q4 to Q1?
And then as you look Q2 and beyond, what are we to expect, as far as the drivers for the rest of the year?
Oren Shirazi - SVP of Finance and CFO
Okay.
So basically, from Q1 going forward, which is I'm sure more interesting -- so whatever incremental revenue that we will have, as opposed to in the average -- impact our gross margin by an incremental 50%, averagely.
So from the one hand, and why it's 50%, the usual answer.
From the one hand, growth, like Russell mentioned, from Fab 2, expected to be at even higher than 50%.
On the other hand, some -- also Russell mentioned the yen changes.
So it means that maybe like Russell mentioned, we have additional $5 million benefit there.
But of course a large portion of the TPSCo is expenses which are denominated in yen.
So, an increase of $5 million, for example, from a Panasonic contract from the yen is very nice on a revenue.
But on the gross profit it brings almost nothing.
Maybe a small percentage of improvement, because there are some margin, but the average increase -- of an increase in revenue which is resulting from a yen increase is, of course, a lower margin than 50%.
On the other hand, we have the Fab 2 which is more than 50%.
We also will have some revenues in Uozu later this year.
So this will -- of course, much better than 50%.
So I believe, for a model, going forward to assume 50% from each incremental revenue goes to the gross profit is a reasonable assumption.
Cody Acree - Analyst
Okay, thank you.
And the drivers for Q4 -- I mean, excuse me, Q1 -- was that primarily Maxim coming in, and then the currency change?
Oren Shirazi - SVP of Finance and CFO
Yes.
Cody Acree - Analyst
Okay.
Thank you.
Operator
Rajvindra Gill, Needham & Co.
Rajvindra Gill - Analyst
Congrats on the good results and execution.
Russell, just on the strategy for bringing third-party revenue into TPSCo and the San Antonio fab, just wanted to make sure that I'm understanding it correctly and if there has been any change.
But are you continuing to basically offload any capacity at Fab 2 and Fab 3, which are currently operating at low 90% utilization rates, above their targets?
Russell Ellwanger - CEO
Our major motivation is really cross-qualification and freeing up capacity through cross-qualification into the organic factories that are with very strategic customers and nominally higher-margin, because the entire margin comes into the Company through what's being done here.
In the case of the cross-qualification -- and some of it is really very good margin -- we had decided that we would cross-qualify the power management flows into the Tonami factory; and fundamentally have there the ability to move a relatively large portion of power management into Tonami; but have a ballast to where we would be able to pull it back into Fab 2, if and when we would have a capacity hole that we would want to fill with the power management.
So that's one side of the cross-qualification.
In the case, again, of the Tonami factory, I wouldn't necessarily call it offloading, although from certain points of time, one could think that it really is offloading.
But it's a cross-qualification, allowing us the ability to load organically or to load in the Tonami factory, depending on where it makes the most sense for the Company and for the business.
Certain customers we have kept within Migdal Haemek because of the -- even within the power management -- because of some strategic reasons that we would want to keep running them in MH.
But still for the area for our customers of having what one calls good business continuity plan.
The ability to have a backup factory where the major flow is qualified in one or two of the products of any given customer is qualified.
Then for any reason, should there be some [abruption] in the supply chain, our customers have an assurance of supply without having to qualify into a different company.
And I think that became one of the big drivers of wanting to have factories that are cross-qualified for the same flows in different regions.
There are certain end customers that do require a business continuity, meaning that there is a dual qualification path in different regions in case there is whatever ecological or political upheaval in some sector of the world.
In our case, this cross-qualification and continuity can happen within the Company, rather than one having to go from one company to another.
Even if a foundry should happen to have multiple fabs, if all of those fabs are in the same region in Taiwan, that does not offer business continuity.
In the case of San Antonio, it's a very, very different activity.
That's a fully owned factory of TowerJazz, and in really a very, very close proximity to Newport Beach.
So in the case of San Antonio, the activities there of the qualification of the RF flows at this point -- and it's RF SOI, and RF control -- that really is for the ability to have customers having a growth path for those products while being able to free up more and more capacity for the silicon germanium in Newport Beach.
While at the same time having the dual qualification, enabling again, the maximization of each factory depending on whatever the circumstance would be on any given quarter.
But in Newport Beach we have very, very strong demand in silicon germanium.
And the greater the amount of RF SOI and RF control that can be done outside of Newport Beach, the more silicon germanium can be processed in Newport Beach.
And then the other activities that we talked about: we have very, very strong relationships with our TOPS customers, with multiple of them.
And the two TOPS customers that we have now are in advanced stages of qualification for certain flows in San Antonio.
Again, those are strong strategic customers, strong relationship customers within our Company that needed greater capacities for their end customers; and, hence, we qualified the flows within San Antonio.
So the reason for having purchased San Antonio was truly the need for additional capacity.
And the model that was purchased under was one that we were able to I think strike of very good win-win deal with Maxim to where, for the initial years, the bulk of all of the costs while ramping additional business is really taken into account from the Maxim model itself, because they owned the factory previously.
And for whatever utilization levels that they were at, they were covering the cost of the factories.
But gives them the freedom then over time, according to contract, to reduce some of that capacity, knowing that even 15 years down the road, there are products there that they need and that they want like to have out of the factory.
Hopefully that answers your question.
I think it did.
Rajvindra Gill - Analyst
No, it was very, very detailed and thorough.
I appreciate that.
On the third-party and Maxim revenue, at the Analyst Day back in March you had mentioned that you were expecting $25 million quarterly third-party revenue at TPSCo, exiting 2016.
And I believe you guys had mentioned that that rate could double to $50 million, exiting 2017.
So, I wanted to see if that was still the case.
Then, number two, on the San Antonio Maxim fab, at the Analyst Day you had outlined expectations to grow that fab above 25% year-over-year in 2017.
So I also wanted to see if that was still the case as well.
Russell Ellwanger - CEO
Very good memory, and it's exactly what had stated there.
In the case of the TPSCo factory, what I said is that we would achieve a $25 million quarterly run rate within 2016.
It's not question, at this point, of achieving it; we will go beyond that.
So, that I'm very confident on with all of the activities that we have, that we'll exceed, and nicely exceed the $25 million third-party run rate in TPSCo within this year.
It's still our target to exceed the $50 million in 2017, and I think we're confident to achieve that as well.
As far as the (multiple speakers).
Rajvindra Gill - Analyst
Thank you.
Russell Ellwanger - CEO
And then you asked about the San Antonio factory itself (multiple speakers).
Our target -- and I think the activities are well in place to do it -- what we had stated was that the revenue coming out of the San Antonio factory, that we would increase that 25%, 2017 over 2016.
And I think that's very realistic.
Rajvindra Gill - Analyst
So, there's a possibility that revenue could increase from $80 million in 2016 to over $100 million in 2017?
Russell Ellwanger - CEO
I have never stated what the revenue is in 2016, because it's really Maxim revenue.
And I've never given the numbers of what Maxim is.
But certainly whatever it is, it will have increased by 25% or more in 2017.
Or at least that's our target; I'm not guaranteeing it, obviously.
But our target is to do so, and I think it's very realistic.
Rajvindra Gill - Analyst
Okay, got it.
Thank you.
Operator
Richard Shannon, Craig-Hallum.
Richard Shannon - Analyst
My first question is on revenues this year.
So you gave us the guidance number; midpoint I think is about 8%.
Obviously part of that is inorganic from the Maxim revenues.
Obviously we could adjust that downward a little bit.
But I think, Russell, your commentary for the second half of the year was to see even stronger growth.
Was the implication there that we should see stronger quarter-on-quarter revenue growth and, say, an adjusted organic number of, say, 5% for the second quarter?
If not, can you help us understand what you meant by those comments?
Russell Ellwanger - CEO
I didn't quite follow your questions.
Could you please start again?
I didn't understand what you said about the inorganic in the beginning.
Richard Shannon - Analyst
No problem.
So your revenue growth guidance for the second quarter is 8%, all in, if we adjust for the extra month of Maxim that would come down some couple of points or so; and I think your comments on your prepared remarks about the second-half growth being even faster.
So, is it fair to assume that the sequential growth rates in the second half of the year, quarter-on-quarter, can be at least above that 5% or whatever adjustment we should be making?
Russell Ellwanger - CEO
So, I just wanted to correct the first statement, if I could.
The quarter-over-quarter growth, if you look at it, it's -- what?
Oren Shirazi - SVP of Finance and CFO
$22 million.
Russell Ellwanger - CEO
Yes, $22 million.
That is not coming from Maxim, the additional month.
It is a lot of organic growth within that.
Although I don't consider any Maxim revenue as inorganic.
As I stated, Maxim activities are really a long-term customer to where the San Antonio acquisition was really an increase of the business model of an organic customer.
But if you were to say what is the 8% growth, the $22 million, and I think I outlined it somewhat well before with Cody, but it's not -- the major portion of it is not coming out of the San Antonio factory.
As far as now the second half, one more time without the 5%, what are you referring to with 5%?
Richard Shannon - Analyst
Well, if you adjust the all-in guidance for the second quarter is up 8% sequentially at the midpoint.
So, you didn't have one month of Maxim revenues in the March quarter.
So if we adjust that apples-to-apples, it would be somewhat lower.
I'm just starting with the base number of 5%.
It sounded like your commentary on your prepared remarks suggested the sequential growth rates in the second half of the year could be higher than that 5%, or whatever we should adjust that for, for the one month missing of Maxim revenues.
Russell Ellwanger - CEO
I didn't say what the percentage was, and I'm not saying I would say higher than 5% or lower than 5%.
But I don't think that 5% is a bad number to be thinking about.
Richard Shannon - Analyst
Okay.
That's what I was looking for.
Thank you for that, Russell.
Let's see here, second question, kind of a question revolving around CapEx.
And you mentioned some prepayments made in the first quarter.
Last quarter's conference call, you talked about some elevated CapEx starting from the third quarter of last year and extending through the second quarter of this year, the current quarter, and then getting to more of the baseline number.
You mentioned there's a prepayment in the first quarter.
Does that extend a higher-than-normal level of CapEx beyond the first half of the year?
And if so, can you help us understand that?
Maybe talk about what you expect for CapEx in total this year.
Oren Shirazi - SVP of Finance and CFO
Yes, so you are correct.
We've described last time the approximately $30 million prepayment that we got already in 2015.
And we said we have additional $15 million for Q1, which is this $15 million.
This really drives a higher CapEx -- drove higher CapEx for Q3, Q4, and expected until Q2 2016.
Obviously we first get the money, the cash in.
And then there is a lag of between one to two quarters until we -- immediately when we get the funds, we order the additional tools for -- required for capacity expansion.
And then there is between one or two quarters until the tool arrives, installed, and paid.
So you are correct in your assumption that the increased $15 million is driving greater CapEx, which is good, because -- and you saw the result of it -- first time this quarter, with the $77 million positive cash from operations, which is a record number.
The previous best number was $57 million, so it is because of the increased capacity.
And since our utilization is a very strong, Fab 2, Fab 3 mainly, I'm very happy that all those investments come off very quickly.
So, you are correct that until the middle of this year, we should continue to expect greater than $40 million CapEx.
I believe with the $70 million, $80 million a quarter positive cash flow from operations -- which is, by the way, very similar amount to the EBITDA now -- all comes together to a very nice net cash flow margin.
So, hope to continue with that.
Richard Shannon - Analyst
Okay.
And is the prepayment -- is that coming from a customer from which you got payments in the past?
Oren Shirazi - SVP of Finance and CFO
Yes.
Richard Shannon - Analyst
Okay.
My last question for me, and I'll jump out of line.
I missed the comments, both of you, from Russell and Oren, about currency benefit or currency effects, both on the top line and gross margins.
Can you repeat what those were?
And did I catch something about a benefit you expected in the second quarter?
And I apologize for missing some of this, but I want to make sure I get it.
Oren Shirazi - SVP of Finance and CFO
Yes.
We said also in the past that actually our revenue is been entirely in dollars, apart from the revenues that TPSCo has for Panasonic, which are denominated in yen.
Which is a good thing, because this is naturally hedging the effect that most of the expenses in TPSCo are denominated in yen -- payroll, electricity, everything, almost everything.
So, basically we are naturally hedged.
So the impact of any yen fluctuations on the gross profit, operating profit, EBITDA, net profit, is almost 0.
But on the revenue -- I was asked on the revenue -- on the revenue, of course in the current trend that the yen is going down from 120 to 112 in Q1, and now it's at 107.
So it had an impact of $5 million positive to the revenue, which means that there is also additional expenses, in COGS mainly, of about $4 million, $4.5 million.
So in terms of margin, when I was asked, going to the future, what will be the incremental gross profit over the incremental revenue which are expected, so I said that from the business [offer to] and Tonami and all those places, all the incremental revenues in Fab 3 and everything, margin should be about 50% incremental, but will be slightly offset by the fact that the additional revenue in dollars, because of the yen, will be an additional, let's say, 10%, 20% incremental margin.
Because it's only the margin of the revenue on top of the COGS, which are in yen.
So the blended growth of the incremental revenue is still more than 50%, driven by the more than 50% growth from revenue wafers, and less than 50% from the exchange rate trend.
Now Russell wanted -- if you -- to add additional input about the customer prepayment.
So, Russell?
Russell Ellwanger - CEO
Yes.
So, I had mentioned $75 million of TOPS contracts that we have took on within Q1.
One of those contracts came with it, as well, customer prepayment specifically towards some incremental CapEx.
So that was on the order of about $13 million.
So that's something else that you would be seeing, is that there will be an increase of customer-funded CapEx for enabling part of that contract.
Oren Shirazi - SVP of Finance and CFO
So this means that Q2 we will see additional $13 million positive cash in from operations from this additional customer-funded agreement.
And it will use to fund additional CapEx for expansion; this is mainly for Q2, Q3, will be additional CapEx of this $13 million.
So, on a net basis, this is a wash.
But since you asked about CapEx against cash from operations, that's important.
Richard Shannon - Analyst
Okay.
I think I caught all that.
I'll take my -- I'll go off-line here to work on this.
If I have any follow-ups, I'll jump back in, guys.
Thank you very much for your time.
Operator
Sabina Levy, Leader Capital Markets.
Sabina Levy - Analyst
Congratulations for the quarter.
I have a question regarding the business development front.
I hope it's not coming too soon; but I was wondering, should we expect any additional developments on the M&A front?
Do you have any specific areas of interest, maybe geographies, that we should look into?
Also take into the consideration your -- the significant improvement in your cash position and the strong cash flows?
Russell Ellwanger - CEO
Thank you, Sabina, for a very good question.
We had actually talked about this at our investor Analyst Day in San Antonio.
We believe that we should be involved in China, and we are actively looking at opportunities in China.
However, an activity that we would be doing there, we would not look at it as a cash-out, but rather a cash-in activity.
So we've tried to work out something that's -- we would get involved in the Chinese market, but not in the way of spending money; but in the way that it would be a cash accretive from the initial engagement.
Sabina Levy - Analyst
Okay.
I understand.
Thank you very much.
Operator
Lisa Thompson.
Lisa Thompson - Analyst
I had a couple of questions about the stuff below the operating income.
Maybe refinancing your bank loan, how do you see that interest expense for the next three quarters?
Oren Shirazi - SVP of Finance and CFO
We believe it will be a little bit lower.
Already we have -- you see in the P&L a low interest level compared to the cash flow: $3 million a quarter.
It maybe will be -- it will be a little lower.
But that's not the main reason why we do of course these replacement of the Israeli bank loans.
They are old loans taken 15 years ago; contain a lot of restrictive covenants that are on the Company, and restrict us from very -- even things which are not common today.
So we wanted to replace it in order to be free from those limitations and covenants, and replace it with unsecured debt vehicle, straight debt vehicles.
So that's the main purpose.
Of course, if we can get some reduction in the interest cost, it will also be good, and we expect that.
But that's not the main reason.
Lisa Thompson - Analyst
Okay, so stick with $3 million a quarter for now?
Oren Shirazi - SVP of Finance and CFO
Yes, yes.
Lisa Thompson - Analyst
And then are you going to have anything in that line item, the other non-cash financing expense?
Oren Shirazi - SVP of Finance and CFO
Excuse me?
Lisa Thompson - Analyst
The line item you have (multiple speakers).
I'm sorry.
On the line item, the other non-cash financing expense, do you expect to see those -- that number in the next three quarters?
Oren Shirazi - SVP of Finance and CFO
Yes.
This is like almost a fixed charge.
It should go down gradually, and it's about $3 million a quarter.
You'll see that it's very low compared to the past.
It was $18 million; it was $12 million.
Now it should not be greater than $3 million.
This is an accounting registration of amortization.
It's mainly amortization and accretion of issuance related of bond debentures in the past.
It's really old stuff that are being amortized to the P&L on a pretty linear basis.
So, I don't expect any change in there also; $3 million flat.
Lisa Thompson - Analyst
And does that continue on to 2017?
Oren Shirazi - SVP of Finance and CFO
Yes.
It will go down.
It will be $2 million in 2017.
Lisa Thompson - Analyst
And 2017?
Okay.
Good.
Good enough.
Think you so much.
That's all I had.
Operator
Hello?
Russell Ellwanger - CEO
Yes?
Operator
Jaret Wilson, JWBC Capital.
Jaret Wilson - Analyst
Congratulations on another strong quarter.
Russell Ellwanger - CEO
Thank you.
Jaret Wilson - Analyst
So, another question on CapEx.
What do you expect maintenance CapEx to be after the second- and third-quarter buildout that you just recently mentioned?
Oren Shirazi - SVP of Finance and CFO
We expect this to go down to the $40 million level for (inaudible).
Jaret Wilson - Analyst
Okay.
And do you think that there will be additional customer-funded prepayments for additional expansion?
Oren Shirazi - SVP of Finance and CFO
We don't see it now in the channels.
We only have this $13 million -- one, three -- that Russell mentioned, for Q2 cash-in.
Don't have any --.
Jaret Wilson - Analyst
Okay.
Thanks.
That's it for me.
Operator
George Berman, IFS Raymond James.
George Berman - Analyst
Again, congratulations.
Great quarter.
I've got a quick question.
Items that occurred last year, do you have any updates on the -- there was talk about a joint venture in India.
And could you be a bit more specific on how you see entering the Chinese market?
Thank you.
Russell Ellwanger - CEO
So, it was press released that the financial arm of that deal, JP, had pulled out of it.
Their own financials did not allow them any longer to be the funding arm of that activity.
Really a shame that I think the project was so longly protracted, but they pulled out of it.
As far as that specific tender -- which was between JP, IBM, and ourselves -- in the interim, IBM semiconductor really no longer exists.
It was purchased.
I'm not sure purchased is the right word.
IBM paid GLOBALFOUNDRIES to take it over.
So that group does not exist now.
Are there other potential or abilities in India?
Possibly, but nothing of any type of level that would be talked to, at this point.
In the case of China, there's quite a bit of governmental incentives for people to build semiconductor in China.
And really the type of activity we might be looking at in China would maybe be similar to what the initial India deal would be, that we would go in there with technical capabilities and have some percentage of a manufacturing site, as an in-kind activity for us lending our manufacturing capabilities.
George Berman - Analyst
Great.
Thank you very much.
Operator
There are no further questions at this time.
Mr. Ellwanger, would you like to make your concluding statement?
Russell Ellwanger - CEO
Certainly.
So, I really just thank everybody for their time, very good questions, and for the interest in the Company.
We really were very, very excited in 2015 to have brought the Company to positive, sustainable, and growing GAAP profit, and really to achieving the announced target of crossing a $1 billion run rate.
It's really equally exciting to guide a Q2 2016 midrange guidance of $1.2 billion annualized.
It's an exciting place to be.
It's an exciting Company.
Maybe the more exciting part of this $1.2 billion run rate is that it's against a backdrop of very high and continuing customer demand, increasing organic capacity, and really multiple flows, and many customers in final stages of qualification or in ramp in the TPSCo factory; or right now starting in the San Antonio factory that we recently acquired.
In addition to the qualification stages, there's other organic developments that we've done at the TPSCo factory.
Oren had mentioned Q4 incremental revenues of a notable amount from the Uozu factory, specifically on image sensors.
So, we are very confident of a second half that could bring us to notable achievements beyond that of the $1.2 billion run rate that will be both top- and bottom-line notable for the Company.
We are excited to get there.
We're happy with where we came from in the past years.
And we see a very, very strong momentum and a very empowered and passionate employee base.
With that, I want to thank you again for your interest in the Company and for having been with us for many years now.
We will be participating in the Craig-Hallum Annual Institutional Investor Conference on June 1 in Minneapolis.
And for those of you who will be there, we look forward to meet and to update as needed.
And again, as always, very happy to engage in any questions that you might have about the Company, or interactions that you'd wish to have beyond this call.
Please contact Ms. Levi.
And we will set up and answer whatever questions, and enter into whatever discourses you'd like.
Again, my many thanks.
Very good day.
Thank you.
Operator
Thank you.
This concludes the TowerJazz first-quarter 2016 results conference call.
Thank you for your participation.
You may go ahead and disconnect.