高塔半導體 (TSEM) 2016 Q4 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz fourth-quarter and full-year 2016 results conference call. All participants are currently present in listen-only mode. Following management's prepared statements, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded February 13, 2017.

  • Joining us today are Mr. Russell Ellwanger, TowerJazz's CEO, and Mr. Oren Shirazi, CFO. I would now like to turn the call over to Miss Noit Levi, Vice President of Investor Relations and Corporate Communications. Miss Levi, Please go ahead.

  • Noit Levi - VP IR

  • Thank you and welcome to TowerJazz financial results conference call for the fourth quarter and fiscal year of 2016. Before we begin, I would like to remind you that some statements made during this call may be forward-looking and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected. These uncertainties and risk factors are fully disclosed in our Forms 20-F, 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 obligations 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 Noit. Firstly, welcome to all of you. Thank you for joining us today.

  • 2016 was a wonderful year, one in which we demonstrated the best business and financial performance in the history of the Company. I appreciate and gratefully acknowledge the combination of a dedicated worldwide employee base, outstanding managers and leadership team for this achievement, as well as, and of great importance, customer partners who have and continue to trust us with their business.

  • We continued to cement our position as the mobile specialty foundry leader, and present yet another year of record revenues, having reached $1.25 billion with an industry-leading growth of 30% year-over-year. We also recorded our highest ever EBITDA of over $365 million, up almost 50% versus last year, and breaking a $400 million fourth-quarter annualized EBITDA run rate with record net profit of over $200 million, and overall margin increases. The performance generated approximately $120 million in free cash flow, a source that may be used to support additional growth initiatives. This growth in performance is evidence a successful business model, which, in our case, is analog industry leadership with low-cost acquisitions, which acquisitions provide self-funded capacity increases. We remain focused on providing best-in-class specialty technology offerings by providing the right platforms to support the trends that are now driving the world.

  • We increased our competitive advantage within existing and within new markets by being responsive to the present and future needs of our diversified customer base. As we did in the fourth quarter of 2015, I would like to discuss the end markets that are served within each of our main business units and provide color to the 2016 annual revenues and year-over-year growth for each of the major groups. I'll discuss the offerings and roadmap progression and, lastly, present the 2017 forecasted growth drivers.

  • As previously done, we are dividing our $1.25 billion 2016 corporate revenues into four groups -- RF, power management, image sensors, and lastly, a grouping of mixed-signal and others.

  • In 2016, our RF group represented 30% of our corporate revenues, approximately $370 million, against $300 million in 2015, a 23% year-over-year revenue increase. Our RF high precision analog business units serves primarily two end markets, mobile and infrastructure, representing 21% and 8% of the corporate revenues respectively. For each market, our technology offers best-in-class performance together with accurate models and design kits that enable our customers to bring, new high-performance products to market faster than with competing solutions.

  • For the mobile market, we offer RF SOI for best-in-class R-on C-off figures of merit, sub-100 femtosecond, which result in lower insertion loss for RF switches, leading to improved reception, faster data rates, and longer battery life for handsets and other mobile devices. In addition, our silicon germanium offering is used for both receive low noise amplifiers, and transmit power amplifier functions and handsets and provides the best silicon-based performance, lowest noise figure for receivers and best power efficiency for silicon-based power amplifiers, enabling higher data rates, better GPS reception, and longer battery life in handsets and other devices. Both LNA and PAs are in high volume production, and new generations of technology are being rolled out.

  • For the infrastructure market, our industry leadership in high-performance silicon germanium continued with the announcement this year of S4 with 300 gigahertz Fmax complementing our production H3 process used for 10 to 100 gigabit per second optical fiber transceivers and millimeter wave radar, which we press released early adoption of this platform with industry leaders, including, alphabetically, Broadcom, Inphi, MACOM, Maxim, Maxlinear, and Semtech, among others.

  • Our main achievements for 2016 in this business group included a successful transport of our most popular RF SOI platforms to our newly acquired facility in San Antonio to enable additional capacity for customers in this growing market.

  • We announced the production ramp of our silicon germanium PA process with Skyworks. This process enables the front end module single-chip with power amplifier, low noise amplifier, switch logic and power management functions that can all be integrated into a single die.

  • In addition, as mentioned, we announced our latest addition to the silicon germanium turbot platform with S4 at 300 gigahertz Fmax. The main growth drivers for the RF high precision analog business unit continue to be front-end modules for handsets and other mobile devices, front-end components for fiber-optic data connection and data centers and networks, as well as production ramp of automotive collision avoidance and other radar applications. These markets drove -- drive growth both in RF SOI and silicon germanium technology platforms.

  • We are well-positioned for continued success in the RF market with industry-leading process technology, strong relationships with Tier 1 customers to drive the Company's roadmap, and a demonstrated ability to bring customers to market quickly with first-path success and ramp to high volumes in multiple factories, a combination that cannot be easily duplicated in the foundry industry.

  • Looking at the power management segment, this group represented 28% of our 2016 corporate revenues, or $345 million, versus approximately $265 million in 2015, a 30% year-over-year growth in revenue. Within this group, we mainly produce power ICs and power discrete products. The power ICs are foundry processes open to all customers, and the power discretes are predominantly integrated device maker proprietary flows with typically multiple generations of additional developments for the specific customer. In the case of power discretes, the greatest portion is on long-term committed contracts.

  • We closely collaborate with our leading customers to find and develop the next generation of its platforms and devices. These collaborations enable our partners an early access to our future offerings with specific solutions tailored for their specific needs. This mode of operation has already yielded developments of new advanced devices such as high-frequency LDMOS and a 5-volt cost effective isolation, all for the high efficiency switch regulator market.

  • Our power management platform includes several distinct advantages -- Low Rdson over a wide and scalable voltage range enabling the highest efficiencies in the foundry industry. Our LDMOS transistors are optimized to maximize the performance cost ratio and minimize the footprint with low Rdson, a wide range of the substrate isolation types ranging from volt isolation for the majority of power management products to full dielectric isolation using 200-volt SOI for enabling positive and negative voltages on the same integrated circuit. The latter can be particularly useful for applications such as wireless charging, Class D audio amplifier and automotive.

  • Lastly, high-density logic orders for both the 1.8-volt and for the 5-volt library and high-density nonvolatile memories for applications which need high digital density such as wireless chargers, PMIC, smart power product or automotive power controllers.

  • During 2016, multiple additional advanced technologies were developed -- 200-volt SOI technology which offers our customers a state-of-the-art full isolation up to 200 volts using the standard TS18 PM PDK. The 200-volt SOI technology is already in use by one of our leading customers to serve the motor control market, but also applicable for medical, home appliances and automotive market. Through 2017, we expect products to be ramped up by many of our other customers on this platform.

  • In addition, we provide a value added low voltage below 5-volt power management offering for high current, high-frequency switch regulators, PMICs, etc. This technology offers advanced isolation capabilities with minimal addition layers and advanced power transistors for high-frequency switching regulators. We also released a new high-density 5-volt digital library to enable denser integration of more controllers within 5-volt only designs to allow for differentiation in an additional $0.5 billion wafer market.

  • In 2017, we will continue to focus on reducing the Rdson to best-in-class levels also for voltages up to 100 volt and also to expand our nonvolatile memory offering to allow more integration of control and processing within power products, all combined with cutting-edge power management devices. More engagements on the 200-volt SOI will happen during 2017 to support high-voltage DC/DC converters, automotive applications, and high-voltage battery management ICs.

  • Our image sensor group also continued to show strong growth in 2016, representing 18% of our corporate revenues in 2016, or $220 million, versus approximately $166 million in 2015, representing 33% year-over-year growth.

  • On the CIS front, we are able to provide best-in-class pixel technology tailored for each specific sensor application areas such as very high dynamic range pixels for the automotive industry, unique, low noise and extremely small mobile shutter pixels for the fast increasing industrial vision market, extremely low dark current, low hot pixel count and low noise pixels for the high-end photography and cinematography markets, large stitched pixels for medical and dental x-ray, near-infrared sensitive mobile shutter small pixels for 3D and augmented and virtual reality applications. In addition, we tailor the pixel layout as well as the process parameters for each customer's requirements, providing silicon proven state-of-the-art pixels.

  • In 2016, we grew our market share substantially, especially in the medical and industrial market segments, ramping to volume production of new devices of our customers. In addition, during the year, we witnessed several large merger and acquisitions in the sensor markets between our customers, which strengthens the Company's position even further as we are the major or sole supplier for these customers.

  • The major focuses for 2017 will be proliferation of next-generation mobile share technology for the medical sensor market, increasing market share in the DSLR market using high-end technology in a 300 millimeter factory in Uozu, Japan, and increased presence in the growing security market.

  • The mixed-signal others group represented a quarter of our 2016 corporate revenues, or approximately $315 million. This is compared to approximately $230 million in 2015, representing a year-over-year growth of 37%. Our mixed-signal CMOS platforms are ideal for customized designs for low-power analog and digital designs, including the latest 65 nanometer milli-meterwave RF CMOS modeling and enabled 18-volt high-voltage CMOS offering. As described in the previous year, the products within this group include microcontrollers, ASICs, ID tags, logic standard cells, certain special CMOS embedded memories, and advanced sensors, including MEMS. These products serve computing, industrial consumer and automotive end markets. Another grouping within this area is aerospace and defense business in the US providing ITAR entrusted access to our commercial technologies for military and space applications in our Newport Beach, California facility. We are able to meet the high volume needs of our customers using our multiple manufacturing sites.

  • To summarize our markets and technology focus, we are well-diversified between the different groups, end markets and products. Our customer demand remains strong while we work together producing platforms which create next-generation differentiated products for future market needs. The continuous growth in each and every one of our business groups is a strong indication for us that we are playing in the right markets with the right customers and providing the correct solutions.

  • Looking into 2017, excluding Panasonic and Maxim, which are captive and stable and under long-term supply agreements, we see growth across the board for all business units. According to customer forecasts, the RF HPA business unit will be single-digit growth and all others nicely above 25% year-over-year growth, the highest growth being in CMOS image sensor, which also provides our highest blended margin.

  • Looking to utilization, I'd like to spend a few moments talking about the current utilization rates and available capacity. The strong customer demand we are experiencing is reflected in the utilization levels. Our operational model is to run at about 85% utilization in each of our facilities.

  • The following are the utilization rates for the fourth quarter of 2016: Fab 1, Migdal Haemek, Israel, our assistant factory, was at 78% utilization; Fab 2, Migdal Haemek, Israel, our 8-inch factory, was at 87% utilization with the previously announced added capacity; Fab 3, Newport Beach, our 8-inch factory, was now at the utilization model at 84%; and the three TPSCo factories had a utilization average of about 50%. And very notably, in the fourth quarter of 2015, we nicely exceeded the previously expressed target of $100 million annualized third-party revenue in the fourth quarter with substantial unused capacity for additional growth.

  • Regarding the San Antonio factory, we have qualified multiple platforms in this factory in a very accelerated time frame and expect a revenue increase in San Antonio of about 30% in 2017 over the Maxim base contract.

  • Looking forward, we expect revenues from the first quarter of 2017 to be about $330 million with an upward or downward range of 5%. This represents approximately 19% year-over-year revenue growth as compared with the first quarter of 2016. And according to customer forecasts, we expect growth throughout the year with each quarter being measurably higher than the corresponding quarter in 2016.

  • To summarize, 2016 was a fantastic year for TowerJazz. We continued our strong year-over-year revenue growth and, due to our efficient operating model, were able to translate this growth into much stronger growth and profit. At the same time, we maintained and further built on our lead in the analog semiconductor space. Our goals for the years ahead remains to continue our Company's proven successful business model. We will drive analog leadership with low-cost capacity expansion, resulting in strong increasing revenues and proportional growth in margins profit and free cash flow at minimal risk to investors.

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

  • Oren Shirazi - SVP Finance, CFO

  • Thank you, Russell, and welcome, everyone. I will start my review by providing our P&L result highlights and then discuss our cash generation debt, share count and the balance sheet.

  • As we previously disclosed, revenues for the fourth quarter was $340 million, a 34% year-over-year increase as compared to $255 million and a 4% quarter-over-quarter increase when compared to $326 million.

  • Gross and operating profits for the quarter were at a record of $88 million and $55 million, respectively, representing 36% and 61% improvement as compared with $65 million and $34 million gross and operating profit in the fourth quarter of 2015 respectively. Both gross and operating profit also increased as compared to $81 million and $49 million respectively in the third quarter of 2016.

  • Net profit for the fourth quarter was $48 million, or $0.53 in basic earnings per share, a significant increase as compared to $22 million, or $0.28 per share, in the fourth quarter of 2015. Net profit for the third quarter of 2016 was $51 million and included a nonrecurring income tax benefit of $6 million related to the finalization of the subsidiary closure that held the fab Nishiwaki, Japan, which ceased its operation in 2014. Diluted earnings per share for the fourth quarter were $0.49 per share as compared to diluted earnings per share of $0.25 in the fourth quarter of 2015 and $0.52 in the third quarter of 2016.

  • Adjusted net profit for the quarter as defined and reconciled in the tables of the press release was $53 million compared with $26 million in the fourth quarter of 2015 and $49 million in the third quarter of 2016.

  • EBITDA for the quarter was at a record of $105 million as compared to $76 million in the fourth quarter of last year, and $97 million in the third quarter of 2016. For the year, revenues were at a record of $1.25 billion, a 30% increase over the $961 million of 2015.

  • Gross profit for the year was at a record of $303 million, 48% higher than gross profit of $205 million in 2015. Operating profit for the year was at a record of $175 million, more than double the $82 million operating profit in 2015.

  • Net profit for the year was at a record of $204 million, reflecting $2.33 per share versus a net loss of $30 million, or $0.40 per share, in 2015.

  • Diluted earnings per share for the year were $2.09. Net profit for 2016 included $50 million net gain on the San Antonio fab acquisition and a $6 million income tax benefit related to the finalization of the closure of the Nishiwaki, Japan subsidiary, which were partly offset by $7 million in non-cash financing expenses related to the Israeli bank loans early repayments.

  • Net loss for 2015 included $81 million non-cash financing expenses associated with Series F bonds accelerated conversion done in 2015, as well as $18 million income tax benefit resulting from the expiration of statutes of limitations and Japanese income tax rate reduction.

  • Adjusted net profit for the year, as defined and reconciled in the tables of the press release, was $175 million as compared to $49 million in 2015. EBITDA for the year was at a record of $367 million as compared with $248 million in 2016.

  • With regard to currencies and hedging, in relation to the euro currency, we have almost 0 business in euros and no exposure to the euro. In relation to the Japanese yen, since all Panasonic revenues are denominated in yen and the vast majority of TPSCo are in yen, we have a natural hedge to most of the Japanese business and operations, excluding the portion in which the yen denominated variable cost associated with the third-party foundry business exceed the yen net gains from the Panasonic business. In order to mitigate this net yen exposure, as previously stated, we have executed zero costs in our hedging transactions. The zero costs (inaudible) transactions hedge all currency fluctuations to be contained within a narrow range as compared to the spot exchange rate. And while the yen fluctuated this year between levers of JPY102 to JPY120, our margins were almost not impacted. In addition and related to the Japanese yen impact on the balance sheet, we have a natural hedge on cash and loan balances whereby the loans and the cash are both yen-denominated, which situation protects us from the yen fluctuation impact on loan and on cash.

  • Lastly, in relation to fluctuation in the Israeli shekel currency, we have no revenues in this currency. And while less than 10% of our costs are denominated in the Israeli shekel currency, we also hedge most of this currency risk by zero costs in their transaction.

  • I will now review the balance sheet analysis as of the end of 2016. In regards to our cash flow, cash and short-term deposits were at a record of $389 million as of September 31, 2015 as compared to $363 million as of September 2016. The main cash activities during the quarter were a $82 million generation of cash flow from operations, $11 million received from exercise of warrants an option, $43 million investment in fixed assets, net, $6 million of debt payments and $17 million of the Japanese yen exchange rate affected the cash balance, which, as previously explained, were mostly offset by a similar impact on the Japanese loan balance.

  • Free cash flow for the fourth quarter was at a record of $39 million compared with $31 million in the third quarter of 2016. As I mentioned, the cash and short-term deposit balance of $389 million grew significantly from $206 million as of December 31, 2015. The main cash activities for the full year were $327 million cash generated from operating activities, $39 million received from exercise of warrants and options, $37 million debt proceeds received, net, net of debt principal payments, and $210 million net investments in fixed assets. Free cash flow for 2016 was at a record of $118 million compared with $30 million in 2015.

  • In relation to our debt, this year, we fully repaid the Israeli bank loans under which we initially borrowed more than $500 million. This was done following the issuance of bonds Series G, a 2.79% text coupon not linked to any index, not linked to any LIBOR. The bonds will mature between 2020 and 2023. This resulted in lower interest costs, improved balance sheet ratios, and released us from many restrictive covenants which were imposed on us, creating much more business and financial flexibility.

  • As of December 31, 2016, our total gross debt was $352 million, comprised of outstanding principal amount of $166 million in bank loans, including $126 million from Japanese banks to TPSCo and debentures in the amount of $186 million, deducting total gross debt of $352 million from total cash and short-term deposit of $389 million, resulting in a net cash position of $37 million as compared to a negative amount of $105 million as of December 31, 2015. Since at that point in time, debt had exceeded the cash we had on hand.

  • Our net current assets, or current assets less current liabilities, increased from $236 million as of December 31, 2015 to $451 million as of December 31, 2016. The current ratio as of December 31, 2016 increased to 2.8X as compared with 2.1X as of December 31, 2015.

  • Shareholders equity as of December 31, 2016 was at a record of $683 million, 77% higher as compared to $386 million as of December 31, 2015. Share count as of December 31, 2016 included 93 million outstanding shares. Our fully diluted share count as of December 31, 2016 includes an additional 14 million maximum possible shares to be issued, comprised as follows: 2 million from exercise of warrants [AS9]; 4 million is operated options and our receivables; 6 million underlying convertible bonds; and 2 million underwriting capital loans. As a result, our fully diluted share count remains unchanged at 107 million, exactly the share count as of September 30, exactly the same count as of June 30, and the same count as March 31, 2016.

  • To summarize, we are very pleased with the results for the fourth quarter and full year 2016, which demonstrates the strength of our financial model, achieving multiple record results, including record revenue, EBITDA, gross profit, operating profit, and free cash flow, as well as a record cash balance and record shareholders equity.

  • That ends my summary and I would like now to turn the call to Noit Levi. Noit, please go ahead.

  • Noit Levi - VP IR

  • Thank you Oren. Before we open up the call to Q&A session, I would like now to add the general and legal statement to our results in regards to statements made and to be made during this call. Please note the fourth-quarter and fiscal-year 2016 financial results have increased in accordance with US GAAP and the financial table 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 and (technical difficulty) 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 amortization and acquired intangible assets, compensation expenses in respect of equity grants to directors, officers and employees, gains from acquisitions, net, non-cash financing expenses related to bank loans early repayment, and other nonrecurring items such as income tax benefit. Adjusted financial measures and non-GAAP financial measures should be evaluated in conjunction with and are not substitutes for GAAP financial measures. The tables and the earnings release also contain the comparable GAAP financial measures to the adjusted financial measures, as well as the reconciliation between the adjusted financial measures and the most comparable GAAP financial measure.

  • EBITDA is reconciled in the table from GAAP operating profit. EBITDA is not a required GAAP financial measure and may not be comparable to a similarly entitled measure employed by other companies. EBITDA and adjusted financial measures and the non-GAAP financial information presented herein should not be considered in relation or as a substitute for operating income, net income or loss, cash flow provided by operating, investing, and financing activities, special data or other income or cash flow statements that are prepared in accordance with GAAP and not necessarily calculated or presented on a basis consistent with the same or similar data presented in previous communications.

  • And now we will open up the call for Q&A. Operator?

  • Operator

  • (Operator Instructions). Cody Acree, Drexel Hamilton.

  • Cody Acree - Analyst

  • Congratulations guys, and thanks for taking my questions. Maybe, Oren, just a housekeeping question on the currency details, and thank you for that. I understand that there's no margin of profitability impact, but you did have quite a bit of a revenue headwind during the December quarter. Can you maybe just detail how much revenue impact you had to absorb to get to that [$40] million number?

  • Oren Shirazi - SVP Finance, CFO

  • The yen, the average yen rate on Q4 2016 was JPY111, which is compared to JPY103 as of the average of Q3. So it's a 7%. And we said in the past that Panasonic revenues are between $90 million to $105 million per quarter. So if you also $90 million C 7%, that's the impact. But like you mentioned, it's fully offset by the same impact on the COGS, so no impact on the -- almost no impact on any of the margins.

  • Cody Acree - Analyst

  • Are you building in any cushion for volatility for revenue for Q1?

  • Oren Shirazi - SVP Finance, CFO

  • Cushion? What do you mean?

  • Cody Acree - Analyst

  • In your guidance for Q1, how are you -- what are you assuming for currency?

  • Oren Shirazi - SVP Finance, CFO

  • We assume the current exchange rate which is already Q1, we are in the middle of Q1 and already the average is about the same, JPY113, and we assume the same will stay. So we don't assume -- we don't expect anything that will change.

  • Cody Acree - Analyst

  • Okay. Thank you very much. Russell, could you just talk about the likelihood of you needing to sign another capacity deal in 2017? It sounds like your utilization rates are moving up nicely and you are expecting TPSCo to continue. So what happens as we exit and look into 2018 and beyond?

  • Russell Ellwanger - CEO

  • Good question. I believe that, during 2017, first half of 2018, the Company, if it maintains, which it should, the growth trajectories that we have been, we will indeed need additional capacity beyond what we have now. We've mentioned that we have two distinct, different models that we are pursuing for capacity. We had stated that we are pursuing a strategy in China, which we are indeed pursuing, and this would lead to where we would partner with somebody and possibly a municipality to build a greenfield site for which our portion of investment would be our IP in building a fab, in equipping a fab and bringing technologies into the fab. It would not be an upfront investment from us. It would be an in-kind investment on capability for where nominally we would be being paid during that period as well. So, that would be one area of gaining greenfield capacity where it would not be at all, from a TowerJazz standpoint, a greenfield type investment as far as the capital that would typically go into a greenfield build.

  • The other that we have had opportunities for in the past year, maybe year and a half, but we haven't seen the proper opportunity other than the Maxim San Antonio factory, would be to continue the type of arrangement that we did with Panasonic, with TPSCo, or going to the full 100% acquisition, what we did with Maxim for San Antonio. And there have been several opportunities of that nature that, for our specific needs, the opportunity didn't fit 100% the template that we would like to have. One of them we tried very hard to make work, but it just didn't meet our template.

  • But one of the beauties for us with IDM consolidation, that continues to go forward -- is that typically IDM consolidation does allow available factories, due to the consolidation and underutilization that some factories become available within the market. And at this point, we've reached a level of customer range that most of the consolidations being done, we have a relationship with either both of the IDMs or with one or the other of the IDMs. So, the ability to get into such a deal at a very, very early stage is very real. Hopefully, that answers your question, Cody.

  • Cody Acree - Analyst

  • It does, Russell. I guess just one point of clarification though. If you pursue this Chinese opportunity or it comes to fruition, a greenfield build or ramping of capacity, what's the earliest timeline that you think that could actually have an impact to your capability?

  • Russell Ellwanger - CEO

  • I think it would be a bit shy of two years that you would start running pilot runs through the fab. So, you would be able to have a flow that's qualified within a two-year period. In China, things can move very, very quick once they're kicked off.

  • Cody Acree - Analyst

  • And then, at the analyst day, you discussed other initiatives, I think one of them being maybe the possibility of looking at another vertical like MEMS. You mentioned it briefly in your remarks of possible drivers, but can you elaborate on any thoughts following that analyst day?

  • Russell Ellwanger - CEO

  • It wasn't just solely MEMS. It was MEMS and sensors. Sensors may or may not be MEMS-based. But however, that is not capacity M&A, so to speak. That really is a technology capability. But certainly, for the MEMS type of an activity, or a strong sensor type activity, for a variety of different end applications, to really grow in that market we believe in a very strong fashion, you have to vet many, many customers. To try to vet many customers within an existing high-volume factory is very difficult, because each of these require a very strong amount of specific development for that customer and in particular with MEMS flows. So, the impact on the efficiency of the factory becomes very, very strong.

  • So, for a MEMS type activity, what we had stated was that we would be looking at two things. One is something that would bring with it IP, and the IP is both from a protection portfolio as well as from a human capability side. And then addition to the IP would be to have some small capacity that is either presently or could quickly become cash flow neutral or cash flow positive to that many customers. And upon any customer reaching a certain level, I don't know, you can say 500 to 800, 1,000, it doesn't actually matter, but reaching a certain level of production to guarantee that customer continuation of the production in the vetting factory while you're transferring the specific flow into a high-volume factory, and at that point doing it in a way that would not impact the efficiency of the high-volume factory.

  • In the case of sensors specifically, there's really two ways to get into that type of a market. One is, again, to do, as I was speaking of, with the MEMS activities. The other would be to bring on a specific IDM transfer that we do with discretes and to deal with a very, very high-volume first year sensor company, and bring one of their flows into your factory, and serve them and develop a very strong core capability by bringing up a very specific flow and flow family for an end customer that you know to begin with has very high-volume demand and can guarantee you that the development does go into high-volume because of a take-or-pay agreement.

  • Cody Acree - Analyst

  • Thank you very much for that. And then the last one from me, Russell. You mentioned, on RF side, that, for 2017, you are expecting single digits. I guess I was a bit surprised by that growth rate. Could you just tell me what's going into that? Is it a slowing of the smartphone market, changes in your customer visibility, just any color?

  • Russell Ellwanger - CEO

  • We've really gained a very, very strong market share within that market. We think that the percentage of the market that we have now is the right place to be at. And it's not necessarily our desire to grow the mobile market at a greater percentage then we have presently of the overall revenue. On the infrastructure market, we still see very nice growth there and we're focused on that. But the mobile market, I think that we are sitting very nicely at the point that we are, at the 22%, I don't think -- as the Company grows, obviously that is increasing, but we really don't want to have too much exposure to any given single market, be it mobile or elsewhere.

  • Cody Acree - Analyst

  • That's perfect. Thank you. Thanks for your help and congratulations.

  • Russell Ellwanger - CEO

  • Thank you Cody, very good questions.

  • Operator

  • Rajvindra Gill, Needham & Company.

  • Rajvindra Gill - Analyst

  • Congratulations as well. Russell, in terms of your comments about the year-over-year growth rate, if you look at the guidance for Q1, it implies a growth rate of about 19% year-over-year after growing 23% in March of 2016. And you come up against some pretty tough compares as well as you progress throughout 2017. Q2 and Q3 and Q4 had been growing at 30% to 34% year-over-year last year. Can you describe -- you gave some detail in terms of the RF and HPA segment growing kind of single digits -- I don't know if it was high single digits or single digits -- after growing 30-odd% year-over-year. Can you talk a little bit about what you are seeing in that particular segment? And then you mentioned the other segments are growing well above 25%. Can you describe some of the drivers that you are seeing there?

  • Russell Ellwanger - CEO

  • So, for the RF HPA, I think it's somewhat similar to Cody's question. We had stated that we've gained a substantial market share within the mobile platforms. We are not necessarily desirous to grow that well beyond where we are at, but to continue on advanced platforms, working with the customers that we have to protect and grow to some extent the market share that we have. And that is what we had stated was about 22% of the corporate revenue dealt with the mobile platforms.

  • In the area of infrastructure, and this is the milli-meterwave optical transceiver area that we have a very strong focus on, and we believe that we will continue to see very good growth in a year-over-year basis.

  • The other markets in the areas of CMOS image sensors, we are seeing very strong growth within the industrial sensor market, and multiple strong engagements within the DSLR market. But the biggest growth factor for us in there is within the industrial sensors, and there's very, very strong demand there, and our medical side continues to grow as well.

  • In the power management, it's across the board with our power management platforms. I spoke of several different things that we are doing with power management. Our BCD process in general has gained very, very strong market acceptance, and we really, across all end applications, we have nice growth in there. I had mentioned we are moving additionally into higher voltage power management. Part of that was the 200-volt SOI, and a greater variety going up to an 80-volt. But with power management, it really goes across an entire gamut of applications.

  • Probably in the mixed-signal and others, we've had very nice growth within the aerospace and defense, continue to see a good forecast within aerospace and defense. That's in the Newport Beach facility. It's a very good market, it's also a very high margin market, and we've seen very strong growth within the MEMS and sensor area.

  • Oren Shirazi - SVP Finance, CFO

  • Maybe just to complete the first part of the question about the growth, so, indeed, you're correct that we have 19% forecasted growth year-over-year as compared to 30% in the last year, but, last year, you should remember that we acquired the San Antonio fab, so it's (inaudible) incremental, which, according to market numbers or analyst numbers, it's $20-something million a quarter, maybe, so as compared to a $240 million baseline of 2015, which you compare it, about 10% or 12% on the 30%, so if you deduct 12% from the 30%, it's about 18% average without any growth the previous year, so we are actually keeping the same momentum and the same percentage of growth this year as well.

  • Rajvindra Gill - Analyst

  • Just to summarize, you got the core business as growing 18% year-over-year, but you also mentioned positively that Maxim is going to accelerate to 30% year-over-year.

  • Russell Ellwanger - CEO

  • No, I didn't say that. I said that the revenue out of the San Antonio factory will go up 30% over the base Maxim contract.

  • Rajvindra Gill - Analyst

  • The base Maxim contract. And remind us what that is again, Russell?

  • Russell Ellwanger - CEO

  • That's what Oren referred to. We have never stated, nor can we legally state, what that is. Analysts have put out what they think the number is coming out of Maxim, but we cannot legally state what it is. That was something we agreed to with Maxim when we bought the fab. But we do have a 15-year contract with Maxim that, at certain incremental years, allows Maxim to decrease the usage of the factory. What we stated was that, for the first multiple years, that the contract itself will cover all of the fixed cost of the factory. But we've never stated exactly what that is, nor, again, are we legally allowed to state that number. We did state what the Panasonic was, which was an annual range of $360 million to $420 million.

  • Rajvindra Gill - Analyst

  • Right, okay. Thank you.

  • Russell Ellwanger - CEO

  • I did want to add one other thing, though, and this is why it maybe sometimes can get a little confusing. The Maxim San Antonio factory itself, we looked at it as really an extension of the business that we have with Maxim. So although the revenue coming out of that factory is stable and under a long-term contract for the first multiple years, when we did that deal, it really was enabled through a relationship we have with Maxim of serving them within the optical market. And the relationship was extremely strong, which allowed us to work together on something that was very, very important to them and critical to them.

  • So, for the growth in 2016, in some people, it was thought of organic growth, because we extended an already existing relationship with Maxim. In other people, it was looked at as an M&A growth, and it doesn't really matter how you want to look at it. But a certain portion of that growth is stable and under long-term contract, and that will not grow.

  • Hopefully, that answers your question and thoughts there.

  • Rajvindra Gill - Analyst

  • Thank you.

  • Operator

  • David Duley, Steelhead Securities.

  • David Duley - Analyst

  • Thanks for taking my questions and congratulations on a great year. A couple of questions from me. Could you talk about -- you mentioned the milli-meterwave opportunity, I think. I think those are automotive sensors. Could you just talk about how big you think that opportunity is for Tower and what you would expect on a near-term or a longer-term basis as far as revenue targets for that?

  • Russell Ellwanger - CEO

  • Milli-meterwave certainly goes into the automotive radar, but the biggest portion of our business there is really backhaul. So, it's infrastructure presently.

  • On the automotive radar, I think the market could be very strong. We do have a very nice engagement on automotive radar presently, and if all goes according to agreements, it should be press released in April. I think, for us, probably we would be looking at a share of I think the served market probably sitting somewhere about $0.25 billion over the next years, and our share of market we probably target to be some good portion of that. So you can think it's, for us, a $200 million to $300 served market. And how much share will we get? We will see. But I think that the press release that we'll do should be very exciting, providing all goes according to agreements and it is press released in the April time frame.

  • David Duley - Analyst

  • Okay. Excellent. Now as far as the growth rate goes, there's been a couple of questions on this. Maybe I'll ask it a different way. You highlighted that the core business so to speak is kind of growing at an 18% year-over-year basis on an organic basis I guess. Is that a good expectation to think about the core business throughout the balance of the year or, because of the difficult comps last year, do you think we should think of a little bit lower year-over-year growth rate?

  • Russell Ellwanger - CEO

  • So, if you were to just extend from what we have stated, and that was that we see growth throughout the year and according to customer forecasts, and we would see every quarter being measurably higher than the corresponding calendar quarter of the previous year, I don't think that an 18% is unreasonable, or a 19%, or maybe higher or maybe lower. But we didn't give a full-year guidance, but we do see very reasonable year-over-year growth, 2017 versus 2016, and I don't think it will be out of line with previous years.

  • David Duley - Analyst

  • And then as far as CapEx and free cash flow going forward, a great year of operational cash flow, and free cash flow seems like it's accelerating. Could you just maybe give us what your planned CapEx might be and what kind of free cash flow would you think that that would generate in 2017?

  • Oren Shirazi - SVP Finance, CFO

  • So, the CapEx is in line with the previous model that we presented and filed in November in the presentation. That should be not more than a $42 million quarter, between $40 million to $42 million. And as you can see, we already achieved it for Q4 2016. Cash from operations, usually it follows the revenue increase and the incremental margins that we have.

  • The one (inaudible) of course to note the fact that we, as we released, we got about $50 million or $60 million of customer prepayments that used in the last year, and year and a half, to purchase additional CapEx, which is always great. And those customer prepayments are returned to the customers based on shipments and orders of the customers. So, this may be assumed to be returned to the customers over a period of between one year to seven years depending on the specific contracts through shipment. And it depends of course on the wafer demand of the customer.

  • Maybe you can assume that average rates over last three years, weighted average over the last three-year period, so maybe if we got $50 million to $60 million, repayment of about $20 million for the entire (inaudible) is reasonable if we just take this linear approach. But other than that, cash from operations of course should go higher than current baseline of $82 million in Q4.

  • David Duley - Analyst

  • Okay. And then final question from me. You talked about the image sensor business I think growing at very strong rates for you. I can't remember what the exact number -- I thought you said all of the segments would grow more than 25%, but it can't remember the exact number there. And you mentioned it was the highest margin business that you have. Would that -- would you think that your gross margin drop rate would improve in 2017 versus 2016 because of the mix?

  • Oren Shirazi - SVP Finance, CFO

  • Yes, it should improve because of the mix, because of the fact that actually we are -- as we showed in the model, the incremental gross margin should be 50% to 55% like presented, or 50% like presented in the model, and the current baseline is below 55%. So, it should improve, and definitely the image sensor, which is more than 55%, it's more even than 65% than the average incremental gross margin, should contribute to this as well as the growth in Ouzo fab. So, yes, this is one of the drivers that should enable us to achieve the 55%.

  • David Duley - Analyst

  • Okay. Thank you very much and congratulations.

  • Operator

  • Richard Shannon, Craig-Hallum.

  • Richard Shannon - Analyst

  • Hi guys. I'll add my congratulations on an excellent last year. Keep up the great work. Let's see. Maybe just a couple of questions maybe kind of digging in a layer here in a couple of different markets. Maybe I'll follow up the last question here on the image sensor topic. Russell, curious to the extent to which you see the growth here from that space coming from the markets where you are doing relatively better, like investor or medical? Or is there any noticeable amount of contribution from some of the other maybe newer markets I think like security or maybe the mobile space? Any way you can help us understand that, that would be great to hear. Thanks.

  • Russell Ellwanger - CEO

  • So, we have a substantial business there, a good business, within cinematography, and that's growing. We are not strong into cell phones; that's not something we really focus on is the cell phone. We do have some very high megapixel cameras that we are doing for certain smartphones, which was nothing until we did the TPSCo acquisition because it was done in 300 millimeter in the Ouzo factor. So that's a very high growth rate, but it's not necessarily the highest growth that we have.

  • Security is definitely growing and we stated that that's one of our focuses of this coming year.

  • By far, the biggest growth is within the industrial and, the biggest single segment within image sensor that we have is high-end photography. And that's more DSLR and for cinematography. Does that answer your question?

  • Richard Shannon - Analyst

  • That's helpful. Perfect. Thank you Russell. Maybe stepping over to the infrastructure side of your business there, you're looking for very strong growth this year. Curious whether this is -- if there's any expectation of share growth in that segment. I know you have it sounds like really only one other true foundry competitor there. Wondering if there's any expectations of share growth in there or are you expecting that 25% plus growth all without any share gains?

  • Russell Ellwanger - CEO

  • As far as the RF side, we stated that the RF this year is somewhere in the single-digit, so to be specific, mid-single-digit. So the infrastructure sits within that group. In infrastructure, we have presently somewhere about 65% market share. So a substantial growth in market share is not necessarily so forthcoming when you enjoy such a high market share to begin with. The growth within that area is really just a continual need for data rate.

  • Richard Shannon - Analyst

  • That is great. I knew it was high, but didn't know it was that high. Thank you for that.

  • Maybe one last question for you guys, more on the gross margin question -- gross margin topic following up on one of the last questions. Again, it seems like some of your growth is coming from higher gross margin areas. Any way you can help us think about how much higher image sensor as a broad category might be above your corporate average in terms of follow-through, or is there any thought that we should entertain about being able to do at the high end of that 50% to 55% fallow-through or perhaps even better?

  • Oren Shirazi - SVP Finance, CFO

  • Yes. The image sensor is -- it depend on which way, but the range is between 70% or 80%. However, this is just one -- this is part of the mix that we assumed already in the model that we presented, which was (inaudible) that the weighted average growth is -- of the weighted average incremental margin is 55%. So for image sensor, we have 70% to 80%. But we have other business which is 40%, so the weighted average mix -- the weighted average still, the same exactly like we presented in the model, 55%.

  • Richard Shannon - Analyst

  • Okay. Fair enough guys. That's all the questions for me. Thanks again.

  • Operator

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

  • Russell Ellwanger - CEO

  • Certainly. Again, we are always very appreciative, very excited to have opportunity to update on what the Company is doing, what we've done, where we are going. As stated at risk of too many times already, 2016 was really an exceptional year for the Company, but not exceptional as far as the fact that we expect it to keep going, because we do expect this type of performance to continue to propagate, but exceptional in the fact that the results were a very, very strong validation of the business model where we acquired very substantial capacity at very low cost, where the agreements with the partners that we bought from or became partners with more or less covered the cost as we move forward, providing very minimal risk for a downside against running cost and allowing ample free capacity from day one. And I think that the margin increases, the net profit increase, the free cash flow increases that we saw within 2016 showed that what we're doing within analog is sustainable and doable, and that the business model is very, very real.

  • We do see 2017 for the core businesses being a good growth year. I think Cody's question was very relevant and insightful that, from the direction that we are going, we will need to be announcing sometime within 2017, early 2018, new initiatives to increase our capacity within this analog space and this analog model, and within a model that we are not using a very, very strong amount of investor money to establish greenfields where you have many, many years before you get back an ROI on that capacity that you are building.

  • So we're really very excited about where we are at, very excited with the cash position of the Company, the freedom that it gives us in moving forward to execute very, very quickly on opportunities that come our way.

  • Within this present quarter, we have two conferences that we will be presenting at. We are very, very happy to invite you to these conferences. One of them is the Susquehanna conference. That's the Susquehanna Financial Group, their Sixth Annual Semi Storage and Technology Conference. It will be on March 9 in New York. The other conference is the Roth conference in Orange County the week of March 13. We will give more information as the specific day of our presentation comes closer.

  • Lastly, and hopefully interestingly for all on the call and additional people interested in the Company, our 2016 business and corporate annual report will be shortly available on our website, www.TowerJazz.com. I think it's a very interesting report, contains an introduction by our Chairman, Mr. Amir Elstein, then an overview and business philosophy by myself, an operations overview and strategy by our COO, Mr. Rafi Mor, a financial strategy and overview by our CFO, Mr. Oren Shirazi. It then goes into the technology overview and strategy by our President, Dr. Itzhak Edrei, and then goes into very specific details and 2017 focuses from each of our business unit general managers, Dr. Marco Racanelli, Dr. Avi Strum, Mr. Shimon Greenberg, and Ms. Mira Levi Stanfeld for the RF HPA, the image sensor group, the power management and mixed-signal group and the Topps Business Group, respectively.

  • And lastly we have a summary of the different activities and actions that we do to show our environmental and societal awareness and programs that we do within those respects, including community service from our Vice President of Human Resources, Mrs. Dalit Dahan. Hopefully, you'll find the reports interesting and insightful as to what the Company is about and what is it within our corporate DNA that attracts customers and creates partnerships with our customers for the long-term. Of course, in the report are detailed financial reports, although maybe the least exciting of the rest of the content. I said that for the sake of Oren.

  • But thank you very, very much. With that, I wish you all really very safe times and look forward to update you at least at the latest at our next quarter, and nominally the interactions we have at the upcoming conferences. Thank you again. Bye-bye.

  • Operator

  • Thank you. This concludes the TowerJazz fourth-quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.