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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to the TowerJazz First Quarter 2017 Results Conference Call.
(Operator Instructions) As a reminder, this conference is being recorded, May 8, 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 Ms. Noit Levi, Vice President of Investor Relations and Corporate Communications.
Ms. Levi, you may go ahead.
Noit Levi
Thank you, and welcome to TowerJazz Financial Results Conference Call for the First Quarter of 2017.
Before we begin, I would like to remind you that some statements made during this call may be forward-looking and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected.
These uncertainties and risk factors are fully disclosed in our Forms 20-F, F-4, F-3 and 6-K filed with the Securities and Exchange Commission as well as filings with the Israeli Securities Authority.
They are also available on our website.
TowerJazz assumes no obligations to update any such forward-looking statement.
Now I'd like to turn the call to our CEO, Mr. Russell Ellwanger.
Russell, please go ahead.
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
Thank you, Noit.
Welcome to our conference call.
I thank you for joining us.
The first quarter, we had revenues of $330 million, beating our guidance, up 19% year-over-year, resulting in EBITDA of $101 million, up 30% year-over-year and gross profit of $85 million, up 38%.
These results demonstrate the operating leverage inherent to our business model.
We also generated a record free cash flow of $42 million, allowing further flexibility to support growth plans and strategic initiatives.
Looking ahead, we see growth into the second quarter and our expectations and guidance are for revenues of $345 million, plus or minus 4%.
$345 million represents a new record revenue level with growth of approximately 13% year-over-year and 5% sequentially.
We continue to target growth throughout the year.
I'd now like to discuss our various business units, reviewing main focuses, achievements, activities and growth drivers.
During the first quarter, we saw strong, even upside demand, for our RF HPA platforms, serving both the mobile and infrastructure markets with visibility for the mobile market well through the third quarter and optical infrastructure visibility through the end of the year.
Within the mobile market, demand was strong for both our RF SOI and silicon germanium technologies.
We continue to migrate more RF products to our San Antonio facility to enable capacity for further growth.
We were informed by key executives from several major customers of design-in wins for first-tier mobile players using our high-value platforms for expected volume production in 2018 to 2019.
Within the infrastructure market, we are experiencing significant increase in demand for our high-performance silicon germanium platform.
As stated, this demand is above previous customer forecast, driven by new data center connectivity, both upgrades in existing data centers and additional new data centers.
Our high-performance SiGe platform is used for many of the devices used in 10, 25, 100 and now even 400 giga bps fiber optic connections that carry data within data centers, between data centers and throughout data networks around the globe.
To further enhance our offering in this fast growth and high-margin area, we announced in Q1, the release of design chips for our latest silicon germanium technology, H5, which can help address the newest 400 giga bps applications.
We also announced early 400 giga bps design wins with Broadcom.
In addition, we launched a new development effort that was also press released in Q1, that is, silicon photonic process to our foundry offering.
Silicon photonics are used to couple light from a fiber and convert it to an electrical signal that is then used by our SiGe components to communicate with the rest of the system.
Once in production next year, this offering will allow us to add more content to many new high-speed data connections.
Our power management business unit continues to grow, given also strong demand from the market.
We continue to focus on expanding and improving our power management offering to be the best-in-class in multiple aspects, offering the lowest RDS(on) over a wide and scalable voltage range.
In parallel, we continue to cooperate closely with the long term partners as we expand this power management road map.
During the first quarter, we received and shipped our first high-volume order based upon a specialty BCD platform optimized in cooperation with a lead power management company for differentiated electric car stacked battery management systems.
For next generations, which may require even further battery stacking, we recently released a 200-volt power management SOI-based technology, further enabling this capability.
This technology also provides superior performance over a wide range of analog and power applications, such as motor drivers, including home and industrial appliances and for electric vehicles.
Technology has added benefit for the ultrafast drivers, enabling the high-efficiencies intrinsic to high-speed of gallium nitride switches as well as requirements for multiple channel, medical ultrasound application.
The 200-volt SOI process is based on and compatible with TowerJazz's advanced 180-nanometer bulk BCD platform.
Hence customers can reuse elements that they are familiar with, leading to faster time-to-market with high confidence of first-time success with the ability to extend their designs up to 200 volts.
This advanced technology offering addresses a significant number of end applications within the automotive and industrial power management IC markets, which end product markets, according to Databeans, our market research firm, are expected to grow from $3 billion in 2017 to approximately $5.3 billion in 2021.
For additional capacity and versatility, in order to optimize our revenues, we have started to ramp our TS18 technology at our San Antonio fab, with customer prototypes expected by the end of 2017.
This will place us in a unique position, a pure play foundry with full versatility of 3 sites running with our leading power management platforms.
With regard to the CIS business unit, in the first quarter, we continued to grow our business, mainly in the industrial sensor and medical x-ray sensor markets.
We saw and continue to see a growth in customers' demand.
This is in combination of our customer market share growth combined with the growth of the total market.
In the industrial market, we already announced the release of the 2.8 micron state-of-the-art global shutter pixel.
This pixel is being used by our lead customers of which e2v announced the release of their Emerald family of high-resolution global shutter sensors.
The technology is available in Arai 110-nanometer fab in Japan and will become available in Migdal Haemek as well in 2018.
This allows us to support large-format high-resolution state-of-the-art global shutter sensors.
In parallel, we developed a near IR version for this technology mainly to support sensitivity and low light conditions as well as to support the 3D and gesture recognition market.
The main growth of our global shutter technology is in our 8-inch fabs, namely Arai in Japan and Fab 2 in Israel.
However, we are now transferring this technology to Uozu, 12-inch 65-nanometer line to support other high-volume applications.
We continue to grow our high-end photography market share, both in still sensors for DSLR and mirrorless cameras and in video, mainly in the cinematography and broadcasting video segments.
The main growth activity in these areas are in our 12-inch line.
The automotive market growth is a major focus for our CIS business, mainly in the LIDAR, light-based radars market that is a key component for the autonomous driving vehicles.
This requires high sensitivity, accurate and low-cost LIDAR, which requirements can be met with our avalanche photodiode technologies.
We expect to see steady growth in the CIS business unit throughout 2017, driven by the industrial medical security and high-end photography market segment, while getting more design wins in the automotive and augmented and virtual reality segments, which growth segments are dependent on our 3D time-of-flight or structured light-based technology.
We believe that these sectors will continue to drive our growth over multiple years.
The TOPS business unit achieved record growth in 2016, and we see continued strong growth during '17.
The business unit's operations expanded to all TowerJazz fabs, including all sites in Japan, enabling flexibility and capacity loading to support our customers' needs.
Our growth increase came from long-term business partnerships as well as several new customers ramping their production.
TOPS customers' applications range from discrete power devices to advance memories, RF SOI and other specialty sensors.
MEMS and other analog sensors will be a main focus for 2017, with the number of projects presently under development with market leaders with high volumes that will be maintained through the next decade.
Now to spend a few moments talking about our current utilization and available capacity.
As previously explained, we calculate utilization as a ratio of actual photo layers processed ratioed to total photo layer capability.
Our operational model is 285% utilization, which provides for us maximized fab productivity.
The following were the utilization rates for the quarter: Fab 1 in Migdal Haemek, Israel, our systems factory was at 87% utilization.
This is strong evidence of our analog business model that a factory built in 1983 runs at model utilization 34 years later; Fab 2, Migdal Haemek, Israel, our 8-inch factory in Israel was at 89% utilization; Fab 3, Newport Beach, California, another 8-inch factory, was at 87% utilization; the 3 Japanese factories had an average utilization of about 50%; Fab 9, our San Antonio factory, was at 60% utilization.
We are now starting to see the upward moves in utilization as a function of new business on top of the Maxim long-term supply agreement.
As we previously stated, our capacity across all fabs is at around $1.6 billion revenue capability.
We have internal available capacity, mainly in San Antonio, as well as Uozu, the 300-millimeter factory in Japan.
Our current strong customer demand provides us with multiple pathways to ramp the Uozu 300-millimeter fab.
It also gives us the ability to focus on and enter into new and higher-margin areas in all of our factories.
For example, during the quarter, we took the decision to increase our silicon germanium mix in Newport Beach Fab 3 in order to have a higher-margin mix in a factory which is at high utilization.
As previously stated, we see very strong demand for the silicon germanium offerings in that factory.
Therefore, given the same nominal wafer output of the facility, we have increased our internal RF HPA revenue growth forecast.
In addition, we are increasing our CMOS image sensor mix at our Migdal Haemek fab, while continuing cross qualification activities and offloading some Tower and other CMOS products into the Tonami fab in Japan.
We also increased our capacity in Tonami as well, which were part of the 2016 CapEx purchases.
We expect to see the positive results from this capacity expansion during 2017.
We're also in the process of adding additional capacity in our San Antonio facility, mostly based on a customer prepayment business model with the focus of enriching the mix of this facility with some special tools needed to qualify flows for new business avenues.
Our focus in the coming year will be to enable TowerJazz to grow beyond its current capacity.
Based upon our strong balance sheet, we are evaluating multiple option avenues to invest in our growth.
Our goal for the coming year is to add capacity through either M&A for the adoption of new business models or partnerships which will provide us with high-value incremental capacity.
In summary, during the first quarter, we demonstrated strong year-over-year growth and noted continued robust demand across our chosen analog markets with several substantial 2018, 2019 design-ins having been communicated by major customers serving first tier mobile players.
Our goal for the year ahead remains to continue our growth by successfully executing on our company's proven successful business model, namely partnering with customer market leaders to enjoy high-value capacity growth.
Our second quarter 2017 record high mid-range guidance is a short-term validation that we are continuing in the right direction.
At the same time, we look to further our market potential and competitive advantage by investing and focusing on higher-growth and higher-margin markets.
We focus on value creation for our customers, while providing the right platforms to support their current and future needs to capitalize on the trends that are prevalent now and with our partners to be ready to supply into the emerging trends, which will be driving the world for years to come.
With that, I'd like to turn the call over to our CFO, Oren Shirazi.
Oren?
Oren Shirazi - CFO and SVP of Finance
Thank you, Russell, and welcome, everyone.
I will start my review by providing our P&L results highlights and then discuss our cash generation, debt, share count and the balance sheet.
P&L.
We reported today successful first quarter 2017 result, which included strong year-over-year growth of 19% in revenue, 38% in gross profit, 30% in EBITDA and 71% in operating profit.
This quarter resulted in $45.5 million in net profits and free cash flow at a record level of $42 million.
Represented revenue of $330 million, up 19% year-over-year as well as gross and operating profit for the quarter at $85 million and $53 million, respectively.
That's compared with $61 million and $31 million gross and operating profit in the first quarter of 2016.
This represents a 38% and 71% increase year-over-year, respectively.
Net profit for the first quarter was $45.5 million or $0.48 per share in basic earnings per share and $0.45 in diluted earnings per share.
For the same period a year ago, net profit, including the $41 million San Antonio fab acquisition gain, was $66 million or $0.78 in basic earnings.
Excluding the San Antonio fab acquisition gain, net profit has increased by $21 million as compared to the first quarter of 2016, gross profit has increased by $23 million and operating profit has increased by $22 million.
Adjusted net profit for the quarter, as described and reconciled in the tables of the press release, was $50 million compared with $32 million in the first quarter of 2016, representing growth of 58% year-over-year.
EBITDA for the quarter was $101 million as compared to $78 million in the first quarter last year, up 30% year-over-year.
This concludes the comparison of the first quarter 2017 P&L to the same period last year.
Now comparing our first quarter 2017 results to the fourth quarter of 2016, we see an additional evidence of our efficient budget control and cost structure.
While the first quarter 2016 was seasonally higher on revenue by $10 million, we mitigated most of the seasonality effect by driving reduced cost and improved revenue mix, which resulted in higher margins and gross operating and net profit to be only $2 million to $3 million lower against the said $10 million revenue difference.
With regards to currencies and hedging.
In relation to the euro currency, we have almost 0 business priced in euros, hence 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 cost are in yen, we have a natural hedge to most of the Japanese business and operations, excluding the portion in which the yen denominated cost associated with the third-party foundry business exceed the yen net margin of our Panasonic revenues.
In order to mitigate this net limited yen exposure, as we have stated in our prior quarters calls, we have executed 0 cost cylinder hedging transactions.
These 0 cost cylinder transactions hedge all currency fluctuations to be contained within a narrow range as compared to the spot exchange rate.
Hence, although the yen fluctuated over the last year between levels of JPY 102 to JPY 120 versus the dollar, our margins saw very minimal impact.
In addition, and in relation to the Japanese yen impact on the balance sheet, we have a natural hedge, as we have yen denominated loans balanced by cash and other current assets also denominated in yen, and this situation mitigates the currency risk over the balance sheet.
Lastly, in relation to fluctuations in the Israeli shekel currency, we have no revenues or CapEx denominated in the Israel currency, hence no impact.
With regard to expenses, while less than 10% of our costs are denominated in the Israeli currency, we also hedge most of this currency risk by 0 cost cylinder transactions, which, as I mentioned earlier, hedge all currency fluctuation to be contained within a narrow range as compared to the spot exchange rate.
Hence, although the Israeli shekel currency fluctuated over the last year between levels of NIS 3.6 to NIS 3.9 versus the dollar, our margins were almost not affected.
Moving to the balance sheet and cash flow analysis.
Cash.
The main cash activities during the first quarter of 2017 were $82 million generated from operating activities and investments of $40 million in fixed assets.
This resulted in $42 million positive free cash flow at a record level; in addition, we received $13 million from warranty and options which were exercised during the quarter; we paid $12 million of debt principal payment; TPS co-paid $4 million in dividend to Panasonic; and we had a positive $4 million impact on TPSCo cash on hand due to the Japanese yen exchange rate.
We achieved a record free cash flow for the first quarter of $42 million, which is compared to $39 million in the first quarter of last year and $20 million in the first quarter of 2016.
Debt.
As of March 31, 2017, our total gross debt was $346 million, comprised of an outstanding principal amount of $166 million in bank loans and $180 million in debentures.
During the first quarter of 2017, we fully repaid bond Series D and F issued in 2007 and in 2010, respectively, thereby, retiring these 2 bond Series in full for a total principal payment of $6 million.
Deducting this total gross debt of $346 million from total cash and short-term deposits of $432 million, results in a net cash position of $86 million as of March 31, 2017.
This is compared to net cash of $37 million as of December 31, 2016, and a $65 million net debt level we had as of March 31, 2016.
Our net current assets, calculated to be current assets less current liabilities, has increased from $263 million as of March 2016 to $451 million as of December 2016 and $496 million as of March 31, 2017, reflecting a strong 3.1x current ratio level.
Shareholder equity as of March 31, 2017, was at a record of $746 million, reflecting 52% of the total balance sheet.
This is a 9% increase as compared to shareholders' equity as of December 31, 2016, and a 48% increase in shareholders' equity as compared to March 31, 2016.
Our outstanding share count as of March 31, 2017, included 96 million ordinary shares, 4 million shares underlying warrant Series 9 and options as well as RSUs granted to our employees and directors, 6 million shares underlying convertible bonds and 1 million remaining shares underlying capital note.
As a result, our fully diluted share count remains unchanged at 107 million, exactly the same share count as in all of the comparable period from March 31, 2016, to date.
To summarize, we are very pleased to present our Q1 financial P&L, which resulted in increased margins and $45.5 million net profit as well as our Q1 balance sheet and cash flow statement, which resulted in a record free cash flow level of $42 million in the quarter with increased balance sheet financial ratio, as I described earlier.
That ends my summary, and I would like now to turn the call back to Noit Levi.
Noit, please go ahead.
Noit Levi
Thank you, Oren.
Before we'll open up the call to the Q&A session, I would like now to add the general and legal statements to our results in regards to statements made and to be made during this call.
Please note that the first quarter of 2017 financial results has been prepared in accordance with U.S. GAAP and the financial tables in today's earnings release include financial information that may be considered adjusted financial measures and non-GAAP financial measures under Regulation G and related 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 tables or in the call, on an adjusted basis after deducting one, amortization of acquired intangible assets; two, compensation expenses in respect of equity grants to directors, officers and employees; three, gain from acquisition, net; four, noncash financing expenses related to bank loans early repayments; and five, other nonrecurring items, such as income tax benefit.
Adjusted financial measure and non-GAAP financial measure should be evaluated in conjunction with and are not substitute for GAAP financial measure.
The tables and the earnings release also contain the comparable GAAP financial measures to the adjusted financial measure as well as the reconciliation between the adjusted financial measure and the most comparable GAAP financial measure.
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 measure employed by other companies.
EBITDA and adjusted financial measures 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 or 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.
And now, we will open up the call for Q&A.
Operator?
Operator
(Operator Instructions) The first question is from Cody Acree of Drexel Hamilton.
Cody Grant Acree - Senior Equity Research Analyst
Russell, did I hear you right that you said you're increasing your RF sales forecast because of the silicon germanium demand?
Could you just verify that?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
Yes, you did hear me correctly.
Cody Grant Acree - Senior Equity Research Analyst
Could you elaborate, maybe?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
We had said when we released the Q4, and that's when we break down the previous year into percentages of different businesses and give forecast for this year, we had said that on a year-over-year basis, that the RF HPA group would be a mid-single-digit growth.
Again, we're not in the practice of breaking down by quarter what the revenues are, we do that on a yearly basis, but we're at least doubling the amount of growth that we'd be having from the RF HPA from our forecast.
Cody Grant Acree - Senior Equity Research Analyst
And that is primarily silicon germanium-driven, is that correct?
And then am I right to think that that's your highest gross margin balance of that business?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
The silicon germanium is the highest gross margin portion of that business and a predominant amount of that growth is within the silicon germanium.
As I stated, we've made a decision to add more silicon germanium capacity, in particular 0.18 silicon germanium capacity in the Newport Beach factory in order to maximize the demand that we're getting from customer upside forecast.
Cody Grant Acree - Senior Equity Research Analyst
And on the optical side, I guess, I was a bit surprised by the strong commentary given maybe what we've been hearing out of some of the optical players...
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
Cody, you faded in out.
I don't know if it's your connection or but...
Cody Grant Acree - Senior Equity Research Analyst
Yes, may be.
Maybe for the optical commentary, I guess, I was a bit surprised on the strength of the comments.
Do you think this is underlying health?
Or do you think this is market share gains?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
I believe that there is a very, very big uptick in data centers and mainly driven by the need of increased data transfer.
So I think it's -- is it a market share increase of our customers?
I think our customers predominantly have the major market share in the segments that they're serving.
I'm not sure if they're growing their market share, the market itself is growing.
Cody Grant Acree - Senior Equity Research Analyst
And then lastly, just any updates on your thoughts on a Chinese partnership of some type?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
We continue to believe that activity in China is important.
We have multiple activities that we're pursuing within China.
When or if any one or more than one will close, I can't commit to nor do I wish to commit to.
But what we've stated before is, that there is a lot of drive in China.
The Chinese government pushing strong focus on semiconductor organic capability within China.
Many municipalities having them receive funds to drive that, creating development zones to that end and areas that I think we could add value in, without -- and hence grow capacities without investing major dollars to do so, but being able to benefit from both our operational capabilities and our technological IP.
So we continue to pursue these opportunities.
And at the point that it becomes relevant to release something, we'll be very, very thrilled to do so.
But we don't want to prestate anything or set someone's expectation.
We would be focused on doing an activity that will provide growth into our company and to do so in a very high-value model.
And when we get to a point that we should release that and are confident that the activity will continue, we will do so.
Operator
The next question comes from Mr. Rajvindra Gill of Needham & Company.
Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog and Mixed Signal; Consumer IC and Multi-Market; Computing; and Global Memory
A question on the incremental model.
Wondering if you could maybe talk about the margin difference from an incremental perspective, from the RF and power businesses at the San Antonio fab and the Tonami fab versus the incremental margin from the business that you're going to flow through the more advanced fab, which is the 300 millimeter fab and the Uozu fab.
How do we think about the incremental model with respect to those different fabs?
And how do we look at the margin structure as we continue throughout the year?
Oren Shirazi - CFO and SVP of Finance
It's Oren.
So from margin point of view, we -- it's exactly like we said in the last few quarters including in the NASDAQ presentation of this publicly filed from the middle of November, this is what we filed then and what we presented is our 55% to 57% incremental gross margin to each incremental revenue, that's the weighted average, that's the long-term, and that's the plan, towards the full utilization of the fabs.
Of course, like you mentioned, your question is very relevant, there is a depreciation between the fab, the different fabs.
So for example, the Uozu fab that you asked, 12-inch, and mainly, we expect that the increments will have much better margins than 50 -- incremental margin than 55%.
While Tonami, the other Japanese fab has lower than 55% incremental margin, more like 40-something.
And also, the San Antonio, lower than the Uozu margins, which should be certainly above the 60%, 65%, towards the 70%, 75%.
So -- and although we talk about business between 60% to 75% incremental margins and Tonami and San Antonio, which has power, which has trench business, which has CMOS business, we talk about 40% to 50% incremental margins.
So the weighted average of that comes back to the model, to the 55% to 57%.
Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog and Mixed Signal; Consumer IC and Multi-Market; Computing; and Global Memory
That's very helpful.
And as we progress throughout the year, do you anticipate more growth coming from the Uozu fab to support the advanced image sensors and some of the CMOS for the automotive business and other end markets that are driving growth, and hence, you'll see maybe more of a contribution to the margin as you more flow more revenue through the Uozu fab?
Oren Shirazi - CFO and SVP of Finance
Yes.
So obviously since the Uozu fab is the 300-millimeter, the 12-inch, each development project and each ramping to production is takes more time that it takes in San Antonio and Tonami, where it's quicker.
So obviously, you should expect that Q2, Q3 still most of the revenue increases will come from Tonami, San Antonio and also of course Fab 2, Fab 3 and Fab 1 that Russell today gave an update to reach to 87%, which is much higher utilization than in the past.
So those fabs will drive most of the growth in Q2, Q3.
And from Q4, we expect also Uozu to contribute a very significant portion of the...
Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog and Mixed Signal; Consumer IC and Multi-Market; Computing; and Global Memory
So the incremental margin should kind of move away from the 40% to 45% mixture from the San Antonio to more of the 55% or 60% from the Uozu fabs?
Oren Shirazi - CFO and SVP of Finance
Yes, yes.
Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog and Mixed Signal; Consumer IC and Multi-Market; Computing; and Global Memory
Okay.
Very good.
And last question from me, Russell, you're seeing excellent growth in your RF HPA business, you've increased the forecast.
You're seeing growth from the -- from silicon germanium but also CMOS insulator wafers.
Just wondering about kind of the overall trend away from gallium arsenide wafers in the RF business to the CMOS SOI?
Is that ongoing?
Do you continue to see that trend?
And the only reason why I ask is, we've seen some growth from WIN Semi, who's doing mostly gallium arsenide coming out at QUALCOMM for RF and PA components.
So I just wanted to get your views on that overall trend that you're seeing?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
So I think for switches, that's -- the bulk of the movement has already occurred from gallium arsenide pHEMTs to RF SOI and there's probably still some percentage of switches that are done in pHEMTs, but the bulk has already transferred.
The power amplifiers are still predominantly done in gallium arsenide.
In our case, we do certain power amplifiers and low-noise amplifiers silicon germanium.
But the bulk of WiFi power amplifiers are done in gallium arsenide.
Operator
The next question from Richard Shannon of Craig-Hallum.
Richard Cutts Shannon - Senior Research Analyst
Maybe I'll throw my first question out in the HPA segment as well.
Russell, are you seeing any movement within the mobile bucket between SOI and silicon germanium?
You talked more about SiGe more recently.
Curious if there's any noted and consistent trend away from or I guess towards silicon germanium that you are seeing there?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
We are seeing increases in some of the silicon germanium activities that we have, again in the area of certain PAs and low noise amplifiers, but it's not a movement or competition between the RF SOI and SiGe.
But we are seeing upticks in some of the SiGe business in the mobile market that we have, in particular with LNA.
In the -- again, our big growth in SiGe right now, the big increased demand in SiGe is optical.
And at this point, the uptick is within data centers.
Richard Cutts Shannon - Senior Research Analyst
Okay.
Specific to that last comment, Russell, do you have a view on -- you keep talking about data centers which is generally shorter reach links.
Do you have full visibility into that part of the market driving it?
Or could it be more metro and long-haul stuff?
Or if you don't view on that, that would be good to know as well?
Just to clarify there as well?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
I don't personally have a deep dig view into the actual end use from our customers.
I believe that Marco Racanelli, the GM of the BU would have a more granular view of what our customers are actually shipping into.
But I could not answer that to any great extent with good accuracy.
Richard Cutts Shannon - Senior Research Analyst
Okay.
That's fair enough.
Will have a follow-up with that offline.
A couple more questions from me.
Russell, you made a comment around within your image sensor business with some time-of-flight licensed structured light sensor for 3D sensing, curious when you expect to see that market take off?
And any way you can discuss the breadth of your customer base there?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
I'm sorry.
One more time, please?
Richard Cutts Shannon - Senior Research Analyst
Related to your image sensor business, you talked about time-of-flight structured light sensors for 3D sensing, curious to get your sense of when that market starts to take off for you?
And any comments you can make about the breadth of your customer base?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
So we've press released on that in the past.
We have several customers that we do with 3D, with gesture control.
The market, I think, is taking off.
It's not the biggest portion of our revenue from CIS, but it is a market that's growing.
We have several new customers that are not in volume production at this point but would promise to be extremely powerful growth drivers for our market, probably within 1 to 2-year time period.
But again, they're in our press release.
Richard Cutts Shannon - Senior Research Analyst
Okay, great.
Fair enough.
And a last question for me for Oren.
Oren, can you comment on what your expectations for gross margins for the quarter, your incremental gross margin profile that you talked about today and other quarters as well as your forward thoughts on CapEx?
Oren Shirazi - CFO and SVP of Finance
Yes.
Well, the margins, it's exactly what I said before with Raji, which is the model, we are sticking to the model it's 55% to 57% incremental long-term.
Q2, Q3 should be still -- could be still a bit lower because it's less driven by Uozu and more driven by Tonami and Uozu Fab 1 to 3. From Q4 should be even stronger than 55%, 57%, because will be more driven by Uozu in the mix.
About CapEx, as we released today, $40 million CapEx and also previous quarter was $42 million CapEx.
So we really are [$18 million] commitment that were given in the last 1.5 year that we'll reduce the CapEx from the $55 million level to the $40 million, $42 maximum in the model CapEx.
And we are maintaining that even with the trends that Russell described in his script in the beginning about some more -- some funded CapEx by prepayments for San Antonio.
So it's an amount that still keep us with the -- not crossing the $40 million to $42 million forecast guidance for the CapEx.
Operator
The next question is from Lisa Thompson of Zacks Investment Research.
Lisa R. Thompson - Senior Technology Analyst
Just wondering if you could just give some sort of timing perspective, I know that you can do a lot of incremental things to increase capacity.
At what point do you have to do something major to just continue the time line uninterrupted given what you see going forward?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
So you're correct.
There are additional things we can do organically if we wish to grow our capacity.
We have quite a bit that we can still build out, additional white space that we can build out and gray space that we can make white space in San Antonio for probably an additional 50%, 60% increase in capacity.
So that we would have to make a decision on probably in the third or fourth quarter of this year, if that's the avenue that we wish to go.
As far as the models that we're pursuing and the activities that we're pursuing, we had stated that we believe that we need to have something clear in hand at the end of this year to enable capacity increase to be coming online in the end of '18, '19 time frame.
Operator
The next question is from David Duley of Steelhead Securities.
David Duley
Russell, you increased your growth rate for the RF segment, I think.
I think, what you said on the previous conference call was kind of mid-single digits.
I guess, I'm thinking now that it's roughly going to be 10%.
But so now that, that sector is going to grow faster, did you change the growth rates in any of the other sectors?
Or would we kind of -- whatever number we had at the beginning of the year, we would think that this as a higher number now for the annual number because you've increased the growth rate of that segment?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
I think, you could consider that whatever number I had in mind at the beginning of the year would be a higher number.
I don't know that, that's necessarily a number you had in mind.
But yes, we -- as stated, we have a factory in Newport Beach that is running very high utilization that we're changing the mix in to enable more silicon germanium to come out of.
That greater silicon germanium capacity as well as really optimal utilization levels of the factory will grow higher a revenue than what we had gone into the year believing.
David Duley
And just on that topic, what are you moving out of Newport that is allowing you to create more silicon germanium capacity and which fab are you moving it into?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
So some of what we're doing is not moving out per se.
There's older silicon germanium technologies that are no longer being used, but for which we needed to invest in some incremental tools to be able to do 0.18 micron, so that's one area of moving the mix from what would now be lower-margin that will not have strong demand over time to a higher-margin, more advanced flow.
And stated a bit earlier, I believe, at the beginning of the call, that we were qualifying San Antonio for multiple RF SOI flows and RF control flows and moving certain customers into San Antonio to free up higher end silicon germanium capabilities in the Newport Beach factory.
David Duley
Okay.
And how is the progress of moving general third-party customers into the TPSCo factories?
Do you believe you'll hit your target number that you expect to hit on an annual basis?
Or are we going to see a little bit more with the movements from -- amongst all of the factories?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
Yes.
So just to reiterate, so we're on the same page with everyone.
We had set a target to hit $100 million annualized run rate in the fourth quarter of 2016, which would have meant in that quarter to exceed $25 million of third-party business.
And we set a target to achieve a $200 million run rate by the fourth quarter of '17, which would be a $50 million third-party business.
We stated that we did achieve the target in the fourth quarter, and we're moving forward to work towards the target of the $50 million in the fourth quarter of '17.
I can't say at this point if it will be achieved, it's certainly our target and that's public information that we're targeting to get to that number.
David Duley
Okay.
Final thing for me.
I'm not sure if you can answer this based on your disclosure agreement, but I'm just trying to understand how much capacity is available in the San Antonio factory to move into there?
Any way that you can help me understand or characterize that, that would be great.
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
So I stated that the present utilization is 60%.
What you don't know is how much of that is now third party.
But the current utilization is 60%.
So if our target is to be running at 85% to a 90% type utilization, then we have that 25 points that can be added to it.
Operator
There are no further questions at this time.
Mr. Ellwanger, would you like to make a concluding statement?
Russell C. Ellwanger - CEO, Director, Chairman of Tower Semiconductor USA Inc, Chairman of Jazz Semiconductor Inc, Chairman of Tower US Holdings Inc, Chairman of Jazz US Holdings Inc, Chairman of Towerjazz Texas Inc and Chairman of Towerjazz Panasonic Semiconductor Co Ltd
Certainly.
So firstly, we are really extremely excited with where we're at right now.
To have had a record quarter of free cash creation of the $42 million, it really gives us a lot of freedom.
We left last year with a cash balance greater than our debt.
In the previous year, 2016, we had paid back the 2 major banks in Israel that we had debt to for which we had some restrictive covenants.
So we're now a company that has cash on hand and a good mechanism and avenue for continued cash creation.
If we look at our growth from 2005 up through 2016, we're able to do that with very, very little resources, but through a lot of creativity and partnership and value-add to our customers.
We don't want to ever miss what we've built upon which is the value-add creativity and partnership with customers, but we now have 1 added tool, and that's some additional cash resources to fuel different strategic and tactical plans of the company.
I came across a quote not too long back that I thought was a very interesting one, and it says, "When our memories outweigh our dreams, it is then that we become old." And I thought that it's interesting for an individual, probably not 100% accurate, because I think it's more when our memories outweigh our dreams and consequent actions, it is then that we become old, because there's maybe, on an individual basis, people at their very young age have a lot of dreams, but they have no actions to make the dreams a reality and they're probably very old at a young age.
But I think for our company, well, I don't think, I know for our company, we really are a very, very young company.
I guess we have extremely strong dreams and a variety of very, very consequent actions to achieve them.
And I take a lot of real satisfaction in that case, the management of the company, the employees at all our sites, they are people that really do not think of the past as the best days, they're extremely excited about what we're doing, where we're going after and what our targets are and how we achieve them.
So in that case, I'm really excited about where we're at, where we're going and the next steps of our development.
We'd like to invite you to feel that, to take a greater part in that through the different conferences that we'll be attending over this quarter.
We'll be attending 7 different conferences.
I'll just mention briefly each one.
To begin, on May 10, we'll be attending the Jefferies -- presenting at the Jefferies Technology Group Investor Conference in Miami; Dr. Marco Racanelli, TowerJazz Senior Vice President and RF HPA General Manager will be presenting.
We'll be presenting at the 17th Annual Oppenheimer Conference in Israel in Tel Aviv on May 21st.
I will be presenting.
We'll be presenting at the 14th Annual Craig-Hallum Institutional Investor Conference in Minneapolis on May 31.
Dr. Racanelli will be presenting.
We'll be presenting at the Needham Automotive Technology Day in New York on June 6. Again, Dr. Racanelli will be presenting.
The Baird 2017 Global Consumer Technology and Service Conference in New York on June 8, Dr. Itzhak Edrei, TowerJazz President will be presenting.
The Jefferies Israel Tech Trek Conference in Herzliya, Israel on June 6. I will be presenting.
And the NASDAQ's 36th Investor Program in London on June 15 for which I will be presenting as well.
So we invite you to attend whichever conferences you might be able to attend and have one-on-ones with us and get a feeling for the excitement that we have in the company by being a company that has many, many dreams and very specific consequent actions to achieve them.
Thank you very, very much.
Operator
Thank you.
This concludes TowerJazz First Quarter 2017 Results Conference Call.
Thank you for your participation.
You may go ahead and disconnect.