高塔半導體 (TSEM) 2018 Q2 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the TowerJazz Second Quarter 2018 Results Conference Call.

  • (Operator Instructions) As a reminder, this conference is being recorded, July 26, 2018.

  • Joining us today are Mr. Russell Ellwanger, TowerJazz' CEO; and Mr. Oren Shirazi, CFO.

  • I would now like to turn the conference call over to Mr. -- Ms. Noit Levi, Vice President of Investor Relations and Corporate Communications.

  • Ms. Levi, please go ahead.

  • Noit Levi-Karoubi - VP of IR & Corporate Communications

  • Thank you, and welcome to TowerJazz' financial results conference call for the second quarter of 2018.

  • Before we begin, I would like to remind you that some statements made during this call may be forward-looking and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected.

  • These uncertainties and risk factors are fully disclosed in our Form 20-F, F-4, F-3 and 6-K filed with the Securities and Exchange Commission as well as filings with the Israeli Securities Authority.

  • They are also available on our website.

  • TowerJazz assumes no obligation to update any such forward-looking statement.

  • Now I'd like to turn the call to our CEO, Mr. Russell Ellwanger.

  • Russell, please go ahead.

  • Russell C. Ellwanger - CEO & Director

  • Thank you, Noit.

  • Welcome to our second quarter 2018 results conference call.

  • Thank you for your interest.

  • Our second quarter results were in line with expectations, with revenues of $335 million, a 7% increase over the prior quarter.

  • EBITDA for the quarter was $96 million, representing a 55% contribution from incremental growth per our model.

  • Net profit for the quarter was $38 million.

  • We generated free cash flow of $37 million.

  • Our first half represented a 4% decrease as compared with the same period of 2017, following regular industry seasonality, with also the industry noted specific mobile market weakness, with some customer inventory corrections due to over ordering at the end of a very strong 2017.

  • Where it was possible to transfer for the benefit of higher margin silicon germanium capacity in Fab 3, we transferred several non-silicon-germanium RF flows to San Antonio for qualification.

  • But not everything could transfer, leaving some gap.

  • Lastly, having expected a recovery, which did not occur from recent reports, it is apparent that one of our major power management customer's end customer has lost substantial market share.

  • This revenue will be restored through our 300-millimeter activity, which we will talk about.

  • Entering the third quarter, we have the proper wafer start plan and product mix to transition us to our fourth quarter targeted record revenue.

  • For the silicon germanium infrastructure technology, given its strong and higher than originally expected customer demand, and hence the high number of customers and flow variance that needed to be qualified, the shipment profile from recently added capacity is pushed out slightly.

  • Customers were notified of increased silicon germanium capacity and starts have now been maximized, expecting full revenue realization in the fourth quarter.

  • As our customer's mid- to long-term demand for silicon germanium exceeds our newly acquired capacity, we are investing in additional CapEx for our Newport Beach facility, targeted to begin qualification in the first quarter of 2019.

  • Additionally, demand remains strong for discrete power and all of our 300-millimeter offering.

  • Our major focuses for this year are, firstly, various organic activities focused on increasing our served market targeting additional mid- to long-term organic growth.

  • These include, among others, analog, artificial intelligence, virtual reality, silicon photonic, sensors and automotive sensor fusion.

  • And for the short-term, the 2 major focuses have been Newport Beach mix shift to high-end silicon germanium infrastructure market and ensuring high-yielding flow capability for the Q3-Q4, 400 -- sorry, 300-millimeter ramp.

  • In line with this, we continue to see growth, second half versus first half of this year, forecasting the third quarter mid-range guidance flat of $355 million and transitioning to a targeted record fourth quarter revenues of about $360 million to $380 million, representing above 25% organic Q4 growth over Q1.

  • The growth drivers remain as stated, the 300-millimeter production ramp and the increased capacity and customer demand for silicon germanium.

  • First, in reference to 300-millimeter, over the past years, TowerJazz and our TPSCo 300-millimeter factory has developed and refined process flows and PDK offering in 3 strategic segments, namely: radiofrequency, power management and CMOS image sensor.

  • The specific end markets we are serving in these segments are: RF low-noise amplifier and switch for mobile application; low-voltage power management ICs, less than 30-volt, with an industry-lowest Rdson figure of merit; an associated 65-nanometer logic circuitry benefit; and image sensors for multiple end market application to include machine vision, DSLR, medical x-ray and surveillance.

  • We continue to engage with multiple industry-leading customers in an effort to meet or exceed their stringent state-of-the-art figures of merit.

  • The fruits of our labors can be observed in the high number of new products introduced into our 300-millimeter factory being well distributed over the 3 general market segments.

  • I'll provide additional information for each of our business unit activities later in the call.

  • Secondly, with silicon germanium, we continue to focus on qualifying and increasing our silicon germanium manufacturing capacity in both our Newport Beach and San Antonio manufacturing facilities.

  • We just recently reached the full wafer start capacity in Newport Beach, which is a 75% ramp in silicon germanium against the 2017 Newport Beach run rate.

  • And while the ramp in starts is only a small impact to wafer output in the third quarter, we will see full revenue impact in the fourth quarter of this year.

  • We are progressing well with the San Antonio silicon germanium qualification, adding an additional 25% capacity against our 2017 run rate with production starting in Q1 2019 and ramping through the third quarter of 2019.

  • Strong customer demand in silicon germanium not only continued but is increasing, resulting in additional tool buys for Newport Beach, which will enable a further increase of over 15% silicon germanium output, which should be running and in qualification at the end of the first quarter of 2019.

  • We plan significant revenue production ramp in the fourth quarter, positioning ourselves with accelerated organic growth carrying forward into 2019.

  • In terms of utilization rates in the quarter, Migdal Haemek Fab 1, our 6-inch factory, was in 95% utilization.

  • Fab 2, our 8-inch factory, was at about 85%.

  • Both have increased compared with 90% and 80%, respectively, in the previous quarter.

  • In Newport Beach California, Fab 3, our 8-inch factory, we are at about 85% utilization versus 80% in the prior quarter.

  • The 3 TPSCo factories had an average of about 50% utilization, so much of that at past quarter, with third quarter start ramp in 300-millimeter planned to triple the present run rate.

  • Our San Antonio factory Fab 9 was about 60% utilization compared with 55% last quarter, with an expected 20% increase in the third quarter for third-party wafer starts.

  • Additionally, with regards to our operations, we have recently notified our customer base of a price increase as a result of continued silicon price increases to us.

  • Our industry is experiencing shortages of silicon wafers, along with significant price increases.

  • With a strong business continuity plan in place, our global sourcing organization has ensured sufficient silicon supply, thus mitigating any and all shortage impact to our customers.

  • As part of this BCP, we have qualified multiple suppliers and/or entered into long-term supply agreements for each of the more than 50 silicon substrate types that are required for our customer products.

  • We have been successful at minimizing substrate cost increases through these multi-sourcing activities.

  • To date, we have absorbed this increase through other general ledger accounts with the hope that the substrate market would normalize.

  • But with the continuation of this trend, we have notified our customers of silicon wafer price adders to new orders, which should positively impact 2019 revenue and margins.

  • I would now like to spend some time discussing performance specific to our various business units.

  • Starting with the RF high-performance analog business unit.

  • We have strong and continued growing demand for silicon germanium.

  • This is driven by the 100-gigabit per second data center and cloud computing segments for which we manufacture fiber optic components.

  • As stated, we have begun wafer starts to the full capacity of this silicon germanium ramp and expect to see the full revenue impact of the SiGe increased capacity in the fourth quarter and are adding even additional capacity in Newport Beach targeted to be in qualification by the end of first quarter 2019.

  • We also expect to be in revenue SiGe shipments from our San Antonio factory in the first quarter of 2019.

  • As part of the plan to move to a higher silicon-germanium-rich mix in Newport Beach, we executed a successful qualification and have begun a substantial ramp for RF SOI and other wafers in San Antonio that were displaced from Fab 3. To further increase our silicon-germanium-served markets, which is our most highly differentiated RF technology, we have added more content into the site full applications.

  • And we are happy to report that we are beginning production of our first silicon photonics project and have launched multiple others, including a project that will ultimately integrate indium phosphide lasers and modulators into the silicon photonics platform, processed in our Newport Beach 8-inch facility.

  • For Silicon Photonics, our lead customer recently gave us their Technology Partner of the Year award.

  • We announced the initial ramp of 300-millimeter RF SOI in our Uozu facility in Japan.

  • This is a significant milestone for our RF business unit and for TowerJazz, as we take advantage of added capabilities and capacity at 300-millimeter.

  • 300-millimeter provides our RF SOI customers not only a very high-performance switch but also the ability to integrate state-of-the-art, low-noise amplifiers and large amounts of digital content on the same die.

  • While relevant for products today, this added capability can address a segment of the front-end module market that we expect will grow significantly in the next years with the advent of 5G and MIMO technology that multiplies the numbers of antennas, low-noise amplifiers and complexity required in a handset.

  • We also announced signing a substantial contract with Soitec to supply 300-millimeter RF SOI wafers ensuring customer supply for years to come.

  • This contract adds to our already strong 200-millimeter business with Soitec.

  • For continued leadership in mobile platforms over the next years, we continue our RF SOI roadmap but also are working on advanced technologies that can leapfrog present RF SOI performance.

  • This includes RF MEMS, where we have customer programs and are delivering today volume production on initial-generation products as well as working on next-generation projects that will address a much larger portion of the total RF switch market as well as a new proprietary technology that relies on different materials to provide breakthrough switch performance for which we are now engaging lead customers.

  • Moving on to the CMOS image sensor business unit.

  • We had announced the new 25-megapixel sensor using our state-of-the-art and record smallest 2.5-micron global shutter pixel with Gpixel, a leading industrial sensor provider in China.

  • The product is achieving very high traction in the market, with samples having been delivered to major end customers.

  • Another leading provider in this market who has worked with us for many years will soon release a new global shutter sensor based on the same platform.

  • Both of the above-mentioned sensors are the first for families of sensors with different pixel count resolution for each of those customers' next-generation industrial sensor offering, ranging from 1 megapixel to above 100 megapixel.

  • We expect this global shutter with this outstanding performance based on our 65-nanometer 300-millimeter wafers to drive high volumes in 2019 and the years following.

  • We see this as a key revenue driver from our industrial sensor customers.

  • In parallel, e2v is ramping to production with its very successful Emerald sensor family on our 110-nanometer global shutter platform using state-of-the-art 2.8-micron pixel with best-in-class shutter efficiency and noise level performance.

  • We recently released our 200-millimeter Backside Illumination for selected customers.

  • We are working with them on new products based on this technology as well as on upgrading existing products from our front-side illumination version to a BSI version.

  • Increasing the quantum efficiency of the pixels by using BSI, especially for the Near IR regime within the industrial and surveillance markets, enabling our customers improved performance of their existing products as a bridge to the next-generation family of sensors in our advanced 300-millimeter platform.

  • The medical x-ray market, we are continually gaining momentum and are working with several market leaders on large panel dental and medical CMOS detectors based on our 1-die per wafer sensor technology using our well-established and high-margin stitching with best-in-class high-dynamic range pixels providing customers with extreme value creation and high yield, both in 200-millimeter and 300-millimeter wafer technology.

  • We presently have a strong business with market leadership in this segment and expect substantial growth in 2019 on 200-millimeter, with 300-millimeter initial qualifications that will drive incremental growth over the next multiple years.

  • For mid- to long-term accretive market growth, we are progressing well with a leading DSLR camera supplier and have as well begun a second project with this customer using state-of-the-art stacked wafer technology on 300-millimeter wafers.

  • For this DSLR supplier, the first front-side illumination project is progressing according to plan, expecting to ramp to volume production in 2020.

  • While the second stacked wafer-based project with industry-leading alignment accuracy and associated performance benefits is expected to ramp to volume production a year after.

  • In the neural network field, we made substantial progress and expect that we will start to ramp multiple mobile platforms towards the end of 2019.

  • In addition, we are progressing on 2 very exciting programs in the augmented and virtual reality markets, 1 for 3D time-of-flight-based sensors, and 1 for silicon-based screen for a virtual reality head-mount displays.

  • We are addressing the powered management IC markets with 4 major activities.

  • First, best-in-world up to 16-volt 300-millimeter 65-nanometer BCD platform; secondly, incorporating 1.2-volt to enable high gate count logic to this previously mentioned best-in-world flow; adding advanced reprogrammable NVM to our 0.18-micron BCD platform; and fourthly, adding high-voltage offering of up to 140-volt breakdown to the 0.18-micron BCD platform.

  • I'll spend a little bit more time on the first 2 activities.

  • Our 65-nanometer platform provides a unique combination of advantages over the competition.

  • With an ultra-low Rdson, less than 1 milliohm square millimeter with a 5-volt LDMOS versus the [other wide] industry-best of 1.1-milliohm square millimeter for IDM, and 1.2- to 1.3-milliohm square millimeter for foundries.

  • For projects which operate as a megahertz switching frequency, the 65-nanometer BCD power transistor benefits from a very low Ron QGD down to 2.6-milliohm nanocoulomb and low mask counts for the 65-nanometer BCD platform.

  • This positions us as the technology leader in this multibillion-dollar market of up to 16-volt operational power management, and we continue to receive very high interest from multiple customers, including leading power management companies, targeting a very wide range of products across various market segments.

  • This includes mobile PMICs, load switches, battery management ICs for PCs and servers and DC-DC converters.

  • So far, in the short time since we released the PDK, more than 20 customers have downloaded the design kit and are in various stages of evaluation and design.

  • Multiple customers boarded our June wafer shuttle with products and test chips.

  • The platform initial ramp to production is planned for the fourth quarter of 2018, and we expect this platform with one of our main power management growth drivers in 2019 and beyond.

  • Secondly, we are increasing our market coverage by expanding this platform to support 1.2-volt transistors, targeting a release this quarter.

  • These advantages will provide our customers the performance superiority as well as with new opportunities for integrating high gate count logic with power-managed devices all on the same die.

  • The integration of logic and power management will enable new types of devices and will significantly reduce the overall system level costs as well as minimize the PCD footprint.

  • This is for the reason that 2 different ICs will be integrated into 1.

  • To discuss the TOPS business unit.

  • The focus of our TOPS business unit is working with our customers to codevelop and/or transfer unique process flows for which we provide capacity under a long-term supply agreement.

  • Throughout the first half of 2018, we successfully ramped our TOPS capacity in multiple of our manufacturing facilities.

  • The greatest revenue portion of it is based upon IDM partnership, specifically driven through codevelopment of discrete power device next-generation platforms, built upon customers' transfer technology.

  • Significant to mention, these activities are now loading our first facility, our 6-inch facility, even presently to record-breaking high utilization rates.

  • The second focus of this business unit are partnership for codevelopment for unique market applications or very unique process features or implementation of unique technologies for highly differentiated end products and product application.

  • Example for the latter are biosensors, differentiated magnetic sensors, digital MEMS speakers and specialized high-end accelerators.

  • Among this grouping, we have recently started engagement with a lead Tier 1 customer at our 300-millimeter facility.

  • In summary, we have solid expectations for the latter half of 2018, especially with regard to organic growth in the fourth quarter as a result of continued investment in our capabilities.

  • We remained profitable and a strong cash-generating business, serving various high-growth markets and technology.

  • The second quarter showed our expectations are on track to achieve our financial model targets with incremental growth, operating and EBITDA margins of between 50% to 60% on incremental revenue growth.

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

  • Oren, please.

  • Oren Shirazi - CFO & Senior VP of Finance

  • Thank you, Russell, and welcome, everyone.

  • Thank you for joining us today.

  • I will start by providing the P&L highlights for the second quarter of 2018 and then discuss the cash flow and balance sheet.

  • Revenues for the second quarter of 2018 were $335 million, a $22 million or 7% revenue growth over the previous quarter, which resulted in $12 million in higher growth, operating and net profit, reflecting approximately 55% incremental profit margins over the $22 million revenue increase.

  • Gross and operating profit for the second quarter of 2018 increased to $79 million and $44 million, respectively, representing an increase of 19% and 39% over the prior quarter, respectively.

  • Net profit was $38 million or $0.38 per share basic, $0.11 higher as compared to $26 million or $0.27 of basic earnings per share in the previous quarter.

  • The net profit represents an increase of 45%, which reflected a 52% incremental margin increase.

  • EBITDA for the second quarter was $96 million and free cash flow was $37 million.

  • EBITDA for the second quarter of 2018 reflects $12 million better EBITDA than the prior quarter or 13% EBITDA growth.

  • I would like to note that the noncontrolling interest was a $1.7 million positive amount for the quarter, which represents a GAAP net loss at TPSCo.

  • This was due to the royalty structure we presented in the second half of 2017.

  • Under which, the royalties from TPSCo to Panasonic and to TowerJazz are calculated as a percentage of TPSCo's profitability under Japanese GAAP report.

  • The JP GAAP -- Japanese GAAP net profit does not differ much from the U.S. GAAP as far as the TPSCo's P&L, excluding fixed asset depreciation.

  • This item, fixed asset depreciation, is higher under U.S. GAAP when compared to JP GAAP, mainly due to valuation of the assets per the purchase price allocation done at the time of the TPSCo acquisition, which is used only for U.S. GAAP.

  • This is higher than the JP GAAP asset base since the JP GAAP assets are measured according to their historical cost.

  • This lower depreciation amount under JP GAAP results in higher profitability at TPSCo under JP GAAP for the second quarter, and royalties payments to Panasonic and to TowerJazz as compared to the U.S. GAAP under which the noncontrolling interest line is calculated from the lower profit.

  • As a reminder, this royalty structure results in a higher cost of revenue, yielding a lower gross margin, creating a lower tax expense and lower noncontrolling interest, which ultimately, generates greater net profit, greater cash and greater free cash flow.

  • I would like to discuss now our applicable and effective all-in tax rates.

  • Our U.S. affiliates, Jazz and TowerJazz Texas, which own our Newport Beach Fab and the San Antonio Fab, respectively, are subject to a 21% tax rate following the recent U.S. tax reform effective January 1, 2019, as compared to 35% prior to the U.S. tax reform.

  • Our profits in Japan are subject to an approximate 32% tax rate.

  • Our profits in Israel from Fab 1 and Fab 2 operations, while subject to 7.5% statutory tax rate, are not expected to result in any cash tax payments in Israel in the foreseeable future since we have more than $1 billion of NOLs, net loss carryforward, to utilize indefinitely.

  • Considering all these, and since we have certain tax exemptions, discounts and credits, our all-in worldwide weighted average effective tax rate was 7% for the second quarter of 2018, 6% for the first half of 2018 and 5% for the first half of last year.

  • The 2017 all-in effective tax rates were lower than 2018, mainly since we commenced to include the 7.5% Israeli statutory noncash tax provisions for the Israeli operations from our 2017 fourth quarter, following the realization of the tax-deferred assets in that fourth quarter.

  • I will now provide the cash flow highlights for the second quarter and the balance sheet analysis as of the end of June 2018.

  • Cash, including short-term marketable securities net of gross debt as of June 30, 2018, totaled a record of $276 million compared to net cash of $247 million as of March 31, 2018.

  • The gross debt outstanding amount as of June 30, 2018, was $351 million, comprised mainly of $140 million in bank loans and $180 million in debentures.

  • The main cash flow activities in the second quarter of 2018 were comprised of the following: cash from operations of $77 million; and the investment in CapEx tools and fixed assets, net of $40 million, resulting in $37 million free cash flow; also, we had $15 million investments in securities and $4 million net of debt received.

  • In relation to our debt, as we previously stated, during the second quarter of 2018, we received an upgrade of our company general as well as our bond-specific rating recommendation from Standard & Poor's Maalot, a wholly owned subsidiary of S&P Global Ratings.

  • Both ratings were upgraded to ilAA- with a stable horizon from the previous ilA+ with a stable horizon.

  • The upgrades are based on our strong balance sheet and financial profile as well as our ongoing solid operating performance, strong EBITDA and generation of significant cash flows.

  • Second update in relation to the debt, in June 2018, we restructured our Japanese subsidiaries loan originally due 2018, '19 and '20, which carried variable interest rates of TIBOR plus 1.65% and TIBOR plus 2% by early repaying them and borrowing instead $100 million new loan from 3 leading Japanese banks at better terms and longer duration.

  • The new loan final maturity date is June 2025, and it includes a 3-year grace period, followed by 9 equal installments from June 2021 to June 2025 and carries a fixed interest rate of 1.95% per annum.

  • And lastly, in July 2018, we early repaid $40 million loan, which was borrowed in 2016 from JA Mitsui to U.S. in relation to the acquisition of the San Antonio fab and its ramp up.

  • The loan carried annual interest of ICE LIBOR plus 2%, hence its early repayment will save the company between $1.5 million to $2 million per annum in interest and fees.

  • Net current assets presented on the balance sheet increased to $648 million on June 30, 2018, resulting in our current ratio of 3.1x.

  • Shareholders' equity is at a record of $1.1 billion as of June 30, 2018, as compared to $1.03 billion at the end of the year 2017.

  • Share count as of June 30, 2018, was 99 million in outstanding shares.

  • Fully diluted share count as of June 30, 2018, included an additional 9 million maximum possible shares to be issued, comprised as follows: 2 million is of related options and RSUs; 6 million underlying convertible bonds; and 1 million underlying capital notes.

  • As a result, the fully diluted share count has remained 108 million, the same as in previous quarters.

  • I would like to discuss now the currencies and hedging activities.

  • In relation to the euro currency, we have almost 0 business 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's costs are in yen, we have a natural hedge over most of our Japanese business and operations, excluding the portion in which the yen-denominated variable cost to related to the third-party foundry business exceed the yen net gains from the Panasonic business.

  • In order to mitigate a large portion of this net yen exposure, we have executed 0-cost cylinder hedging transaction.

  • This 0-cost cylinder transaction hedge all currency fluctuation to be contained in a very narrow range as compared to the spot exchange rate.

  • Hence, while the yen rate against the dollar may fluctuate, our margins are almost not impacted.

  • In addition, in relation to the Japanese yen impact on the balance sheet, we have a natural hedge on cash and loan balances since the loans and the cash are both yen-denominated.

  • This helps to protect us from potential impact of yen fluctuations.

  • Lastly, in relation to the fluctuations of the Israeli shekel currency, we have no revenues in this currency.

  • And while less than 10% of our costs are denominated in the Israeli currency, we also hedge a large portion of this currency risk using 0-cost cylinder transaction, which hedges in a narrow range.

  • This ends my summary, and now I wish to turn the call back to Noit Levi.

  • Noit, please go ahead.

  • Noit Levi-Karoubi - VP of IR & Corporate Communications

  • Thank you, Oren.

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

  • Please note that the second quarter of 2018 financial results have been prepared in accordance with U.S. GAAP.

  • The financial tables in today's earnings release also include certain adjusted financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as established with the Securities and Exchange Commission.

  • The financial tables include the full explanation of these measures and the reconciliation of these non-GAAP measures to the GAAP financial measures.

  • For the Q&A session, we are pleased to have with us (inaudible).

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

  • Operator?

  • Operator

  • (Operator Instructions) The first question is from Cody Acree of Loop Capital.

  • Cody Grant Acree - MD

  • Russell, if we can maybe start with the wireless outlook and the weakness that's extending into the September quarter.

  • We're foreseeing better indications from your customers regarding some sequential growth into the second half.

  • How do you pair that with what you're seeing?

  • Russell C. Ellwanger - CEO & Director

  • We've seen a major customer recently reduced its forecast for the third quarter.

  • Is that due to a single end customer of theirs that had a very, very high demand, that's maybe reduced the demand?

  • Is it due to possibly a loss of market share?

  • Either way, would not be -- I don't know the exact answer.

  • I wouldn't speculate on it.

  • But we certainly, within the past weeks, have seen a reduction in demand to a point that it was not forecasted even a month ago.

  • We have 3 other customers that are reasonable-sized customers for us that have also shown weakness extending into the third quarter.

  • So where others might be seeing strength, certainly, we have not seen that across the base that we have in the area of the RF SOI.

  • More than that, I can't really state.

  • The people that we're dealing with, as far as our customers, are very good customers with, we believe, excellent products and customer relationships.

  • Some of what we're seeing right now is a possible delay or reduction, we believe, will be made up, forecasted 300-millimeter RF SOI in the fourth quarter, and that being directed at new SKUs and new wins for at least one big customer.

  • But -- and the rest of another large customer, they're a very, very strong player within front-end module.

  • I would believe that whatever downs we have with them, which we are seeing, will be restored as well.

  • So I don't see this as being something that's long term or long lasting.

  • I can't overly speak to the mobile market what other people are seeing.

  • Q3 is not over, so what people had forecasted weeks ago or a month ago or 2 months ago on previous releases, how that really has impacted with the present reality because the present reality is what we've seen within the past 10 to 12 days.

  • Cody Grant Acree - MD

  • Russell, and you've mentioned that you don't have visibility as to whether the change from the customers are their market share related or inventory.

  • But do you have a sense of -- given that this is a recent change, do you believe that this is really more a matter of your customers rationalizing inventory into the second half?

  • Or do you think it's something more than that?

  • Russell C. Ellwanger - CEO & Director

  • At least in one case, the change is abrupt enough that it has to be a rationalization of inventory.

  • In the other cases, I think it's just a forecast that's down for whatever end markets that they're serving, their customers are not overly pumped at the moment.

  • I think recent reports, and it's really not my part in the call to speak to end users that are up or down, but there are multiple end cellphone providers that are not seeing big growth in their business at the moment.

  • So -- and some out there are candidly flat to down, and some that are very down.

  • So -- but in the one case that came in most recently, I would believe that that's an inventory correction based upon a reduction of demand.

  • But if you have certain customers that require a very high upside capability and demand goes down, then you have an overcorrection because you had oversupply to make sure you can cover an upside.

  • Cody Grant Acree - MD

  • And then lastly on RF, last quarter, you mentioned that it was both -- on wireless, I guess, you mentioned that it was both RF and a bit of turns impact on your power management business.

  • I guess, what you're seeing as far as order change rates into Q3.

  • How do you parse that between RF SOI and power management?

  • Russell C. Ellwanger - CEO & Director

  • We haven't seen any changes in power management.

  • What I did mention during the call was that one of our larger power management customers that's a substantial amount of revenue from the power BU had reduced against their forecast in the second quarter and that we had all expected a reversal on that.

  • But it has become apparent by looking at end market reports that their major customer has dropped substantially in market share.

  • So I don't see that recovering.

  • But other than that, I don't see that we have any changes within power management that's really going into the mobile market.

  • I think there's some of our customers that had expected much higher ramps coming into this year for the SKUs that they won, and the ramps aren't hitting the levels that they have thought.

  • But that's not a change from when we had announced Q1 to the present.

  • Some of that has not yet recovered or hit the ramp levels that they thought that they would be, but I'm not sure that there is an additional -- any additional weakness or surprise.

  • Cody Grant Acree - MD

  • And then just lastly, Oren, just with the ramp of silicon germanium and Russell talking of additional capacity going into next year.

  • Does that capacity fall within your prior CapEx budgets of kind of the low $40 million range for the quarter?

  • Oren Shirazi - CFO & Senior VP of Finance

  • Yes.

  • So I believe that the new investment that Russell informed about it to add more additional 15% capacity SiGe in Newport Beach maybe will cause the $40 million to be for a quarter or 2 more closer to the $45 million.

  • But in the past, we always say that it's between $40 million to $45 million, so probably, it will be the upper end of that for a quarter or 2 in the beginning of '19, but it's still too premature to know.

  • Operator

  • The next question is from Rajvindra Gill of Needham & Company.

  • Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog & Mixed Signal; Consumer IC & Multi-Market

  • So just a follow-up on the RF business.

  • Now that it's had a few quarters of weakness, how are you internally thinking about forecasting that business going forward and kind of calibrating those numbers and communicating that to the Street?

  • Since it is about 22% of revenue or so, and it's caught off -- caught some folks off by surprise the last 2, 3 quarters where there's been such a significant dropoff in that business?

  • How do you look at that business internally going forward?

  • And kind of what are the thoughts in terms of trying to calibrate the downside going forward?

  • Russell C. Ellwanger - CEO & Director

  • As far as what we're targeting in Q4, everything is already within that number.

  • So when we said that we're targeting a record revenue, somewhere of between $360 million and $380 million, what we see right now in the market is absorbed in there.

  • As we enter into Q1, Q2, Q3, it really -- as we always do, we work very closely with our customers to understand their present forecasts, make sure that we have capacity for their forecasts.

  • And certainly, as there had been some surprises this year, we'll be from my standpoint and then from the standpoint of the sales and the BUs, a bit more stringent about trying to understand why there were deltas against their own forecast this year and what is the safe number and how do we mitigate any changes next year.

  • Now as far as what we're doing within the specific, the RF SOI space, we have continuous developments driving really outstanding performance, what we believe is probably the best Ron-Coff offerings in the world.

  • And if we look at the 300-millimeter offering, that's a very, very excellent Ron-Coff that's combined with the 65-nanometer digital that allows for an outstanding LNA.

  • So the big thing for us is always to focus on increasing our share of market and in other areas then increasing our served market whenever possible.

  • In the area of RF SOI in and of itself, it's a question of really increasing the share by making sure that we have the best platform available that addresses the upcoming requirements in the market.

  • As we had mentioned with the 5G and the MIMO, we believe that our 300-millimeter platforms have a very, very special capability there.

  • As far as the 200-millimeter for switching capabilities, we have really outstanding performances and, I think, the best in the world.

  • So continual working with customers on taping out and winning the new SKUs, that's the best way that one has protection over any market movement, if you're growing your market share and especially if you're increasing your served market.

  • As we mentioned, we're very engaged in advanced technologies to replace RF SOI that bring the performance into really a very, very new level.

  • One is the MEMS switch, and another is a total different material.

  • For the total different material, we are engaged with leaders in the market on a codevelopment.

  • And I think that's always been as well as with the MEMS switch.

  • But that's, I believe, what's been somewhat of our success formula for the way that we've been able to grow, is that we look at breakthrough developments not in an isolated fashion but in a fashion of partnering with the customer and with the lead customer in that segment during the development itself.

  • And as long as we continue to do that and the technologies are successful, you would then have a very sure road map of 2- to 4-year growth as those technologies get adopted and really do have breakthrough performances.

  • Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog & Mixed Signal; Consumer IC & Multi-Market

  • And I just want to get some more clarity on the RF business again.

  • So was there 2 things that happened in the smartphone?

  • You had a power management customer that was selling into smartphones that had a significant reduced forecast that's not going to reverse course.

  • Then you had your RF customers also were reducing forecast.

  • I was just wondering if you can clarify that because it seems the power management customer seems to be new.

  • The weakness across your RF suppliers seem to be ongoing.

  • I was just wondering if you can clarify that.

  • Russell C. Ellwanger - CEO & Director

  • Sorry if I said something that was confusing.

  • In the case of the power customer, a large power customer that we had expected recovery from, that had forecasted much higher, has stated in -- when we gave our Q1 guidance that we saw some weakness within power management and stated that some power management was also serving mobile.

  • This customer does not serve mobile.

  • It's another end application where we had -- or the end customer doesn't serve mobile.

  • Maybe our customer does, but the end customer is not a mobile application.

  • And in that case, it was the biggest portion of one of our customers, and the business has just gone away.

  • The end customer really has lost its market.

  • So I don't expect that, that will recover.

  • In the area of where our power management serve the mobile market, it's more in the discrete space, and there is some power management discrete and as well as another specific application within power IC.

  • And that serves a customer that is a very, very big customer that just is a bit off of its growth right now.

  • But I believe that, that will recover.

  • Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog & Mixed Signal; Consumer IC & Multi-Market

  • Okay.

  • And then with regards to the trying to match the demand and supply for the SiGe infrastructure capacity.

  • So you mentioned that the demand was much stronger than expected, and so as a result, your shipment profile from recently added capacity has been pushed out slightly.

  • When you're looking at Q4 target of $360 million to $380 million, how much visibility do you have now in terms of trying as best as you can, obviously, match the level of capacity to support the demand?

  • Do you think this year, you've got the right process flows in place.

  • You've moved them.

  • You've transitioned to the right fabs in order to support that ramp in Q4.

  • Because it seems like there's a lot of drivers to a big Q4 ramp, but the capacity has to be there in order to support that.

  • Russell C. Ellwanger - CEO & Director

  • The qualified capacity.

  • Yes, I believe that -- and I am pretty sure we have this in the press release itself, that we do have presently in the start plan in place for qualified materials to hit the $360 million to $380 million.

  • In the case of the silicon germanium, the demand remains very strong, and that's really the reason to -- on top of what we're qualifying in San Antonio, to add additional capacity in Newport Beach beyond what we are adding right now or what we've now fully started to.

  • So the capability for the starts themselves, it's fully there.

  • Were I to have more capacity at the moment for Newport Beach, we would fill more capacity.

  • So the ramp is there.

  • The customer demand is there, and we're looking forward to continue to load and ship these wafers.

  • The thing with silicon germanium is that you're dealing with a very, very long flow.

  • It's somewhere between 40 and 44 layers.

  • And that type of a layer count, from the time that you start it, you're -- it's not turn business within the same quarter.

  • So the starts having been in place at the beginning of Q3, those shipments really happen then in Q4.

  • Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog & Mixed Signal; Consumer IC & Multi-Market

  • And last question from me, Oren.

  • If you're talking about a ramp of $360 million to $380 million in Q4, so that's an incremental $35 million of revenue from Q4 to Q3.

  • Are we still kind of assuming that we're going to have a 50% to 55% gross profit fall through?

  • And as a result, we should start to see gross margins in the high 26 -- 26.7%, 26.8%, in that range.

  • Is that what we're expecting?

  • Oren Shirazi - CFO & Senior VP of Finance

  • Yes, yes.

  • Like Russell mentioned, the major part of the growth would be the SiGe, which is higher margin and the 300-millimeter fabs.

  • So we should expect those incremental margins like we achieved in Q2.

  • Operator

  • The next question is from Quang Le of Crédit Suisse.

  • Quang Tung Le - Research Analyst

  • So we know your guidance for 2018.

  • Would you be able to provide more comments for 2019?

  • And how is your discussion with Panasonic going on?

  • I believe the deal expires in March 2019.

  • And also if you could add any comment on your China deals with Tacoma [Yuanchen] that will be greatly appreciated.

  • Russell C. Ellwanger - CEO & Director

  • So we haven't given any targets for 2019 other than I will very happily state that we're excited to complete the Q3.

  • As was asked just previously, do we have the right ramp plan in place, do we have the capacity and the right factories qualified and in place.

  • The answer is we do.

  • So we'll finish -- should finish the Q4 with this $360 million to $380 million very accelerated organic growth, and this should propel us very nicely into the next year on the growth trajectory that we believe our capability has shown in the past and will continue to show.

  • So we believe that 2019, on the organic side, will be a very, very strong growth year.

  • As far as the negotiations with Panasonic, you are correct.

  • The present contract expires at the end of the first quarter of 2019.

  • We are in discussion negotiation with Panasonic.

  • There's no question of an extension of the contract and an extension of what we're doing.

  • It becomes, at this point, really a discussion of multiple factors, some of the deals with internal costings and how things are charged.

  • So it's not at a point yet to discuss openly.

  • We're not at an end point.

  • But I believe that we'll be in a very good position, and it will be a win-win for Panasonic and for TowerJazz as it has been a win-win for the past 4.5 years.

  • So hopefully, that answers your first question.

  • Your second question was, again, about Tacoma.

  • Oren Shirazi - CFO & Senior VP of Finance

  • Tacoma, China.

  • Quang Tung Le - Research Analyst

  • Yes.

  • China deal, yes.

  • Russell C. Ellwanger - CEO & Director

  • So yes, very happy to state that the governmental entity, the Nanjing Development Zone, had recently become the general partner and the majority shareholder of the Tacoma venture.

  • Within the past month, we received a commitment letter from Nanjing Development Zone for the completion of the project, and that they're really backing it.

  • I'll be in China for our own internal technical seminar in August and look forward to following meetings there.

  • But we sit at this point very optimistic on what's happening with the movement to the government to take the majority ownership of the entity and the commitment letter that we received.

  • We additionally have a customer that is committed to load 50% of the factory, and that's why it's very exciting and very important to move it along.

  • A single customer with that type of a commitment, it's a long-term commitment, that becomes a very, very big viable opportunity for whoever is involved and investing in it.

  • Quang Tung Le - Research Analyst

  • And if I could move back to your power customer that lost the market share, could you specify what is the percentage of your revenue?

  • Russell C. Ellwanger - CEO & Director

  • I didn't say that our customer lost market share.

  • I said our power management customer's customer lost [its market].

  • Quang Tung Le - Research Analyst

  • Oh, yes.

  • Yes, so could you specify more or less what is the percentage of that customer related to Tower in terms of revenues?

  • Oren Shirazi - CFO & Senior VP of Finance

  • 1.5%.

  • Russell C. Ellwanger - CEO & Director

  • It's on the order of 1.5% of our total revenue.

  • Quang Tung Le - Research Analyst

  • Did you say 1.5%?

  • Russell C. Ellwanger - CEO & Director

  • Yes, sir.

  • Quang Tung Le - Research Analyst

  • Of total revenue.

  • Russell C. Ellwanger - CEO & Director

  • Yes.

  • Quang Tung Le - Research Analyst

  • I see.

  • And also, in terms of tax rates that you've been mentioning, given that you still have this tax deferred asset in Israel, what should we be modeling for 2018 and full year 2019?

  • Oren Shirazi - CFO & Senior VP of Finance

  • Yes, so...

  • Russell C. Ellwanger - CEO & Director

  • Just let me clarify, that customer is about 1.5% of our total revenue.

  • That end customer of theirs is not 100% of the revenue we get from them.

  • Oren Shirazi - CFO & Senior VP of Finance

  • Yes, so from -- I spoke about it in my word.

  • So basically, we have this statutory tax in Israel of 7.5%.

  • This is for the P&L basis.

  • But cash-wise, like I said, it's not -- we will not pay tax in the coming foreseeable future because this is reducing the tax asset that we are utilizing, the tax deferred asset that we recorded in Q4 2017.

  • So at least, I mean, if we continue, we will improve our net profit.

  • Still, we will not pay taxes at least for the coming 5, 6 years in Israel.

  • So we will have in the P&L a charge of 7.5%, which is an amortization of this deferred tax asset.

  • But on the cash basis, net cash or free cash flow or cash from operations, that will be 0 payment.

  • Quang Tung Le - Research Analyst

  • And in terms of effective tax rate for the whole year -- full year then?

  • Oren Shirazi - CFO & Senior VP of Finance

  • For the consolidated, so considering that in the U.S., we have 21%, and in Japan, 32%.

  • But still, majority of the profits are generated in Israel.

  • So I believe to assume the current 7% that we saw in Q2 is reasonable.

  • I mean considering that we have some credits and other waivers.

  • So just you can model the current 7%, I think it's reasonable.

  • Operator

  • Your next question is from Richard Shannon of Craig-Hallum.

  • Richard Cutts Shannon - Senior Research Analyst

  • My first question is I think early in your prepared remarks, you talked about wafer prices that you pass along to your customers will have an impact to sales and gross margins.

  • Any way you can characterize or quantify that for us?

  • Russell C. Ellwanger - CEO & Director

  • With regards to what?

  • Richard Cutts Shannon - Senior Research Analyst

  • How much of an impact the wafer price increases that you're passing along to your customers.

  • I think you said that will have an impact on your 2019 sales and margins and wondering if you can quantify that in any way.

  • Oren Shirazi - CFO & Senior VP of Finance

  • For the margin.

  • Russell C. Ellwanger - CEO & Director

  • We're targeting to get somewhere about 50 basis points.

  • If we were to look at this, we think that that's probably somewhat reasonable.

  • It's -- we have different requirements for different customers as you do on pricing to start with.

  • But across the board, we think it's a fair thing to share in the increase that we're seeing.

  • We -- but I think our target of 50 basis points is probably reasonable.

  • Does that answer your question, Richard?

  • Richard Cutts Shannon - Senior Research Analyst

  • Yes.

  • Yes, it does.

  • Going over to silicon germanium, you're talking about additional capacity increases beyond what you currently have in place here.

  • When do you -- I mean, it sounds like you have great demand from a number of different products here.

  • When do you start to reach kind of maximum utilization on that capacity that you've referred to?

  • Does that happen in the first half of the year?

  • Or is that second half of next year?

  • Oren Shirazi - CFO & Senior VP of Finance

  • About which capacity, you mean?

  • Richard Cutts Shannon - Senior Research Analyst

  • Silicon germanium, company-wide.

  • Russell C. Ellwanger - CEO & Director

  • So right now, it is running at full utilization.

  • I believe that it will continue to run at full utilization throughout 2019.

  • As additional capacity comes online, it's immediately sold and used.

  • So we are running right now at full utilization of the silicon germanium installed capacity.

  • Richard Cutts Shannon - Senior Research Analyst

  • Okay.

  • And did I hear you correctly that the silicon germanium is ramping up in the San Antonio fab starting in the first quarter?

  • Russell C. Ellwanger - CEO & Director

  • Yes.

  • In the first quarter, we'll begin revenue starts.

  • And will we shift revenue in the first quarter?

  • Not sure yet.

  • We'll either shift in the first or the second.

  • But we will begin by plan.

  • We'll be beginning revenue starts in the first quarter.

  • Richard Cutts Shannon - Senior Research Analyst

  • Got it.

  • Okay.

  • So probably not much of an impact in revenues in the first quarter then.

  • Is that fair?

  • Russell C. Ellwanger - CEO & Director

  • It will be minimal and ramping through the second and third.

  • Richard Cutts Shannon - Senior Research Analyst

  • Okay.

  • Okay, perfect.

  • Maybe a question on RF, RF SOI.

  • Obviously, you're expanding your capacity into 300-millimeter.

  • But kind of moving some away from 200-millimeter that you've talked about earlier this year.

  • How should we think about your capacity growth corporate-wide, overall wafer size and RF SOI in 2019 over 2018?

  • Is that going to be growing much, if at all?

  • Russell C. Ellwanger - CEO & Director

  • The 200-millimeter?

  • Richard Cutts Shannon - Senior Research Analyst

  • The total RF SOI capacity, corporate-wide.

  • Russell C. Ellwanger - CEO & Director

  • It's a little bit hard to answer that because the RF SOI doesn't necessarily require any separate tools off of any of the other CMOS flows that we're doing.

  • So it's -- the RF SOI capacity is more or less the full capacity of our factories.

  • But are we investing specifically to increase RF SOI capacity?

  • At this point, we're not.

  • We will most likely invest some amount or with customers invest some amount to increase capability on advanced flow, such as the MEMS flow or this new material that we're speaking of.

  • Richard Cutts Shannon - Senior Research Analyst

  • Okay.

  • So is it fair to think about your RF SOI growth like counter '19 over '18, is that something that you may not necessarily expect to grow then?

  • Russell C. Ellwanger - CEO & Director

  • I don't think that that's the case because of the 300-millimeter.

  • So the incremental revenue of 30-millimeter, I believe, will be incremental on top of the RF SOI that we're doing presently.

  • Richard Cutts Shannon - Senior Research Analyst

  • Got it, okay.

  • Just want to make sure what kind of growth do you expect from that, I think that's pretty helpful.

  • My last question, I'll jump out of the line, is on the topic of silicon photonics.

  • I think you talked about a lead customer here ramping up -- well, actually let me ask that question, lead customer, when do you expect that one to ramp up?

  • Russell C. Ellwanger - CEO & Director

  • We stated that it entered production presently.

  • Richard Cutts Shannon - Senior Research Analyst

  • Okay.

  • And then can you give us a sense of what kind of customer breadth you have here?

  • And can you characterize any of the customer base here, known silicon photonics suppliers in the market today or any other way, please?

  • Russell C. Ellwanger - CEO & Director

  • I don't know if I could do that without very much specifying who they are.

  • There's not so many known players at the moment.

  • But certainly, somebody that would go into production presently is someone that's playing in the market presently.

  • Operator

  • The next question is from Lisa Thompson of Zacks Investment Research.

  • Lisa R. Thompson - Senior Technology Analyst

  • So just 2 quick ones.

  • When you talk about the fourth quarter revenue range, to get to the high end, are you expecting any change in mobile orders?

  • Or is that just based on the current level it's at now?

  • Russell C. Ellwanger - CEO & Director

  • That's based on the current level.

  • I mean, there's puts and takes in all our business.

  • That was the reason to say a target of $360 million to $380 million.

  • But I mean, we didn't put a guidance out.

  • What we're saying is we do expect the fourth quarter to be at least $360 million.

  • We wouldn't expect it to be over $380 million.

  • And as we release Q3, we'll obviously give a target that will have the guidance with a plus, minus around it.

  • But this was just what we -- from what we see now, the reasonable midpoint that we think that we would target in Q4.

  • Lisa R. Thompson - Senior Technology Analyst

  • Okay, good.

  • And then just on 2019, Oren, do you think that the incremental gross margin contribution from new revenues will go higher than 55% based on product mix?

  • Or is it going to stay there?

  • Oren Shirazi - CFO & Senior VP of Finance

  • No, I believe it's already aggressive, 50% or 60% incremental margin is a very nice model to continue.

  • I don't think it will be better, but it will not be lower.

  • Operator

  • There are no further questions at this time.

  • Mr. Ellwanger, would you like to make your concluding statement?

  • Russell C. Ellwanger - CEO & Director

  • Sure.

  • Thank you.

  • So I thank all of you for your attention and support.

  • We really are excited to complete our third quarter and built upon the activities, deliver our fourth quarter record revenue, entering then into 2019 well poised to continue on a significant growth path.

  • In August and September, we'll be participating in the following conferences.

  • I will be at the Oppenheimer 21st Annual Technology Conference in Boston on August 7. We'd love to meet with whoever would be available in formal one-on-ones or whatever.

  • I'll also -- I'm sorry, Dr. Racanelli will be presenting at the Jefferies 2018 Semiconductor Conference on Tuesday, August 28, in Chicago.

  • And he'll be happy to meet, explain and talk in much more detail about anything happening in RF than I would be capable to do.

  • Oren Shirazi and myself will be presenting in Israeli capital market conference on September 3 in Tel Aviv.

  • And I will be presenting and attending at the Crédit Suisse 19th Annual Asian Conference at the Grand Hyatt in Taipei on September 5. So if anyone is available to be at any or all of those conferences, we look forward to the opportunity to interact and see you there.

  • With that, I thank you again for your attention, for your participation, and look forward to sharing very nice results with you and trajectories of activity over the next years.

  • Thank you again.

  • Operator

  • This concludes the TowerJazz Second Quarter 2018 Results Conference Call.

  • Thank you for your participation.

  • You may go ahead and disconnect.