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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to the TowerJazz Fourth Quarter and Full Year 2018 Results Conference Call.
(Operator Instructions) As a reminder, this conference is being recorded, February 19, 2019.
Joining us today are Mr. Russell Ellwanger, TowerJazz's CEO; and Mr. Oren Shirazi, CFO.
I would now like to turn the call -- conference over to 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 Fourth Quarter and Full Year 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.
Please note that the fourth quarter and full year of 2018 financial results has been prepared in accordance with U.S. GAAP.
The financial tables and data in today's earnings release and in this earnings call 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 a full explanation of these measures and reconciliation of these non-GAAP measures to the GAAP financial measures.
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 conference call discussing our fourth quarter and full year 2018 results.
Firstly, I thank you for your continued interest, trust and support in our business.
Our fourth quarter results were within the guidance at $334 million, a 3% increase over the prior quarter.
For 2018, we reported revenues of $1.3 billion, generating a net profit of $136 million with continued strong positive free cash flow for this year of $143 million.
This profit generation continued to strengthen our balance sheet, contributing to record shareholders' equity of $1.24 billion.
We're in the strongest financial situation TowerJazz has ever been in, opening new doors.
We look forward to leveraging our strength and potential.
Oren will provide a detailed analysis of our financials shortly.
For the first quarter of 2019, our guidance is $310 million with an upward or downward range of 5%.
Although current macroeconomic uncertainties are driving tighter inventory management, the core behind our business activities remained strong.
We see increased Tier 1 traction across our various business units, many of which are parting with us on diversified and differentiated technological platforms.
Beginning with our RF group, we'll now go and discuss business performance and strategies.
Our total RF business, including wireless and mobile communication and infrastructure, represented 27% of 2018 corporate revenues or $356 million, down from approximately $400 million in 2017, representing a decrease in mobile platforms.
Infrastructure alone, served by our silicon germanium technologies, represented 11% of our corporate revenues, up from approximately 8% in the previous year.
Silicon germanium revenues in total were approximately $160 million, including automotive radar and mobile, representing a 30% year-over-year growth and a 50% increase Q4 '18 over Q4 '17.
SiGE continues to be a source for future growth driven by data center, 5G infrastructure, automotive radar, mobile handset and IoT markets.
We are qualifying San Antonio additional SiGE capacity and have as well purchased additional tools for Newport Beach presently in early installation stages, which should increase the SiGE revenue capability by approximately 40% in Q4 2019 against the $50 million achieved in Q4 2018 or the $200 million annualized run rate achieved in that quarter.
In addition to our SiGE offering, we began production shipments of our silicon photonics platform, which add content that we previously did not serve in the optical fiber transceiver market.
Our platform integrates optical detectors, wave guides and modulators on a single die, eliminating the need for costly assembly of discrete components.
While this is presently small in production volume, we believe that the size and cost advantage of silicon photonics over discretes will lead us to become the central technology of the future.
Looking ahead, we aim to integrate lasers and other features that will help increase the silicon photonics market share versus existing discrete solutions.
Wireless represented 16% of our corporate revenues, down from 21% in 2017.
This 2018 decrease was in accordance with our announcement of moving away from lower-performance SOI platforms in order to ramp higher-margin silicon germanium in Newport Beach.
2019 mobile revenues should be predominantly flat to 2018.
However, with a big move to higher-margin advanced platforms, sub-130-femtosecond platforms are forecasted to double from about 30% to 60% of the RFSOI mix, including the recent and continuing volume ramp of our most advanced 90-femtosecond RFSOI 300-millimeter platforms, supporting all standards, including the most stringent 5G standards.
Our present wins with higher-performance, high-margin platforms should enable growth trajectory in 2020 and beyond as the 5G families gain foothold in the market.
Moving to power management.
In 2018, this business containing both power ICs and discretes, represented about 34% of our corporate revenues or $438 million as compared to 30% in 2017 or $420 million.
In 2018, we released 2 new power management IC platforms which are strong differentiators.
In May, we announced our 300-millimeter 65-nanometer BCD platform which support power management ICs up to 16-volt operation.
This platform, as previously stated, is very well received by leading market players.
We are well positioned as the technology leader in this multibillion-dollar market of up to 16-volt operation power management, targeting a very wide product and market range.
This includes mobile PMICs and load switches, battery management ICs, DC-to-DC converters with end applications spanning automotive, mobile, consumer and computing.
A second technology differentiator is our RESURF technology, supporting the increasing demand for higher voltage which is used for 48-volt architectures such as automotive and data centers.
We are engaged with large IDMs planning to use our RESURF technology for industrial and automotive applications.
We have continued to grow our customer partnerships within our captive discrete businesses with 2018 increases in capacity and capability cutbacks fully aligned to our customers' present capacity needs and next-generation road maps.
These developments included state-of-the-art p column super junction for up to 800 volts and very high density of charge balance, split-gate technology for the lowest Rdson and intense switching performances.
Moving on to the sensors business, which includes both visual CMOS image sensors and nonvisual sensors.
In 2018, these revenues represented 18% of corporate revenue or approximately $230 million compared with 15% in 2017 or approximately $210 million with majority of revenues related to industrial, medical, security and high-end professional markets.
We have made significant investments over the past few years in developing unique and outstanding platforms.
In 2019, we will begin to harvest from the previous year's efforts, as many of these are customers' excellent products ramped into mass production.
We provide the most advanced global shutter pixel platform, boasting a 2.5-micron pixel size built on a 65-nanometer platform.
These sensors are geared toward both industrial and commercial markets, covering applications such as machine vision, facial recognition, 3D mapping and augmented and virtual reality.
We expect our global shutter platform to drive increased sales volume in 2019 and beyond.
And with the strong related market growth, we see this as a key revenue driver from our industrial sensor customers.
In the medical x-ray market, we are continually gaining momentum working with several market leaders on large panel dental and medical CMOS detectors.
These are based on our 1 die per wafer sensor technology using our well-established, higher-margin stitching with best-in-class high dynamic range pixels, providing our customers with extreme value creation and high yield, both in 200-millimeter and 300-millimeter wafer technology.
We presently have strong business with market leadership in this segment and expect substantial growth in 2019 on 200-millimeter and with 300-millimeter single die per wafer initial qualifications that will drive incremental growth over the next multiple years.
In terms of upcoming growth drivers, there is now a major trend in the market, termed time-of-flight and structured-light 3D-sensing technologies.
Markets driven by these technologies are generally mobile, mainly facial recognition, but also front-looking 3D mapping, commercial and augmented reality and virtual reality.
We are well positioned with our unique global shutter pixel technology to address the structured-light market and have developed single-photon avalanche diode for direct time-of-flight.
In particular, we are progressing well on 2 very exciting opportunities in the augmented and virtual reality markets, one for 3D time-of-flight-based sensors and one for silicon-based screens for VR head-mount displays.
For mid- to long-term accretive market growth, we have completed development and are releasing highly differentiated and distinctive technologies for nonvisual sensors for temperature, ultraviolet, magnetic, gas and radiation sensing.
In the neural network field, we have made some substantial progress in partnership with AI Storm, demonstrating the unique building block for full onboard analog AI that can be embedded into our sensors to make smarter sensors.
The remaining 21% of corporate revenues, approximately $275 million, is comprised mainly of mixed signal products serving aerospace and defense, industrial, IoT, computing and consumer.
We gave a corporate revenue breakdown according to our main technology platforms.
We do not have total granularity on end market applications.
However, within our ability, 2018 main end market applications were about $135 million for infrastructure revenue; $135 million for automotive with a very strong strategic pipeline with multiple opportunities, including Tier 1 automotive players; wireless, $220 million; industrial, $80 million; aerospace and defense, $50 million; security, $70 million; high-end photography, $50 million; medical, $40 million; consumer, including computing, $80 million.
Additional power management device revenues were $325 million, which we don't have exact end market use, but would serve multiple above-mentioned segments such as automotive, industrial, IoT, wireless and consumer, and as well a grouping of mixed signal devices of about $120 million, where we don't have exact end market application, but which serve, again, consumer automotive, wireless and a variety of IoT applications.
Looking at utilizations, we ended the fourth quarter of 2018 with the following utilization rates: In Migdal Haemek, Israel, Fab 1, our 6-inch factory, was again above 90% utilization; Fab 2, our 8-inch factory, was about 76% compared to 80% in the previous quarter.
At Newport Beach California, Fab 3, another 8-inch factory, we were at about 90% utilization versus 85% in the prior quarter.
And due to the added capacity, this is the highest wafer loading in that fab's history.
Our San Antonio factory, Fab 9, was about 55% utilization, a 5-point reduction from previous quarter, mainly due to some mobile-related foundry weakness.
Blended TPSCo factories had an average of about 50% utilization.
But very notably, we were 12 points up in Uozu foundry 300-millimeter utilization.
To update right now on our TPSCo partnership and long-term supply agreement, we continue to progress with our TPSCo partnership, including a targeted extension for 3 years for the next phase of TPSCo beginning in the second quarter of 2019.
We expect similar loading as present run rate with some changes to the pricing tables, resulting in some revenue reduction from our partner.
This is expected to be mitigated by core business growth, mainly 300 millimeter, which is presently ramping; strong efficiencies; and TPSCo-specific cost-reduction activities already in place, all of which should enable margins growth.
Looking at China, and specifically the Nanjing project, as previously stated, the government has taken major ownership on the project.
We recently received a $10 million milestone payment for services within the project scope.
We are now in further discussions to move the project forward.
In summary, despite a slightly weaker 2018, from a full financial perspective, our business is in the strongest position it has ever been.
From a customer engagement perspective, our business is in the strongest position it has ever been.
I am truly excited to continue and to fulfill our potential in 2019, 2020 and well beyond.
With that, I would like to turn the call over to our CFO, Oren Shirazi.
Oren?
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 full year of 2018 and for the fourth quarter, and then discuss our balance sheet.
During 2018, the company generated revenues of $1.3 billion, EBITDA of $362 million, net profit of $136 million, basic earnings per share of $1.35, cash from operating activities of $313 million and free cash flow of $143 million.
Gross and operating profit for 2018 were $293 million and $155 million, respectively, as compared to $354 million and $220 million, respectively, in 2017.
EBITDA for 2018 was $362 million, reflecting 28% EBITDA margins and compared to $425 million in 2017.
Net profit for the full year of 2018 was $136 million or $1.35 basic earnings per share and $1.32 diluted earnings per share as compared to $298 million or $3.08 basic earnings per share and $2.90 diluted earnings per share in 2017, whereby net profit included $95 million from specific tax benefit onetime items.
These onetime items comprised of $82 million benefit from an income tax benefit resulting from an Israeli deferred tax asset realization following a valuation allowance release and $13 million due to an income tax benefit related to the U.S. 2017 tax reform.
For the fourth quarter of 2018, revenues were $334 million, $11 million higher as compared to $323 million in the third quarter of 2018.
Gross and operating profit for the fourth quarter of 2018 were $76 million and $40 million, respectively, sequentially higher as compared to $73 million and $39 million, respectively, in the third quarter.
EBITDA for the fourth quarter of 2018 was $93 million as compared to $89 million in the third quarter.
Net profit for the fourth quarter was $38 million or $0.37 basic earnings per share and $0.36 diluted earnings per share.
This is compared to a net profit of $34 million or $0.34 per share and $0.33 diluted earnings per share in the third quarter of 2018.
Analyzing the margins, we see $4.4 million incremental sequential net profit or 40% incremental sequential net profit margin resulting from the $11 million higher revenue.
The incremental growth for the fourth quarter of 2018 gross margins was $3 million as compared to those $4.4 million, due to the TPSCo royalty structure that we previously described, which replaced the TPSCo Tower-Panasonic dividend structure, and according to which, added royalties are recorded as expenses that create a benefit to the net profit, as reflected in the $4.4 million or 40% sequential increase in the net profit index margins during the fourth quarter.
Compared to the fourth quarter of 2017, revenues were $358 million, resulting in $89 million gross profit, $54 million operating profit and $147 million net profit, net profit for fourth quarter of 2017 included, as I said before, $95 million in those 2 specific tax benefit items.
During 2018, we reduced the company's debt, mainly bank loans and bonds, by $98 million, resulting in $7 million financing expense savings per annum.
The debt reduction included the following: a full conversion of $58 million short-term notes to shares, of which $39 million were converted during the fourth quarter of 2018.
In July 2018, we repaid early a $40 million loan, initially borrowed in 2016 from JA Mitsui in U.S. in relation to the acquisition of the San Antonio Fab and its ramp.
In June 2018, TPSCo restructured its outstanding loans originally due 2018, '19 and '20, which carried variable interest rates varying between TIBOR plus 1.65% to TIBOR plus 2%, by an early repayment with it of these loans and obtaining a new approximately $100 million loan from 3 leading Japanese banks at better terms with longer duration.
The new loan's final maturity date is June 2025, including 3 grace -- 3 years of grace period followed by 9 equal installments on June 2021 to June 2025 and carries a fixed interest rate of 1.95% per annum.
In April 2018, the company and our outstanding bond series received an upgrade from S&P ratings agency from ilA+ stable to ilAA- stable.
I will now provide the cash flow highlights for the full year 2018 and for the fourth quarter and our balance sheet analysis at the end of September 2018.
Cash flow report components during the fiscal year 2018 were as follows: the company generated $313 million of cash from operating activities; invested $170 million in fixed assets; invested $158 million in marketable securities, short-term deposits and others; and repaid debt in the amount of $49 million, net, which included mainly the early repayment of $40 million loan borrowed in 2016 in relation to the acquisition of San Antonio Fab.
As of year-end 2018, our total cash, short-term deposits and marketable securities exceeded our total debt as presented in our balance sheet by the amount of $374 million, which is $149 million higher as compared to $225 million as of December 31, 2017.
For the fourth quarter of 2018, the main cash activities were cash from in operating activities of $91 million, $49 million invested in fixed assets, resulting in $43 million free cash flow and $120 million invested in short-term deposits.
Net current assets, as presented in the balance sheet, namely current assets less current liabilities increased to a record of $784 million as of the end of December '18, resulting in a record current ratio of 4.8x as compared to $571 million net current assets and net current ratio of 2.9x as of December 31, 2017.
Shareholders' equity at 2018 year-end reached a record of $1.24 billion or 69% of the balance sheet as compared to $1.03 billion or 62% of the total balance sheet at year-end 2017.
I would like now to elaborate on 2 specific lines in our P&L report: the noncontrolling interest and the tax expense.
One, noncontrolling interest line.
While TPSCo's operations are profitable, the noncontrolling interest line in the P&L for 2018 is a positive $2.2 million increase in net profit, which is mainly due to TPSCo's royalty structure.
Under this royalty structure that we introduced during the second half of 2017, the royalties from TPSCo to Panasonic and to TowerJazz are calculated as a percentage of TPSCo's profitability as calculated using TPSCo's Japanese GAAP P&L.
The Japanese GAAP net profit differs from the U.S. GAAP net profit as far as TPSCo's P&L is concerned, mainly in regards to the amount of fixed asset depreciation, which is higher under U.S. GAAP when compared to Japanese GAAP, as a result of the valuation of those assets in accordance with the purchase price allocations used for U.S. GAAP at the time TPSCo was acquired.
The lower depreciation expense under Japanese GAAP results in higher profitability at TPSCo under Japanese GAAP and in royalties payments to Panasonic and Tower, as compared to 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 in the P&L, lower profit before tax, lower tax expense, lower noncontrolling interest and higher consolidated net profit and higher EPS.
This royalty structure replaced the previously established dividend structure, under which TPSCo paid to TowerJazz and to Panasonic dividends in 2015, 2016 and 2017 from its net profit, including the $4.4 million dividends paid from TPSCo to Panasonic in 2017, which is quoted in the cash flow statement just published.
The second item in the P&L is the tax line in the P&L.
I would like to describe our applicable and effective tax rates.
Our U.S. affiliates, Jazz and TowerJazz Texas, which own our Newport Beach Fab and San Antonio Fab, respectively, are taxed in 2018 at 21% tax rate, following the U.S. tax reform as compared to 35% prior to the U.S. tax reform.
TPSCo's profit on its Japan operations are subject to an approximate 32% tax rate.
Our profits in Israel from Fab 1 and Fab 2 operations, while subject to a 7.5% statutory tax rate, are not expected to result in any tax payments in Israel for the foreseeable future since we have more than $1 billion in historical NOLs still to be utilized which can be carried forward indefinitely.
Considering this, and since we have certain tax exemptions, discounts and credits, our all-in worldwide weighted average effective tax rate was 4% for 2018.
In 2017, the tax income included $95 million income tax benefit I described earlier.
In 2017 prior to the fourth quarter, the all-in effective tax rate were also lower than in 2018, mainly because we commenced incurring the 7.5% Israeli statutory noncash tax for the Israeli operations after the fourth quarter of 2017 due to the realization of the tax-deferred asset recorded in 2017.
I would like to describe now our currency hedging activities in relation to the euro currency, there is no update.
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 cost is 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 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 execute -- we executed 0-cost cylinder hedging transactions.
This 0-cost cylinder transaction hedge all currency fluctuation to be contained in a 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 loans 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 fluctuations in the Israeli shekel currency, we have no revenues in this currency.
And while less than 10% of our costs are denominated in the Israeli currency, we also hedge a large portion of this currency risk using 0-cost cylinder transactions.
And the last note, on our share count.
As of December 31, 2018, we had 105 million ordinary shares following the full conversion of the notes which I described earlier.
The fully diluted share count remained unchanged at 108 million, similar to that of previous quarters and years, and included 3 million maximum possible shares to be issued comprised mainly from ESOP-related options and RSUs.
That ends my summary.
And now I wish to turn the call to the operator for the Q&A session.
Operator?
Operator
(Operator Instructions) The first question is from Mark Lipacis of Jefferies.
Mark John Lipacis - Senior Equity Research Analyst
On the -- Russell, I guess I'm trying to understand the margin or the profitability profile as we go through the year.
As Panasonic -- I understand that the pricing is lower.
And so should we expect the margins to decline in Q2 and then start to increase as we go through the year?
Is that a reasonable expectation?
Oren Shirazi - CFO & Senior VP of Finance
Mark, yes.
Thank you for the question.
So indeed, we expect from the Panasonic part of the revenue to have a decreased -- I mean, same quantities but a decreased level of revenue and maybe margins, but this should be mitigated from the second quarter of 2019 by what we also stated in the press release, which is the ramp that we are seeing in Uozu, the organic growth of the revenue of the foundry in the other areas, and specifically, from what we said in the press release, specific TPSCo cost-reduction plan in Japan that we are doing to reduce the cost there in full collaboration with our partner.
Mark John Lipacis - Senior Equity Research Analyst
So does that mitigation all happen in Q2?
Or is that something that takes through the year to happen and offset the lower margin that you would get with the lower pricing from Panasonic?
Oren Shirazi - CFO & Senior VP of Finance
We target to fully mitigate it from Q2.
Mark John Lipacis - Senior Equity Research Analyst
Okay, understand.
All right.
That's helpful.
And then is the -- and then the programs that you have ramping in Uozu right now, it's encouraging to see the utilization rates go up already.
Can you kind of characterize the programs that are driving that increased utilization?
And it sounds like you feel comfortable that utilization has a good chance to continue to go up.
And I'm hoping you can characterize, are there kind of a handful of programs that give you particular conviction in that increased utilization as we go through the year?
Russell C. Ellwanger - CEO & Director
Yes.
We're quite confident in continued increased utilization.
As well, we stated, I believe at the last release call, that come the third quarter of 2019, we would be giving further input about additional 300-millimeter capacity growth because we believe that we will need it.
What are the specific areas of big growth right now?
One very big growth is in the 300-millimeter RFSOI, that family of 90-femtosecond switches, combinations that you have with switch L&A, et cetera.
So that's a very strong driver at the moment.
The other big driver that will be coming on is the 65-nanometer BCD.
And as I stated in the script, the variety of the advanced image sensor activities that we are doing have a very, very big portion within the 300-millimeter factory.
So we have a combination of all 3 of those activities adding to the demand requirements and the capacity ramp throughout 2019 and throughout 2020.
Operator
The next question is from Quang Tung Le of Crédit Suisse.
Quang Tung Le - Research Analyst
Can you hear me?
Russell C. Ellwanger - CEO & Director
Very well.
Quang Tung Le - Research Analyst
Yes.
So my first question will be on Panasonic.
If you could provide more color on that.
Obviously, you're just saying that the units or loading will be similar or the same, and pricing will be affected.
Could you provide more color in terms of -- could you quantify how pricing will be affected?
And also, if you could provide what was the percentage of revenues in 2018 from Panasonic and top 1, 2 and 3 customers of yours.
Russell C. Ellwanger - CEO & Director
I'm sorry.
The second question was what, please?
Quang Tung Le - Research Analyst
So the second question was what was the percentage of revenues in 2018 that Panasonic contributed as and your top 3 players -- 3 customers.
Russell C. Ellwanger - CEO & Director
Okay.
I'll try to drive the second question right now.
First question.
Again, I don't believe, really, that we can, at this point, or should, give more color to the specific reduction that will be coming out of the TPSCo from the side of our partner.
We did state that there will be a revenue reduction, which makes sense.
The whole drive of the initial contract was to give runway to allow a third-party business to be built and then a second phase of contract where the cost of the facilities would be better shared between both us and the partner.
So that will be happening.
The volumes, as we stated, will, for any reasonable estimate, stay about the same, but pricings will decrease.
And that was known and believed from day 1 would be occurring.
I think the very positive statement about it is what Oren said is that we target to mitigate the drop-down to the bottom line within the first quarter of the decrease in the revenue by both activities that we're doing at TPSCo as well as third-party business growth elsewhere.
But the specific contributions of the drop of revenue from the partner should be mitigated, to some extent, just by the cost-reduction activities that have already occurred within the factory that will be realized on a financial base and shown as of the second quarter.
More color than that, again the contract isn't completed.
What we said in the PR is that we are in agreement on multiple phases of the contract, but that still has to be signed.
And I really shouldn't say more than that.
As to the second question, Oren?
Oren Shirazi - CFO & Senior VP of Finance
Yes.
So on the breakdown of the revenue by customers, obviously customers wouldn't be so happy if we give the exact amount.
The customer but on -- in terms of magnitude, what you ask, definitely we can say that, of course, Panasonic is the biggest customer.
And we previously said that it was between $360 million to $420 million, and we didn't restate.
So it's in this range.
So it's obviously about 30%.
And then we have 3 customers, which you will also see in the notes of the financial statement after we'll file them.
So we have additional 3 customers that accounted for between 7% to 9%, each one of them of the revenue.
And then we have customers of 4, 4, 3, 3, 2, so very nicely -- I mean, there is a list of more than 300 customers.
Quang Tung Le - Research Analyst
I see.
And if I can ask one more question about your...
Russell C. Ellwanger - CEO & Director
I just -- I will add just one piece of more color to your first question but I think was answered by Oren previously.
But whatever revenue reduction would be noted in the second quarter, we target to mitigate margin impacts of that revenue reduction, but we also, in a very, very short term, expect to retrieve whatever that revenue reduction was through the third-party business.
Okay.
So I think that was stated by Oren, but I wanted to reiterate that.
Quang Tung Le - Research Analyst
Okay.
And I wanted to come back to your gross margin in Q4.
So basically, you're saying it was impacted by TPSCo royalty structure.
And this kind of distorted a bit your model, that 50% of your incremental revenue would be felt in your gross profit.
And now I see it's only 36%, if I'm not mistaken.
Going forward, is -- has this model changed now?
Or are you still going to keep your 50% incremental revenue that will flow down -- flow through your profit lines?
Oren Shirazi - CFO & Senior VP of Finance
Yes.
When we speak always about incremental model, incremental margins to the gross and operating, indeed, we are saying average 50%, 55% in average, unless it is a SiGE or it is an Uozu product.
And this is excluding the royalties impact.
Royalties, you are correct.
That if now there is a royalty payment, if TPSCo is hitting whatever threshold of very nice profitability there is royalties, which reduce this margin, but we get full compensation and even more than that on the net profit line.
And this is why you'll see, even in Q4, just to justify, we are saying that it's below $4 million in the gross profit, but you'll see the $4.4 million improvement in net profit.
So it's 40% to the net profit, which is way above the model, because even the model should be like, after minority and after a minority share count -- not minority share -- after noncontrolling interest and after tax, it should be less than 30% to the net profit.
And we achieved 40%, so it's very nice.
Going forward, yes.
I mean, the royalty, the structure agrees.
But of course, the payment under it, whether they will be higher or lower than this year, depends on the profitability level, on the future profitability level of TPSCo.
If we assume it will be better, the royalties will be a bit higher.
But the big impact that you see now is the -- it's not so big.
It's $1 million.
It's because it's compared to previous structure with no royalties.
But in the future, it will be existing royalties against existing royalties, so shouldn't be a dramatic impact on the incremental margin.
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 to put it in another way with respect to Panasonic because I think that's some incremental information that's positive.
So basically, you will be able to offset the revenue impact from Panasonic through third party and organic, and you will also potentially offset the cost impact from cost reductions in that factory as -- and potential mix shift.
But then at the same time, you aren't going to have a potential, maybe positive on the net profit line because you have a lower minority interest expense and lower tax rate.
So just want to clarify that this -- net-net, this could be actually -- the impact of Panasonic could actually be positive on the actual bottom line without giving specific numbers related to Panasonic.
Oren Shirazi - CFO & Senior VP of Finance
Well, it can be.
And we -- like I said, we target that it will be fully mitigated and fully offset, but we didn't commit to that because, obviously, depends on the future revenue of the third party, which we see that it should grow, and on the success of the cost reduction, which there is no reason why it will not be successful and in full force.
But you know, to act and to put it into action and to succeed to realize all the cost benefit from Q2 is a little bit nearby, so we didn't commit that it will be fully mitigated.
But of course, what we put in place, as we said in the PR, in the first place is enabling to achieve this, and we are targeting to achieve this.
Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog & Mixed Signal; Consumer IC & Multi-Market
Okay.
That's helpful.
And, Russell, you had mentioned, if I recall correctly, that you expect the mobile revenue to be flat year-over-year in 2019 after kind of declining last year.
Is that the case?
Russell C. Ellwanger - CEO & Director
Correct.
Yes
Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog & Mixed Signal; Consumer IC & Multi-Market
Okay.
So the fact that you've -- the move away from the low-performance SOI platform to the ramp of the higher SiGE, that's been complete.
So the assumption of flat revenue off that lower base, is that just kind of status quo in terms of your mix of RF products going forward, you have the right mix of products that you want in the smartphone segment, and it's going to be maybe based on units?
Or is there any potential market share gain?
Or any kind -- and maybe you could elaborate any assumptions on the mobile revenue flat kind of comment.
Russell C. Ellwanger - CEO & Director
Of course.
So the fact that the 2019 is doubling in the mix of the sub -- what was it, sub-130, I said, femtosecond.
So that's going from the 30% to 60% on the RFSOI mix, and that's really for design wins that have occurred.
I stated that we will see or should see again a growth trajectory in 2020 and going forward, and those are for wins that we've had and are having.
But those are for platforms that will not be coming out on new phones until a 2020 release or maybe we'll start seeding the market at the end of Q4 this year, but it will be a 2020 growth.
And that's just the latency of design wins within the mobile market.
So the flatness right now year-over-year is really that the additional advanced platforms that were qualified last year do not come into the market at any strength this year.
However, and what I had stated, I mentioned that we're seeing a very, very big ramp in 300-millimeter RFSOI.
From our initial forecast, it would be flat.
It's possible that it will not be flat, but that we'll see growth because of what's going on with the RFSOI right now.
But what we've committed to is a flatness as that's what the forecast had come in at, but the ramp is going maybe a bit higher than expected.
Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog & Mixed Signal; Consumer IC & Multi-Market
Okay.
Got it.
And then the comment on the qualification of additional SiGE capacity in San Antonio and then you purchased new tools for the Newport Beach, could you just reiterate what you had mentioned that you're going to increase the SiGE revenue by 40% in 3Q against what metric again?
Russell C. Ellwanger - CEO & Director
Sorry.
Yes, maybe was unclear there.
In the fourth quarter of 2018, what we're just releasing, we achieved the $50 million SiGE sales rate or $200 million annualized silicon germanium.
Off of that $200 million baseline, I said we would have capacity qualified in the fourth quarter.
So that would be the ability to go from a $200 million to $280 million.
I didn't say that we would be selling all of that in the fourth quarter.
They'll be qualified to go.
Right now, I -- as a company, we don't have total visibility in fourth quarter demand.
A lot of this is data center.
I think that you would have seen from releases of multiple people that are our customers, some present weakness within data centers.
Now some of that is being augmented a bit by base station build-out, but some of the base station build-out are with much smaller devices.
But the -- we do believe that the data center business is a very, very strong long-term growth business, and we're very well embedded in it with good market position and very, very strong customers.
There are multiple analyst reports that state as well that the data center will rebound in the second half of the year very strong.
But regardless of -- if it's going to be third quarter, fourth quarter or if whatever weakness there is right now is really weak or if it's just concerns and it pops back immediately, we're quite convinced of the need for the additional capacity.
Again, the capacity that we've added presently is truly off of customer forecasts that we're having in the middle of last year.
And those customers, I mean, they haven't lost their market share.
And the data center build-out, the base station build-out for the infrastructure will continue.
So installed capacity, a long answer.
Installed capacity, will it be able to achieve circa $280 million in the fourth quarter?
The question of the customer orders, I can't commit to that at the moment.
Operator
The next question is from Richard Shannon of Craig-Hallum.
Richard Cutts Shannon - Senior Research Analyst
Let me follow up on the silicon germanium topic.
You mentioned a lot of growth, particularly from the data center market, which we can see from some of our other coverage.
A couple of questions on that topic.
Wondering, a, if you have any visibility and understanding of how much your business is run from kind of the mainstream 100-Gb speeds versus the upcoming 20- or 400-Gb speeds?
And then we're also seeing a lot of pricing difficulty in that market.
Wondering whether that's flowing through to you?
Russell C. Ellwanger - CEO & Director
A good portion of our business was 100 gigabit per second, so was 4 by 25.
We see prototyping of 200 Gb per second.
I'm honestly not aware that we're doing anything at the moment, other than prototypes at the 400.
I mean, it could be, but I don't know of that specifically.
Certainly no discussions on it.
And the 400 gigabit per second, will that then go to advanced platforms, would be 4 by 100 or an 8 by 50, there is still a lot of discussion there.
So -- but certainly, a big portion of the growth that we saw last year was also of the 100-Gb demand, and that remains very, very strong.
If anything, I think that there are some discussions and thought in the market that the move to 400 Gb will be postponed a bit, but -- I mean, depends, I mean, we're -- if it's 200 or 400, I think we're in with all of those players that are going there, and we've -- most recently released a platform in combination with lead customers that will address that market very well.
So that was the first question.
I'm sorry.
What was your second question or the second part?
Richard Cutts Shannon - Senior Research Analyst
Regarding pricing, we're seeing some tough pricing on the transceiver side.
Wondering if that's coming down to the component guys that you're working with?
And is that -- are you seeing that as well?
Russell C. Ellwanger - CEO & Director
I think that customer partnership is always a point of working together to add efficiencies.
And have we seen extreme pricing pressure?
I would say, no, we haven't.
I think you see much more pricing pressure on the mobile side than you do in the infrastructure side, but there's always, not necessarily give and take, but an aligned road map.
And the more capability that you throw into a platform, that's how you keep your margins up.
It's not that you hold strong to a point that would disable a customer from being competitive in a market.
I think that's as much color as I'd like to give on that.
Richard Cutts Shannon - Senior Research Analyst
Okay.
That's fair, and that's very helpful.
So your second question, just regarding opportunities for adding capacity, and you've taken a couple of big actions in the last few years with Panasonic and with Maxim.
Wondering what you're seeing out there in the environment?
And specifically, I noticed, I think, that Vanguard was able to acquire a 200-millimeter fab earlier this year.
Wondering if that was something you were interested?
And maybe just comment more about the opportunities and what you're seeing, whether it's still favorable to be acquiring stuff.
Or are you looking more to build organically?
Russell C. Ellwanger - CEO & Director
I think it's very favorable to acquire things depending on the contract that you would be getting when you acquire something.
The capacity acquisitions that we've done to date have been acquisitions that have allowed us a runway to build a third-party business.
And I'm not making a comment on -- specifically on a Vanguard global foundry deal as I really don't know what they agreed to with each other, but you'd have to look at what is a loading agreement and a guarantee.
Are the customers staying in that factory or customers moving out?
I don't know.
All of that comes into the consideration.
Was that something that we were looking at?
It was not.
Was it a good move or not a good move?
I honestly don't know, but it's not that we haven't or aren't looking at acquiring foundry -- the existing foundry capacity or existing foundry enterprises.
We might be, but it always has to be something that makes sense as far as the stickiness of the present customer demand.
And that's very, very important.
And then comes the second question is beyond the stickiness of the customer demand as the platforms that are being run in most factories, do they demand margins that are accretive or decretive to you?
So that's the big thing about buying any existing enterprise.
But we are certainly and have looked at buying existing enterprises, going concerns that make sense, could make sense.
Some haven't happened, some we're continuing looking at.
So I think that, that maybe answers the first part of the question.
The second part, we are very, very excited about what we're doing with 300 millimeter and very excited to move forward in different models to expand capacity there, some being organic capabilities we'd mentioned in the Uozu factory.
We will be making a decision and announcing it in the -- probably third quarter as to an expansion there because of what we believe is the present ramp and the continuation of that ramp.
But we're very desirous to look at additional 300-millimeter capacities and capabilities through a variety of models, and it's not that we have anything against increasing 200.
We think it's a good place to be on the analog side.
We have a lot of good products, the 200 millimeter, but we see 300 millimeters as equally important to us.
Richard Cutts Shannon - Senior Research Analyst
Okay.
That was helpful.
One last question from me, probably again for you, Russell.
In the image sensor business, both this call and I think the last couple of ones, you talked about some interesting dynamics there.
One of which is in the time-of-flight type of image sensors.
I'm wondering if you could provide a little more detail about what you're seeing there.
I think in your prepared comments, you talked about 2 very interesting opportunities.
Wondering if you could give us a sense of the scale that you see there and then maybe if you can describe the breadth, probably more so on the mobile side, but any other applications that you're seeing interest in time-of-flight.
Russell C. Ellwanger - CEO & Director
Specifically, on the mobile side, we're looking at an interesting facial recognition opportunity.
And I really can't give too much color on that, honestly can't.
The other opportunities that we have there that are moving along are dealing with augmented reality, and I think that's progressing extremely well with a very notable force within that market.
And as far as on goggles as well, we have activities happening; additional activities for automotive on time-of-flight that I think is also moving very, very strongly now.
But those are specifically where we're focused.
The mobile market is a very, very interesting one that it takes a combination of things for us to want to get involved in that.
Mobile, always, in a sensor side, is not the highest margin.
So the way we would do it have to be a very, very efficient platform with good partners that would allow us not to become a provider of antiquated DRAM factory that's doing image sensors out of it on a fully depreciated, very outdated equipment center.
Richard Cutts Shannon - Senior Research Analyst
Russell, if I could quickly follow up on this, at least with regard to the mobile opportunities in time-of-flight.
Do you see this being a notable and material contributor to revenues in this calendar year?
I don't remember the numbers about mobile you gave us early in your prepared remarks.
But is it something that can be noticeable?
Or is it more 2020 opportunity?
Russell C. Ellwanger - CEO & Director
For mobile time-of-flight?
Richard Cutts Shannon - Senior Research Analyst
Mobile time-of-flight, yes
Russell C. Ellwanger - CEO & Director
I see.
It is not a contribution whatsoever in 2019.
Operator
The next question is from Cody Acree of Loop Capital.
Cody Grant Acree - MD
Russell, if we kind of go back to the beginning and just talk about your comments on the macro demand environment.
Obviously, there's been a large inventory drawdown across the industry.
You've also had to face significant headwind and a slowdown in the smartphone market.
So can you just maybe parse that out as to what you're seeing today?
And are you expecting further drawdowns in the inventory channel?
Russell C. Ellwanger - CEO & Director
Are we expecting further drawdowns?
I would say we're not expecting further drawdowns, but I don't know how important that is, what we expect there.
What we have from our customers, we have from our customers.
We certainly have had some customers that have decreased forecasts over the past month.
We have others that have increased forecast over the past month.
If you look at the mobile market specifically, you know who we serve within that market, you know what they've released.
So that is pretty straightforward what they're saying.
We don't have any greater crystal ball than the customers that have released in the past 3 weeks, and so I don't want to state what our customers have given us their guidance and their outlooks.
But other than generically, they say that there's uncertainty.
In any market where there's uncertainty, people don't take risk on too much inventory.
They keep inventory pretty close to the vest.
Additionally, there has been some statements that there's possibly a consumer pullback a bit until 5G becomes a little bit more embodied in the market, that the present generation phone platform that the consumer has is good enough until the next real breakthrough when the 5G infrastructure and 5G content comes out on the phones.
And that might be the case as well.
So I think the combination of those 2 really tie into that.
Beyond that, again, I don't think I could add much more color than our key customers have said in the past 3 weeks.
Cody Grant Acree - MD
Well, many of your customers or many of the analog companies have said that while they were seeing drawdowns in inventory across the space, they have started to see better orders over the last several weeks.
How long would that take to flow through to your demand?
Or are you starting to see any impact already?
Russell C. Ellwanger - CEO & Director
Yes.
We've certainly seen upsides from a few customers, and we've seen further pull-downs from others.
So I can't really give much more color than that, Cody.
What I'd say was...
Operator
The next question is from David Duley of Steelhead Securities.
David Duley - Managing Principal
Just a couple from me.
In the past, you've mentioned what your organic growth rate was.
Could you give us that statistic for 2018?
Russell C. Ellwanger - CEO & Director
Maybe give me a minute or 2, can try to calculate it.
David Duley - Managing Principal
Just a further question.
You mentioned that, I think mid this year, you'll have to add capacity or 300-millimeter factory in Japan.
Once that factory is basically full, what will the utilization rates be of the overall Panasonic network?
Russell C. Ellwanger - CEO & Director
Just to clarify, I didn't say that we would have to add capacity in the middle of this year.
I said that come third quarter, we'd be making a decision to add capacity.
So the capacity wouldn't be added probably and come online until the middle of 2020 off of the decision point.
The -- if that factory is up at 90%, it depends on what the other 2 factories would be doing at that point.
We see utilization increasing in 1 of the 2 factories, 200-millimeter factory through the year.
So what would it be on a blended basis?
I would assume probably somewhere between 70% and 75%, but that's just an assumption.
David Duley - Managing Principal
Okay.
And then are you still taking customer deposits?
Or has that -- maybe mention -- maybe you could help us.
In 2018, how much incremental customer deposits were taken in?
Oren Shirazi - CFO & Senior VP of Finance
No.
We had no new customer deposits in '18.
David Duley - Managing Principal
Okay.
And with the long-term customer deposit balance being stuck at this level, I think, for 3 or 4 quarters, that's indicative that the consumer isn't using that deposit.
So when will that balance be start to be drawn down on the balance sheet?
When will that customer use that deposit that he's given you?
Oren Shirazi - CFO & Senior VP of Finance
Yes.
Your observation is correct.
Obviously, these customer deposits which were granted to us in 2016 and '17 were, at the good times, that the -- from customer point of view, they focused it to needs, much more wafer then eventually they order.
So they gave us the deposits, and it was supposed to be returned to them in a -- by the rate of purchases that they will do.
And obviously, since I believe also we said, "Who are those customers and in which field?" Most of that, which is in the mobile, since this is lower than initially planned to -- generally in the market.
Also, those customers purchase less, and so the cash stayed within the company.
But as you mentioned, it's true.
It's our obligation to fully prepay it once the customer will -- by each customer has some threshold that he needs to meet.
And above that, we prepay some of that.
You may assume that it will be fully utilized in the coming 2 to 3 years, according to current rollout.
This is what I see.
But obviously, if markets will recover, we will return it quicker.
If not, it will be slower.
But it's really pending future purchases from those customers.
David Duley - Managing Principal
And the rate of using those deposits, I think what I've heard you guys talk about is you have some new RFSOI at the 300 millimeter or at 65 nanometer.
Will the ramp of that product line be the key determinant to using these customer deposits?
Oren Shirazi - CFO & Senior VP of Finance
No, no.
If you remember in 2016 and '17 when we got those deposits, this was specifically used to increase the capacity, specifically in Fab 2 and in San Antonio.
So only -- and this 300-millimeter is not in Fab 2 or San Antonio.
So only purchases from Fab 2 and San Antonio, which will exceed, maybe a little bit in Fab 3 also in Newport, that will exceed thresholds will trigger that repayment.
But from the other factory has nothing to do with those deposits.
David Duley - Managing Principal
Okay.
Final question from me is, for 2019, what do you think your expected CapEx level is going to be?
Oren Shirazi - CFO & Senior VP of Finance
Yes.
I believe it will remain at the current levels of 2018.
You saw a little bit of growth in Q4 to $48.5 million as compared to $42 million, $45 million before, but this was still within the $168 million, $170 million annual budget or plan.
So we are in the plan and really achieve the numbers that we said.
For 2019, it should remain the same levels, excluding what Russell mentioned before, which we have a decision point in the second half of this year about Uozu and maybe also about San Antonio.
If there will be a need to increase the capacity in those places, it will be on top of that plan.
Operator
There are no further questions at this time.
Mr. Ellwanger, would you like to make your concluding statement?
Russell C. Ellwanger - CEO & Director
Certainly.
Thank you.
Really, thank you, everyone, and thank you for the very good questions.
Just 2 things to close with.
The TowerJazz 2018 business annual report is now available on our website.
It contains further details of our business and operational strategies and tactics and really some very pretty graphics.
I believe you'll enjoy it.
Please, if you wish, download it, take a look and we'll be very happy to follow up with whatever questions you might have after going through that report.
And on a very specific matter, Dr. Marco Racanelli, Senior Vice President of our Analog IC Business Group, will be at the upcoming Susquehanna Technology Conference, March 12 in New York, and that will be a series of one-on-one meetings or what typically turns out to be one-on-six meetings, one-on-eight meetings.
And please, sign up for that if you're in the area.
We'd love to follow up with you.
Other than that, as always, we're very happy to follow up with anybody.
Please reach out to Ms. Levi, and thank you very much for your interest.
We look forward to updating as the year continues.
We have a lot of good activities going on, and we're really very confident of announcing and releasing strong milestone achievements throughout the year.
Thank you.
Operator
Thank you.
This concludes the TowerJazz Fourth Quarter 2018 Results Conference Call.
Thank you for your participation.
You may go ahead and disconnect.