Tower Semiconductor Ltd

NASDAQ:TSEM

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz Fourth Quarter 2017 Results Conference Call. All participants are currently present in a listen-only mode. Following management's prepared statements, instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, February 22, 2018. Joining us today are Mr. Russell Ellwanger, TowerJazz's CEO; and Mr. Oren Shirazi, CFO.

I would now like to turn the conference over to Ms. Noit Levi, Vice President of Investor Relations and Corporate Communications. Ms. Levi, please go ahead.

[Noit Levi]

Thank you. And welcome to TowerJazz financial results conference call for the fourth quarter and fiscal year of 2017. Before we begin, I would like to remind you that some statements made during this call may be forward-looking, and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected.

These uncertainties and risk factors are fully disclosed in our Forms 20-F, F-4, F-3 and 6-K filed with the Securities and Exchange Commission, as well as filings with the Israeli Securities Authority. They are also available on our website. TowerJazz assumes no obligation to update any such forward-looking statements.

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

[Russell Ellwanger, Chief Executive Officer]

Thank you, Noit, and thank you all for joining us today. 2017 was another rather significant year for the company with palpable high-performance across all industries further cementing our position as the global specialty foundry leader for providing us with the strongest financial position in the history of the company. We presented another year of record revenues at $1.39 billion representing year-over-year growth of 11% excluding the Panasonic and Maxim's contracts which are committed and stable, 2017 annual revenues represent year-over-year business unit based organic growth of 23%

We also recorded our highest ever EBITDA of over $425 million and a record net profit of $298 million. Our operating margins continue to increase in 2017, reported 15.8% operating margin and 30.0% margin a 130 basis point increase over that of 2016 respectively. This was the result of utilization and optimization of product portfolio mix for which we expect further improvements in 2018.

Our balance sheet is strong approaching $0.6 billion in deposits and short-term cash investments having been built throughout 2017 by a company record free cash flow. Oren will cover our financials for the year and for the quarter in great detail in a few minutes.

Our 2017 performance is evidence of the strength of TowerJazz's business model in growing both organically as well as our ability to identify and pursue opportunities on an ongoing basis for company expansion and growth. Our success is based upon providing our customers best-in-class specialty technology offerings providing the right platform to support them within the trends that are now driving the world namely energy efficiency and seamless connectivity and sensors as the foundation of smart systems. We continue to increase our competitive advantage both existing and new markets by being responsive to the present and future need for diversified customer base. In 2008, our focus will remain on our high-end businesses and hence to enhance value across all of our manufacturing facilities. We begin the year with typical first quarter seasonality, our mid-range guidance being $325 million plus or minus 5% with customer forecast showing growth throughout the year with a very strong second half.

In particular, this year we look forward to wrapping our 300 millimeter factory and in Uozu, Japan; please allow me to explain it in some more detail. Our business model, when we acquired majority ownership of the Panasonic semiconductor fabs and later full ownership of Maxim's, San Antonio fab provided us with a long lead runway during which fixed costs were being covered enabling us time to both transfer and in some cases with some further developments on our flows and for our customers to qualify there end customers on these flows. This process is a 2.5 to 3 year period to reach volume production as was evidenced in our large capacity fab five in Tonami, Japan which ramped almost full utilization in 2017.

At the time of the Panasonic conductor fab acquisition we identified value in having a 300 millimeter factory with 65 nanometer capabilities in order to further enhance certain of our analog offerings. Hence, we are excited to acquire the 300 millimeter Uozu factory as part of this transaction, but these 300 millimeter platforms needed a full development from scratch, in all cases creating new product applications and in most cases attracting new customers who were not previously part of our customer base. These 300 millimeter activities are ramping now in 2018. The three main areas where we have used 65 nanometer capabilities to further add to our state-of-the-art platform, our CMOS image sensors, RF and power management mixed-signal. For CMOS image sensor we use the 300 millimeter 65 nanometer capability to develop unique high dynamic range and extremely high sensitivity pixels with very low dark current for the high-end digital SLR and cinematography and broadcasting markets.

In these developments, we've included are fab 2 stitching technology to enable large full frame sensors. In addition, we developed a unique family of global shutter state-of-the-art pixels ranging from 3.6 micron down to 2.5 micron to note the smallest in the world with extremely high-shutter efficiency using the unique dual light pipe technology already developed at TPS Go for high quantum efficiency and high image uniformity.

And lastly within the CIS regime, we've pushed the limits of our x-ray dye size developing a one dye per wafer x-ray stitch sensor to produce a 300 millimeter a 21 cm x 21 cm imager. All of the above technologies have been or are being implemented in our CAS customers next generation products and are ramping or are plan to begin ramping this year with some additional next year.

Looking at RF, we are offering RF SOI technology in our 300 millimeter factory. The technology makes use of unique capability of the 65 nanometer to deliver one of the industry best or on CAS figures of merit for RF switches to be below 100 femto second together with high performance low-noise amplifiers, the combination of switch in L&A at our performance levels, we believe to be otherwise unmatched by any other provider in the industry combining high-performance L&A switch is becoming increasingly important in new smartphone architectures.

For mixed-signal and power management, during 2017, we announced the availability of the five-fold CMOS and low-voltage power 65 nanometer 300 millimeter process providing customers with multiple advantage over present industry five volt offerings including lower RDS on tighter analog design rules as well as very dense digital capabilities combining about a 30% aerial reduction for customer benefit while as well lowering the manufacturing mass count. This is an important segment and to have a competitive advantage here is significant.

According to market reports such as Your Development, the low-voltage power IC market is estimated to be almost 50% of the overall power management market. The five volt 65 nanometer technology addresses multiple applications such as LED lighting analog switch DC/DC converter and load switch across consumer industrial and automotive market and is presently being used by our customers to give them strong competitive advantage in large market such as LED drivers and fingerprint ICs. We are also expanding our 300 millimeter power management offering to include up to 16 volt operation with best-in-class RDS on and other combined parameters with also the very high logic density of 65 nanometer at a low mass count. This platform will enable our customers reduce the dye size by 20% to 50% versus 0.18 micron platforms and will best match the needs of a wide variety of applications across many market segments. We have strong customer pool for this offering presently for applications such as MEMS, battery protection, Class D amplifier and load switches and we see it as a high-growth driver beginning the second half of this year 2018.

I would like to spend a few minutes talking about our current utilization as well as plans for expanding our capacity which will enable us to continue to deliver growth for the coming years. In terms of the utilization rates Fab 1 our 6-inch factory Migdal Haemek, was at 93% utilization above our 85% design utilization model, again a statement about the longevity of our analog asset re-use business model.

Fab 2 our 8-inch factory which is also Migdal Haemek, Israel was at its target 85% utilization. At Migdal Haemek, we are increasing our monthly capacity by 6,000 wafers per month for certain IBM customers; these are specific customers with long-term contracts with us. These customer flows are mainly discrete that require more and longer firm cycles and different CMP steps in the imaging RF and power flows. Fab 3 at Newport Beach California, our 8-inch factory was operating at 76% utilization during the quarter, refreshing the line to enable the transition and capacity increases to substantially higher volumes of high-end Silicon Germanium flows. We invested in 2017 for tooling that is coming online now; we expect to nearly double the advanced SiGe capacity by the second half of this year. And as I mentioned in the minute, we are also adding silicon germanium capacity to our San Antonio facility .Our SiGe flows are highly differentiated adding substantial value to our customers and as such are among our higher margin offering. Thus, as we increase our capacity in this realm, we will lead to increases in overall margins. The 3 TPS factories in Japan had a weighted average of approximately 60% utilization with the 15 point increase in our 8 inch third party foundry business. I do note that the 12 inch factory is still at low utilization level which allows us substantial open capacity to be targeted as I explained throughout this year and through 2019 and continue into the 2020s.

And finally fab 9, our San Antonio factory was at about 55% utilization. We've recently installed several new tools to start providing some SIGI capabilities in San Antonio which in addition to the current flows will bring the SIGI capacity from 0 to 2,000 wafers per month in San Antonio by the end of this year. Furthermore, in San Antonio we are in the very good position of being able to trigger organic capacity expansion whenever we wish with the potential of adding a further 12,000 to 14,000 wafers per month. We are currently working on a large two deal to substantially decrease the cost per thousand wafers per month capacity increase, and we will update when we have further detail.

Looking at China, for our standard foundry business, China is a highest growth region having grown by about 86% versus last year with continued strong growth forecast. We have over 20 active customers being served with activities from all of our business units, as well as many more Chinese customers in the funnel. Growth in China has both tactical and strategic importance to us. Considering the government backs semiconductor initiatives, and the Chinese stated goal to develop a complete a semiconductor infrastructure to serve the growing need of IC manufacturing and IC integration, we view it as strategically important to take part in this build out. Therefore, we have been and continue to be active in exploring multiple opportunities to expand our presence there.

With respect to Takoma, another avenue for capacity growth in the company, the partnership in China that we announced in Q3, 2017 to the establishment of 8 inch facility Nanjing, I intended a roof ceiling ceremony to celebrate building completion, co-hosted by [Takoma] and Nanjing economic technology development zone this past month. The project is progressing well. We've agreed on terms for licensing and technologies, subject to payment milestones and deliverable and are working to finalize the terms of support services and structure. The full funding of this project is also in progress supported by the local government. We look forward to utilizing the capacity of the Nanjing fab to meet our customer demand and winning opportunities to fulfill our allocation of 50% of the fab capacity and as well for the strengthening our geographic presences in the China region.

Moving onto our business units. I'd like now to discuss end markets that are served within each of main business unit, provide color to the 2017 annual revenue and year-over-year growth for each of the major groups. We divide our revenues in to four groupings. RF, Power management, CMOS image sensors and lastly a grouping of mix signal and others.

In 2017, as we had forecasted we experienced organic revenue growth in all business units of over 25% except for RF which grew approximately 10% yielding for the company a 23% year-over-year organic growth.

I'll now provide a summary of main activities per business group. In 2017, our RF group including mobile and infrastructure represented 29% of corporate revenues, approximately $400 million. Mobile represents about 21% of the revenues while infrastructure was at about 8%. Of this silicon germanium offerings for infrastructure and some high end mobile applications grew 22% year-over-year. We continue to invest in technology to address the next generation of connected and smart devices. During 2017, we launched H5, a leading silicon germanium technology that is now part of TowerJazz's silicon germanium terabyte platform enabling next generation data communication and networks and data centers, supporting the dramatic increase of wire line data traffic.

We announced key design wins with Broadcom, a leading designer developer and global supplier of a broad range of digital and analog semiconductor connectivity solutions. We qualified our RF SOI platform at multiple manufacturing sites, offering increased capacity to meet growing customer demand.

We also began offering our enhanced and advanced automotive offering with leading technology for the complex requirements of ADAS and autonomous driving and the wireless connectivity in automotive radar markets. We announced strong partnership with Denso entering production on RF radar sensors for the Toyota Camry cars released in North America. We launched a new foundry silicon photonic process. This new SiPho offering adds new serviceable content to the optical fiber market already served by high performance silicon germanium technology and data and cloud computing centers.

Looking ahead, the RF and HPA business unit is investing heavily to capture several emerging opportunities, the most significant being the advent of 5G for higher wireless data rates. 5G will increase Europe content in smartphones and improve performance benefiting from the company's most advanced RFSOI and silicon germanium technologies. The higher data rates will also provide an infrastructure growth business which TowerJazz will serve with its high performance silicon germanium and new SiPho platforms.

In addition to our 5G activities, automotive sensors will continue to provide new business opportunities as advance safety systems enable autonomous vehicles in the future. TowerJazz's RF group will continue to expand its strong offering and presence within this fast growing market. In 2017, our power management group including Tower ICs and Tower Discrete represented about 30% of our corporate revenues or approximately $420 million. The power management business unit continues to see high demand, driven primarily from automotive industrial markets with additional consumer needs. During 2017, we significantly expanded our offerings by providing a broader voltage coverage and new capabilities providing increased efficiency and additional features to our customers while enabling better cost structure from which both we and our customers benefits.

Several of the highlights of the year, we released our 200 volt SOI technology which is now in mass production. We released the 5 volt only and 3.3 volt only 65 nanometer process platforms in Uozu, Japan, which started mass production and is ramping now. We ramped the production multiple Gen4 and low RDS on products. We are qualifying our tower management platform over San Antonio facility to enable additional capacity and flexibility for our customers and we are releasing 5 volt high density best in the world 91K gig per square millimeter digital library to enable high density digital designs on the analog platform.

We see a number of interesting opportunities ahead of us. In the short term, we expect to increase our footprint in low voltage market using our previously described 300 millimeter 65 nanometer platform, providing customers with substantial cost advantage as we take part and sharing higher margin. And as mentioned we had strong customer draw for a unique 65 nanometer BCD platform which will give us leadership at the 16 volt level offering the leading edge platform with best-in-class RDS on while again providing lower cost to our customers and higher corporate margin.

Our Image sensor end markets including medical, machine vision, digital SLR camera, cinematography and security among others represented about 15% of our corporate revenues or $210 million and provided the highest margins in the company. We are offering the most advanced global shutter pixel for industrial sensor market with a 2.8 micron global shutter pixel on 110 nanometer platform. The smallest global shutter pixel in the world already in manufacturing. Additionally, as mentioned we have a 2.5 micron state of the art global shutter pixel in development at 65 nanometer, 300 platforms with several leading customers allowing high sensor resolution for any given sensor size enabling TowerJazz to further grow its market leadership.

We also offer single photon avalanche diode which is state of the art technology and ultra fact global shutter pixel for automotive radars based on time of flight principle, answering automotive market needs. We have engaged with several customers in the development of their automotive radar and expect to be a major player in this market in the coming future.

During 2017, we announced a partnership with Yuanchen Microelectronics for backside illumination manufacturing in Changchun China that provide us the BSI process segment for CIS 8 inch wafer manufactured by TowerJazz to increase our service to our worldwide customer base in mass production. So I will be ready for this mass production early second half of this year with multiple customers already having started their product designs.

In addition, we developed backside illumination and stack way for technology on 12 inch wafers in the Uozu factory serving as a next generation platform for high end photography and high end security market. We now offer both BSI and column level stack wafer PDKs to our customers.

We are investing today in three main directions. Next generation global shutter technology for industrial sensor market. Backside illumination stack wafers for the high end photography market and special pixel technology for the automotive market.

About 26% of corporate business served various mix signal applications. The products within this group included MCUA6, RFID TAG, logic standard cells; certain special CMOS embedded memory and advanced sensors including MEMS. These products serve computing, industrial, consumer and automotive end markets. And we service both the aerospace and defense business in the US providing --access to our commercial technologies for military and space applications at our New Port Beach California facility.

So to summarize, we see strong demand across all of our business units with additional specific demand for high end high margin silicon germanium platform based product. As such, we are doubling our sizing capacity. We anticipate significant ramp in 300 millimeter 65 nanometer flows starting production this year. We are increasing capacity organically as outlined in this call and as well through initiations in China such as Takoma which is progressing nicely. As stated, we anticipate growth throughout the year in a particular very strong second half.

As we continue to our lead in the analog, semiconductor space, we are taking significant strides to increase our activities and capabilities and look to further our market potential and competitive advantages by investing and focusing on additional high margin market. Two of the newest focus in activities of the company is analog and real networks fitting within the AI space and environmental sensor modules. We look forward to giving further updates as these activities progress.

I appreciate and gratefully acknowledge the combination of a dedicated role of our employee base, outstanding managers and leadership team for the achievement I presented as well as and of great importance our customer partners who have and continue to trust us with their business.

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

[Oren Shirazi, Chief Financial Officer]

Thank you, Russell. And welcome everyone. Thank you for joining us today. We start by providing the results [P&L] results highlights for the full year 2017 and for the first quarter. And then discuss our cash flow report and balance sheet. Financial results for 2017 are the best financial results we have ever achieved including record net profit and cash flow results. Record revenue, gross profit and record profit in EBITDA. Revenues for 2017 were a record of $1.39 billion reflecting an 11% growth as compared with $1.25 billion in 2016, and reflected organic revenue growth of 23%. Growth and operating profit for 2017 were a record of $354 million and $220 million, an increase of 17% and 26% as compared with $303 million and $175 million in 2016, respectively.

EBITDA was a record of $425 million, representing 31% EBITDA margin, an increase of 16% as compared with EBITDA of $367 million in 2016. Net profit for 2017 was at a record of $298 million reflecting 46% year-on-year net profit increase resulting in record basic earnings per share of $3.08 and record diluted earnings per share of $2.90. Excluding two onetime items related to tax which I will describe in greater details later, net profit for 2017 was $203 million, reflecting 15% net profit margin in 2017 and reflecting 36% incremental net profit of comparable with $154 million recorded in 2016 excluding San Antonio acquisition gain. Net profit for 2017 included two specific one-time items in relation to tax. The first income tax benefit is $82 million resulting from deferred tax assets realization following the release of evaluation allowance we previously had over the Israeli net operating loss carry forward allowance for tax.

As of December 31, 2017 such allowance amounted to approximately $1.2 billion and they can be carried forward forever without any time limitation. As an industrial company located in Migdal Haemek in Israel, our applicable tax rate is only 7.5%. However no cash basis we'll be required to pay income taxes after our future accumulative taxable profit will exceed even those $1.2 billion allowance. Multiplying this $1.2 billion allowance by this 7.5% applicable tax rate resulting in a deferred tax asset of approximately $90 million. This deferred tax asset is presented in the balance sheet as a long term asset with a value of $82 million being partially offset by the realization of deferred tax liabilities, mainly associated with a higher book value of our property and equipment as compared to its tax base value. As a result of accelerated depreciation for tax purposes.

The realization of this net deferred tax asset of $82 million was recorded in the fourth quarter of 2017 as income tax benefit in the statement of operations thereby increasing our net profit and shareholders' equity by the same amount. The deferred tax asset will be utilized without any time expiration against future profits to be generated by us in Israel up to an aggregate amount of $1.2 billion. As a result, we will record a period non-cash income tax expense equal to 7.5% of any pretax profits to be generated by us in Israel. The second income tax benefit is $30 million resulting from the recently legislated US tax reform, reducing the federal income tax rate from 35% to 21%. This tax rate reduction will reduce our future tax payments in the state and has already resulted in a reduction of certain US deferred tax asset liability net of certain deferred tax assets for $32 million to $19 million.

Our net profit was 46% higher than the net profit recorded last year of $204 million or $2.33 per share basic and $2.09 diluted earnings per share in 2016. Net profits for 2016 included $50 million net gains on the San Antonio fab acquisition and $6 million income tax benefit related to Nishiwaki fab closure, which were offset by $7 million non-cash financing expenses relating to Israeli bank loan early full payment.

Net profit excluding all above mentioned one-time items increased from $154 million last year to $203 million in 2017 reflecting an incremental net margin of 36% from the $138 million revenue book. Adjusted net profit as described and reconciled in the tables of the release, increased from $175 million in 2016 to $226 million in 2017 representing 29% incremental growth and $50 million incremental adjusted net profit over those $138 million incremental revenue. For the fourth quarter of 2017, revenues were at a record of $358 million compared with $340 million in the fourth quarter of 2016. EBITDA for the fourth quarter of 2017 was $107 million, or 30% EBITDA margin, as compared to $105 million in the fourth quarter of 2016. Net profit for the fourth quarter of 2017 was a record of $147 million as compared to $48 million in the fourth quarter of 2016.

Basic earnings per share for the quarter was a record $1.50 and diluted earnings per share was a record $1.40, as compared to $0.53 and $0.49, respectively, in the fourth quarter of 2016.

Net profit for the fourth quarter of 2017 included the same two one-time items, I mentioned before namely the $82 million Israeli deferred tax asset realization and $13 million resulting from the US tax reform. Adjusted net profit for the quarter $60 million representing a 12% increase as compared to $53 million in the fourth quarter of 2016. With regards to our cash flow report, in 2017 we generated a record level of cash from operations and achieved record free cash flow. Free cash flow for 2017 was $191 million and included $356 million positive cash from operations and $165 million CapEx payments. As compared with $170 million of free cash flow in 2016, representing $73 million or 53% year-over-year incremental free cash flow from the $138 million revenue interest. The other main cash flow activities in 2017 were comprised of the following $115 million of cash invested in marketable securities, $31 million received from the exercise of warrants and options and $50 million debt repaid.

Cash flow from operations in the fourth quarter of 2017 was $85 million and CapEx payments were $41 million, resulting in $44 million of free cash flow. The other main cash flow activities in the fourth quarter of 2017 were comprised of the following, $65 million invested in marketable securities, $17 million debt repaid and $3 million received for the exercise of warrants and options. I will now provide a balance sheet analysis as of the end of 2017. As of such date, cash, short term deposited and short term marketable securities increased to $560 million as compared to $389 million as of December 31, 2016.

The gross debt outstanding amount as of December 31 2017 was $334 million comprised mainly of $138 million of bank loans and $180 million of debentures. Cash including short term marketable securities net of gross debt as of December 31, 2017 totaled a record of $226 million as compared to a net cash of $37 million as of December 31 2016. In February 2018, Wells Fargo and Jazz Semiconductor, our US fully owned subsidiary signed a five year extension of the existing credit line agreement which has been originally set to mature in December 2018, under which Jazz will be able to drawdown up to $70 million thought 2023. Any such drawdown will bear an interest rate ranging from LIBOR plus 1.25% to LIBOR plus 1.75% and as of December 31, 2017, and the date hereof, there were no loans drawdown under this credit line.

Shareholders' equity was at a record of $1.03 billion as of December 31, 2017 as compared with $683 million as of December 31, 2016. Share count as of December 31, 2017 included 98 million outstanding shares.

Our fully diluted share count as of December 31, 2017 included an additional of total of 10 million possible shares that may be issued comprised as follows, 3 million and as of [ESOP] plan and our receivables, 6 million underlying convertible bonds and 1 million underlying capital loans. As a result the fully diluted share count was 108 million unchanged from previous quarter.

With regards to currencies and hedging, in relation to the Japanese Yen, since all Panasonic revenues are denominated in Yen and a vast majority of EPS costs are in Yen, we have a natural hedge for most of the Japanese business and operations, excluding the portion in which the Yen denominated variable cost associated with foundry business exceed the Yen net gains from Panasonic business. In order to mitigate most of this Yen exposure, we have executed zero cost in handling hedging transactions. This zero cost in handling transactions hedge, all currency fluctuations to be contained within a narrow range as compared to the spot exchange rate.

Hence while the Yen rate against the US Dollar may fluctuate, our margins are almost not impacted. In addition, in relation to the Japanese Yen impact on balance sheet we have a natural hedge on cash and loan balances since the loan and the cash are both Yen denominated and in similar amounts. This protects us from potential impact of Yen fluctuations. In relations to fluctuations in the Israeli Shekel currency, we have no revenues in this currency and while less than 10% of our cost are denominated in the Israeli currency, we also target to hedge this currency risk with zero cost transactions. Lastly, in relations to the Euro currency, we have almost zero business in Europe and hence no exposure to the Euro.

To summarize, 2017 was the best year we had to date, a year in which company achieved all-time records in revenues, profit margin and cash flow.

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

[Noit Levi]

Thank you, Oren. Before we open up the call to the Q&A session, I would like now to add general and legal statements to our results and with regards to statements made and to be made during this call. Please note that the fourth quarter and fiscal year of 2017 financial results have been prepared in accordance with U.S. GAAP and the financial tables in today's earnings release includes financial information that may be considered adjusted financial measures and non-GAAP financial measures under Regulation G and related reporting requirements as established with the Securities and Exchange Commission, as they apply to our company.

Namely, this release also presented financial data, which is reconciled as indicated in the table or in the call on an adjusted basis, after deducting; one, amortization of acquired intangible assets; two, compensation expenses in respect of equity grants to directors, officers and employees; three, gain from acquisition net; four, non-cash financing expenses related to bank loans early repayment; and five, other non-recurring items such as acquisition-related costs and Nishiwaki Fab restructuring costs and impairment.

Adjusted financial measures and non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for GAAP financial measures. The tables and the earnings release also contain the comparable GAAP financial measures to the adjusted financial measures, as well as the reconciliation between the adjusted financial measures and the most comparable GAAP financial measures.

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

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

[Operator]

Thank you. First question is from Cody Acree of Drexel Hamilton. Please go ahead.

[Cody Acree, Drexel Hamilton]

Thanks guys for taking my question and congratulations on a strong 2017. Sure. If we can go back to comment you made in your press release, I think the quote was realization of several key initiatives that would be a foundation to long term growth. You talked about your organic capacity expansion, obviously up the Chinese to become a project. Are there other key initiatives that you were alluding and how does that relate to the long term $3.5 billion target that you laid out at the Analyst Day?

[Russell Ellwanger, Chief Executive Officer]

Yes. There are multiple things, a lot that were press released. So the initiatives that we did over the year was or was over that really took fruition in the past year with the customers were to a very large extent on impact for 2018 and 209, those activities that I summarized for 300 millimeter. I mean if you look at the CIS, the column stacking for example. The back side illumination activities in addition to what's in there now were very, very strong initiatives. Now the column stacking at BSI will not be 2018 revenues but we have a very strong activities that have happened there that will continue in I think outstanding performance within the image sensor for a long period of time. What we've done within the imaging side and the lighter activities, very, very strategic. In the power management, the activities we are doing on the up to 16 volt BCD technologies with lower mass count, those are type activities that add tremendous benefit in that both the customer and ourselves sharing in higher margins. It's a very, very big step function difference on chip sizing and performance. The RF capabilities that we talked about that we are ramping in Uozu. So those are some of the strategic initiatives that really took tremendous customer actions in 2017 to drive what we are forecasting in the 2018. And certainly the Takoma project we had stated back in 2016, the importance that we saw in China and to announce that project and we've stated as well that there is a variety of other things that we are pursuing. But the Takoma project, the 8 inch back side illumination project that we have there. The overall Chinese growth is both tactical and strategic and we think very, very important. And then we had the other activities that we are doing in a variety of areas. The SiPho, I think we have incredible SiPho program going on and a variety of things in the SiPho arena that are not press released. We have a variety of things within the image sensor arena that are not press released but we have very strong customer interactions and joint development that are under NDA. But across the board on a technology front, on a tactical front and what we've qualified, how we are growing things, I think we've made some very good moves in the areas sizing capacity increase, we had seen and believed very, very strong growth in our SiGe demand, the tools that we actually got for silicon germanium deposition itself had extremely long lead time that had we not had the foresight to, I think a good business outlook and relation with customers to acquire the tool when we did, we wouldn't be in a position to be ramping and meeting customer demands in Q1, Q2, Q3 of this year. So I think tactical execution was very, very good. Strategic execution I think has been extremely good. So I don't know if there is more that you want to hear about that. But I think as far as what is in public record. The statements are very, very accurate, at vendors substantially more that is not in public record.

[Cody Acree, Drexel Hamilton]

Well, it may be true that, Russell. You laid out that very aggressive $3.5 billion target; you didn't give obviously timing on that at the Analyst Day. But a lot of the program that you have laid out at least that have been released, sound like they are kind of block and tackling organic initiative, maybe very aggressive but still relatively organic. So, I guess, for a $1.5 billion revenue company to $3.5 billion, can you walk us through the mindset of how do you get to $3.5 billion and why $3.5 billion, why not $2.5 billion or $4 billion? I mean why you settle on that number.

[Russell Ellwanger, Chief Executive Officer]

Very specifically we have a series of board meetings, within these board meetings obviously there is always the financial board meeting and audit committee meeting each quarter. But we have very strategic meetings that we call content boards that cover a variety of issues. One is M&A initiative and landscape and we outlined at that meeting a variety of activities that we were pursuing, some at beginning stages, some at later stages. But with all the opportunities that we thought were very realistic that would enable $3.5 billion, in addition to the organic growth that we were talking about. So the organic footprint that we've talked to, if you include Takoma project which you could consider organic or having done a very, very strategic business model, probably puts us somewhere between a $2.3 billion and $2.5 billion. And then the other initiatives that we are looking at where we would increase our served market on market that are adjacent to what we have right now, hence advancement meaning predominately serving a variety of existing customers in areas that we do not presently present. And hence the ability in our mind and from some customer inputs to somewhat rapidly grow market share in a new served market. That is what we have as the basis for the $3.5 billion. So the $3.5 billion wasn't just a target pulled out of the air. It was number that we had discussed on paper with the board that we thought was reasonable to get to with a variety of activities that we are pursuing, have pursued and will continue to pursue.

[Cody Acree, Drexel Hamilton]

That's very helpful. Thank you. And then lastly, Oren, could you just talk about use of cash going forward. You obviously have these organic initiatives you're doubling of SiGe, what kind of CapEx or are we looking at for 2018 and then what your thoughts are now that you are - I think you are annualizing getting into a point where dividends and buybacks might be a possibility. Can you just talk about your use of cash wins?

[Oren Shirazi, Chief Financial Officer]

Okay. So with regard to CapEx we so far don't change our previous focus which is about $168 million -$170 million total CapEx per year. And this is our standard run rate and of course Russell mentioned in his part about possibility to increase capacity of San Antonio and other possibilities and of course once we will announce that such plan was done, this will be on top of the $170 million and we will be very happy to use for that, the cash usually it has IO have 1.5 and 2 yield from such CapEx investment. With regards to dividend and buyback, we believe that the best use for our foundry the growth opportunity exactly what Russell spoke before, all kind of acquisition and other transactions that we consider all the time and we want to achieve those this very aggressive target of $3.5 billion for that of course like Russell said $2.2 billion, $2.3 billion is maybe internally possible. We including that Takoma and San Antonio expansion and all the other but the rest should come from acquisition. And for that we want to have - we need to have this fund.

[Operator]

The next question is from Rajvindra Gill of Needham & Company. Please go ahead.

[Rajvindra Gill, Needham & Company]

Yes, thank you. And thanks for taking my questions. Question, Russell and Oren on the near term. So Q1 revenue is implying to be down about 9% sequentially. If you look at last year in March our revenue was down 3% sequentially. So it was greater than seasonal at least with respect to last year. And on year-over-year basis revenue is down about 1.5% year-over-year. And so this is kind of now several quarters in which growth rate has been decelerating on a year-over-year basis and now entered into negative territory in Q1. So wanted to maybe you could elaborate on a kind of what happened in the quarter in terms of the seasonality effect and I know you had mention organically you are growing - you grew 23% year-over-year in 2017 but the overall growth rate has been decelerating since Q4 of 2016. So maybe you could talk to that as well though? I would appreciate it.

[Russell Ellwanger, Chief Executive Officer]

Certainly. So the first point is your question about the seasonality. You are correct in Q1 of 2016 we saw much less of the seasonality that the entire industry saw. So certain areas that we were involved in then were seeing some surges and market demand outside of seasonality. And we were going in market share in certain areas that allowed us to curtail seasonality. I think if you were to look at the industry itself, and if I look at the industry I look at the largest foundry in the world, I think that they were as well in Q1, 2016 on the area of about 10% down quarter-over-quarter. We were somewhere about 2%. And I think right now if you look at the biggest players in the world they are down 10% quarter-over-quarter, we are down 9%. I don't think there is any big difference. But you are correct. We did mitigate more of the seasonality through certain areas that we are involved in that had very high demand at the beginning of 2016. I don't see that as being a problem at all. If you talk about growth decelerating, we had 2016, 30% organic growth. We had a 2017, 23% organic growth. I don't know that one can maintain a 30% organic growth forever. Some of the organic growth really will tail out unless you are increasing your served markets. Certainly 23% is probably more than any single segment that we are involved in has grown over the past year. So we are outgrowing markets with an area that we are in because we are growing market share within those areas. And part of the answer to Cody's question, without getting into details is part of what we are focusing on for the $3.5 billion as I mentioned or adjacent technologies will then have increases in your share of market almost from day one because it's increasing your served market. And that becomes something that we've I think been very strong at and very good at. If you look at most of the products that we do even the organic growth is increasing our served market capabilities. Certainly when we got involved with image sensors at 300 millimeters, there were markets that were then able to compete in that we didn't compete in before such as the digital SLR camera. So by doing that acquisition, we enabled a new served market. It takes a number of years especially with an area of digital SLR for that to start growing because you are dealing with - if you won't have any big growth, there is not so many big players in that. You have to get them. They have to design to you and then get into the models of cameras. But that is how we outgrow the market is by either organically increasing served market areas or inorganically buying something that allowed us to get into a new served market. You cannot continually have organic growth that outgrows a market growth.

[Rajvindra Gill, Needham & Company]

That's very helpful. Oren on the gross margins, again you don't breakup the stock based comp across a different lines although it's still small. But it's basically implies kind of 25.2% gross margin in Q4. I am wondering how you are looking at gross margin going forward? Russell mentioned that you should have mix shift positive impact with SiGe, are there any other additional tailwinds that you are seeing on the margin front or conversely any headwinds other competitors or at least some folks have talked about higher wafer pricing for 200 millimeter for rollover first. So I was just wondering if you could talk about the puts and takes on the gross margin as we go - progress throughout this year?

[Oren Shirazi, Chief Financial Officer]

Yes. You are correct about the SiGe observation that certainly like Russell indicated this should improve our gross margin, while the capacity [Indiscernible] stays the same, we will introduce more SiGe wafer, we are almost like Russell said, and almost doubling the capacity of the SiGe and the gross margin will improve from that. And another factor is the Uozu introduction. So we are ramping up in Uozu for mainly in the second half of this year. The Uozu product which is obviously sets 300 millimeter a better for margin point of view in the average than other fab. So we will have also benefit from that aspect. With regards to the silicon cost, we succeeded through a cost - through qualification of other vendors to restore situation that it almost knowing fact on us and our cost are not going up almost in any manner because of that indeed trend of silicon price increase. We found alternative suppliers and alternative materials and overall we don't have any cost increase.

[Rajvindra Gill, Needham & Company]

Okay, good. And last question for me. Last year you talked about the RF business kind of growing mid-single digits and then it ended up growing 10% year-over-year, and then you had mention the other businesses power management, sensor and mix signal kind of grow in 25% year-over-year. And so I am wondering if you could provide forecast for this year as best as you can base on these growth drivers. Because you've outlined kind of going from 1.5 to 2.2 to 2.3 organically so want to get a better sense, you are talking about return on investment as 18 months so that's going to be sometime relatively soon. I was wondering if you can elaborate on some of those growth drivers this year.

[Russell Ellwanger, Chief Executive Officer]

Probably organically this year we will sit somewhere in the - as a company organically somewhere in the low double digits that's what things are rolling up to look like at this point. RF this year should be somewhere again around 10% but within the RF one of the big things of RF is the silicon germanium growth that is probably be out somewhere between 35% to 45%. And what that matters are really that we had stated back at the beginning of 2016 and it hasn't changed. We are not extremely interested to compete on low margin RFSOI. If you look at our RFSOI, it has a very, very good selling sale price because of the substrate itself is very expensive. But the margin isn't necessarily a fantastic unless you are doing the higher end products. So when I talk about around 10% RF growth, the RF margin would grow much more than 10%. But the revenue itself were replacing some high ASP , average selling price products that aren't necessarily high margin with very high margin that because of the substrate is now taking out at a $300 to $400 level, you are dealing with a similar selling price but a much higher price per layer.

[Operator]

The next question is from Quang Le of Credit Suisse. Please go ahead.

[Quang Le, Credit Suisse]

Hi. Thank you for taking my question. And so I'll have the question - almost all my questions were answered right. But I would have a question to your tax. So basically you do said that you will benefit going forward from lower taxes in US and on the group level then what do you see the tax rate going to be in 2018 and 2019?

[Oren Shirazi, Chief Financial Officer]

So I believe the overall total will be close to zero because on the one hand we have the tax reduction in the States from 35 to 21 and we will also have the tax program that we are launching, the previous quarter we spoke about this in Japan about royalties and other expenses paid from TPSCo to Japanese JV to Panasonic and Tower. And in Israel it is obviously zero until we will make accumulated profit of $1.2 billion. So I believe that tax payment will be very small and maybe one digit meaning less than $10 million for the year. So less than may be $2 million a quarter. And the total tax expense will be a little bit higher but they will be non-cash. But overall very, very small amount.

[Quang Le, Credit Suisse]

I see. And then when could you elaborate more on your wafer supply, you said that you found alternative wafer supplier. Did you have to qualify all of them and when you said you found alternative wafer supplier, could you specify what your fee is? What would they be?

[Russell Ellwanger, Chief Executive Officer]

Yes. We certainly have to qualify every alternative supplier. And that's an activity that was not an immediate activity; it's something that we've been working on for many years. And we've been pretty successful at it. So although there is from some people standpoint a shortage of silicon, we are pretty much that everything taken care of, reserved and on contract. And we have never missed any wafer starts because we didn't have available silicon for those starts. Our alternative base is really in many, many different areas. Some now being qualified in China.

[Quang Le, Credit Suisse]

And these are all on 200 millimeters, am I correct?

[Russell Ellwanger, Chief Executive Officer]

For the most part 200 millimeters because most of our volume is 200 millimeter, 300 as well.

[Quang Le, Credit Suisse]

You too have 300 from China as well.

[Russell Ellwanger, Chief Executive Officer]

No. We have 300 millimeter. I honestly don't know if we have any 300 millimeter substrate from China. I really don't think so. But I am not sure.

[Quang Le, Credit Suisse]

Thank you.

[Russell Ellwanger, Chief Executive Officer]

And your question was about the 200 millimeter the China substrate. So definitely the 200 millimeter is coming from China. But for one specific flow, I really don't know of any 300 millimeter from China at all.

[Operator]

The next question is from Lisa Thompson of Zacks Investments Research. Please go ahead.

[Lisa Thompson, Zacks Investment Research]

Hi. I just want to do follow up a little bit on your statement that you said this year is going to be heavily backend weighted. Could you describe perhaps in order of magnitude what is causing that? Either by product or technology.

[Russell Ellwanger, Chief Executive Officer]

Really two major things as I talked about very strongly in the call. We are anticipating forecasting a substantial ramp at 300 millimeter. The ramp beginning now so any time we have a ramp, every quarter is more than the other. So we would expect the second half of the year to be significant amount of 300 millimeter revenue. On the others as I talked about was the silicon germanium capacity increases that we are doing. So as we from now in the qualification to the end of the year or into the third quarter as we double the silicon germanium capacity obviously that allows higher revenues. And then we have as well an additional 6,000 IDM wafer that we are adding to Migdal Haemek, and that's being done as we speak and that will go then through Q1, Q2 until that's fully installed. So you have then the additional capacity coming out of fab 2 for that additional 6000 IDM wafers.

[Lisa Thompson, Zacks Investment Research]

Okay. So it's more a factor or production rather than customer demand for some particular products that are coming online?

[Russell Ellwanger, Chief Executive Officer]

They both go hand in hand actually, right. I mean it's the ramping in 300 millimeter is as per customer demand in 300 millimeter. The 6000 wafer addition of IDM activities is also customer demand related. So I am not trying to be up two sides. I don't know how to separate each one but certainly its capacity that's driven by certain people using the capacity. We add capacity already in Uozu. So it's the demand of the customers that's driving the revenue growth.

[Lisa Thompson, Zacks Investment Research]

Okay, great, thank you.

[Russell Ellwanger, Chief Executive Officer]

In the case of the silicon germanium it's really a case of capacity and demand going hand in hand.

[Operator]

The next question is from Richard Shannon of Craig Hallum. Please go ahead.

[Richard Shannon, Craig Hallum]

Good morning. Thanks for taking my questions. I am going to follow up on the last one year. I get interrupted during prepared remarks so I may have missed your comments Russell but specific to the acceleration in the second half of year from 300 millimeter; did you specify which product or products were driving that?

[Russell Ellwanger, Chief Executive Officer]

I did.

[Richard Shannon, Craig Hallum]

Can you repeat what those are? Sorry about that.

[Russell Ellwanger, Chief Executive Officer]

It's probably about 15 minute portion of my script. But I'll go ahead and summarize it.

[Richard Shannon, Craig Hallum]

Are there a 10 second summary on that one?

[Russell Ellwanger, Chief Executive Officer]

Yes. It was CMOS image sensor in particular we talked about the high end digital SLRs, cinematography and broadcasting. It was within RF, it was on RFSOI and [Indiscernible] and within power management it was the 5 volt ramping presenting and we said platform a BCD platform 65 nanometer with up to 16 volt capability ramping in the second half of the year.

[Richard Shannon, Craig Hallum]

Okay, that's helpful. I did want to follow up on the combination of 1A and switches. How prevalent of an architectural shift you expect that to be going forward? Is this relatively small portion? And we could see a pervasive across all the leading edge handsets? Any thoughts on that.

[Russell Ellwanger, Chief Executive Officer]

I think it will really coming into a fact of is it cost productive through combine it versus having smaller 1As and a separate bill. So but right now we are seeing a lot of interest by people. We've certainly taped down a variety of products and we've multiple customers sampling a variety of products both at 200 and 300 millimeter. There is a very big provider that's very strong into a combined switch L&A right now. Provider meaning one of those I would say within our customer's base.

[Richard Shannon, Craig Hallum]

Okay. Maybe a couple of quick questions for me. You made a brief comment on - to comment it sounds like you are in process negotiating something there. Sounds like you would prefer us not to try to include anything in your model at this point. But if you can give us any updated thoughts on how to think about the scale both of the kind of the interim consulting or service related revenues and then any expectation and timeframe for wafers coming out that would drive some revenues?

[Russell Ellwanger, Chief Executive Officer]

So we actually have I think a very, very shunt a band for that capacity presently that would be substantial revenue, would probably come online within 2019. And be steady throughout the entirety of the 2020s. So I think that's the timing that we would look at from the demand that we are seeing right now would be a round in 2019 and hitting probably entitlement volumes in 2020 and staying that way for a quite long time. The numbers that we've always said from Takoma you could look at. I mean it's - it would give us 20,000 wafers per month of 200 millimeter capability. So we never gave a specific forecast on it. But that would be on a totality or you can do the calculation in terms of the sale price would be per wafer. As far as the contract it and what would be getting out of the contract we had announced that the first payment was gross somewhere about $20 million net of tax is I think I was [18] that we got on that. And the rest of the payment schedule we've not really said what it would be but there would be several more technology on the transfers as well as milestones of building up the facility. And then certain other servicing agreements that would be on a year-over-year basis or after. Timeframe I do think that that Takoma project is moving nicely. And I would expect that in Q2, Q3 timeframe that pretty much everything is settled and done.

[Operator]

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

[Russell Ellwanger, Chief Executive Officer]

Certainly. Again, as always really do very much thank our investors, our analysts for their interest in the company. Very grateful to our customers for trusting us for an integral part of their business. Company has been a very good trajectory and in an incredible position that we never had before as far as sitting on a very good financial base to allow us to move in several direction that maybe weren't available for us before to increase our served market. As a nicety, we would really look forward to seeing any and all of you face to face at upcoming conferences on March 8; we will be at the UBS Conference in London. March 12, at the Roth Conference in Orange County California. At March 14 at the Susquehanna Annual Technology Conference in New York. So anyone who would like to sign up for those conferences, we really enjoy the one-on-one, face-to-face time with you. And obviously any follow up to this call as per normal we are very, very happy to do. Also, our 2017 Annual Report is now available on our website. It contains a message from our Chairman and message from myself; from our CFO, from our President. It contains sections from each of our business units, general managers outlining their vision of their business, of their markets. And concludes with the message from our Head of the Human Resources, talking about different initiatives we do to inspire our employee base and also outline our environmental social activities in order to show our value as being a global citizen, and how we value being a global citizen.

With that I thank all of you for your participation. Please take a look at the annual report on the website. I think you would enjoy it. I think it's an interesting report. Certainly has some very pretty graphics in it. So thank you very, very much.

[Operator]

Thank you. This concludes the TowerJazz's fourth quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.