Tower Semiconductor Ltd.
Q4 2016 Earnings Call Transcript

Published: 13 Feb 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz Fourth Quarter and Full Year 2016 Results Conference Call. All participants are currently present in listen-only mode. Following management’s prepared statements, instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, February 13, 2017. Joining us today are Mr. Russell Ellwanger, TowerJazz’s CEO; and Mr. Oren Shirazi, CFO. I would now like to turn the call over to Ms. Noit Levi, Vice President of Investor Relations and Corporate Communications. Ms. Levi, please begin.

[Noit Levi:]

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

Thank you, Noit. Firstly, welcome to all of you, thank you for joining us today. 2016 was a wonderful year, one in which we demonstrated the best business and financial performance in the history of the company. I appreciate and gratefully acknowledge the combination of a dedicated worldwide employee base, outstanding managers and leadership team for this achievement as well as and of great importance, customer partners who have and continue to trust us with their business. We continue to cement our position as the global specialty foundry leader and present yet another year of record revenues having reached $1.25 billion with an industry leading growth of 30% year-over-year. We also recorded our highest ever EBITDA of over $365 million, up almost 50% versus last year and breaking a $400 million fourth quarter annualized EBITDA run rate, with record net profit of over $200 million and overall margin increases. The performance generated approximately $120 million in free cash flow, a source that maybe used to support additional growth initiatives. This growth in performance evidence a successful business model, which in our case is analog industry leadership with low cost acquisitions, which acquisitions provide self-funded capacity increases. We remained focused on providing best-in-class specialty technology offerings by providing the right platform to support the trends that are now driving the world. We increased our competitive advantage with an existing and within new markets by being responsive to the present and future needs of our diversified customer base. As we did in the fourth quarter of 2015, I would like to discuss the end markets that are served within each of our main business units and provide color to the 2016 annual revenues and year-over-year growth for each of the major groups. I’ll discuss the offerings and roadmap progression and lastly present the 2017 forecasted growth drivers. As previously done, we are dividing our $1.25 billion 2016 corporate revenues into four groups; RF, power management, image sensors and lastly a grouping of mixed-signal and others. In 2016, our RF Group represented 30% of our corporate revenues approximately $370 million against $300 million in 2015, a 23% year-over-year revenue increase. Our RF, high-precision analog business units serves primarily two end markets, mobile and infrastructure, representing 21% and 8% of the corporate revenues respectively. For each market our technology offers best-in-class performance, together with accurate models and design kits that enable our customers bring new high performance products to market faster than would competing solutions. For the mobile market, we offer RF SOI, for best-in-class Ron-Coff figures of merit, sub 100 femtosecond, which result in lower insertion loss for RF switches leading to improved reception, faster data rates and longer battery life for handsets and other mobile devices. In addition, our silicon germanium offering is used for both receive , low noise amplifiers and transmit power amplifier functions in handsets and provides the best silicon based performance, lowest noise figure for receivers and best power efficiency for silicon based power amplifiers, enabling higher data rates, better GSP reception and longer battery life in handsets and other devices. Both LNA and PAs are in high volume production and new generation of technology are being rolled out. For the infrastructure market, our industry leadership in high performance silicon germanium continued with the announcement this year of S4, with 300 gigahertz Fmax complementing our production H3 process used for 10 to 100 gigabit per second optical fiber transceivers and millimeter wave radar. For which we press released early adoption of this platform with industry leaders including alphabetically Broadcom, Inphi, MACOM, Maxim, Maxlinear and Semtech among others. Our main achievements for 2016 in this business group included, a successful transfer of our most popular RF SOI platforms to our newly acquired facility in San Antonio to enable additional capacity for customers in this growing market. We announced the production ramp of our silicon germanium PA process with Skyworks. This process enables the front-end module single chip with power amplifier, low noise amplifier, switch, logic and power management functions that can all be integrated into a single die. In addition as mentioned, we announced our latest addition to the silicon germanium Terabit platform, with S4 at 300 gigahertz Fmax. The main growth drivers for the RF high precision analog business unit continue to be front-end modules for handsets and other mobile devices, front-end components for fiber optic data connection and data centers and networks, as well as production ramp of automotive collision avoidance and other radar applications. These markets drive growth both in RF SOI and silicon germanium technology platforms. We're well positioned for continued success in the RF market with industry leading process technology, strong relationships with Tier 1 customers to drive the company's roadmap and a demonstrated ability to bring customers to market quickly with first path success and ramp the high volumes in multiple factories a combination that cannot be easily duplicated in the foundry industry. Looking at the power management segment, this group represented 28% of our 2016 corporate revenues or $345 million versus approximately $265 million in 2015, a 30% year-over-year growth in revenue. Within this group, we mainly produce power ICs and power discrete products. The power ICs are foundry processes open to all customers and the power discrete are predominantly integrated device maker proprietary flows with typically multiple generations of additional developments for this specific customer. In the case of power discrete, the greatest portion is on long-term committed contracts. We closely collaborate with our leading customers to find and develop the next generation of its platforms and devices. These collaborations enable our partners an early access to our future offerings with specific solutions tailored for their specific need. This mode of operation has already yielded developments of new advanced devices such as high frequency LDMOS and a 5 volt cost effective isolation all for the high efficiency switch regulator market. Our power management platform includes several distinctive advantages, low Rdson over a wide and scalable voltage range enabling the highest efficiencies in the foundry industry. Our LDMOS transistors are optimized to maximize the performance cost ratio and minimize the footprint with low Rdson. A wide range of substrate isolation types ranging from both isolation for the majority of power management products to full dielectric isolation using 200 volt SOI for enabling positive and negative voltages on the same integrated circuit. The ladder can be particularly useful for application such as wireless charging, Class D audio amplifier and automotive. Lastly, high density logic cores for both the 1.8 volt and for the 5 volt library and high density non-volatile memories for applications which need high digital density such as wireless chargers, PMIC, smart power products or automotive power controllers. During 2016 multiple additional advanced technologies were developed. 200 volt SOI technology which offers our customers a state-of-the-art full isolation up to 200 volts using the standard TS18PM, PDK. The 200 volt SOI technology is already in use by one of our leading customers to serve the motor control market, but also applicable for medical, home appliances and automotive market. Through 2017 we expect multiple products to be ramped up by many of our other customers on this platform. In addition we provide a value added low voltage below 5 volt power management offering for high current, high frequency switch regulators PMICs, et cetera. This technology offers advanced isolation capabilities with minimal additional layers and advanced power transistors for high frequency switching regulators. We also released a new high density 5 volt digital library to enable denser integration of more controllers within 5 volt only designs to allow full differentiation in an additional $0.5 billion wafer market. In 2017 we will continue to focus on reducing the Rdson to best-in-class levels also for voltages up to 100 volt and also to expand our non-volatile memory offering to allow more integration of control and processing within power products all combined with cutting edge power management devices. More engagements on the 200 volt SOI will happen during 2017 to support high voltage DC-DC converters automotive applications and high voltage battery management ICs. Our image sensor group also continue to show strong growth in 2016, representing 18% of our corporate revenues in 2016 or $220 million versus approximately $166 million in 2015, representing 33% year-over-year growth. On the CIS front we are able to provide best-in-class pixel technology tailored for each specific sensor application area such as very high dynamic range pixels for the automotive industry, unique low noise and extremely small global shutter pixels for the fast increasing industrial vision market, extremely low dark current, low hot pixel count and low noise pixels for the high end photography and cinematography markets, large stitched pixels for medical and dental X-ray, gear infrared sensitive global shutter small pixels for 3D and augmented and virtual reality applications. In addition we tailored the pixel layout, as well as the process parameters for each customers’ requirements providing silicon proven state-of-the-art pixels. In 2016 we grew our market share substantially especially in the medical and industrial market segments ramping to volume, production and new devices of our customers. In addition during the year we witnessed several large merger and acquisitions in the sensor market between our customers, which strengthens the company’s position even further as we are the major or sole supplier for these customers. The major focuses for 2017 will be proliferation of next generation global shutter technology for the medical sensor market, increasing market share in the DSLR market using high end technology in the 300 millimeter factory in Uozu, Japan, and increased presence in the growing security market. The mixed-signal others group represented a quarter of our 2016 corporate revenues or approximately $315 million. This is compared to approximately $230 million in 2015, representing a year-over-year growth of 37%. Our mixed-signal CMOS platforms are ideal for customized designs for low power, analog and digital designs including the latest 65 nanometer, millimeter wave RF CMOS modeling and enabled 18 volt high voltage CMOS offering. As described in the previous year the products within this group include microcontrollers, A6, ID tags, logic standard cells, certain special CMOS embedded memories and advanced sensors including [indiscernible]. These products serve computing, industrial consumer and automotive end markets. And other grouping within this area is aerospace and defense business in the U.S. providing ITAR and trusted access to our commercial technologies for military and space applications in our Newport Beach, California facility. We’re able to meet the high volume needs of our customers using our multiple manufacturing sites. To summarize our markets and technology focus, we are well diversified between the different groups, end markets and products. Our customer demands remain strong while we work together producing platforms, which create next generation differentiated products for future market needs. The continuous growth in each and every one of our business groups is a strong indication for us that we are playing in the right markets with the right customers and providing the correct solutions. Looking into 2017 excluding Panasonic and Maxim, which are captive and stable and under a long-term supply agreements we see growth across the board for all business units. According to customer forecast the RF HPA business unit will be single-digit growth and all others nicely above 25% year-over-year growth the highest growth being in CMOS image sensor, which also provides our highest blended in margin. Looking to utilization, I’d like to spend a few moments talking about the current utilization rates at available capacity. The strong customer demand we’re experiencing is reflected in the utilization levels, our operational model is to run at about 85% utilization in each of our facilities. The following were the utilization rates for the fourth quarter of 2016. Fab 1 Migdal Haemek, Israel our 6-inch factory was in 78% utilization; Fab 2 Migdal Haemek, Israel our 8-inch factory was at 87% utilization; with the previously announced added capacity Fab 3 Newport Beach, our 8-inch factory, was now at the utilization model at 84% and the three TPSCo factories had utilization average of about 50% and very notably in the fourth quarter of 2015 we nicely exceeded the previously expressed target of $100 million annualized third party revenue in the fourth quarter with substantial unused capacity for additional growth. Regarding the San Antonio factory, we’ve qualified multiple platforms in this factory in a very accelerated timeframe and expect the revenue increase in San Antonio of about 30% in 2017 over the Maxim base contract. Looking forward we expect revenues for the first quarter of 2017 to be about $330 million with an upward or downward range of 5%, this represents approximately 19% year-over-year revenue growth as compared with the first quarter of 2016. And according to customer forecast, we expect growth throughout the year with each quarter being measurably higher than the corresponding quarter in 2016. To summarize, 2016 was a fantastic year for TowerJazz. We continued our strong year-over-year revenue growth and due to our efficient operating model, we are able to translate this growth into much stronger growth in profit. At the same time we maintained and further built on our lead in the analog semiconductor space. Our goals for the years ahead remain to continue our company’s improvement successful business model. We will drive analog leadership with low cost capacity expansion resulting in strong increasing revenues and proportional growth in margins profit and free cash flow at minimal risk to investors. With that, I would like to turn the call to our CFO, Mr. Oren Shirazi. Oren?

[Oren Shirazi:]

Thank you, Russell and welcome everyone. I will start my review by providing our P&L results highlights and then discuss our cash generation debt share account and the balance sheet. As we previously disclosed revenues for the fourth quarter were $340 million a 34% year-over-year increase as compared to $255 million and a 4% quarter-over-quarter increase when compared to $326 million. Gross and operating profit for the quarter were at a record of $88 million and $55 million respectively, representing 36% and 61% improvement as compared with $65 million and $34 million growth in operating profit in the fourth quarter of 2015 respectively. Both gross and operating profit also increased as compared to $81 million and $49 million respectively in the third quarter of 2016. Net profit for the fourth quarter was $48 million or $0.53 in basic earnings per share, a significant increase as compared to $22 million or $0.28 per share in the fourth quarter of 2015. Net profit for the third quarter of 2016 was $51 million and included a nonrecurring income tax benefit of $6 million related to the finalization of the subsidiary closure that held the fab in Nishiwaki, Japan, which ceased its operation in 2014. Diluted earnings per share for the fourth quarter were $0.49 per share as compared to diluted earnings per share of $0.25 in the fourth quarter of 2015 and $0.52 in the third quarter of 2016. Adjusted net profit for the quarter, as defined and reconciled in the tables of the press release was $53 million compared with $26 million in the fourth quarter of 2015 and $49 million in the third quarter of 2016. EBITDA for the quarter was at a record of $105 million as compared to $76 million in the fourth quarter of last year and $97 million in the third quarter of 2016. For the year revenue were at a record of $1.25 billion a 30% increase over the $961 million of 2015. Gross profit for the year was at a record of $303 million, 48% higher than gross profit of $205 million in 2015. Operating profit for the year was at a record of $175 million more than double the $82 million operating profit in 2015. Net profit for the year was at a record of $204 million reflecting $2.33 per share versus a net loss of $30 million or $0.40 per share in 2015. Diluted earnings per share for the year were $2.09, net profit for 2016 included $50 million net gain from the San Antonio fab acquisition and the $6 million income tax benefit related to the finalization of the closure of the Nishiwaki, Japanese subsidiary, which were partly offset by $7 million in non-cash financing expenses, related to the Israeli bank loans early repayment. Net loss for 2015 included $81 million non-cash financing expenses associated with Series F Bonds accelerated conversion done in 2015, as well as $18 million income tax benefit resulting from the expiration of statute of limitations and Japanese income tax rate reduction. Adjusted net profit for the year as defined and reconciled in the tables of the press release was $175 million, as compared to $49 million in 2015. EBTIDA for the year was at a record of $367 million as compared with $248 million in 2015. With regard to currencies and hedging, in relation to the euro currency, we have almost zero 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 cost are in yen. We have a natural hedge to most of the Japanese business and operations, excluding the portion, in which the yen denominated variable cost, associated with the third party foundry business, exceed the yen net gains on Panasonic business. In order to mitigate this net yen exposure, as previously stated, we have executed zero-cost cylinder hedging transactions. These zero-costs cylinder transaction hedge all currency fluctuations to be contained within a narrow range, as compared to the spot exchange rate. Hence while the yen fluctuated this year between levels of 102 to 122 our margins were almost not impacted. In addition and related to the Japanese yen impact on the balance sheet, we have a natural hedge on cash and loan balances whereby the loans and the cash are both yen denominated, which situation protect us from the yen situation impact on loan and our cash. Lastly, in relation to fluctuation in the Israeli shekel currency, we have no revenues in this currency and while less than 10% of our costs are denominated in the Israeli shekel currency, we also hedge most of this currency risk by zero-cost cylinder transaction. I will now review the balance sheet analysis as of the end of 2016. In regards to our cash flow, cash and short-term deposits were at a record of $389 million as of December 31, 2016, as compared to $363 million as of September 2016. The main cash activities during the quarter were $82 million generation of cash flow from operations, $11 million received from exercise of warrants and options, $43 million investment in fixed assets net, $6 million of debt payments and $17 million of the Japanese yen exchange rate, affected the cash balance, which as previously explained were mostly offset by a similar impact on the Japanese loan balance. Free cash flow for the fourth quarter was at a record of $39 million, as compared with $31 million in the third quarter of 2016. As I mentioned the cash and short-term deposit balance of $389 million grew significantly from $206 million as of December 31, 2015. The main cash activities for the full year were $327 million cash generated from operating activities, $39 million received from exercise of warrants and options, $37 million debt proceeds received net, net of debt principle payment and $210 million of net investments in fixed assets. Free cash flow for 2016 was at a record of $118 million, as compared with $30 million in 2015. In relation to our debt, this year we fully repaid the Israeli bank loans under which we initially borrowed more than $500 million. This was done following the issuance of bond Series G, a 2.79% fixed coupon not linked to any index, not linked to any LIBOR. The bonds will mature between 2020 and 2023. This resulted in lower interest cost, improved balance sheet ratios and the restart for many restricted covenants which were imposed on us, creating much more business and financial flexibility. As of December 31, 2016, our total gross debt was $352 million, comprised of outstanding principle amount of $166 million in bank loans, including $126 million from Japanese banks to TPSCo and debentures in the amount of $186 million, deducting total gross debt of $352 million from total cash and short-term deposit of $389 million, resulting in a net cash position of $37 million as compared to a negative amount of $105 million as of December 31, 2015. Since in that point in time debt has exceeded the cash we had on hand. Our net current assets or current assets less current liabilities increased from $236 million as of December 31, 2015 to $451 million as of December 31, 2016. Current ratio as of December 31, 2016 increased to 2.8x as compared with 2.1x as of December 31, 2015. Shareholders' equity as of December 31, 2016 was at a record of $683 million 77% higher as compared to $286 million as of December 31, 2015. Share count as of December 31, 2016 included $93 million outstanding shares. Our fully diluted share count as of December 31, 2016 includes an additional 14 million maximum possible shares to be issued comprised as follows, 2 million from exercise of warrants Series 9, 4 million is of related options and RSUs, 6 million underlying convertible bonds, and 2 million underlying capital note. As a result our fully diluted share count remains unchanged at 107 million exactly the same share count as of September 30, exactly the same count as of June 30 and the same count as March 31, 2016. To summarize, we are very pleased with the results for the fourth quarter and full year 2016 which demonstrates the strength of our financial model achieving multiple record results including record revenue, EBITDA, gross profit, operating profit and free cash flow, as well as a record cash balance and record shareholders' equity. That ends my summary, and I would like now to turn the call to Noit Levi. Noit please go ahead.

[Noit Levi:]

Thank you Oren. Before we open up the call to the Q&A session, I would like now to add a general and legal statements to our results in regards to statements made and to be made during this call. Please note that the fourth quarter and fiscal year 2016 financial results have been prepared in accordance with U.S. GAAP in 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, amortization in acquired intangible assets, compensation expenses in respect of equity grants to directors, officers and employees, gain from acquisition, net, non-cash financing expenses related to bank loans early repayment; and other non-recurring items such as income tax benefits. Adjusted financial measures and non-GAAP financial measures should be evaluated in conjunction with, and are not substitute for, GAAP financial measures. The tables and the earnings release also contained 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 measure 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. Ladies and gentlemen at this time we'll begin the question-and-answer session. [Operator Instructions] The first is from Cody Acree of Drexel Hamilton. Please go ahead.

[Cody Acree:]

Congratulation guys and thanks for taking my questions. Maybe Oren just a housekeeping question on the currency details and thank you for that. I understand that the business margin or profitability impact, but you did have quite a bit of a revenue headwind during the December quarter, can you maybe just detail how much revenue impact you had to absorb to get to that $40 [ph] million number?

[Oren Shirazi:]

The yen -- the average yen rate on Q4 2016 was 110 to 111 which is compared to 103 ahead of the average of Q3, so it’s a 7% and we said in the past that Panasonic revenue are between $90 million to $105 million per quarter. So if you assume 90 times 7% that’s the impact. But like you mentioned it’s fully offset by the same impact on the COGS, so no impact on the -- almost no impact on any of the margins.

[Cody Acree:]

Are you building in any cushion or volatility for revenue for Q1.

[Oren Shirazi:]

Cushion, or what do you mean?

[Cody Acree:]

Just in your guidance for Q1, how are you -- what are you assuming for currency?

[Oren Shirazi:]

We assume the current exchange rate, which is already Q1, I mean we are in the middle of Q1 and already the average is about the same 113 and we assume the same will stay. So we don’t assume -- we don’t expect anything that will change.

[Cody Acree:]

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

[Russell Ellwanger:]

Good question Cody. I believe that during 2017, first half of ‘18 the company if it maintains which it should the growth trajectories that we have been, we will indeed need additional capacity beyond what we have now. We have mentioned that we have two distinct different models that we are pursuing for capacity. We had stated that we are pursuing a strategy in China, which we are indeed pursuing and this would be to where we would partner with somebody and possibly a municipality to build a greenfield site, for which our portion of investments would be our IP and building a fab and quipping a fab and in bringing technologies into the fab it would not be an upfront investment from us, it would be an in kind investment on capability for where nominally we would be being paid during that period as well. So that would be one area of gaining greenfield capacity where it would not be at all from a TowerJazz standpoint a greenfield type investment as far as the capital that would typically go into a greenfield build. On the other that we have had opportunities for in the past year, maybe year and a half, but we haven’t seen the proper opportunity other than the Maxim San Antonio factory would be to continue the type of an arrangement that we did with Panasonic, with TPSCo or going to full 100% acquisition what we did with Maxim for San Antonio and there have been several opportunities of that nature that for our specific needs the opportunity didn’t fit 100% the template that we would like to have, one of them we tried very hard to make work, but it just didn’t meet our Templin. But one of the beauties for us, with IDM consolidation that continues to go forward is that typically IDM consolidation does allow available factories due to the consolidation and under-utilization that some factories become available within the market. And at this point we have reached the level of customer range that most of the consolidations being done, we have a relationship with either both of the IDMs or with one or the other of the IDMs. So the ability to get into such a deal at a very, very early stage is very real. Hopefully it answered your question Cody.

[Cody Acree:]

It does. And so I guess just point of clarification though, if you pursue this trainings opportunity when it comes to provision. A greenfield build or ramping of capacity what's the earliest timeline that you think that that could actually have an impact to your capability?

[Russell Ellwanger:]

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

[Cody Acree:]

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

[Russell Ellwanger:]

So it wasn't just solely MEMS it was MEMS and sensors. Sensors may or may not be MEMS based. But however that is not capacity M&A so to speak that really is a technology capability. But certainly for the MEMS type of an activity or a strong sensor type activity for a variety of different end applications. To really grow in that market we believe in a very strong fashion you have to vet many, many customers to try to vet many customers within an existing high volume factory is very difficult because each of these require a very strong amount of specific development for that customer and in particular with MEMS flows. So the impact on the efficiency of the factory becomes very, very strong. So for a MEMS type of activity what we have stated was that we would be looking at two things one is something that would bring with it IP and the IP is both from a protection portfolio as well as from a human capability side. And then addition to the IP would be to have some small capacity that is either presently or could quickly become cash flow neutral or cash flow positive to that many customers. And upon any customer reaching a certain level I don't know you can say 500 to 800 or 1000 doesn't actually matter, but reaching a certain level of production to guarantee that customer continuation of the production in vetting factory while you're transferring the specific flow into a high volume factory and at that point doing it in a way that would not impact the efficiency of the high volume factory. In the case of sensors specifically, there is really two ways to get into that type of a market. One is again to do, as I was speaking of with the MEMS activities. The other would be to bring on a specific IDM transfer that we do with discretes and to deal with the very, very high volume first tier sensor company and bring one of their flows into your factory, and serve them and develop a very strong core capability by bringing up a very specific flow and flow family for an end customer that you know to begin with has very high volume demand and can guarantee you that the development does go into high volume because of a take or pay agreement.

[Cody Acree:]

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

[Russell Ellwanger:]

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

[Cody Acree:]

That’s perfect, thank you. Thanks for your help and congratulations.

[Russell Ellwanger:]

Thank you, Cody. Very good questions.

[Operator:]

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

[Rajvindra Gill:]

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

[Russell Ellwanger:]

So for the RF and HPA I think it’s somewhat similar to Cody’s question we had stated that we’ve gained a substantial market share within the mobile platforms. We’re not necessarily desirous to grow that well beyond where we’re at, but to continue on advanced platforms working with the customers that we have to protect and grow to some extent the market share that we have and that’s where we had stated was about 22% of the corporate revenue dealt with the mobile platforms. In the area of infrastructure and this is the millimeter wave optical transceiver area on way we have a very strong focus on and we believe that we’ll continue to see very big growth in a year-over-year basis. The other markets in the area of CMOS image sensors we’re seeing very strong growth within the industrial sensor market and multiple strong engagements within the DSLR market. But the biggest growth factor for us there is within the industrial sensors and there’s very-very strong demand there and our medical sites continues to grow as well. In the power management it’s across the board with our power management platforms, I spoke of several different things that we’re doing with power management, our BCD process in general has gained very, very strong market acceptance and we really across all end-applications we have nice growth there. I had mentioned that we’re moving additionally into higher voltage power management, part of that with a 200 volt SOI and a greater variety going up to an 80 volt but with power management it really goes across an entire gamut of applications. Probably in the mixed-signal and others we’ve had very nice growth within the aerospace and defense continue to see a good forecast within aerospace and defense that’s within the Newport Beach facility it’s a very good market, it’s also a very high margin market and we’ve seen very strong growth within the MEMS and sensor area.

[Oren Shirazi:]

Maybe just to complete the first part of the question about the growth, so indeed you are correct that we have 19% forecasted growth year-over-year as compared to 30% in the last year, but last year you should remember that we acquired the San Antonio Fab so it’s the Maxim incremental, which according to market numbers or analyst numbers it’s 20 something million a quarter maybe. So as compared to $240 million on baseline of 2016 which you compare it’s about 10% or 12% from the 30%. So if you deduct 12% from the 30% it’s about 18% average with only grow previous year. So we’re actually keeping the same momentum and the same percentage of growth this year as well.

[Rajvindra Gill:]

So just to summarize you got the core business that’s growing 18% year-over-year, but you also mentioned positively that Maxim is going to accelerate to 30% year-over-year.

[Russell Ellwanger:]

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

[Rajvindra Gill:]

The base Maxim contract and remind us what that is again, Russell?

[Russell Ellwanger:]

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

[Rajvindra Gill:]

Right, okay. Thank you.

[Russell Ellwanger:]

I did want to add one other thing though and this is why at maybe some times can get a little confusing. The Maxim San Antonio factory itself, we looked at it as really an extension of a business that we had with Maxim. So, although the revenue coming out of that factory is stable and under a long-term contract for the first multiple years. When we did that deal, it really -- it was enabled through a relationship we have with Maxim of serving them within the optical market and the relationship was extremely strong, which allowed us to work together on something that was very, very important to them and critical to them. So, for the growth in 2016 and some people that was thought of organic growth, because we extended an already existing relationship with Maxim and other people it was looked at as an M&A growth and it doesn't really matter, how you want to look at it. But a certain portion of that growth is stable and under long-term contract and that will not grow. Hopefully that answers your question and thoughts there?

[Rajvindra Gill:]

Yes, thank you.

[Russell Ellwanger:]

Thank you.

[Operator:]

The next question is from David Duley of Steelhead Securities. Please go ahead.

[David Duley:]

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

[Russell Ellwanger:]

Millimeter wave is certainly goes into the automotive radar but the biggest proportion of our business there is really on backhaul so it's infrastructure presently. On the automotive radar, I think the market can be very strong. We do have a very nice engagement on automotive radar presently and if all goes according to agreements, it should be press released in April. And I think for us probably we would be looking at a share of, I think, the served market probably sitting somewhere about $0.25 billion over the next years and our share of market we probably target to be some good portion of that. But though you could think it's for us a $200 million to $300 million served market and how much share will we get, we'll see. But I think that's a press release that will do should be very exciting providing all goals according to agreements and it is press released in the April timeframe.

[David Duley:]

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

[Russell Ellwanger:]

So, if you were to just extend from what we've stated and that was that we see growth throughout the year and according to customer forecast and we would see every quarter being measurably higher than the corresponding calendar quarter of the previous year. I don't think that an 18% is unreasonable or a 19% or maybe higher or maybe lower. But we didn’t give a full year guidance, but we do see very reasonable year-over-year growth '17 versus '16 and I don’t think it will be out of line with previous years.

[David Duley:]

Okay, thank you. And then as far as the CapEx and free cash flow going forward, great year of operational cash flow and free cash flow seems like it is accelerating, could you just maybe give us what your planned CapEx might be and what kind of free cash flow would you think that would generate in '17?

[Oren Shirazi:]

So the CapEx is inline -- it’s Oren, the CapEx is in line with previously -- with the previous model that we presented and filed on November in the presentation that should be not more than $42 million a quarter between $40 million to $42 million and as you can see we already achieved it for Q4 ‘16. The cash from operations, usually it follow the revenue increase and the incremental margins that we have. One shall of course note the fact that as we released, we got about $50 million or $60 million of a customer prepayment that used in the last year and year and half to purchase additional CapEx which always great and those customer prepayment are returned to the customer based on shipments and orders of the customers. So this maybe assumed to be return to the customers over a period of between one year to seven year depend on the specific contract through shipments and depends of course of the wafer demand of the customer, maybe you can assume that averagely it’s over a three year weighted average over the three year period. So maybe if we got $50 million to $60 million, repayment of about $20 million for the entire year is reasonable if we just take this linear approach. But other than that cash from operations of course should go higher than current base line of $82 million in Q4.

[David Duley:]

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

[Oren Shirazi:]

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

[David Duley:]

Okay, thank you very much and congratulations.

[Oren Shirazi:]

Thank you.

[Russell Ellwanger:]

Thank you.

[Operator:]

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

[Richard Shannon:]

Well hi guys. I’ll add my congratulations on an excellent last year, keep up the great work.

[Russell Ellwanger:]

Thank you.

[Richard Shannon:]

Maybe just a couple of questions from me, kind of digging in a layer here in a couple of different markets and maybe I’ll follow-up the last question here on the image sensor topic. Russell curious to the extent to what you see the growth here from that space coming from the markets where you are doing relatively better like investor or medical or is there any noticeable amount of contribution from some of the other maybe newer markets I think like security or maybe the mobile space. In any way you can help us understand that would be great to hear. Thanks.

[Russell Ellwanger:]

So we have a substantial business there, a good business within cinematography and that’s growing, we are not strong into cell phones, that’s not something that we really focus on the cell phone, we do have some very high megapixel cameras that we're doing for certain smartphones, which was nothing since until we did TPSCo acquisition because it’s done in 300 millimeter in Uozu factory. So that’s a very high growth rate, but it’s not necessarily the highest growth that we have. Security is definitely growing and we stated that that’s one of our focuses of this coming year. By far the biggest growth is within the industrial and the biggest single segment within image sensor that we have is high-end photography and that’s for DSLR and for cinematography. That answers your question?

[Richard Shannon:]

Yes, that’s helpful, perfect, thank you, Russell. Maybe stepping over to the infrastructure side of your business area looking for very strong growth this year, curious whether this is -- if there is any expectations of share growth in that segments, I know you have sounds like which really only one other true foundry competitor there wondering if there is any expectation share go in there, are we expecting that 25% plus growth all without any share gains?

[Russell Ellwanger:]

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

[Richard Shannon:]

Okay, that is great. I knew it was high, but is that highest thank you for that. And maybe one last question from me guys, more of the gross margin question, gross margin topic I’m following up and one of the last questions. Again it seems like some of your growth is coming from higher gross margin areas, anyway that you help us think about how much higher image sensor as a broad category might be above your corporate average in terms fall through or is there any thought that we should entertain about being able to do at the high-end of that 50% to 55% fall through or perhaps even better?

[Oren Shirazi:]

Yes the image sensor is depends on which way but the range is between 70% or 80%. However this is just one, I mean this is part of the mix that we assumed already in the model that we presented, which resulted in that the weighted average growth is of -- the weighted average incremental margin is 55%. So for image sensor we have 70% to 80%, but we have other business which is 40%. So the weighted average mix, I mean the weighted average still the same exactly like we presented in the model 55%.

[Richard Shannon:]

Okay, fair enough guys. That’s all the questions from me, thanks again.

[Russell Ellwanger:]

Thank you very much.

[Operator:]

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

[Russell Ellwanger:]

Certainly. Again, we are always very appreciative, very excited to have opportunity to update on what the company is doing, what we've done, where we're going, as stated at risk of too many times already, 2016 was really an exceptional year for the company. But not exceptional as far as the fact that we expect it to keep going, because we do expect this type of performance to continue to propagate, but exceptional in the fact that the results were very, very strong, validation of a business model. Where we acquired very substantial capacity at very low cost. Where the agreements with the partners that we bought from or became partners with more or less cover the cost as we move forward, providing very minimal risk for a downside against running cost and allowing ample free capacity from day one. And I think that the margin increases, the net profit increase, the free cash flow increases that we saw within 2016 show that what we're doing with an analog is sustainable and doable and that the business model is very, very real. We do see 2017 for the core businesses being a good growth here. I think Cody’s question was very relevant insightful that from a direction that we are going we will need to be announcing sometime within 2017 early 2018 new initiatives to increase our capacity within this analog space and this analog model. And within a model that we are not using a very, very strong amount of investor money to establish greenfields where you have many, many years as before you get back an ROI on that capacity that you are building. So, we really -- I’m very excited about where we are at, very excited with the cash position of the company, the freedom that it gives us in moving forward to execute very, very quickly on opportunities that come our way. Within this present quarter, we have two conferences that we will be presenting at. We’re very, very happy to invite you to these conferences. One of them is the Susquehanna Conference that’s Susquehanna Financial Group, their 6th Annual Semi Storage & Technology Conference, it will be on March 9th, in New York. The other conference is the Roth Conference in Orange County the week of March 13th. We’ll give more information as the specific day of our presentation comes closure. Lastly and hopefully interestingly for all on the call and additional people interested in the company, our 2016 Business and Corporate Annual Report will be shortly available on our website on www.towerjazz.com. I think it’s a very interesting report, contains an introduction by our Chairman, Mr. Amir Elstein then an overview and business philosophy by myself and operations overview and strategy by our COO, Mr. Rafi Mor, a financial strategy and overview by our CFO, Mr. Oren Shirazi. It then goes into a technology overview and strategy by our President, Dr. Itzhak Edrei, and then goes into very specific details in 2017 focuses from each of our business unit General Managers, Dr. Marco Racanelli, Dr. Avi Strum, Mr. Shimon Greenberg and Mrs. Zmira Shternfeld for the RF HPA, the Image Sensor Group , the Power Management Mixed-Signal Group and the TOPS Business Group respectively. And lastly we have a summary of the different activities and actions that we do to show our environmental and societal awareness and programs that we do within those respects including community service from our Vice President of Human Resources, Mrs. Dalit Dahan. Hopefully, you’ll find the report interesting and insightful as to what the company is about and what is within our corporate DNA that attracts customers and creates partnerships with our customers for the long-term. Of course in the report, our detailed financial reports, although maybe the least exciting of the rest of the content. I said that for the Oren. But thank you very, very much, with that I wish you all really very safe times and look forward to update you at least at the latest at our next quarter and nominally the interactions we have at the upcoming conferences. Thank you again. Bye, bye.

[Operator:]

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