Tower Semiconductor - Earnings Call - Q2 2020

Transcript

Speaker 2

Ladies and gentlemen, thank you for standing by. Welcome to the Tower Semiconductor second quarter 2020 results conference call. All participants are currently in a listen-only mode. Following management's prepared statements, instructions will be given for the question-and-answer session. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded July 29th, 2020. Joining us today are Mr. Russell Ellwanger, Tower Semiconductor'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.

Speaker 1

Thank you, and welcome to Tower Semiconductor Financial Results Conference Call for the second quarter of 2020. 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 20F, F4, F3, and 6K filed with the Securities and Exchange Commission, as well as filings with the Israeli Securities Authority. They are also available on our website. Tower assumes no obligation to update any such forward-looking statements. Please note that the second quarter of 2020 financial results have been prepared in accordance with US GAAP.

The financial tables and data in today's earnings release and in today's earnings call also include certain adjusted financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as established with the Securities and Exchange Commission. The financial tables include a full explanation of these measures and the reconciliation of these non-GAAP measures to the GAAP financial measures. Now, I'd like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.

Speaker 0

Thank you, Noit. Thank you, everybody, for joining our call today discussing our second quarter of 2020 business and financial results. Second quarter revenues met our guidance at $310 million, resulting in EBITDA of $82 million and net profit of $19 million. We further strengthened our financial position, having achieved records in shareholders' equity and total balance sheet. During the quarter, we continued our capacity expansion plan of our 300-millimeter facility, as well as certain incremental capability enhancements in 300-millimeter and 200-millimeter, as shown by the increased levels of investment in equipment to $63 million to support existing and future capacity and technology demands. Later, Oren Shirazi, our CFO, will provide an in-depth review of our second quarter financial results, balance sheet, and main financial activities. We are guiding the third quarter to be a mid-range of $320 million, supported by higher utilization rates, which I will review later.

Addressing the COVID-19 pandemic and its effects, while viewing various regional changes in rates and impacts, we continue to ensure and are committed to provide reliable technology and manufacturing solutions, diligently taking action to reduce health and business risk to our employees, customers, suppliers, and partners. We strictly adhere to all government guidelines, and our dedicated workforce continues to meet all of our customer business needs. We have implemented many health and safety guidelines within our workplace and ensured flexibility for remote work if and when needed. Visits to and from customers, suppliers, and partners, as well as internal employee meetings, convened through video conference calls to minimize face-to-face interaction. To date, and since the beginning of this pandemic, all of our worldwide manufacturing sites operate without interruption. We have seen and continue to see no material impact on our supply chain.

We continuously monitor the situation globally and drive required measures and actions to ensure business continuity and a safe environment. Many of our measures go well beyond those required by governmental instruction and regulation. Looking at our different business unit activities within the analog IC business unit, our silicon-germanium optical business continues to show strength, driven by both 5G infrastructure and data center demand. Our second quarter was much stronger than the first quarter, and we anticipate this trend continuing through the remainder of this year and into 2021, realizing at least a 20% 2020 over 2019 yearly revenue growth in silicon-germanium output. This is due to our high market share tied to the 5G infrastructure rollout, the rebound in data center orders, and as well from what appears to be increased demand for bandwidth due to enhanced work-from-home protocols around the globe.

Considering the silicon-germanium market growth, we are in good position to support increasing demand, being in the final stages of qualifying silicon-germanium capacity at our San Antonio facility, providing further shipment capacity above the increased silicon-germanium capacity that we have built in our Newport Beach facility. We continue to invest in new technology and wins with tier-one customers. An example announced in Q2 is our partnership with Infinera to deliver an advanced 800 gigabit per second optical transceiver using our advanced silicon-germanium technology. Currently, most transceivers we are shipping are at the 100 gigabit per second with some amount of 400 gigabit per second node. 800 gigabit per second represents two-generation advancement in technology versus what most of our customers are building today, hence maintaining our long-term roadmap leadership position.

Along with advancements in silicon-germanium, we continue to advance our silicon photonics platform, expected to ramp to higher volumes in the coming years with the 400 gigabit per second node. Our mobile RF business experienced very strong growth through 2019 and in the first quarter of 2020 due to a combination of increased market share, ramp of our 300-millimeter RF-SOI technology, and overall RF market content growth with the start of 5G handset rollout. As we discussed last quarter and has been well advertised in the industry, the COVID-19 has slowed the mobile market, resulting, as per analysts, in about a 20% market pullback. A strong verification of our market increases. We forecast, although lower than our start of the year pre-COVID expectations, a 10-15% increase in mobile 2020 over 2019 revenue against this decreasing market backdrop.

We remain bullish about prospects for further growth due to 5G adoption and our strong design win pipeline, but are short-term cautious as our customers have less visibility than is typical. Our power IC business remains solid as we continue to gain overall market share despite some COVID-19-related market impacts, primarily in the automotive sector, for example, battery management products for electric vehicles. According to customer forecasts, due to our broad power IC application coverage, we should see also in this sector about a 20% year-over-year revenue growth 2020 over 2019. Last quarter, we announced a breakthrough power IC technology, Gen 6, that offers over 35% power efficiency improvement and/or equivalent amount of die area reduction at 24-volt operation through an innovative transistor design. This quarter, we have engaged with several customers on this platform and are seeing strong acceptance towards initial designs.

This new technology complements our platform leadership at lower voltage with our previously announced 65-nanometer BCD 300-millimeter process, and at higher voltage with our recently announced 140-volt and 200-volt resurf and SOI technologies. The combination of these segment-leading technologies across this large voltage range should continue to enable share gains in this very large portion of the analog market for years to come. Our power discrete business, predominantly tier-one MOSFET customers, is realizing some recovery in the third quarter of 2020. However, this business is significantly down 2020 over 2019. Our customers continue to express caution but also continue with us on advanced MOSFET co-development. Moving to our sensor business unit, we forecast single-digit year-over-year growth in spite of several segments being strongly adversely impacted by COVID-19. For example, dental X-ray sensors, where we have major market share.

The impact is mainly seen in the form of customer requests to push out orders. Dental clinics were closed for a long period and are still not back to full speed, hence customers are very inventory cautious. Industrial sensors, namely manufacturing line inspections, are also down as a function of reduced new manufacturing line build-out. Due to our very strong CIS platform and compatibility of fingerprint sensors, namely the under-OLED one-on-one sensor and the under-LCD lens-type modules, we were developed and qualified in very short time. We target our first volume production revenue in the fourth quarter, wrapping throughout 2021. Our time-of-flight program is moving along very well. We are prototyping the first sensor to our lead customer this quarter and plan to ramp to production in the first half of next year.

This would be our first product moving to mass production, utilizing our stacked wafer BSI pixel-level bonding platform. In the area of non-imaging sensors, we have started the production ramp of a novel MEMS microphone product line and expect this business to grow nicely. In addition, we're making progress in several fronts of next-generation displays, which we are developing with leaders in the industry, expecting to ramp to production as early as 2022. Looking at utilization rates during the second quarter, we saw the following. In Migdal HaEmek, Israel, Fab 1, our 6-inch factory, we were at 60% utilization, similar to last quarter. Fab 2, the 8-inch factory, was at 70%, similar as well to last quarter.

Newport Beach, California, was at about 70% utilization, showing substantial increase as compared to the previous quarter and presently moving towards our 85% utilization model due to the line being loaded with a strong increase in demand for silicon-germanium for 5G infrastructure and data centers. Our San Antonio factory was at 70% utilization, an increase as compared to the previous quarter. Looking at our TPSCo fabs in Japan, utilization for the 8-inch foundry business was at about 60%, an increase as compared to the previous quarter. Our 12-inch foundry business utilization was at 85% at our capacity utilization model. The capacity expansion project for this 300-millimeter fab is progressing according to plan, hence being able to support additional wafer starts and increasing the capacity output of the 85% utilization model.

To summarize, we are motivated with the degree of customer interaction and acceptance of our recent developments, namely in advanced silicon photonics, in very high-speed silicon-germanium, and the entire backside illumination and stacked wafer sensor offerings, as well as our newly served markets in display. These activities, in addition to our present strong and growing core business, back our confidence in our strategy and roadmap and will be additionally accretive when all end markets revive to previous patterns. We focus to continue smooth production and global capacity assurance in order to meet current and forecasted demand. Our thoughts are with the people affected and the healthcare professionals working tirelessly, helping those in need, and wish everyone safety, security, and good health during this challenging time. With that, I'd like to turn the call to our CFO, Oren Shirazi. Oren? Welcome, everyone, to our call today.

To start, and in relation to Russell's description of COVID-19, I am satisfied that all our manufacturing fabs operated during this entire period with no interruption. We have not missed any day of production or shipment and have succeeded in managing our supply chain efficiently to avoid any raw inventory shortage. We completed the quarter presenting revenue of $310 million, achieving quarter-over-quarter and year-over-year revenue growth, as well as quarter-over-quarter margin growth. As I will show in my balance sheet analysis, the company is in a very strong and stable financial and cash position. Our balance sheet as of June 30, 2020, reflects a current assets ratio of 3.5x. We achieved record shareholders' equity of $1.39 billion, while total balance sheet and total assets exceeded $2 billion. I will now provide the P&L highlight for the second quarter and then discuss our cash flow and balance sheet financial statements.

Revenues for the second quarter of 2020 were $310 million, an increase as compared to $300 million in the first quarter of 2020 and $306 million in the second quarter of 2019. Gross profit, operating profit, EBITDA, and net profit for the second quarter of 2020 are all higher as compared to the first quarter of 2020. Gross and operating profit for the second quarter of 2020 were $58 million and $22 million as compared to $53 million and $16 million in the prior quarter, respectively representing $5 million incremental increase each or 50% incremental gross margin over the $10 million higher revenue. Net profit for the second quarter of 2020 was $19 million or $0.18 per share, basic and diluted, an increase as compared to $17 million or $0.16 basic and diluted earnings per share in the prior quarter.

The increase in income taxes expenses in the second quarter of 2020 P&L as compared to the prior quarter is mainly due to the higher revenues we had from our Newport Beach fab, as well as the Japanese factories, consistent with Russell's report on the increased utilization rates in Newport Beach and Japan, where the tax rates vary from 21% to 30%. This increase in the Japanese factories' revenue and utilization also resulted in higher non-controlling interest amount for the second quarter of 2020 P&L as compared to the previous quarter. Comparing to the second quarter of 2019, gross and operating profit for the second quarter of 2020 were each $4 million higher as compared to gross and operating profit of $53 million and $18 million, respectively, in the second quarter of 2019.

Net profit in the second quarter of 2019 was $21 million or $0.20 basic and diluted earnings per share, which is a $2 million increase in profit or $0.02 per share higher than compared to $19 million or $0.18 basic and diluted per share in the second quarter of 2020. From a cash flow perspective, in the second quarter of 2020, cash flow generated from operations was $67 million, while investments in fixed assets net, mainly for CapEx, were $63 million, which included payments related to the 300-millimeter facility capacity expansion program. In addition, we repaid $5 million of our debt. In the first half of 2020, cash flow generated from operations was $135 million, while investments in fixed assets net were $125 million, which included also payments related to the 300-millimeter facility expansion in Japan.

We also repaid, in the first half of this year, $29 million of our scheduled debt. Looking at the balance sheet, we present a strong and stable financial position measured as follows. Shareholders' equity reached a record of $1.4 billion. Total assets and total balance sheet totaled $2 billion. Current asset ratio, defined as current assets divided by short-term liabilities, was 3.5x. Short-term debt, in the amount of $80 million, includes $38 million principal payment of debenture, Series G, to be paid during the next 12 months, as well as $42 million current maturities of bank loans and capitalized liabilities. In relation to the company's rating, in May 2020, S&P Maalot, an Israeli rating company that is fully owned by S&P Global Rating, completed its annual rating review for the company and affirmed a corporate credit rating and bond Series G rating of ILAA minus.

I would now like to describe our currency hedging activities. In relation to Japanese yen, since the majority portion of TPSCo revenue is denominated in yen and the vast majority of TPSCo costs are in yen, we have a natural hedge over most of our Japan business and operations. In order to mitigate part of the remaining yen exposure, we executed zero-cost cylinder hedging transactions. These zero-cost cylinder transactions hedge currency fluctuations to be contained in a narrow range as compared to the spot exchange rate. Hence, while the yen rate against the dollar may fluctuate, the impact on our margins is limited. In addition, in relation to the Japanese yen impact on the balance sheet, we have a natural hedge on JPY cash and JPY loans balances to the extent the loan amount does not exceed the cash amount.

This helps to partially protect us from potential impact of yen fluctuations. Lastly, in relation to fluctuations in the Israeli shekel currency, we have no revenues in this currency. Since approximately 10% of our costs are denominated in the Israeli currency and we have some liabilities denominated in shekel, we also hedge a large portion of this currency risk by, A, engaging zero-cost transactions to mitigate exposure resulting from our shekel-denominated cost, and, B, investing a portion of our cash in Israeli marketable securities denominated in the Israeli currency to mitigate exposure resulting from our shekel-denominated liabilities. The last note on our share count, as of June 30, 2020, we had 107 million outstanding ordinary shares, and the fully diluted share count was 109 million, same figures as in prior quarters. I wish to turn the call back to the operator. Operator? Thank you.

Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Rajvendra Gill of Needham & Company. Please go ahead. Yes, thanks for taking my questions. I appreciate it. Just a question on the organic sequential growth and organic year-over-year growth rate. I was wondering if you could provide that information given some of the end markets that you talked about. I think Russell talked about that most of the organic growth was in the 5G in Newport Beach for the data centers and 5G.

In Wazu, it's for the SOI. Russell, if you want to talk about. No, I'm talking about the actual number. What was the organic sequential growth number and the organic year-over-year growth number? We'll get back to you on that very shortly. I don't have it off the top of my head. Okay. You're seeing some strength in 5G on the 5G and data center, and that's continuing. Where are we in terms of the kind of capacity expansion to support this demand? You also mentioned that the San Antonio facility is above Newport Beach. Maybe you could talk a little bit about what are the steps you're taking there to make sure you have adequate capacity?

If you recall, we built out quite a bit of capacity in 2018 and stated that we would be building additional 30-plus capacity in 2019 at the time that the data center had pulled back a bit. We did complete the capacity build-out. As stated, we also, within that, built capacity in San Antonio. Off of the present start levels, we could go somewhere about, I'd say, 30%-35% higher off of the right now very high start levels that we're at. Okay, great. On the mobile side, you talked about that the mobile market kind of slowed down given what's happened with COVID. I'm not sure I heard it. Are you confirming your 10%-15% year-over-year growth in RF-SOI despite the market pullback? I didn't hear that part.

How is 5G helping you kind of offset that potential unit weakness in the overall market? Yes, we are restating a growth of 10-15% year-over-year in RF-SOI. That is what I stated and stating that that was against a backdrop, according to analysts, of a market that has about a 20 percentage point pullback. I think that that is quite substantial and certainly indicative of gaining substantial market share. The 5G rollout is certainly helpful because of more content. I do not have tremendous granularity at this moment as to how many parts are specifically going into a 5G phone versus LTE. As stated, as the 5G rollout continues with the percentage of content growing within that, that has a benefit for everybody.

I believe that the 10-15% year-over-year revenue increase is very, very much driven by the market share increases that we have. As stated, we had started the year believing it was much, much higher, but it has pulled back. The market has pulled back. In spite of the market pulling back, we will still recognize growth. Thank you. To your previous question, apologize. On the year-over-year, it was a 0% on the organic because of a pullback very strong within discretes. The present outlook would be a 5% increase in organic quarter over quarter in Q3 versus Q2, but still backfilling against a substantial decrease in discrete market. The next question is from Ahal Sultania of Credit Suisse. Please go ahead. Hi, good afternoon. Russell, can you help us understand these new contracts or projects that are ramping up on the sensing side?

You mentioned the fingerprint and the time-of-flight projects. Can you provide a bit more color as to how should we think about the size of those opportunities? Is it confined to one customer at this point, or are you already engaging with multiple customers on those two design wins? How should we think about that opportunity in 2021 when those projects start to ramp up? Secondly, if we think about the RF part of your business for mobile, specifically smartphones, can you help us understand what exactly are you involved in on the RF side? Is it switches? Is it LNAs? Is it multiplexers, duplexers? What kind of products are you making? How should we think about the adoption of RF-SOI in terms of smartphones going forward in 2021?

Is it going to be a significant part, or is it still going to be a fairly small part of mix within total smartphones, 5G smartphones? Okay. Long question. I recall the second part very clearly, and that was, what are we doing within the mobile platform for the RF content? On that, we serve a variety of different power amplifiers with silicon germanium, including standalone low-noise amplifiers. We have combined switch LNAs that we do with 65-nanometer RF-SOI. We have a lot of two-way radio switches that we're doing in general at 200 and 300 millimeter, and that's all RF-SOI. We have LNA switches and the PA controllers. That's the bulk of what we're producing within the RF content. And antenna tuners, sorry, also antenna tuners. Within the antenna tuners, we have, in addition, a line that we're producing with MEMS. Yeah.

What I was trying to understand—that's helpful, Russell. What I was trying to understand is that, obviously, in those categories, whether it's PAs or LNAs, there is a market which is split between gallium nitride, silicon germanium, RF-SOI. How are you thinking about the adoption of these different technologies? What kind of suits you the most when it comes to where the market moves, what kind of chemical compound the market adopts? Certainly, the gallium arsenide PAs are a mainstay for a variety of applications. The SiGe PAs are aimed at different activities, and a lot of that deals, for example, with Bluetooth PAs. The LNA itself and the standalone LNA banks are, I believe, predominantly done in silicon germanium, and that's where we have a very strong capability and offering.

The integrated CMOS LNA with integrated LNA switch is done with RF-SOI in our case. The PA controllers are RF CMOS. I believe we're standing very strong in all of the offerings that we have there. On the switches themselves and antenna tuners, we're dealing with RF-SOI, and I believe that the whole market is with RF-SOI. If you recall, some four or five years ago, plus minus, that was predominantly in gallium arsenide PHEMT. That moved totally to the RF-SOI because of the reduced cost and improved performance. I think at this point, all switches for all practical purposes are done with RF-SOI. As far as is this a significant amount of business for us? It certainly is.

It's a big business, and we see 2021, as stated, with a 20-point pullback, we're seeing a 10-15-point increase in revenue year-over-year. We stated that 2019 over 2018, we saw an over 50% increase in revenue year-over-year, which is certainly much, much bigger than the market itself grew. Obviously, a function of market share. The 35-point delta this year against the market pullback and what we're showing, obviously, also indicative of market share increase. Our customers are very strongly indicating a return to not just normalcy, but a return to growth in the beginning of 2021. They're very, very bullish about their forecasts. I believe that it'll be a very strong growth engine for us throughout 2021 and an area that we're continually working on to actually increase capabilities and capacities. Does that answer your second question? I hope it does. Yeah. Yeah.

Yeah. Yeah. I think that was really helpful, Russell. Coming back to the first one, that was on fingerprint and the flight design wins that you talked about. What is the scope? What is the size of the customer traction that you're seeing, and how should we think about that opportunity in 2021? It's multiple customers that we're doing with the fingerprint, both the one-to-one under OLED and the other more standard under LCD fingerprint. Multiple customers where you're looking at several tens of thousands of wafer opportunity within that space. It's a question now of us showing our capabilities. We're stating that the first volume productions will be shipped in the fourth quarter. Those parts that we're shipping have to have differentiated benefit for the customer. The customer has to show differentiated benefit within their respective markets to grow.

It can be quite substantial. As stated, for us, one of the beauties of that market is that we were able to very, very quickly develop and qualify flows because of a very, very strong and diverse CIS core that we have throughout the company. So CMOS, I mean, sensor throughout the company and take advantage of a market need. As far as the time-of-flight, there's a variety of applications we're going out for time-of-flight. It's predominantly at 300 millimeter, and it's focused with backside illumination and stacked wafers. That is also more than one customer with blue chip customers that are signed up on long-term agreements. Of course, we have to perform, but that is a very, very substantial market for us. Okay. That's really helpful. Thanks, Russell. Thank you. The next question is from Mark Lipesis of Jeffries. Please go ahead. Hi.

Thanks for taking my questions. Russell, first one, I have a couple of questions. First one for you, I think. When you talk about visibility from your clients, are you of the view that your clients are taking orders from their customers on a non-cancelable, non-refundable basis? Is that how you guys are normally operating? On the same topic, when you're getting orders from customers, are they asking for short lead time windows, or are they asking you to run hot batches of wafers through your fabs because they also are getting orders with requests for short lead times? Good questions, Mark. The answer to the first question is the contracts that we have really are very dependent upon the customers and the type of business we're doing.

Within the power discretes, our customers are, for the most part, held to a forecast very closely. That does not mean that we do not give a lot of leeway. It is partnerships. Within what we do with those discretes, it is more or less sole sourced, everything that we sell. The ability then to be malleable if someone's demand is really down and to hold them to a previous forecast, nominally, that does not help either person if they do not need the wafers. You work out a deal, and you try to come up with something that is a win-win for both people.

In the case of our standard foundry business, from the moment that we start wafers, customers must take the wafers or at least take them to an inventory point of when they say, "Stop the wafers." Once a wafer is started in the fab, our normal T's and C's is that, obviously, if a customer wishes to cancel something, they can, but they would take it to the inventory point of when they would cancel it, which, for the most part, does not make much sense for a customer. Now, depending on the customer themself, the T's and C's can vary as to if they want to put something on hold, how long it can be on hold for before they either have to pay to that inventory point or until the wafers have to be completed through the line.

That depends on the customer, the T's and C's, the relationship, and the amount of business. That's predominantly how the T's and C's would set about customer giving a purchase order. For the most part, a purchase order can be canceled before the wafers are started without any liability. That was that part. Now, as far as our customer visibility, at this point, especially in the mobile sector, we have—well, not just especially there. I think across the board, we have very good interactions and very candid updates, forecasting. That's very accurate with our customers. It's rare that a forecast changes drastically within a four or five-month period. What our mobile customers are telling us now, and it's not a fact of us not having visibility with them. It's them having less visibility on their customers than they've had in the past.

That's where we stated that we're cautious about the mobile side in the short term because our customers really are not stating the same degrees of visibility that they had in the past. I don't think that that's really the case with other customers, for the most part. As stated, one of Roger's questions was on the organic growth. We have stated very clearly that, and it's known in the industry, that the power discrete, the MOSFETs, are down pretty substantially, and it's starting to come back, but it's down substantially. That business is down several tens of millions. We are working with them when there are upside capabilities, and when they see that, they might ask for a short lead time.

It is to the benefit because they have an upside of some certain SKU, of some certain amount of wafers that we'll go ahead and we'll take. I believe anytime, especially in weaker markets, customers, as soon as they have an opportunity, they get very excited to do that opportunity and to be able to, at any given time, start wafers and expedite well below the normal cycle times that you have in the factory. It only enhances the relationship because many times, if there is an immediate need that they need to pull in for, if they do not supply that business, it is either lost because the opportunity of the end customer is gone, or the end customer might try to buy from someone else. Anytime that we get an urgent upside request, we'll go after it as strongly as we can.

Now, that is not necessarily in times when the market is weak. In times when the market is very strong, it's the same type of thing. In fact, I would say maybe in times when the market is strong, there's more upside requests because the end customer or integrator, if you will, has an opportunity that they don't see how they can get fulfilled because everyone's supply chain is full. Those are where you sometimes get very, very big upsides if you can somehow pull off either a substantial amount of pull-ins or start wafers and ship them well under the normal lead time and cycle times of the factory. I think, is it steady state? Sometimes it's more, sometimes it's less.

The only thing that we're seeing right now that, going back to the first question on POs and visibility, our customers in the mobile space are saying that they have less visibility. We have seen a very, very big reduction in the forecast of the image sensors for dental X-ray. That is one of the areas where it is very, very nice that, other than the power discretes and this predominant portion of the image sensor business, as well as if we look at some industrial sensors for manufacturing lines. Even with that, the CIS business is single-digit up this year or should be, according to present forecast, which shows growth in other markets other than that.

When you talk about organic growth, if you have certain markets where you have a fallout because of the environment of many tens of millions of dollars, in order to have a 5% organic growth that we're talking about, you have to have very, very big market show wins in other areas because they obviously have to first make up for the gap of the segments that are down. Then themselves, a 5% number is a nice % number of growth. If everything was as per normalcy and the X-ray was where it has been in the dental X-rays, I'm sorry, dental X-rays and discretes where they have been, the organic growth would be extremely high. It is what it is.

We are very fortunate, I think, that we are very diverse in our end markets, that we are not restricted to any single market, and that even in the markets that are pulling back, a big market that we serve, such as the mobile, that our market share growth is big enough that we see this 15-point increase year over year versus the 20-point down that the analysts speak about. Hopefully, that answered your question. I tried to give a thorough answer. Yeah. That is great, Color. Thank you for that. I had a follow-up, if I may. A question on the automotive business. Can you remind us roughly what your automotive exposure is? Is it mostly in discretes? The reason I ask is that it seems like a number of companies are calling Q2 the bottom for the automotive business.

It seems like the factories are coming back online. A large bank in the U.S., I think last week or two weeks ago, reported June quarter auto loan originations at the highest levels ever. It seems like automotive is somewhat potentially spring-loaded and ready to go once the factories come back online. I'm wondering just if you could remind us the exposure there, whether the customers are starting to give you any visibility in that vertical market. That's all I had. Thank you. Good question. As you're well aware, we have a long-term agreement with Maxim in San Antonio. A good portion of that factory serves automotive. That's known. I mean, Maxim is a big automotive player, a very good automotive player. We can't say exactly how much of that is serving automotive or not serving automotive.

In that regard, the contract is a very solid contract. We would not see something going down or coming back up as it is a contract on an amount of volume that is purchased. I think Maxim just released they had very good financials, I believe. I think that is a good thing. That is one area of automotive. In the other areas of automotive that we do, we have silicon germanium for safety. We had press release that we serve Dental and Toyota with SiGe for radar. I believe that we see good visibility and very strong optimism for upticks there. The other area that we serve very strongly, as stated in the call, is electric vehicle battery management. I have not yet seen a big rebound in that.

We have a diversity of other automotive products that we make, but any single one in any single end market is not necessarily big, but the combination is reasonable. Great. That's very helpful. Thank you. The next question is from Richard Shannon of Craig-Hallum. Please go ahead. Russell, thanks for taking my questions as well. Maybe I'll follow up on the topic of RF-SOI. Obviously, you had a nice growing share in that business a few years ago. I think due to perhaps some aggressive competitive pricing, you backed off a little bit here. Now you've really seen nice resurgence here, including with some share gains here. Do you know what your share position is, relatively speaking? If you do, can you share it with us? Is there any natural limit to where that can go?

The second part is easier to answer. The natural limit, I would say not. We have extremely strong advanced flows at 200 millimeter that are being used for some of the most advanced activities in the world. We have a, so 200 millimeter, obviously, we have a lot of factories—a lot. I think a reasonable amount of factories at 8 inch. The utilization numbers that I just gave was, for example, the factory in Migdal HaEmek was at 70% utilization. Some of that delta of the 70 to the model is because of a downtick right now in RF-SOI. We can grow that. We have also talked about the fact of adding capability CapEx at 200 millimeter. A reasonable amount of that capability CapEx is, again, for very advanced 200 millimeter RF-SOI capabilities and platforms.

I don't see it at 200 millimeter that we have really a foreseeable boundary that we can't get beyond. I think from the growth that we've had, we can continue to grow even at last year's rate at 50% for a number of years and not run into a gate, depending on how we would like to set up the factories on the mixes that we're running in the factories. The 300 millimeter is a little bit of a different story. We've expanded our 300 millimeter capability. We'll probably need further 300 millimeter capability in the end of 2021, 2022 timeframe for not just RF-SOI, but for other areas as well. At this point, without further expansion, either organically or inorganically, whatever form that might take, we would probably hit a wall at the end of 2021 on 300 millimeter growth in RF-SOI.

That is not our plan to hit that wall. Okay. I guess that leads to my last question here, Russell, on 300 millimeter. How do we think about that expansion here, whether it's internal and at Uzod or maybe some other internal approach versus getting some access externally? I know you've talked about a prior partner who I think has recently dissolved or disintegrated. That seems to take that opportunity away. Where do you think you're going to get that, and how soon do you need to make some sort of decision or activity here that will kind of provide that certainty as you get to calendar 2022? Yeah. I'm not sure what you're referring to about having talked about a partner that dissolved away. I don't know of any partner that we talked about for 300 millimeter publicly, period.

I don't know of any that's dissolved away. I'm not sure, Richard. Maybe we can talk about that later offline if you have some questions there. I don't believe we ever said something like that. The organic growth, we've done a lot of internal exercises as to what it would take and cost to grow a substantial amount internally. We could. We can go almost to 3x the present capacity with organic investment, and we might go ahead and do that. It is expensive. We're also pursuing other inorganic activities of a variety of different models, and we continue to pursue those.

More than that, I can't state without getting into things that I don't want to release that are not yet released, some because of maybe agreements of not talking about things before they're a done deal, and others because it doesn't make a lot of sense to talk about things before you know that they're going to happen. Obviously, we've had, I think, a good track record of M&As that were beneficial to both the seller and the buyer. We're working on those models continually, be it under whatever condition it might be. At this point, we were asked last quarter, I believe, in the Q&A if the COVID environment enhances or decreases the M&A activity landscape. I would say, from an opportunity standpoint, it enhances it. From a get-the-deal-done standpoint, it decreases it, right?

It's not simple to complete a deal when you're not face-to-face with people if that's where you're at. Are there things we're working on? Mr. Ellwanger, your line has been muted. I'm sorry. I don't know where that cut off. The phone muted automatically. I don't know why. Could you please tell me where you stopped hearing me? I do apologize. Russell, I think it was about the last five to eight seconds of what you're—Oh, good. Okay. What I was stating is we have, I believe, of plus-minus or six plus-minus months to make a strong decision if we don't move forward in an avenue of doing things inorganically to invest organically. That's specific at the 300 millimeter level. I always appreciate the detail. You're very welcome. Thank you. I appreciate the question. Thanks. The next question is from Chris Sancar of Cowan.

Please go ahead. Yeah. Hi. Thanks for taking my question. I have two of them. Russell, if I recollect correctly, I think in the prepared comments, you said that your silicon germanium revenue output is going to grow 20% year over year. Is it predominantly driven by the 5G data center ramp, or are you also gaining market share on top of already high two-thirds market share in that segment? You are correct. We enjoy a very, very high market share. There are more customers that come into the market, and those that enter into the market are not yet necessarily very, very big on a revenue basis. In increasing market share on a revenue basis, I do not believe that we have increased our market share substantially as we already enjoy a very, very high market share percent.

If you, for example, go from 60% to 65%, now that's a 5-point. It's a 12% increase in share. I don't know. It's a little bit hard to measure. We do enjoy a very, very high market share within the high-end 5G optical. That being said, the growth that we see really is around 5G built out with existing customers and certainly data center, very strong with existing customers, as well as other activities with data streaming. Those are the major reasons that we see the growth right now. Got it. Got it. That's very helpful. Just as a follow-up, I know it's not a big part of your business today, but I think end of last year, you guys announced a partnership with Aledia on micro LED.

When do you think, from a realistic standpoint, that business takes off, or when do you think micro LED gets into mass production? I think that that's not unfair for you to ask me at all. It would be improper for me to answer it. Aledia is the only press-release customer that we've talked about with nanowire, micro LED, if you will. Anything that I would say there is very related to them. I don't think that I should talk very specifically about any single customer's market. I think that that would not be proper for me to answer. If I was Aledia, I probably wouldn't be very happy if somebody was talking about something that could be reflected back to be my market very strongly. I apologize, but I don't think it's proper for me to answer the question.

Talking about Aledia, however, just specifically, I think it's an incredible technology, and I think they're moving along very well. Fair enough. Fair enough. Thanks, Russell. The next question is from Lisa Thompson of ZACKS Investment Research. Please go ahead. Hi, Oren. I just have a quick housekeeping question. You talked that sales at Newport Beach and Japan are increasing substantially. Does that change your thinking on the tax rate this year at all? Is it still 4%? Yeah. I think you can already see that in Q2 financials. We showed very nice, very positive, and good incremental gross profit margin and operating profit margin and EBITDA margin incremental to 50-60% because of this 5G and also Japan, like you mentioned. Indeed, you see that the tax line went up because—I also refer to that in my prepared comments.

This is why I refer to that. Indeed, the increase associated with Uzod, the 300 millimeter RF-SOI and 5G is in sites which have tax rates of 21%-30% as opposed to Power Discrete and TOPS business that was more in Israeli sites that had much less tax rate. Okay. The corollary to that is we should expect minority income to increase sequentially as the year goes on? Yes. Yes. Again, the gross and operating and EBITDA incremental margins will be better than the average. There will be an increase to the tax and non-controlling more than the model. Eventually, of course, all that is very beneficial to the net profit because the growth is in the most high-margin business units that we have. Right. Okay. Great. That's all I have for questions. Thank you.

The next question is from David Dooley of Steelhead Securities. Please go ahead. Yeah. Thanks for taking my questions. I was just wondering, in the second half of this calendar year, in the September and December quarters, what would you expect the CapEx levels to be? Will we go back down to the $45 million run rate, or will we stay at these elevated run rates that we're currently running? Yeah. We will stay in this level and even go up. As we mentioned already in the last year, once we approved the—actually, we released it in July last year, the $100 million CapEx for Uzod. And we also spoke about additional CapEx for the BSI, backside illumination, for Japan. Also, we spoke about QT9. I think we said $20 million. All in all, it's more than $120 million CapEx that we are buying to satisfy existing demand.

Those tools, actually, almost all of them already arrived and are in final installation phases, some of them already installed. This payment of $120 million is, in the beginning, we were thinking it will be spread more linearly in this year. As you see from the financials, you can assume that it had less than 50% of this amount already in Q1, Q2 was paid. A little bit more than 50% of this amount will be added to the $42-$45 million regular model. You can expect for Q3, Q4, in addition to the regular model, more than 50% of the $120 million, which means that it's a little bit higher amount than was in Q1, Q2. Okay. Okay. What can we expect for gross margins in the third quarter? Okay.

You should expect that whatever we had in Q2, Q2 gross margin, the baseline against the $310 million revenue. We mentioned that the increase for the mid-range gardens, it's a general $10 million for the revenue. We mentioned that it will be mainly from 5G and Uzod, which means that it's 50% plus or even 60% incremental gross margin. Okay. The drop rate should accelerate here in the upcoming quarter because the mix of 5G is higher. Yes. Okay. Final thing from me. Could you just give us the dollar revenue number for 5G now so we have a base number? And also, did you have any 10% customers during the quarter? Thank you. Yeah. On the 5G, it's about $40 million. I don't want to give the exact number. It's a little bit north to $40 million besides your revenue.

The second question, a 10% customer. Other than Panasonic, we do not have. Thank you. Panasonic is, I mean, I guess you know that it is between $70-$85 million per quarter. So it is about 25%, right? Thank you. There are no further questions at this time. Mr. Ellwanger, would you like to make your concluding statement? Certainly. Firstly, I thank everybody for their time and their interest in the company for attending the call. I really thank the analysts for their questions. Thought they were very good questions. Enjoyed the dialogue. In the short term, we will be participating in the Jefferies 2020 Virtual Semiconductor IT Hardware and Communications Infrastructure Summit again September 1st and 2nd. We will also be holding virtual NDRs during September and October for which additional information will be provided shortly.

Just as a very last comment, although times are a little bit difficult right now, we obviously stay very positive and optimistic about the ability of people to pull together and make things happen. As a company, we see that very strong in the company. We've been able to continue with all that we can control or attempt to control and I think execute pretty flawlessly. We've completed our semi-annual global business alignment meeting within the past several weeks and very encouraged with how we're sitting with our customers, with the excitement of the market, with existing and new platforms, and the overall partnership within the company and within the company with the customers.

We look forward to completing the year strong and to seeing a very strong resurgence as everything gets back to previous trends and patterns and having the market share growths be able to be very, very evident on top of a core business that's back at normal run rates. With that, I thank you all very, very much and wish you to stay safe and healthy. Thank you. This concludes the Tower Semiconductor second quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.