Categories Earnings Call Transcripts, Technology

Tower Semiconductor Ltd  (NASDAQ: TSEM) Q1 2020 Earnings Call Transcript

TSEM Earnings Call - Final Transcript

Tower Semiconductor Ltd  (TSEM) Q1 2020 earnings call dated May 13, 2020

Corporate Participants:

Noit Levy — Vice President of Investor Relations and Corporate Communications

Russell Ellwanger — Chief Executive Officer

Oren Shirazi — Chief Financial Officer and Senior Vice President of Finance

Analysts:

Cody Acree — Loop Capital — Analyst

Rajvindra Gill — Needham & Company — Analyst

Mark Lipacis — Jefferies — Analyst

Richard Shannon — Craig-Hallum — Analyst

Krish Sankar — Cowen — Analyst

Lisa Thompson — Zacks Investment Research — Analyst

David Duley — Steelhead Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Tower Semiconductor First Quarter 2020 Results Conference Call. [Operator Instructions] Following management’s prepared statements, instructions will be given for the question-and-answer session. [Operator Instructions] As a remainder, this conference is being recorded, May 13, 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.

Noit Levy — Vice President of Investor Relations and Corporate Communications

Thank you, and welcome to Tower Semiconductor financial results conference call for the first 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 Form 20-F, F-4, F-3 and 6-K filed with the Securities and Exchange Commission as well as filings with the Israeli Securities Authority. They are also available on our website. Tower assumes no obligation to update any such forward-looking statements.

Please note that the first 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 this earnings call also include certain adjusted financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as established with the Securities and Exchange Commission. The financial tables include a full explanation of these measures and 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.

Russell Ellwanger — Chief Executive Officer

Thank you, Noit, and thank you, everyone for joining our call today, discussing our first quarter 2020 business and financial results.

First quarter revenues met our guidance at $300 million, resulting an EBITDA of $73 million, net profit of $17 million. During the quarter, we began to implement the capacity expansion plan of our 300mm facility, as evidenced by the higher level investment in equipment to $63 million. This activity supports existing and future demand, which we see from our customers for our various 300mm platforms, which exceeds our current capacity with an expected increase in shipments beginning in the third quarter of this year.

We have maintained our strong balance sheet and financial position. Later, Oren Shirazi, our CFO, will provide an in-depth review of our first quarter financial results, balance sheet and main financial activities.

We began 2020 with the pandemic that has grown worldwide, vastly impacting the global business and economic environment. COVID-19 has created new and considerable hurdles, forcing us together with the entire world, to modify and implement a new mode of life, and with that, a different mode of work.

As responsible world citizens with factories, employees and customers spanning many geographic regions, we continuously track the coronavirus pandemic outbreak and are proactive smart on all fronts to ensure the health and safety of our employees while maintaining seamless operational supply chain, committed to provide reliable, state-of-the-art technology and uninterrupted manufacturing solutions to answer all our customer needs.

Each of our sites corporate-wide is taking measures and actions in alignment with the regional government instructions and for which in many cases, we have gone well beyond with additional precautionary steps in order to ensure the health and safety of our employees and the success of our business.

Within these activities, we implemented a work-from-home policy for all functions that can be performed remotely. For on-site, we implemented multiple protocols, including social distancing, minimizing frequency and attendance of in-person face-to-face meetings, frequent cleaning of all public areas, including intense comprehensive cleaning of all heavy traffic areas before and after shift changes, hygiene education, wearing masks while being at the facilities, implementing automated temperature measurement upon entering the facilities and video conferencing with customers and business partners rather than face-to-face meetings. In addition, all employee travel had been suspended.

Supply chain performance has been flawless. We have increased inventory of indirect materials and silicon, all supply chain materials are without interruption. There are certain challenges, but all have been and continue to be mitigated well. Of course, we will continue to monitor, assess and focus on appropriate actions as needed.

From a business demand perspective, the first months of the year were stable and even growing. Recently, we’ve seen decreases in customer forecasts for some end markets, whilst the demand for other end markets grow. I will now provide detailed overview of our different business unit activities.

To begin with the Analog IC business unit, our mobile RF business experienced very strong growth through 2019, and remained on the same growth trajectory for the first quarter of 2020, due to a combination of increased market share, ramp of our 300mm RF SOI technology and overall market content growth with state-of-the-art 5G handset roll outs.

As has been well published, COVID-19 has slowed the mobile market and we are seeing this reflected in customer forecasts. Present customer demand profile dictates a lesser degree of mobile growth for 2020 than our beginning of the year expectations. We maintain our technology leadership and market share increases, as well as our increasing utilization levels of the 300mm capacity.

Different than our RF mobile business, our infrastructure, silicon germanium optical business was weak through 2019, as the data center market was undergoing an inventory correction. Starting late in 2019, we reported a resurgence of orders, driven primarily by optical fiber communication used in 5G infrastructure. We are happy to report that this trend is accelerating, and we now also see data center orders rebounding. Based on customer forecasts, we anticipate strong quarter-over-quarter growth in this market through the remainder of 2020, helping to offset other COVID-19 related weaknesses.

We also continue to invest in new technology and win Tier 1 customers. An example announced in our first quarter is our partnership with Renesas in bringing to market advanced satellite terminals with our silicon germanium technology. Also, we continue to make progress with prototyping next-generation optical transceivers at 200-gigabit, 400-gigabit and even 800-gigabit per second with our latest 5G technology H5, as well as with our silicon photonics platform.

After a strong growth in 2019, our power IC business remains good despite some COVID-19 related market impact, specifically in the automotive sector and battery management products. New product ramps in the second half of 2020 are expected to mitigate such COVID impact as we continue to gain market share in the broader power IC market.

This quarter we announced a breakthrough power IC technology Gen6, that offers over 35% power efficiency improvement and/or equivalent amount of die-area reduction at 24-volt operation through an innovative transistor design. We have provided initial design kits to early adopters and are seeing very strong interest in this new 200mm process. This new technology complements our platform leadership positions at lower voltage with our previously announced 65-nanometer BCD, 300mm process and at higher voltages with our recently announced 140-volt Resurf and 200-volt SOI technologies.

This completes a revamp of our offering across a wide range of voltages that covers most of the power IC market and should enable share gain in this very large portion of the analog market for years to come. Moving to our Sensors business unit, our development focus is on two major technologies, which should enter production this year and high-volume production in 2021, optical fingerprint sensors for smartphones, both lens type or under LCD displays, and one-to-one type for under OLED displays on our well-established 0.18 micron 8-inch wafer CIS technology.

We are prototyping such projects with several customers. To support the high volume required, especially in the one-to-one under OLED sensors, we are cost qualifying our CIS technology among our 8-inch fabs. Our second focus is time-of-flight sensors based on our state-of-the-art stacking wafer technology, and global shutter Pixel in our 65-nanometer, 12-inch wafer CIS platform. We are working with two market leaders on this technology and more prototype early next year. These sensors are targeted mainly for face recognition applications in the mobile market, as well as in payment points, but also as front looking cameras for gaming, commercial and AR type applications.

In parallel, we are engaged in several programs of large X-ray sensors, some already moved to production and next generation industrial sensors on 300mm using our small state-of-the-art global shutter pixels. Our stacked copper-to-copper bonding backside illumination wafer technology is the basis for many new exciting products including the time-of-flight mentioned earlier, global shutter industrial sensors and high-end photography sensors, giving extremely low dark current values and enabling fast sensors of continuous 1,000 frame per second of full resolution around 20 mega pixel high end sensors.

As per end markets that are impacted by the coronavirus, within the last few weeks, we have seen a drop for X-ray sensors, serving the dental market. Customer developments have not been impacted. For the TOPS business unit, where the business model is flow transfer and customer co-development activities, the majority of activities serve the power discrete end market. At the beginning of the year, we saw increases in demand forecast from some of our large MOSFET customers that now expressed caution and have reduced their forecast for the second half. We continue with advanced MOSFET’s co-developments and additional engagements with existing customers for both MOSFETs, as well as additional disruptive technologies.

For discrete flows, we continue to focus on alignment on engagements and plans for 12-inch and releasing advanced new split gate super junction and advanced trench MOSFET platforms to production, enabling our customers a better position in the market offering more competitive product line. We previously discussed several mid-to-long term market trends being addressed through the TOPS Group with initial platform transfers and developments.

Such activities include advanced nanowire intrinsic RGB microdisplay on 200mm and 300mm, productization of innovative liquid crystal metasurface technology and expanding our partnership with a leading TMR sensor provider. These activities are of great relevance to advancements in our industry and target high returns.

During the first quarter of 2020, we saw the following utilization rates. In Migdal Haemek, Israel, Fab 1, our 6-inch factory, we were at 60% utilization per previously discussed decreases in discrete demand. Fab 2 was at 70% similar to last quarter. Newport Beach, California, Fab 3 was at about 55%, similar to last quarter, with significant increases in utilization already seen in Q2 due to the large uptick in demand of silicon germanium for 5G infrastructure and for data centers. Our San Antonio facility Fab 9 was at 65% utilization, which includes an 8-point increase in non-Maxim business on top of the Q4 ’19 10 point corresponding increase in non-Maxim business.

Looking at our TPSCo fabs in Japan, utilization of our 8-inch foundry business was at about 55%, similar to the previous quarter, our 12-inch foundry business utilization was 80%, a 10 point increase as compared to Q4 ‘ 19, while noting that additional capacity is being built presently to both eliminate non follow of graphic bottleneck constraints for our advanced 200mm flows as well as adding additional photolithography capacity. We are progressing according to plan and should at maximum start capability by the end of Q3 this year.

In summary, according to current customer forecasts, we see quarter-over-quarter growth throughout the year. However, there is uncertainty with customers stating their own limited visibility. We guide the second quarter of 2020 to be $310 million, with an upward or downward range of 5%. As a well experienced, mature, strong global company, with an exceptional base of talented and most dedicated employees, we remain committed to meeting all our customers’ short, mid and long-term needs.

Our best wishes to all of you for your welfare and the health of your loved ones. We hope that at least one upside of this global pandemic would be greater actions of world citizenry and cooperation.

To recite the words of former US President, John F. Kennedy, we all inhabit this small planet, we all breathe the same air, we all cherish our children’s future.

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

Oren Shirazi — Chief Financial Officer and Senior Vice President of Finance

Thank you, Russell. Welcome, everyone. Thank you for joining us today. As an introduction to capitalize on Russell’s description of our actions in related to COVID-19 outbreak, I’m pleased to update that all our manufacturing fabs operated throughout this period without interruption and did not miss even one production day with no shipment and with successful management of our supply chain avoiding any supplies shortage.

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 the end of Q1 2020 is reflecting current assets ratio of 3.8 times, cash including short-term deposits and investments in marketable securities exceeding our short and long-term debt balance by $438 million, and record shareholder liquidity of $1.36 billion, representing shareholders’ equity to total assets ratio of 70%.

I will start by providing the P&L highlights for the first quarter of 2020, and then discuss our balance sheet. Revenues for the first quarter of 2020 were $300.2 million, meeting our guidance provided three months ago, reflecting 10%, or $19 million year-over-year organic growth. Non-organic revenue, defined as revenues from Panasonic in the TPSCo fabs and revenue for Maxim in the San Antonio fab were lower by $29 million year-over-year, mostly due to the March 2019 previously announced Panasonic renewed contract.

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Gross and operating profits for the first quarter of 2020 were $53 million and $16 million, respectively, as compared to $55 million and $19 million, respectively, in the prior quarter, and as compared to $63 million and $27 million, respectively, in the first quarter of 2019. EBITDA for the first quarter of 2020 was $73 million as compared to $75 million in the prior quarter, and $79 million in the first quarter of 2019.

Net profit for the first quarter of 2020 was $17 million, or $0.16 per share, basic and diluted, as compared to $21 million, or $0.19 basic and diluted earnings per share in the prior quarter. Net profit for the first quarter of 2019 was $26 million, or $0.25 basic and diluted earnings per share.

Comparing to the first quarter of 2019, the 10% year-over-year organic revenue growth and efficiency measures taken enabled us to mitigate 55% of the impact from Panasonic renewed contract revenue reduction over the gross and operating profit. Comparing to the fourth quarter of 2019, gross and operating profits reflect $3 million lower cost in our P&L COGS line against the $5.5 million lower revenue, which is aligned with our previously discussed incremental margin model.

The financing and other income P&L line totaling $2 million for Q1 2020 reflects the impact of the decreased interest rates and bond value of our bank deposits and marketable securities investments. The income tax benefit to P&L line totaling $1.7 million for the first quarter of 2020 included a tax benefit resulted from the CARES Act, which was recently announced by the United States.

I will now provide the cash flow highlights for the first quarter of 2020 and a balance sheet analysis as of March 31, 2020. Cash flow generated from operations in the first quarter of 2020 was $68 million as compared to $72 million in the prior quarter and to $75 million in the first quarter of 2019.

Investment in fixed assets net was $63 million in the first quarter of 2020, and included payments related to the previously announced 300mm fab capex investment as compared to $44 million and $42 million in the prior quarter and in the first quarter of 2019, respectively. In addition, we repaid $24 million of our debt in the first quarter of 2020, mainly bonds series G.

Looking at the balance sheet, we presented a strong and stable financial position, measured as follows. Shareholders’ equity reached a record of $1.36 billion, reflecting 70% ratio of shareholders’ equity to total assets of $1.94 billion, current assets ratio, defined as current assets divided by short-term liabilities, was 3.8 times. Cash including short-term deposits and investments in marketable securities exceeded our short and long-term debt by $438 million.

Moving on to elaborate on the tax line in the P&L, I would like to describe applicable and the effective tax rates. Our US factories and affiliates are subject to a tax rate of 21%, and as noted earlier, we have a tax benefit as a result of the recently announced CARES Act in the States. TPSCo’s profits from its Japanese operations are subject to an approximate 30% tax rate. Our profit in Israel in Fab 1 and Fab 2 operations, while subject to a 7.5% tax rate, are not expected to result in any tax payments for the foreseeable future due to the approximate $1 billion historical NOLs that may be carried forward indefinitely.

With regards to the Company’s rating in May 2020 Standard & Poor’s Ma’alot, an Israeli rating company that is fully owned by S&P Global Ratings Agency, completed its annual rating review for the company and affirmed a corporate credit rating and bonds series G rating of ilAA- with a stable horizon.

I would now like to describe our currency hedging activities in relation to Japanese yen. Since the majority portion of TPSCo’s revenues is denominated in yen and the vast majority of TPSCo’s costs are in yen, we have a natural hedge over most of our Japanese business and operation. In order to mitigate part of the remaining yen exposure, we executed zero cost cylinder hedging transaction, which are containing fluctuations to be contained in a narrow range as compared to the spot exchange rate. Hence, while the yen rate against the US 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 cash and loan balances since the loans and the cash are both yen-denominated, which helps to protect us from potential future impact of yen fluctuation.

Lastly, in relation to the fluctuations of the Israeli currency, we have no revenues in this currency and since approximately 10% of our costs are denominated in the Israeli currency, we also hedge a large portion of this currency risk using, A, zero cost cylinder transaction; and B, investing a portion of our cash in Israeli marketable securities denominated in the Israeli currency, thereby providing us a natural hedge.

During Q1 2020, the US dollar to NIS exchange ratio went up significantly from ILS3.45 to above ISL3.80, which provided us with an opportunity to increase our hedging coverage and mitigate our US dollar NIS exposure for the coming 12 months on very good financial terms achieved during that quarter.

And a last note on our share count. As of the end of Q1 2020, we had 107 million of ordinary shares outstanding and the fully diluted share count was 109 million, same figures as in the prior quarters. The difference between the outstanding and the diluted share count is comprised entirely of ESOP related options and RSUs.

And now I wish to turn the call back to the operator.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Cody Acree of Loop Capital. Please go ahead.

Cody Acree — Loop Capital — Analyst

Thank you very much. Hey, guys. I hope everybody is well. First off, I wanted to just touch on the customer demand improvements around 300mm. Is that a function of just getting the capacity on line, you said it should be at full wafer capacity by the end of the year? Is it a matter of market share gain driven, is the underlying optical market to your knowledge growing at that rate and just kind of how you size up those positives in such a negative environment?

Russell Ellwanger — Chief Executive Officer

Yeah. Thank you for the question, Cody. I think, in general, there is two ways that I would account for are positives and that’s, we’re still — we’re cautious. There is uncertainty being voiced by customers, but forecasts for us looks strong through the year. Firstly is that, we have very diversified end markets that we serve, and that allows you to, for example, I mean, it’s obvious, everyone in automotive is taking a hit right now, so even within power to where we had very good share and growth within battery management for EVs, there is so many other things that power serves that we will see by forecast a year-over-year growth in power ICs this year. So that’s very, very good to see.

In the case of the RF mobile and this relates maybe a lot to your 300mm question, I think, the thing that’s very exciting there is that there is a big pullback in the RF mobile market presently, as well published, but due to the fact of pretty major share gain, as well with some content increase, we will still see from present forecasts not just reasonable, but good year-over-year growth in RF mobile. Not as high as we initially anticipated, but the year-over-year growth is still strong in RF mobile. So you have two things that play to our benefit.

One is being very diversified end markets, so you’re not overly tied into any single up or down trend, and the second part is, areas and I would say in most every area to where we’re growing market share. And hence you can mitigate as with the RF mobile for this year, a pullback that we would still be having year-over-year growth. Does that answer your question, Cody?

Cody Acree — Loop Capital — Analyst

Yes. It does. Maybe with silicon germanium, is that also market share growth or is it just capacity coming online, or maybe a bit both?

Russell Ellwanger — Chief Executive Officer

Very good question and I thank you again for following up with that. We already enjoy a very, very high market share in optical transceivers. So I don’t know that there is necessarily market share growth there. There is an expanding market and why is it an expanding market. You have last year a decrease in data center demand because of an inventory correction, but there was no question that data center information transfer that the capacity of data centers had to grow. So now that’s coming back. So I don’t know, necessarily that we’re growing market share and we have really a very, very high position, but we are growing with a growing market.

The other part is the 5G infrastructure that was also accretive to the market itself. So in that case, we have and enjoy a very high market share that the market is growing. And one of the reasons that it made sense to put so much energy and effort into capacity expansion within the 5G was that we knew that the market would grow, even though there was a pullback during 2019. It’s very possible that within the next few quarters we will surpass our highest quarter ever in silicon germanium shipments and that’s a good place to be.

Now, that is not necessarily market share growth, that is a market growth, but it was an anticipated market growth and the capacity expansions that we did were well — I mean, not just well aligned, they are totally aligned with our customers. So we put strong investments in 2018 to expand silicon germanium capacity that right now is paying back very well as far as what we see for the next quarters. So hopefully that covered your question totally.

Cody Acree — Loop Capital — Analyst

Yes. It did. Thank you very much. And lastly for Oren, could you just walk us through the gross margin decline? It was maybe a little bit of a shortfall of what I would have expected. And then how you’re seeing gross margin through the year?

Oren Shirazi — Chief Financial Officer and Senior Vice President of Finance

No, I think our gross margin were good in Q1. I mean, even the slight reduction in revenue, which was guided and expected, I mean, we achieved the $300.2 million, which is slightly above the mid range. So even if you annualize that is $5.5 million below prior quarter, we saved the $3.3 million from the COGS attached to that. So actually, gross profit is only $2.2 million impacted from this $5.5 million, which is by the model. I mean, our model is usually incremental 50%, 60% and exactly we lead by this model.

For the future, obviously, we said in the press release, on top of the fact that we expect a growth to $310 million in the next quarter, which is additional more than 3%, we said that we expect further quarter-over-quarter growth during the year and obviously, you should expect that the margin will improve by our model, which means about 50%, 55% incremental growth of gross profit as a result of this increased revenue.

Cody Acree — Loop Capital — Analyst

Very good. Thank you very much guys.

Russell Ellwanger — Chief Executive Officer

Yeah. Cody, just let me add one thing. Within the areas where I talked about, where we have very, very strong growth, there is one area that we are not seeing the growth this year and that would be in the discretes. So there is continued pullback in discrete that we’re seeing, but other than discretes, across the board, I think we’re in pretty good shape.

Cody Acree — Loop Capital — Analyst

Great. Thank you very much.

Operator

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

Rajvindra Gill — Needham & Company — Analyst

Yes. Thank you and congrats on solid results in this uncertain environment, that’s very good. Just a question, Oren, in terms of the guidance. So $310 million for 2Q, I was wondering if you could just provide what the organic year-over-year growth rate would be? And also, how you’re thinking about the organic growth rate for the year?

Earlier in the year you talked about kind of a low double-digit organic growth rate. This was back in January. Obviously, things have changed, some pluses and minuses. Are you still maintaining that assumption? And if so, it would require about 12% to 15% growth in the second half versus the first half. So I was wondering if you could just explore the organic growth rate question. Thank you.

Oren Shirazi — Chief Financial Officer and Senior Vice President of Finance

Yeah. On the organic growth from Q2 ’19, we don’t have anymore — I mean the Q1 ’19 was the last quarter under the Panasonic previous contract, and on Q2, it’s the new level ’19. So Q2 ’20 against Q2 ’19 and against Q1 ’20 will be entirely organic against organic. So there will not be any reduction on organic, so it will be consistent.

Rajvindra Gill — Needham & Company — Analyst

Okay. And then, are you still kind of reiterating the low double-digit organic for the year, and if so, that would imply 12% to 15% growth in the second half versus the first half?

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Oren Shirazi — Chief Financial Officer and Senior Vice President of Finance

We didn’t change that forecast. And I don’t think we said 12% to 15%. We said low-double digits right?

Russell Ellwanger — Chief Executive Officer

Yes.

Rajvindra Gill — Needham & Company — Analyst

No, no. What I’m saying is that, in order to get low double-digit organic growth rate for the year, you would have to kind of grow 12% to 15% in the second half versus the first half, roughly. So that implies a ramp throughout the year. And I’m just wondering — I want to get your thoughts on that.

Oren Shirazi — Chief Financial Officer and Senior Vice President of Finance

I mean exactly what we meant to say is that, we have a quarter-over-quarter growth and we didn’t change this focus —

Rajvindra Gill — Needham & Company — Analyst

Okay.

Russell Ellwanger — Chief Executive Officer

Yeah. So just to add maybe slightly more color on that, because we were seeing such a high initial forecast even with uncertainty, we’re still quite convinced of growth throughout the year. To reiterate a low double-digit or not is very difficult to say at this point sincerely because the visibility is not perfect, but the growth base right now is strong enough in the forecast that we’re confident, within reason, that our initial statements were correct. To this degree of how much, that’s a little bit difficult to state at this point.

Operator

The next question is from Mark Lipacis of Jefferies. Please go ahead.

Mark Lipacis — Jefferies — Analyst

Hi. Thanks for taking my question. On the 300mm capacity increase, it sounds like there’s two things going on. There is the non-litho bottleneck and then you’re also adding additional lithography capacity, which is supposed to hit later on. And so a couple of questions here. Can you give us a sense of how much the capacity increase is due to the non-litho bottleneck when it starts to uncork in the third quarter? And how much will the capacity increase from the additional litho capacity that you’re adding and when does that kind of layer into your total capacity on 300mm?

Russell Ellwanger — Chief Executive Officer

So the annualized capacity increase, as we said, is somewhere between $70 million to $100 million. If we talk about the bottlenecks, at this point, I stated that we’ve had a 300mm utilization at 80%. Our utilization rates, we always talk about against the photo capacity that’s allotted. We would have had enough demand. Our model is to run at somewhere between 85% to 90%. So we have enough demand that we would have been at 90% utilization if we didn’t have processed bottlenecks that are being alleviated through some of this capacity expansion.

So you could say that, initially there would be a relief of about 10 points of capacity through the bottlenecks, but additional capacity is being added with the photo, but the total, we have said, depending on exact mix that we’d be shipping is somewhere annualized between $70 million to $100 million.

Mark Lipacis — Jefferies — Analyst

That is for — just to make sure I’m clear, this is for the non-litho or was that for the additional lithography?

Russell Ellwanger — Chief Executive Officer

Almost everything.

Mark Lipacis — Jefferies — Analyst

That’s with everything. Got you. Okay. And Russell, when you — in terms of time like this, you talked about this a little bit in your prepared comments, but I was hoping you could share color like how do you manage your own supply risk in an environment like this? Could you just review how you think about this and what your strategy is? Thank you.

Russell Ellwanger — Chief Executive Officer

Okay. So our fundamental business model has always been based upon very close contact and partnership with customers and with suppliers. Due to relationships that we’ve developed, we’ve been able to very, very easily transition into even greater amount of communication with both suppliers and customers and to understand any gives or takes of what they have or don’t have. There have been a few incidents where something wouldn’t have been shipped, but we had enough heads up on it that we were able to change to another supplier.

And in most all circumstances of our supply chain, we have multiple qualified suppliers and one predominant supplier that we work with, but we always maintain a business continuity plan to where if someone has something happen abruptly to their factory either we try to ensure that they have multiple factories, so that we can have continuity from them or we have another supplier. And that’s how we’ve been able to manage extremely well.

I mean one of the obvious things that have happened in the past months is that, commercial freight has been decreased quite readily because commercial flights have decreased quite readily. So we’ve shifted very quickly to freight flights, but we were able to understand, know, and do that seamlessly. But from the suppliers themselves — that was just getting supplies from point A to point B. For the suppliers themselves, it’s really just a question of having a very, very strong relationship with suppliers. And with the communication, asking the right questions and knowing something that might occur in enough advance that you can address it.

And as I stated we ourselves in certain areas, built up a much higher inventory than normal on indirect materials and silicon wafers. We have a supply of silicon for every SKU that we use and for the very high level SKUs a fairly high supply of silicon, higher than the inventory levels that we normally carry. But we thought it was prudent to build up inventory levels during a period that the supply would be there, knowing that they were being used, but we are at higher inventory levels than we would be on a normal state of operation. Mark, did that answer your question I hope?

Mark Lipacis — Jefferies — Analyst

Yeah. That’s very helpful. And I hope you don’t mind if I just follow up on that briefly. I guess the one concern right now I think in the market is that, that behavior of trying to add a little extra inventory in order to guarantee your own operations, do you have a sense to the extent how much that is happening in your customer — at your customers? And that was my last question. Thank you.

Russell Ellwanger — Chief Executive Officer

At our customers, I have a very, very good feel for what’s happening with their inventory because we have very close interactions. I don’t know that our customers have the same degree of feel for their end customers. One area that we were more optimistic on in the beginning of the year was in discretes. And some of what they had thought, I believe, was due to people wanting to build more inventory, that have now decided that they didn’t. A lot of discretes go through distribution centers and distribution centers, they will pull back very, very quickly.

So most everything other than discretes doesn’t deal with discretes very, very much. But that is the one area that we have seen a reduction than what we had initially thought and most likely, a year-over-year reduction in revenue is to our discrete customers.

Mark Lipacis — Jefferies — Analyst

That’s very helpful. Thank you.

Operator

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

Russell Ellwanger — Chief Executive Officer

Hey Richard.

Richard Shannon — Craig-Hallum — Analyst

Russell, hi how are you? Hi, Oren.

Oren Shirazi — Chief Financial Officer and Senior Vice President of Finance

Hi.

Richard Shannon — Craig-Hallum — Analyst

Hi. I’m going to follow up on this last question just very quickly. A good detail here, but Russell just one thing there. The wafer supplies that you have increased inventories of, do you see the risk kind of equally across wafer sizes and the different technologies you deal with, silicon versus SOI and others or are there meaningful differences in the risks there?

Russell Ellwanger — Chief Executive Officer

For very, very high usage, high demand, we have pretty stable contracts and those contracts forecast and commit to us buying wafers and to the suppliers supplying the wafers. With the RF SOI that’s the type of a contract that we have. So there, it’s a very, very stable type of an activity. For the others, what we’ve done is, we’ve had built greater inventory and now it’s just going with steady state orders, by having a reserve inventory that in case there should be something that comes into and some of that is really just a question of being able to get material from point A to point B. So if that answers your question, the very high demand, high volume is for the most part under strong contracts.

Richard Shannon — Craig-Hallum — Analyst

Okay. That is helpful. I just want to make sure. My next question is probably a multi-parter on the mobile market here. You’re talking about still expecting growth in 2020 from share gains.

Russell Ellwanger — Chief Executive Officer

I didn’t catch the beginning — how you introduced it. It was on what?

Richard Shannon — Craig-Hallum — Analyst

In mobile.

Russell Ellwanger — Chief Executive Officer

Okay. Thank you.

Richard Shannon — Craig-Hallum — Analyst

So you talked about expecting growth in 2020, although that growth has come down here with obvious inflection from mobile purchasing patterns here, but you said it was coming from strong growth in content gains. I guess my first part of this is, would you still expect growth that we didn’t have?

Russell Ellwanger — Chief Executive Officer

I said market share gain and content increases, but I think it’s probably market share gain. But go ahead.

Richard Shannon — Craig-Hallum — Analyst

Yeah. Okay. Does that mean you’d still have growth in mobile if you didn’t have the share gains, do you think?

Russell Ellwanger — Chief Executive Officer

I didn’t have share gains, would I still have growth in mobile? No, I don’t think so.

Richard Shannon — Craig-Hallum — Analyst

Okay. In the construct of the share gains, is there any way you can characterize it by technology, either by for your customers or your internal technology 200mm versus 300mm or geographical customers or anything like that that’s kind of a driver for these share gains?

Russell Ellwanger — Chief Executive Officer

I think the share gains are coming really worldwide, some customers more than others, but it’s not specific to any certain geographic region. There is higher share gain in some regions than others, but I mean, you know who all the big players are and who the emerging players are and I think we’re doing pretty well across the board there.

Richard Shannon — Craig-Hallum — Analyst

Okay. That sounds good. My last question here is, while most people are probably focusing near term given COVID impacts on the economy here, wonder if you could look out into next year and kind of look at some of your growth drivers both growth in your larger markets, mobile infrastructure/optical, but also looking at some of the new projects and products you’re talking about, like the fingerprint sensors and time-of-flights, some of your new power products, silicon photonics, etc? If you talk about from a dollar growth perspective, which ones — do any of these growth drivers stand out as a one that could really have an outsized impact on your next year?

Russell Ellwanger — Chief Executive Officer

Next year is referring to which?

Richard Shannon — Craig-Hallum — Analyst

2021.

Russell Ellwanger — Chief Executive Officer

I think, certainly, RF mobile and RF infrastructure always will have big impact, because they’re very big markets and we are well positioned in growth in these markets. One, because we have very, very high market share already and that’s the optical market with the silicon germanium, and the other with very strong market share gains and increasing capacity with very exciting technologies.

So those I believe will remain very, very strong growth drivers. As I stated earlier, the reason that we invested strongly in silicon germanium and capacity expansion in 2018 and why we will most likely continue to invest in that is, because it is a very, very big expanding market. With data traffic, obviously, increasing and increasing. If we look at it from 2020 through — or 2019 through 2021, there should be about a 30% increase in 4x25s, and many, many x increase in 8x50s, so 400-gigabit per second and that’s what we stated, that we have many, many wins, SKUs, protos and even beginning the 800-gigabit per second. So those two remain very important for us.

The other area that I believe we’ll see very strong growth in is what we have said was our focus is with the fingerprint under OLED. That will be a very, I believe, strong area for us, as well as the fingerprint under LCD and the LCD will start volume production by target at the end of this year and growing into volumes significant volume should in 2021. In addition, we have a lot of very, very active advanced stacking projects with image sensors that will continue in ’22-’23-’24 to become very, very big numbers, I believe they should and they promise to be able to.

The MOSFET market will certainly rebound at some point, how much of a growth driver will it be or not. I think that the consensus was somewhere about a 5%, 6% CAGR, but it’s pulled back quite substantially, so that when it comes back should come back very strong and get to well beyond previous rates. And the power management, we have a very, very broad portfolio in power management that I think is quite strong even with as I stated, the automotive portion of power being down this year, by forecast, we would see year-over-year power growth and not insignificant. And then, in 2021 when all things are equal, I assume that that should take off very strong with the new platforms that we have going out.

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So I think probably across all of our business units, we would see good growth. As I had stated during the formal comments, within the top business unit, where the model is really taking a customer flow or a customer idea working on them, where everything stays behind a firewall, we’re doing some very, very innovative things on this nanowire RGB and intrinsic RGB the microdisplay and that is promising to take off very, very strong as well. So within the TOPS, there is additional things that are being done in addition to a MOSFET market or the power discrete market, of which, the biggest portion that we serve is MOSFET. But there is additional very, very high growth markets, because they don’t interest right now. I mean there are technologies that are disruptive technologies that could grow very, very strong.

So I think, across the board, we’re in pretty good shape. One of the nice things about our business and I think one of the reasons that — coming back to some of the previous questions, the reason that we’re able to mitigate whatever impacts there are from COVID this year is because we do serve so many end markets. And within multiple of them, we have market share growth and most of them are growing markets. So hopefully, that answers your question, Richard. It’s a long answer.

Richard Shannon — Craig-Hallum — Analyst

I appreciate the detail. And that’s very helpful, Russell. And that is all from me. Thank you.

Russell Ellwanger — Chief Executive Officer

Thank you.

Operator

The next question is from Krish Sankar of Cowen. Please go ahead.

Krish Sankar — Cowen — Analyst

Yeah. Hi. Thanks for taking my question. I have a couple of them, Russell. One, if you spoke about improving strength in data center orders Q-over-Q, do you have any view on the sustainability of this data center’s trend for the rest of the year? And then, I had a follow-up.

Russell Ellwanger — Chief Executive Officer

I would believe that the trend is pretty strong, probably of anything that we’re looking at, I believe, at least from my perspective, the highest confidence at this point is in the silicon germanium. So I think that the trend is very strong, the demand is very strong. And it’s not just data center, as I said, it’s also 5G infrastructure, but I think that’s very real. And one of the reasons that you know that it’s real is when you’re getting very recent upside orders. And it’s not just forecast, there are orders that are coming in and most all of our silicon germanium is running 40 to 43 photo layers.

So orders have to be placed early, starts have to be done early, not early, but just meaning for a Q3 shipment, if you’re dealing with 43 layers, you have to start the wafers fairly quickly. So for silicon germanium, we have fairly good visibility because it’s a longer processing time than most all of our other flows. So the purchase orders come in earlier, and you start the wafers earlier.

Krish Sankar — Cowen — Analyst

Got it. That’s really helpful color, Russell. And then as a follow-up. You spoke about seeing sequential growth through the rest of the year. So is it fair to assume that utilization rates across your entire fleet will continue to improve and is there any color you can give in terms of quantification into the next quarter?

Russell Ellwanger — Chief Executive Officer

Certainly, as revenue goes up, utilization rates must go up. I stated that we’ve already seen a big increase in the Fab 3 Newport Beach facility as a function of the increase of orders with silicon germanium. And beyond that I don’t want to necessarily give specific utilization rates, because I don’t have them off the top of my head and I don’t want to have to correct anything. But in general, the answer is, absolutely, as revenue goes up, utilization rates go up.

Krish Sankar — Cowen — Analyst

Got it. Thanks, Russell.

Operator

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

Russell Ellwanger — Chief Executive Officer

Hey Lisa.

Lisa Thompson — Zacks Investment Research — Analyst

Hey. I just have a few questions for you. One is really easy. Oren, do you still think the tax rate should be around 4% this year?

Oren Shirazi — Chief Financial Officer and Senior Vice President of Finance

The tax rate?

Lisa Thompson — Zacks Investment Research — Analyst

Yeah.

Oren Shirazi — Chief Financial Officer and Senior Vice President of Finance

Yeah.

Lisa Thompson — Zacks Investment Research — Analyst

Okay. Could you talk a little bit about the economics for you, the gross margin or how does it work from going from 100-G products to 400-G and above, does that change for you, do you make more money at the higher speeds?

Oren Shirazi — Chief Financial Officer and Senior Vice President of Finance

I think our model, like I mentioned before, on any incremental revenue growth is that in average it’s 50%, 55% to the gross profit and EBITDA and operating profit. Now anything of what you said, if it is related to 5G, so we’ve said in the past that for 5G, of course, our margins are better. They are closer to 65%-70% incremental. And if it is in SOI or smartphone or discrete, so it’s lower than the 50%. So any analyst can assume from what is the growth and then assume the result in the margin.

Russell Ellwanger — Chief Executive Officer

Yeah. And for your specific other part of that question, Lisa, where you said — you asked if the margins go up, yeah, that is a very partnership based thing with our customers. We work with them to serve their longer-term needs and with each platform, there is typically a reset of the pricing of the platform. And then you might have off of any platform some year-over-year or every several year price reduction, but every new platform will have a reset of pricing versus the previous platform that is in high volume.

Lisa Thompson — Zacks Investment Research — Analyst

Okay. I guess my final question is, there has been so much talk about changing supply chain for derisking geographic sources. Have you seen any change in your customers, has that benefited you at all?

Russell Ellwanger — Chief Executive Officer

By changing supply chain slightly — you mean from our customers changing their supply chain or from — I don’t understand the —

Lisa Thompson — Zacks Investment Research — Analyst

Yeah. Right. Obviously, there’s a lot of talk about maybe we shouldn’t be getting so much stuff from China. Are people looking at you, because you’re not there and could that possibly benefit you?

Russell Ellwanger — Chief Executive Officer

Potentially, but I would say, fundamentally, not so much. The bulk of what is bought in China is not products that we ourselves or product flows that we ourselves serve. There is either lower end foundry capabilities or you would have other foundries that do and focus on digital technologies. So for the most part, what we serve our customers could not really obtained from China.

Lisa Thompson — Zacks Investment Research — Analyst

Okay. Great. Thank you. That’s all my questions.

Russell Ellwanger — Chief Executive Officer

Thank you very much.

Operator

Our next question is from David Duley of Steelhead Securities, please go ahead.

David Duley — Steelhead Securities — Analyst

Yes. Most of my questions have been answered, but just a couple of clarifications. Could you just help us understand, you mentioned you have very high market share in the optical silicon germanium area. Could you just highlight what you think your market share is there? And then, could you talk about the competitive environment in the RF SOI area and how that’s changed over the last few quarters or how you expect it to change going forward? Thank you.

Russell Ellwanger — Chief Executive Officer

Yeah. The first question, I’ll happily answer it. We believe we’re at about 60% market share or higher. So that’s for your first question. For the second question, it’s not something that I prefer to talk about, meaning to speak about competitors. The competitive landscape itself, as with any high-end technology, the landscape requires better performing platforms. So in the case of the RF SOI, will demand continually continue reduction in [indecipherable] it demands, very, very good digital capabilities, it demands very good linearity.

So just all of the figures of merit continually have to move forward. On the landscape itself, again that’s — I don’t talk about competition openly and that’s not something I would prefer to speak to, but the competitive landscape is really just based upon having very good platforms to be able to get the most recent design wins and then performing well in how you supply.

David Duley — Steelhead Securities — Analyst

Having a 300mm platform differentiate you in the RFSOI market at this point or the 65-nanometer design rules or either one of those helping you capture further market share?

Russell Ellwanger — Chief Executive Officer

One more time please. I’m sorry. What with 300mm that–

David Duley — Steelhead Securities — Analyst

Is having a 300mm factory that’s running RFSOI or having 65-nanometer design rules, are either one of those allowing you to pick up further market share?

Russell Ellwanger — Chief Executive Officer

Absolutely. Yeah. Although we have an extremely good 200mm platform, that’s called QT9, having the ability to do 65-nanometer allows you very, very strong digital integration, which is important for an integrated switch L&A. So yeah, the 300mm certainly is enabling increases in market share, definitely.

David Duley — Steelhead Securities — Analyst

Great. Final question from me is, as far as a percentage of overall revenue, what percentage do discretes represent at this point, approximately?

Russell Ellwanger — Chief Executive Officer

Percentage of revenue of the Company?

David Duley — Steelhead Securities — Analyst

Yes.

Oren Shirazi — Chief Financial Officer and Senior Vice President of Finance

Yeah. It’s about 12% to 13%, was in the full year ’19.

David Duley — Steelhead Securities — Analyst

Thank you.

Russell Ellwanger — Chief Executive Officer

Thank you.

Oren Shirazi — Chief Financial Officer and Senior Vice President of Finance

Welcome.

Operator

We have a follow-up question from Rajvindra Gill of Needham & Company. Please go ahead.

Oren Shirazi — Chief Financial Officer and Senior Vice President of Finance

Hi, Rajiv.

Russell Ellwanger — Chief Executive Officer

Yes please.

Rajvindra Gill — Needham & Company — Analyst

Yes. Thanks for the follow-up. Just a quick question on automotive. Obviously, a lot of the factories have been shut down in the US and Europe. They’re starting to reopen a bit. You did mention some weakness in power for auto, but any sense in terms of how the automotive market could shape up for the year? Are you seeing any kind of rebound at all as you look into the second half from your customers?

And also, in terms of kind of content gains, semiconductor content increases in automotive, whether it’s from sensors or increased power management, do you foresee that partially offsetting some of the weakness in the overall automotive market?

Russell Ellwanger — Chief Executive Officer

Our predominant power management into automotive really is in battery management. And we have not seen an increase of that demand as of yet. If indeed factories are opening up and models are being built, then we will see an increase there, but to-date we have not. As far as the amount of content going into automotive and vying for a bigger portion of that content, we’re always actively going after that. But our biggest portion right now directly in automotive that at least we’re aware of and it’s not that we have 100% visibility into the end use of every part that we sell, but the biggest portion of it is for battery management and that has not stamped back yet.

Rajvindra Gill — Needham & Company — Analyst

Okay. Thank you.

Russell Ellwanger — Chief Executive Officer

Thank you.

Operator

This concludes the question-and-answer session. Mr. Ellwanger would you like to make your concluding statements.

Russell Ellwanger — Chief Executive Officer

Certainly. Again, thank you very much, and really thank all of you for the — I think, very, very good questions. I appreciated them. Just as a summary statement, we are optimistic and encouraged and I am truly proud of our employees that to-date throughout this worldwide pandemic for our Q1 performance, it was exact. And since that time, we have not missed a step on shipments. The integration of customer demand and operational flexibility has really been outstanding.

I am certainly encouraged that in the midst of global challenging times, even in the mobile market, our RF mobile share increase continues and should show meaningful 2020 quarter-over-quarter growth and meaningful 2020 over ’19 growth. That our end-market coverage is broad enough, allowing very strong growth in multiple markets during even the current situation.

We look forward to speaking with as the year progresses. And to that end, between now and the beginning of June, we will participate in the following investor conferences. The Oppenheimer Annual event, Sunday, May 17, 2020; the 17th Annual Craig-Hallum Institutional Investor Conference, May 27, 2020; and the Needham 4th Annual Automotive Tech Conference, June 3, 2020. All of these are virtual events and for those of you who are able or have wishes, we’d love to interact with you and speak with you at those times or at any other. Thank you very, very much.

Operator

[Operator Closing Remarks]

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