Ladies and gentlemen, thank you for standing by. Welcome to the Tower Semiconductor First Quarter 2024 Financial Results Conference Call. As a reminder, this conference is being recorded May 9, 2024. Joining us today are Mr. Russell Ellwanger, Tower's CEO; Mr. Oren Shirazi, CFO. I would like to turn the conference call over to Ms. Noit Levy, Senior Vice President of Investor Relations and Corporate Communications. Ms. Levy, please go ahead.

Thank you, and welcome to Tower Financial Results Conference Call for the first quarter of 2024. 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 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 2024 financial results has been prepared in accordance with U.S. GAAP. The financial tables and data in today's earnings release and in this earnings call also include certain adjusted financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as established with the Securities and Exchange Commission. The financial tables include a full explanation of these measures and the reconciliation of these non-GAAP measures to the GAAP financial measures. We have a supporting slide deck that complements today's conference call. This presentation is accessible on our company's website and is also integrated in today's webcast for your convenience. Now I'd like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.

Welcome, everyone. Thank you for joining our first quarter 2024 earnings conference call. I have been looking forward to this opportunity to discuss our performance and positive outlook. Revenue for the first quarter was in the upper half of our guidance at $327 million. We delivered a net profit of $45 million, representing a net margin of 14%. For the remainder of 2024, our target is to achieve quarter-over-quarter revenue and margin increases. Our guidance for the second quarter is for revenue to be $350 million plus/minus 5%. I'll now provide a breakdown of Q1 revenue for major technology groups. For reference, please see Slide 3. I'll refer to the business momentum we see for each group and highlight significant achievements. RF Mobile, predominantly RF SOI represented 37% of revenue in the first quarter of 2024, a strong increase against the 2023 run rate. We continue to experience strong demand from RF SOI customers; our 300-millimeter RF SOI capacity at Uozu is fully utilized. We are addressing excess demand by transitioning some production to Agrate, where we are currently working through final steps of production qualification towards production ramp, which remains on track with the planned schedule. This transition and capacity expansion will extend through 2024 into 2025 to meet the forecasted growth in customer demand. Ramping up the new facility in Agrate will bring, as previously communicated, some expected reduction to margins in the short term due to added depreciation and start-up costs at low utilization, but will be offset and become accretive with the ship volumes we expect to achieve within the first half of 2025. This is enabled by an accelerated corridor for profitability through having partnered with ST. We continue developments in 200-millimeter and 300-millimeter RF SOI technologies, setting industry benchmarks in efficiency and power handling, having customer demonstrated sub-60 femtosecond RonCoff, enhancing battery life and signal reception in handsets. Please see Slide 4. The increasing RF content in 5G handsets drives market growth and our technological advancements have captured increased market share. This momentum is expected to be strong throughout all of 2024 and is expected to continue into 2025 as well. RF Infrastructure business represented 14% of revenue this quarter, an increase from 10% in the fourth quarter of 2023. During the past quarter, we experienced strong performance in our RF Infrastructure business, where we provide optical transceiver components such as silicon germanium and silicon photonics for AI infrastructure, data centers, and datacom markets. This performance is a testament to our strategic initiatives and technological advancements in this sector. The growth was attributed to several factors: expanded market opportunities driven by substantial investments in AI, the introduction of new products for higher data rates spurred by AI developments, and the unexpected rapid adoption of silicon photonics for 800G with an increased interest in lower latency and lower power architectures like linear pluggable optics, LPO. Additionally, we've seen a recovery in legacy product orders after the previous quarters of inventory adjustments. Our achievements in silicon photonics were marked by a technology award from Coherent and a partnership with InnoLight, the top 2 worldwide optical integrators. We are advancing in 400G and 800G products and pioneering with select customers on 200G per lane technologies for future 1.6T systems. Including InnoLight and Coherent, the top 2, we have active silicon photonics programs with 6 of the top 10 optical integrators. Validating these achievements, the Optical Fiber Conference, March 25 through 29 in San Diego, felt much more like a family or a union than a conference. It's gratifying to see our vision of creating an open silicon photonics foundry coming to fruition. Beyond datacom, our engagement with automotive leaders in frequency-modulated continuous wave-based LiDAR and other sensors, including SiPho-based positioning gyros with Anello, confirms a broad-based need and usage for advanced photonics. Please see Slide 5. Please note, we have over 50 SiPho customers, most of which are in active silicon phases. Silicon Photonics currently represents 5% of our revenue, greatly accelerated by the adoption of AI with momentum that is extremely strong and promises to be long-lasting. In the Silicon Germanium segment, we are experiencing renewed demand, thanks to new high data rate products, active cable, and LPO technologies. LPO is enhancing the silicon germanium market by integrating equalizers, receivers, and transmitters, eliminating the need for the DSP in the pluggable module, hence reducing cost, power consumption, and latency, all crucial for AI and data center applications. Please see Slide 6. Momentum is strong throughout the year and expected to continue beyond as well. Sensors and displays represented 15% of the total revenue in Q1; we continue with all development and manufacturing activities as detailed last quarter. Please see Slide 7 for a review. We expect a notable increase in imaging revenue from Q1 to Q2 and to maintain that strong level throughout the year. Power IC business, excluding power discretes, represented 10% in the first quarter of our corporate revenues. Present POs show substantial increases in Q2 revenue with further increases throughout the year. We view Q1 as the low point in revenue for our power business and expect long-term growth thereafter. We are progressing with power management platform qualification in Albuquerque under our capacity agreement with Intel with on-target initial silicon results. We anticipate starting customer prototyping in the second half of 2024, leading to qualification and production ramp start in 2025. Slide 8 shows our power offerings over a large voltage range. Power discretes represented 14% of revenue and are expected to be stable at this revenue level throughout 2024. The mixed-signal/CMOS business was 8% of revenue, and about 2% was miscellaneous for this period. Our fab utilizations for the quarter: Fab 1, which, as announced, will be operationally consolidated into Fab 2 was about 65%; Fab 2, 8-inch was about 75%; Fab 3, 8-inch at about 45%, presently at a very high ramp; Fab 5 8-inch was about 40%, impacted by the earthquake in Japan and is presently ramping; Fab 7 12-inch was about 75% due to earthquake impact; and since recovery from the earthquake, it has been fully loaded, which to remind for our model is 85% utilization; Fab 9, 8-inch was about 60%, related to the worldwide decreased demand for power management. With that, I'll turn the call to our CFO, Mr. Oren Shirazi. Oren, please.

Hello, everyone. Earlier today, we released our first quarter financial results. For the first quarter of 2024, we reported revenue of $327 million, gross profit of $73 million, and net profit of $45 million, reflecting 14% net profit margins. I will now begin a more detailed review of our results, first analyzing the P&L highlights, followed by our balance sheet. Revenue for the first quarter of 2024 was $327 million in the upper range of our guidance compared to $352 million in the fourth quarter of 2023. Gross profit and operating profit for Q1 were $73 million and $34 million, respectively, aligned to our financial model, compared to $84 million and $45 million in the prior quarter. Net profit was $45 million, reflecting 14% net profit margins or $0.40 diluted earnings per share compared to a net profit of $54 million, reflecting 15% net margins or $0.48 diluted per share in the prior quarter. Moving to balance sheet and future CapEx and cash plan. As of the end of Q1 '24, our balance sheet assets totaled $2.98 billion compared to $2.58 billion in the same period last year, primarily comprised of $1.18 billion of fixed assets, mostly machinery and equipment, and $1.74 billion of current assets. Last week, we were very happy to receive an updated corporate credit rating from Standard & Poor's. Following their annual review, our rating has been reaffirmed at ilAA, including a stable outlook for the company. This reflects the robustness of our financial position and underscores our ongoing commitment to maintaining a strong financial foundation. Current asset ratio, reflecting the multiple by which current assets are larger than short-term liabilities is very strong at 5.4x. Shareholders' equity reached a total of $2.5 billion at the end of Q1, further increasing from $2.4 billion at the end of December 2023, and from $2.0 billion as of the end of March 2023. Our strong financial position enables us to plan for the following investments in strategic opportunities that are aligned to our vision: Approximately $500 million of total aggregate cash was allocated to make investments in equipment and other CapEx items required for the 12-inch factory in Agrate, Italy. Following the previously announced STMicro partnership agreement signed in 2021. We have already invested $340 million to date, while $160 million are to be paid from Q2 '24 to the end of '25. In addition, as previously announced, we will invest up to $300 million in the coming 2.5 years to buy equipment and other CapEx items that we will own in Intel's Fab in New Mexico, enabling us to ramp up capacity and capabilities for our customers. These payments will commence in Q2 '24. Furthermore, we expect our maintenance CapEx baseline level to remain as previously announced at about $200 million per annum. Lastly, we expect to invest additional cash to acquire more capability CapEx tools and other assets to expand our technology offering, including increasing our 5G and silicon photonics capacity and technological offering to enhance our flexibility and support our customers from our various sites as well as change our product mix to a richer mix from a margins perspective. In summary, the above investments are aligned to our business strategy and financial model as previously presented by the company this past November. In the model, we outlined our revenue target of $2.66 billion per annum that could be achieved by loading our existing facilities at 85% utilization, which would result in $500 million annual net profit.

Thank you, Oren. We would like to open the floor to any questions you may have, and after that, I will provide some summary and concluding statements. Please.

The first question is from Cody Acree of Benchmark.

Congrats on the progress. Oren, if I can maybe start real quickly on a point of clarification or further color on your CapEx expectations. You've mentioned increasing your maintenance level and increasing some of your core CapEx on your fabs to further expand some of your leadership products and shift your mix to those areas. Can you just add some specifics to what you're expecting to spend?

Yes, we did not mention. I mean, I mentioned the $500 million for Agrate, of which we are left with $160 million to pay from Q2 until the end of '25 plus Intel's 11X $300 million that will start to be paid this quarter and the maintenance CapEx of $200 million a year. In regards to the additional machines that we wanted to buy for 5G and silicon photonics, we are still evaluating. Now the plans, we didn't yet come up with final numbers. It will be in the order of many, many tens of millions. But of course, we have the cash to support it from our balance sheet.

Okay. And any sense of what that might do to your $2.66 billion of revenue potential?

No, this is already included. Meaning when we presented the model in November with the $2.66 billion revenue, all these CapEx that I am mentioning here are already included. The fact that we don't yet know exactly how much they will cost, indeed finalize the plan, it's still our multi-year plan that reached the $2.66 billion includes revenue from those machines that will improve the mix and this is already built into the model. It's not an addition.

Okay. Very good. And Russell, I guess, for you, your comments in your prepared remarks and in the press release were very encouraging. You talked about gaining some visibility from customer forecasts. Has that also translated to improving customer orders? Or is that more of a longer-term outlook?

Good question. The orders that we have are very much related to the optimistic forecast we have for this year of quarter-over-quarter growth. What I was referring to were inputs from customers, forecasts from customers, specifically around data centers that would show that the inventory has been burned off in the legacy data center in addition to the orders that we're getting for acceleration of 800G. So, and then we've also begun to start seeing some increases both in POs and in forecast for power management. But power management, as I stated, Q1, we see it as having been the low in our business; if I look closely at our plan for 2024. But the power management specific to automotive is still, I think, burning off inventory, but with signs right now that there will be new buys. But the overall power management market, I think, is still weak. If we look at our own numbers for '24 versus '23, it is deficient compared to the '23 total. But the growth that we have within our plans is really dependent on POs and pretty vetted forecasts. Not what I'm talking about the trend of the market itself recovering.

Okay. And sorry.

I'm sorry, Cody. Should the market recover within some short term, which I don't know, that would be accretive to the targets that we have right now. But it's not that clear. What I stated was really signs of recovery.

Okay. And specifically, in power management, just to be clear, you are still seeing inventory excesses pressure in that market, but you are expecting Q2 to be a low point for that market.

Q1 already passed was a low point.

Sorry.

Yes. We have a substantial increase in power management from Q1 to Q2, which you might see reflected in the increased guidance. But, and then we would see also growth in power management throughout the year, but not having recovered to the highs of previous years.

Okay. That's very helpful. I guess if you could handicap your end market either order rates or forecast visibility improvements, where do you think you're going to get the best growth recovery from through the second half?

The growth is very strongly related to data centers, a lot with AI, I think, and then also with RF SOI. Those are the 2 bigger growth markets. As well, against the Q1 baseline is 300-millimeter power management.

I guess just on the AI business, I think I've asked this in the past, but maybe we can revisit it. Just have you had a chance to parse out your business that leverages AI, whether that be on the data center piece of business or even as we're looking at AI shifting more toward consumer end devices such as smartphones? Can you talk about your overall AI leverage?

I think the bulk of it right now is pluggables going into the data center. I don't think there's an awful lot going into a mobile phone at this point, if any. But certainly, the movement within pluggables to move away from discrete indium phosphide detector and modulator to a monolithic SiPho with an integrated modulator and silicon detector, then the passives within the guide being part of the pluggable; that's where we see the growth right now.

Okay, great. Russell, do you see any impact in March or June from the end-of-life pull-ins due to the Fab 1 shutdown?

Not material. If we were to look at Fab 1, I would say probably the revenue levels in Fab 1 are higher for the year because of end-of-life than they would be otherwise. And that's why we decided to consolidate certain flows into Fab 2 and to end-of-life those that were really by customer demand going to be end-of-life in general. But it's not an appreciable increase against previous year run rates; if anything, it brings it back almost to previous year run rates.

Okay. And then lastly, just any impact on pricing, labor pricing as the business is recovering, as you're looking at the rest of the year?

I'm not exactly sure what you mean by recovery. We haven't seen a decrease in pricing or significant increases. However, we always observe that newer platforms have higher prices. I expect that our average selling price will likely increase this year, especially when we compare the silicon layers sold this year to those sold last year. This is due to a richer mix that includes silicon photonics, which is a new platform with a different price point and likely has the highest price per layer that we offer.

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

I can't complain; it's a nice spring day here. Thanks for asking.

I'm sorry, I didn't hear you. It got a little jumbled, Richard.

Sorry, I lost my headset. So I'm doing the speaker phone. Hopefully, this is good enough.

Now it's better. Okay.

Okay. Let's hear a couple of questions here. You mentioned an RF SOI, which you're gaining share. Maybe you can kind of discuss this a little bit here. I think you've talked about having a subset of the customer base out there. Are you gaining new customers or getting more share from them? And any way to think about the magnitude of the increase you're expecting to see in kind of the next generation?

We certainly have new customers that had been supplied by other foundries prior to us serving them now. So there, I am quite convinced that we're gaining share. We also have existing customers whose demand last year was much lower than it is presently. So nominally, they've gained share and potentially gained share against people that maybe weren't using us. As far as giving a specific quantitative measurement at this point as to how many points of share we've gained, I wouldn't feel very comfortable to give that, as I've not really seen the overall numbers for RF SOI. But as the reports get out talking about the amount of modules having been sold and the amount of SOI wafers having been sold, when that data is available, I'll be happy to make comments on it. But I really don't know what the overall market is at this point.

Okay. Fair enough for those comments. So let's jump forward to silicon photonics. Did I hear you correctly that this was 5% of sales in the first quarter?

Yes, sir.

An excellent number here, obviously, in the early stages of growth here. I guess a few questions around this here. Do you have any sense of what kind of share silicon photonics has in the 800 gig generation? And any thought process about how that changes? I assume it increases as you go to 1.6T.

A qualitative feel, certainly. At the 800 gig, it's basically a 4 by 200, right? So the cost of doing the discrete detectors as compared to doing the monolithic SiPho becomes substantial, as well as the form factor. If you go to the 1.6T, it's an 8 by 200, in which case form factor becomes very critical as well as cost. So how much SiPho is right now at 800G? I don't know. I really don't. That's where I think our biggest cutting is and I believe that the bulk of all the 5% of the corporate revenue of Q1 was in 800G. What percentage that is, I don't think that it's the major percentage of 800G at this point. But 800G itself is surprisingly quickly being adopted. According to reports of 2 years ago, there'd be very little 800G now and I would think 800G is probably 40% to 50% in the market at this point. But, and 1.6T is probably already going to be cutting in at the end of '24, certainly in 2025. But I couldn't tell you exactly at 800G what the SiPho percent of sales will be. But I think at 1.6T, it'll be very substantial.

Okay. That sounds great here. And you also called out in silicon photonics having 6 of the top 10 pluggable module suppliers as customers here. I get 2 questions around this. Do you see it?

What I meant is that there are engagements with SiPho. There could be additional customers who are not with SiPho. Specifically, I mentioned that six of the top ten players are engaged with SiPho, but that does not mean all ten are. Six of the top ten are our customers. I did not specify how many are our customers in total, but at least six of the ten are ours. There may be more customers outside of SiPho.

Okay. And I guess to that point here. Do you see the potential for seeing that number increase here as you go to 1.6T?

Yes, sir.

Okay. Excellent. Great to hear.

I actually think it's already increased.

Okay. Great.

I wasn't sure, so I didn't say it. Whereas to say 6 was a sure bet.

Okay. All right. Fair enough. Wonderful. I guess a quick question here as we think about your overall revenue profile with 300-millimeter versus 200-millimeter. You've talked about expecting some increase in 300-millimeter power management. I know you're trying to drive 300-millimeter into more of your product lines here. So can you give me a general sense of where you sit in terms of revenue exposure at 300-millimeter and then how does that progress over the next 1 to 2 years?

Right now it's a bit over 20% of our revenue, and it is, obviously, if you look at the fact that the capacity that we're growing is in Agrate, that's 300-millimeter, and in Albuquerque, that's 300-millimeter, it'll be substantially higher. So a good portion of our plan of the $2.6 billion is 300-millimeter growth. So I would say that by the target of the $2.6 billion, the majority of our business will be 300-millimeter.

Okay. Excellent. Last question for you; I'll jump out of line, Russell. I want to get your sense here of thinking about the revenues for the year. I think you've characterized this call as in the last call, where you can see sequential growth throughout the rest of the year. I guess 2 questions to that end. How do we think about the growth profile in the next 2 quarters of the year, kind of qualitatively? Would you expect the third quarter to be similar or higher sequential growth? And then as we've seen in your normal patterns in the past, the fourth quarter tends to be more flat or at least a lot more growth than the third. Is that still a revenue profile that we should count on?

Well, I'm not sure I want to commit to that question, but what I said at the previous call is that there'd be notable growth in the quarters. I still feel that we'll have notable growth in the quarters. Will it be a continuum of a 7% or an 8% or a 9%? No, I'm not committing to that. But I do believe that Q2 to Q3 will be notable growth.

Okay. Maybe I'll ask the question in a slightly different way, which is to ask you a question I asked you on the last call, which is do you expect to grow this year? I think you said you'd be disappointed if you did not. Is that still your expectation?

I'd still be disappointed if we don't.

The next question is from Mehdi Hosseini of SIG.

Yes. I have a couple of follow-ups from my end. Russell, if silicon photonics is going to profit some of your revenue in Q1, how should we think about the contribution, either a percentage of revenue or sequential growth by Q4 of this year? And I understand, I'm not asking for the year-end guide, but I just want to see how these new wins and new markets are helping you with the overall revenue trajectory?

The level of revenue in Q1, we would see it in Q4 being higher, but the level of revenue for the company will be higher in Q4 as well. So I don't think that we'll necessarily have higher than 5% of the corporate revenue being silicon photonics. But staying at the 4.5% to 5.5% level would be a higher silicon photonics revenue baseline for that 4.5% to 5% contribution, if that answers your question.

Yes. Absolutely. And then, is there like a kind of synergy between silicon photonics and silicon germanium? And is that what's enabling you to be that basically you're the first on the silicon photonics revenue? Is that simply germanium enabling you to do that?

Certainly, there is a connection as we move into the pluggable area. The ecosystem consists of similar customers and end-users. Within our SiPho platform, we are also working on a germanium modulator, leveraging our experience with 5G, which involves depositing and handling germanium. There is definitely an overlap in the market, customer base, and our expertise. I believe that our RF technology team is among the best in the world. This encompasses their service and knowledge. We are making significant advancements on the platform and exploring new modulator materials, which will help maintain our strong leadership position due to our highly skilled personnel. The company president, Marco Racanelli, is an RF expert, and Ed Preisler, who leads this initiative, is outstanding in his field. I could name many talented individuals from his team, but I worry about them being recruited away. They are truly exceptional. The success we are achieving is tied not just to our silicon germanium work but also to the expertise of the people in that domain. I have a deep understanding of the RF space.

Okay.

And then I want to play this. We have extremely good customers that are very good partners within that. Now, we've done several press releases with Anello in the past. The CEO of Anello, Mario Paniccia, has been an amazing partner that, in general, has been very helpful for us. So the customer base that we have and the way we work with our customers are also tremendous enablers in technical advancement.

Just on that note, given how sophisticated the Anello design is and the characterization of silicon, even if competition catches up, these wins are sticky. And I shouldn't be concerned with any pricing pressure looking to next year because competition is catching up. You could be a single source for some time. Is that the right way of thinking about these new wins?

If it's the right way, that's how I prefer to view it. I believe it's largely accurate. Our relationships are strong, and when it comes to pricing pressure, it's essential to collaborate closely with our customers to establish prices that also enable their success. When you have a good customer, pricing pressure isn’t about being used against other competitors; it's about partnering to ensure mutual success in the market. I honestly see pricing pressure as an opportunity to work together toward winning outcomes. To alleviate any pricing pressure, we focus on technological advancements, which may involve reducing the form factor to increase the number of devices per unit of silicon or enhancing performance to raise the value of the silicon we sell. Therefore, I don’t perceive pricing pressure as a significant issue. Our goal is to foster sole supplier relationships, built on partnership and trust with all our customers.

And in that context, combined with silicon photonics, germanium, and combined with certain RF SOIs, are these going to be margin accretive or margin neutral? Hopefully, it's not margin dilutive.

The silicon photonics is definitely margin accretive and silicon germanium has always been at the upper end of our margin spectrum in general.

And RF SOI?

RF SOI itself is very, very good margin. What dilutes RF SOI margin to some extent is that the SOI substrate itself is very expensive. So RF SOI has a very good revenue contribution, but the margin that you get on the RF SOI is really off of the silicon that you're processing. You're not doing a big uplift on the substrate and the substrate's expensive. So if you look at the total margin of an RF SOI wafer, it's not the highest margin that we sell. If you look at the margin per layer of silicon manufacturing, it's very, very good.

Okay. And then lastly, OpEx sold $33.5 million for Q1.

Sorry, I couldn't hear the beginning of the question. If you could repeat it.

I'm shifting to OpEx. You did $33.5 million for Q1. How should we model this for the rest of the year?

Our OpEx are pretty much flat. I mean, despite the revenue increase that Russell is talking about, we do not expect to increase those OpEx because they are fixed costs. So I think the current level is the level that we'll take.

So just the model is kind of flattish going forward.

Yes.

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

I do have a couple of questions for you. I was wondering, could you talk a little bit about the electric vehicle market and what you're seeing for your products there?

Sure. Thank you. So the biggest market that we serve and have served within the EV is battery management, which right now is not as strong as it had been as the overall automotive is not. But that is an area that we serve. We have a new platform, which is a reserve platform that is gaining a lot of traction for designs for battery management. I think the first prototypes on that will be happening in the fourth quarter and first quarter, fourth quarter of this year and first quarter of 2025, according to recent customer interactions that I had asked. So the biggest area on the EV that we have is within battery management. Within automotive in general, we have a variety of other activities that we do. We have another that had been press released over the years. We do radar, silicon germanium based radar that was with DENSO, Toyota. We have a variety of activities with automatic door openings, spinning mirrors, a certain number of activities with cameras, and right now, a lot of activities, whether electric vehicle or not, dealing with LiDAR. I think I mentioned that in the script; we're dealing with silicon photonics for FMCW based LiDAR, which has not gone into mass manufacturing yet but promises to really be what will take over on autonomous driving for the LiDAR market. So those are the major activities that we have with automotive and specifically with electric vehicles. Now, there are many other products that we serve within automotive as well that comes from having purchased the Maxim facility where the bulk of the long-term contract we have is serving automotive. That's very captive within Maxim and the specific applications that are served within there, I really shouldn't get into because that's Maxim's business and not mine. But we serve Maxim on a contract, well, ADI at this point, and that's predominantly automotive.

So are you seeing demand up, down, or sideways?

I said initially that the automotive demand is weak right now and I reiterated that for battery management, that it's also down right now.

Okay. And then a question for Oren, could you explain what happened with the taxes this quarter and whether we should still expect it to be about 14% for the full year?

Yes. The model should be that you should expect, I mean, all in effective rate, whatever you want. The Israeli operations create 7.5%, our taxable at 7.5%, the U.S. at 20%, the Japan at 30%, so you can assume 14% or whatever. For this, from Q2 and beyond, for this quarter, as you see, there was a one-time benefit, which is the base for your question; instead of having an expense, we had a benefit from some historical accrual reduction. But of course, this cannot be the baseline assumption for the future that we'll have tax benefits when we have pre-tax income, like in this quarter. So for the future, the assumption should remain the same.

And then just to ask you about the interest income, at $4 million, that was significantly lower than I was estimating just based on interest income. So what do we think about that going forward?

So usually it's between $4 million per quarter to $7 million per quarter. Last quarter, we had a one-time benefit there in that line; usually in this line, it's not only interest, it's also gains from some sale of machinery or other specific transactions in that line and gains from exchange rate. So this line is not something that is like the OpEx, which I could answer before so that it's a fixed amount. Usually, it's between $4 million to $7 million. Obviously, Q4 '23 last quarter was exceptionally good, but you see that it's coming back to this level of $4 million to $7 million.

Okay. I think you had kind of a big exchange rate hit there, didn't you, this quarter, according to the cash flow?

No. Not exchange rate hit, no.

The next question is from David Duley of Steelhead Securities.

Congratulations on nice execution. I just had a couple of questions. I guess, they're more housekeeping. Oren, you gave us a bunch of CapEx numbers, but they seem to kind of be over a multi-year period. I was wondering if you'd give us your best guess as to what CapEx is going to be in 2024.

So, I mean, it's pretty straightforward from what I said. I mean, $200 million a year maintenance CapEx, so it's $50 million a quarter, plus we said $160 million is remained this year and next year. You can assume about $30 million, $40 million a quarter for Agrate, and you saw it in Q1 that the CapEx is $98 million, which means that on top of the $50 million baseline, there was probably $40 million to $50 million for Agrate. So you can assume this will be also for the next quarter.

So $40 million or $50 million a quarter for Agrate?

Yes.

Okay.

Now for Intel Fab 11X, I don't want to speak about it. It's also related to Intel business CapEx that we buy from them and that they buy from vendors and sell to us. And I don't want to enter into the number. I just said that it's a $300 million that will start this quarter, Q2 '24, for the coming 2.5 years. If you want, you can divide the $300 million by 10 quarters, which is 2.5 years, and reach $30 million, but everybody can make an assumption. I don't want to enter into specific numbers. And that's all.

And then you will spend some more on SiPho and 5G, right?

Yes. SiPho, 5G capability tools. I said it's multiple dozens of, multiple tens of millions of dollars. This year, if you average it over a few quarters, it's almost a quarter of that, but it will not be material amounts this year because we are now ordering those tools for capability and most of the payments will not be this year.

So that sounds like it adds up to somewhere like around $125 million a quarter, CapEx?

It could be. We don't give guidance for that. It's a reasonable calculation, although it's not something that is linear.

Just along the same lines, I'm looking at your cash flow statement and your press release. The depreciation expense was down like $6 million quarter-over-quarter. First of all, why was this depreciation down so much with you ramping up CapEx? And then if you could help us understand what that depreciation number is going to do on a quarterly basis for the balance of the year, I'd appreciate it?

On the depreciation, as noted in the cash flow appendix, it averages $60 million per quarter. A year ago, it was $62 million, and a quarter ago, it was $65 million, so it's relatively consistent. The decrease is not linked to new capital expenditures, which you mentioned are increasing. Instead, it results from tools that completed their depreciation 15 years ago.

From 15 years ago.

I think, yes. So, anyway, it's probably tools that were purchased in 2009 and finished their depreciation, but that $60 million is the baseline and you're right that you should add to that whatever amount of new CapEx that should be now depreciated. Will not change a lot.

But what do you think that will be for the balance of the year? Because it's kind of important for your gross margin.

Yes, I don't expect it to exceed $60 million, possibly reaching a maximum of $65 million. One reason is that the CapEx for Intel's Fab 11 won't start being depreciated this year until production begins. Additionally, for other tools, we won't start depreciation immediately after payment; we first have to receive the tools, which can take a few quarters for qualification, leading to a potential year delay in depreciation. There will be an impact from the aggressive tools that will begin depreciation, and Russell mentioned this as one of the factors causing headwinds. Therefore, I would estimate $65 million as the new level.

Okay. And then final question from me and it has a lot to do with these depreciation questions, is going forward you're ramping up your CapEx, and obviously, depreciation is going to be going up, and during that timeframe, I'm kind of wondering what you think the drop rate of the business is going to be. You've always given us a target drop rate, but that's not when you're spending $125 million a quarter in CapEx. So I'm kind of wondering, when we're at these elevated CapEx levels, what the drop rate to gross margin is you expect with revenue growth through the balance of the year?

So we believe strongly in our financial model that we published in November and it already included, baked into that all those CapEx of Agrate for sure, 11X for sure, and also the additional capability tool. And the margins are outlined there very clear. I mean, that we expect to be $500 million at $2.66 billion, so it's almost 20% net profit margin and you have the growth and operating, so.

I can't see that right now, so could you please explain what you think the gross margins drop rate is going to be this year?

This year? We didn't give a guidance for this year.

Okay. So longer-term, you think the drop rate is going to be what again?

According to exactly to the slide, which is publicly filed with the financial model.

Yes. I can't see the slides right now, Oren. That's why I'm just asking.

We can have it in front of us either, but we'll pick it up. So the financial model clearly states, I'm just reading the publicly filed document, that the gross profit supposed to go up from $347 million baseline that was in the end of last year to $740 million a year gross profit out of $2.66 billion, which is 32% incremental margin. Operating profit to go from less than $200 million to $560 million a year, which is 30% incremental. And net profit from $200 million to $500 million, which is a $2.4 billion growth, which is 24% incremental margin.

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

I would indeed. Thank you. So to summarize, as we move through the year, we remain focused on and confident about continuous growth, driven by the performance of several of our differentiated technologies, being critical to present market needs and having partnered with market leader customers who are really true partners. This growth is against the landscape of a not yet robust market. Recent customer forecasts give us reason to believe the market recovery is forthcoming. We greatly appreciate your continued support and confidence in our vision. Our team is eager and fully prepared to continue to capitalize on opportunities, targeting substantial value for our customers and shareholders. As far as activities going on within the next month to two and conferences where we really hope that we'll have the opportunity to see you, on May 20 and 21, we'll participate in the 52nd Annual JPMorgan Global Technology, Media and Communications Conference in Boston. On May 26, we'll participate in the 25th Annual Israeli Oppenheimer Conference in Tel Aviv. And on May 29 and 30, we will be attending the 52nd Annual TD Cowen Technology, Media & Telecom Conference in New York. As many of you would have the opportunity to come, we would look forward to meeting, talking with you, and explaining where we're at, where we're going, and why we're confident in where we would be. So thank you very much again, and have a wonderful day and following week. Bye-bye.

Thank you. This concludes the Tower Semiconductor conference call. Thank you for your participation. You may go ahead and disconnect.