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Tower Semiconductor Ltd (NASDAQ:TSEM)
Q2 2019 Earnings Call
Jul 29, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz Second Quarter 2019 Results Conference Call. [Operator Instructions] Joining us today are Mr. Russell Ellwanger, TowerJazz's CEO and Mr. Oren Shirazi, CFO.

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

Noit Levy -- Vice President of Investor Relations and Corporate Communications

Thank you, and welcome to TowerJazz's financial results conference call for the second quarter of 2019. 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, F4, F3 and 6-K filed with the Securities and Exchange Commission, as well as filings with the Israeli Securities Authority. They are also available on our website. TowerJazz assumes no obligation to update any such forward-looking statements.

Please note that the second quarter of 2019 financial results have been for prepared in accordance with US GAAP. The financial tables and data in today's earnings release and in this earnings call also includes certain adjusted financial information that may be considered non-GAAP financial measures under Regulation-G and related reporting requirement that the established with the Securities and Exchange Commission. The financial tables include a full explanation of these measures and a reconciliation of these non-GAAP measures to the GAAP financial measure.

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. Welcome to our second quarter of 2019 financial results conference call. Revenue for the second quarter of 2019 was at our guidance of $306 million, with EBITDA of $70 million and free cash flow of $28 million. Oren will provide full financial details later in the call. The second quarter was our first quarter within the new three-year contract extension with Panasonic. We were able to offset to a great extent, the $22 million Panasonic revenue reduction having achieved good quarter-over-quarter organic growth of 11%. We guide further organic and total revenues growth for the third quarter.

We're executing on exciting opportunities within all of our business units, many of which segue into new and large served markets. Of particular interest, our 300 millimeter activities have resulted in very strong demand and forecasted excess demand, for which we are now investing to meet. This investment has additional benefits that tie to substantial 200 millimeter partnership projects.

I'll now review our business for the different business unit's activities. In the first half of 2019, our RF mobile business experienced strong growth for 2018, primarily as a result of strong design wins, one, during 2017 and 2018 in RF SOI for our advanced platforms, both in 200 millimeter and in 300 millimeter. 300 millimeter RF SOI has now ramped to high levels and they've executed on initial small capex in other projects to relieve some floor-related bottlenecks to meet present demand.

Customer forecasts have grown well beyond our current 300 millimeter capacity. I will address this in a few minutes with our capex expansion plans.

Of interest to note, our third quarter forecast present the highest revenue quarter for RF SOI that the Company has seen to-date. In addition to our successful wrap of 300 millimeter RF SOI, we have introduced an industry-leading 200 millimeter platform QT9 to address high-power switch and tuner applications. This new technology complements our digitally intensive 300 millimeter process, and positions us for further growth in the strong 200 millimeter RF SOI market.

We have one initial design slots in this process and anticipate ramping this new technology in late 2020 and into 2021. We expect overall growth in mobile to result from a combination of market share gains, a significant portion of the 300 millimeter volume that has ramped recently, for example, our design slots we did not previously hold, as well as general RF content growth in handsets, due to increased adoption of sub 6 gigahertz 5G standards. And longer term, we view millimeter wave 5G to provide additional drivers for growth as this standard will enable integration of power amplifiers in our technology, first today, where most power amplifiers are built in 3 Fi [Phonetic] technologies, which we do not serve.

In the first half of 2019, our infrastructure optical silicon germanium business suffered from an industrywide pullback, which is expected to run its course through 2019. Third quarter shipments will be lower than the second quarter and we have not yet seen signs of rebound. In addition to inventory correction in the most recent US government ban on Huawei may be further softening the short-term demand in this space.

However, data traffic rates only continued to increase for all analyst reports. There is no question that data center growth will return, and hence, we look forward to enjoying and sharing with you the fruits of our high market share, due to our differentiated high-end optical device performance in 2020 and beyond.

What can be on current production, which is dominated by the 100 gigabit optical standard, we have strong design wins in 400 gigabit, with new products in our highest performance silicon germanium H5 platform, as well as our new silicon photonics platforms. To speed up the 400-G design cycles for our customers, we announced this past quarter, our further enhancement of our design kits, to enable the co-optimization of silicon germanium and silicon photonic components in a single design environment.

We anticipate that the new 400 gigabit silicon germanium SiPho product lines, in addition to the recovery in the 100-G market will provide strong potential growth in an area where we provide high value, and hence, are able to maintain significant ASPs. 400 gigabit products are just beginning to hit the market now, and we'll ramp to a significant portion of the market over the next few years.

Our power business continues to see a good revenue stream, but more importantly, an accelerated pipeline of design activity and more highly differentiated areas of high voltage and in 65 nanometer 300 millimeter BCD. Our 300 millimeter 65 nanometer technology has best-in-class figures of merit for low voltage power. During the first half of 2019, we delivered initial production volumes, as well as continue to attract a large amount of prototyping activity. In addition to providing the ability to integrate large digital content, the platform provides very low resistance [Phonetic] at low voltages, which has allowed some customers to remove their external discrete power FETS, integrate them directly on chip saving bill of material cost and board area, while improving overall efficiency. The strong prototyping activity from Tier 1 customers in this technology has also contributed to our decision to expand capacity in our 300 millimeter factory, which I'll elaborate on shortly.

For higher voltage application requirements, we have one initial Tier 1 design in our 200 millimeter 140-volt technology we announced this past quarter. This technology targets the high volumes of automotive, data centers, and industrial markets which demand 48-volt to 125-volt operation, and is unique and that it provides a high level of integration, smaller footprint using BOX silicon, hence, eliminating the need for expensive SOI starting material and providing an efficient, low-layer count process flow.

Also within automotive, we continue to see strong demand for a family of power management with lithium-ion battery stacks. To note, electric vehicle sales worldwide continued strong growth driven primarily in China. We serve this exciting EV market and expect to see continual strong tailwinds with our advanced power management platforms within battery management systems. At even higher voltages, we received a Tier 1 design win for our new 200-volt to 300-volt power management within SOI technology.

Looking into our CMOS Image Sensor business, our largest application and market is the industrial market. As previously discussed, we have seen a pullback, which our customers attribute to the trade war. It is starting to pick up now with new projects, many of which are targeted toward large-screen display inspection using very high resolution global shutter sensors. All of our new projects are based on our state-of-the-art global shutter pixels in our 65 nanometer, 12-inch line in Uozu. We expect these projects to ramp toward the end of next year.

Orders for present products are forecast by customers to recover with wafer starts beginning during the fourth quarter of this year. We have won a large face recognition sensor project for smartphones that will be based on indirect time-of-flight technology, and we'll use state-of-the-art stacking technology, utilizing our 300 millimeter 65 nanometer platform.

In parallel, for mobile applications, we are working with three leading fingerprint companies for our under-OLED and under-LCD optical sensors, based upon our unique pixel technology. These projects are expected to begin to ramp in 2020, utilizing our well-established 0.18 micron, 200 millimeter CIS technology.

In the high-end photography area, we're moving along with the next generation stacking sensor project, partnering with an undisputed leader in the market targeted to ramp in 2021. Medical and dental X-ray demand has remained stable with strong margins. We see an increased demand for large CMOS based panels. They are now in the final qualification stages of new products, with one of the leading providers. Additionally, we are fully qualified and started to ship single die wafer scale medical X-ray sensors on 300 millimeter, with two additional customers planning final product tape-out in the fourth quarter of this year.

Looking to the 300 millimeter capacity expansion, as a result of present capacity and forecasted demand growth of our highly differentiated 300 millimeter RFSOI, 65 nanometer BCD power management, and imagers, both smallest pixel global shutter industrial imagers, as well as high-quantum efficiency stacked imagers for facial recognition and high-end photography, we have decided to accelerate our plan to expansion and to allocate $100 million to increase the capacity of our 300 millimeter Uozu fab in Japan. Equipment should begin to arrive in December, with most to all tools expected to be qualified during the first half of 2020.

This investment not only increases our 300 millimeter wafer capacity, but will drive additional benefits that tie to new and large 200 millimeter partnership activities. In our TOPS business, although seeing an inventory correction pressure, mainly stated by our customers at their distribution channels, our TOPS business revenue comprised predominantly of power discretes, is stable after a 2018 growth here, with continual refreshing of new developments with our largest partner, and otherwise multiple new activities, which should turn into revenue in 2020.

Specific to automotive, during the second quarter, we announced partnership with Lumotive, a Bill Gates-funded LiDAR start-up with successful demonstration of the first beam steering IC for automotive true solid-state LiDAR systems based Lumotive's unique, Liquid Crystal Metasurface technology. Lumotive's complete LiDAR system will also utilize a custom silicon photo multiplier sensor using TowerJazz's cutting-edge single-photon avalanche diode technology.

In addition, and very importantly, we announced an expansion of our manufacturing collaboration with our long-term successful partnership with Vishay-Siliconix, for next-generation automotive platforms.

In terms of utilization, Fab 1 was at 76% during the second quarter, Fab 2 utilization was 80%, Fab 3 utilization for the quarter was about 70%, due to the stated decrease in silicon germanium demand for data centers, Fab 9, San Antonio facility was at about 50% utilization impacted by discretes.

TPSCo blended utilization remained in an average of about 50% with foundry utilization having gone up substantially and specifically Uozu 300 millimeter foundry, up 33 points.

In summary, we start the second half of the year having shown good organic growth and guiding a 6% organic growth for the third quarter, resulting in a $312 million mid-range guidance. We are seeing very strong demand in 300 millimeter; the fruits of past year's developments of advanced 65 nanometer platforms in RF, power and imaging; and as stated, our investment to grow the capacity to support the increased demand, with customer forecasts showing continued growth throughout all 2020, and then as well for 2021 and 2022. This capex expansion should begin ramping into increased revenues at the end of the first half of 2020.

At this time, I'll turn the call to our CFO, Mr Oren Shirazi. Oren?

Oren Shirazi -- Chief Financial Officer, Senior Vice President of Finance

Thank you, Russell and welcome everyone. Thank you for joining us today. We'll start by providing the P&L highlights for the second quarter of 2019 and then discuss our balance sheet. Revenues were $306 million reflecting 11% organic growth as compared to the first quarter of 2019. Net profit was $21 million and diluted earnings per share of $0.20 and adjusted non-GAAP earnings per share of $0.24. Cash from operating activities was $72 million in the second quarter and free cash flow was $28 million, net of $44 million investments in property and equipment. We are satisfied to see that we were able to mitigate a large portion of the Panasonic revenue and margin reduction for strong organic growth and efficiency measures.

Looking at the revenue line, we see that 91% of the $22 million revenue reduction in Panasonic quarter-over-quarter, was mitigated from different sources of organic revenue, which went up by a total of $20 million. Analyzing the margins by looking at the operating profit and EBITDA lines, we see that about 60% of the Panasonic revenue reduction impact on our operating profit and EBITDA lines was mitigated by the organic revenue growth and by efficiency measures we took, contributing $13 million improved profitability to these lines, excluding the Panasonic income.

Net profit for the second quarter of 2019 was $21 million or $0.20 per share on a diluted basis as compared to a net profit of $26 million or $0.25 per share in prior quarter.

Before moving to the cash flow and balance sheet analysis, I would like to mention the capacity expansion plan in our 300 millimeter fab in Uozu, Japan. Following the recent substantial increase in our 300 millimeter fab utilization and forecasted customer demand exceeding our current capacity capabilities, we have announced a capacity expansion plan in order to satisfy this excess demand for our highly differentiated 300 millimeter RFSOI, 65 nanometer BCD power management and CMOS Image Sensor platform. Under the plan, we will allocate an amount of about $100 million to increase the capacity of our Uozu fab in Japan. The equipment tools to enable this increase are targeted to be installed during the first half of 2020, and expected to result in higher revenue and higher margin commencing already in the second half of 2020.

We'll now provide the cash flow highlights for the second quarter and our balance sheet analysis as of June 30th, 2019. During the second quarter of 2019, the Company generated $72 million in cash from operations and invested $44 million in fixed assets net, resulting in $28 million of free cash flow. Compared to the first quarter of 2019, cash from operations was $75 million and investment in fixed assets net were $42 million. Net current assets as presented on the balance sheet, namely current assets less current liabilities, was $808 million on June 30, 2019, resulting in a current ratio of 4.8 times as compared to $784 million net current assets with a -- and a similar current ratio of 4.8 times as of December 31, 2018.

Short-term and long-term debt presented in the balance sheet as of June 30, 2019 have increased as compared to December 31, 2018, mainly due to the implementation of Accounting Standard Update ASU 2016-02 leases effective January 9, 2019 with regards to lease right-of-use assets and lease liabilities, which implementation also increased fixed assets bonds. Additional details regarding ASU 2016-02 were also included in Note 2I to our annual financial statements for the year ended December 31, 2018.

In addition, the first principal payment of $18 million scheduled to be paid in Q1 2020 for the series G bonds, which we issued in 2016, was recorded as short-term debt as of June 30, 2019. Shareholders' equity as of June 30, 2019 reached a record of $1.29 billion, which is a $59 million increase as compared to December 31, 2018.

Moving to elaborate on the tax line in the P&L, I would like to describe our applicable and effective all-in tax rates. Our US affiliate Jazz Semiconductor and TowerJazz Texas, which own our Newport Beach and San Antonio fabs, respectively, are taxed at 21% rate starting in 2018 following the US tax reform as compared to 35% prior to that. TPSCo's profit from its Japan operations are subject to an approximate 32% tax rate and our profits in Israel from Fab 1 and Fab 2 operations, while subject to a 7.5% statutory tax rate, are not expected to result in any tax payments in Israel for the foreseeable future, since we have more than $1 billion in historical NOL still to be utilized, which can be carried forward indefinitely. Considering these, and since we have certain tax exemptions, discounts and credits, our all-in worldwide weighted average effective tax rate was 4% for the year-ended 2018 and 1.4% in 2019 to-date.

I would like to describe now our currency hedging activities. In relation to the euro currency, we have almost zero business in euros, hence no exposure to the euro. In relation to the Japanese yen, since the majority portion of TPSCo's revenue 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 operations. In order to mitigate the remaining yen exposure, we execute zero-cost cylinder hedging transactions. These zero-cost cylinder transactions hedge currency fluctuations to be contained in a narrow range as compared to the spot exchange rate. Hence, while the yen rate against the US dollar may fluctuate, the impact on our margin 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 yen denominated. This helps to protect us from potential impacts of yen fluctuations.

And lastly, in relation to the fluctuation of the Israeli shekel currency, we have zero revenues in this currency and while less than 10% of our costs are denominated in the Israeli currency, we also hedge a large portion of this currency risk using zero-cost cylinder transaction.

Our last note on our share count. As of June 30, 2019, we had 106 million outstanding ordinary shares. We no longer have any capital notes outstanding, since all were converted into equity in the past. The fully diluted share count is 109 million. 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 to the operator.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, we'll 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

Yeah, thanks guys for taking my questions, and congratulations on the continued progress. Oren, if we could start maybe on the capex schedule, your expectations on how that money is going to be spent and which we built into our model?

Oren Shirazi -- Chief Financial Officer, Senior Vice President of Finance

I believe most of the payment, the vast majority of them will be done through 2020. I think it's reasonable to assume a linear spread over 2020. It could lead up to 5% of that or 10% will be already paid in 2019 in Q4, because it will be attributed to facility preparations and some down payments required. But I wouldn't think that we need to increase the CapEx model for 2019. I guess, it will be within the number that we know, the model which is up to $45 million per quarter. I don't believe we will cross that number in '19. Definitely 2020, we'll see these amounts.

Cody Acree -- Loop Capital -- Analyst

And are there any other areas of your fabs infrastructure that you could increase if your demand continues to trend in [Technical Issues]?

Russell Ellwanger -- Chief Executive Officer

Yes. The answer would be, I don't think it's a huge amount of capex that would be required, but as we move forward, the different requirements from customers, different products we have with customers sometimes requires a few tools to change the capability of the line. If you recall, when we substantially moved the Newport Beach Fab 3 from a lot of RFSOI into adding much more silicon germanium, the capex spend was relatively small for the amount of silicon germanium capacity that we put in, because we added a few unique tools for the capability that drove the movement of the mix.

So there is a strong possibility continually that we change the mix of different factories, it doesn't take an entire set of tools to do so, but it will always require a few unique tools in order to change the mix capability.

Cody Acree -- Loop Capital -- Analyst

Thank you, Russell. And then lastly, also for you, just on your silicon germanium ramp last quarter. You had said that you're getting some anecdotal input from your customers that demand was still soft, inventory was still being burned, but you did expect orders to come in, in Q3 for delivery in Q4. It sounds like that may not have materialized. Can you just talk to that a bit?

Russell Ellwanger -- Chief Executive Officer

As I stated, the Q3 revenue for silicon germanium will be lower than Q2, and we have not yet seen signs of a rebound in the market. We have heard customers talk about a rebound and we continue to, but we've not seen it as far as purchase orders coming in to the same level that we have been having in Q3 and Q4 of last year. So I don't know really much more to say on that.

I do think or I go beyond thinking, I know that the Huawei ban did have an impact. We were able to mitigate the impact and that's our Q2 guidance was hit to the midpoint. I think it was a bit better than analyst expectation for the quarter, given everything that was happening in the quarter. But Q2 was impacted by specifically the ban with Huawei, with customers having canceled or delayed shipments, cancel the order and delaying shipments, and we're going to see that in Q3 as well, I mean, that we know at the moment.

However, as stated during the script, there is no question that data traffic continues to grow and there is no question that the devices that we serve are absolutely required for that growth. And we enjoy a very high market share within that segment, and -- a market share that I have not seen any reason to believe that we're losing anything in, our customers to not believe that we've lost anything in it, maybe in some cases to the opposite.

So I -- again, I couldn't state as the CEO right now that we see orders coming in that would show that Q4 is rebound to the opposite we do not, and that is what I did state. But it is certainly not a question of if data center growth will begin, it's just a question of when it will begin and I'm quite convinced that's the pull-back that we see cannot last throughout much more than this year, and we should start seeing POs that would impact revenues in 2020, again the optical space or many layers. So we're pretty much within a month, month-and-a-half of start dates for Q4 revenue.

Cody Acree -- Loop Capital -- Analyst

Understood. Thank you very much for that.

Operator

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

Quang Le -- Credit Suisse -- Analyst

Hello. Hi, thank you for taking my question. The first would be regarding your 300 millimeters fab in Uozu. And obviously, you are now expanding the capacity and you expect the revenue to already come in, in the second half of 2020. May I ask what is the extent of revenues you are expecting, and what was the utilization of 300 millimeters fab in the last quarter?

Russell Ellwanger -- Chief Executive Officer

We expect the revenue depending on mix to be somewhere between an annual $70 million to $100 million increase. As far as the specific Uozu factory utilization, that we have not given. We haven't given it from the start, we gave a blended utilization of the TPSCo factories. To get too specific on any single factory, I think is, maybe giving too much data specifically on our major partner there, which is Panasonic. But we've always from day one, as we reported utilization, given a blended utilization. What we did say was that the foundry utilization was up 33 points in the second quarter for the Uozu factory.

Quang Le -- Credit Suisse -- Analyst

I see. Okay, and can I ask about your organic revenue. You said it grew 11% quarter-on-quarter in Q2 and project it to grow 6% quarter-on-quarter in Q3. On a year-on-year basis, how much is that?

Russell Ellwanger -- Chief Executive Officer

I'll look at that, one second. I don't have it off the top of my head. One second here?

Quang Le -- Credit Suisse -- Analyst

Yeah.

Russell Ellwanger -- Chief Executive Officer

We'll calculate that and we'll get back to the answer before the end of the call. So maybe we can just move on.

Quang Le -- Credit Suisse -- Analyst

Sure. Can I also ask you about your silicon germanium revenues then, because you used to give these numbers as is Q2, I believe, it was like $40 million as you guided at this last quarter. Can I ask what was the actual revenues for silicon germanium and how much you are expecting in Q3?

Russell Ellwanger -- Chief Executive Officer

We actually didn't guide for it. We give end of year breakdown of the different end markets that we serve, but I don't mind giving you the number.

Quang Le -- Credit Suisse -- Analyst

Yeah.

Russell Ellwanger -- Chief Executive Officer

So one second here. So your question was Q2, and what we expect for Q3?

Quang Le -- Credit Suisse -- Analyst

Correct, yes.

Russell Ellwanger -- Chief Executive Officer

Q2 total would have been somewhere about $37 million.

Quang Le -- Credit Suisse -- Analyst

Yeah.

Russell Ellwanger -- Chief Executive Officer

And Q3 looks now to be somewhere about $32 million.

Quang Le -- Credit Suisse -- Analyst

$32 million. Got it. And my final question would be just on, again, on the capacity expansion. Obviously you are seeing the growth in your RFSOI and your 65 nanometer BCD power management and then CMOS Image Sensor. If I were to give percentage- wise of the main drivers, what percentage would you put for each of these three, if you have any indication on that?

Russell Ellwanger -- Chief Executive Officer

I'm not 100% sure I understand the question, could you rephrase it?

Quang Le -- Credit Suisse -- Analyst

Oh, yes. So basically, you are adding capacity for your products, right. One of them is 300 millimeters RFSOI, the second one is your power management 65 nanometer BCD, and the third one will be your CMOS Image Sensor platform, right. So of, let's say, this $100 million spend that you're going to increase the capacity of each of these, what percentage would you allocate to each of these products or is there any allocation?

Russell Ellwanger -- Chief Executive Officer

Our desire is not to allocate anybody within the 300 millimeter, but rather to at this point, increase the capacity and then continue as we stated the 2021 and 2022, those continual increase well beyond what we need to have in 2020, which itself is beyond the capacity we have now. So we're looking at multiple tracks to continually increase the 300 millimeter capacity.

As far as the most immediate need, it's RFSOI. And the highest amount of volume that's required in the immediate term is RFSOI, the highest mix of volume right now is RFSOI. And as far as the very strong prototyping and demand and the number of customers, it's power management, the 65 nanometer BCD. And as far as the stickiness and projects that are really breakthrough-type projects, but not the same type of volumes, it's a CMOS Image Sensor. Although the CMOS Image Sensor is in many layers, and hence, very strong selling prices of wafers and all of these platforms being highly differentiated, demand very good, [Phonetic] margins. So I think hopefully that answers the question.

Quang Le -- Credit Suisse -- Analyst

Yeah, that's correct.

Russell Ellwanger -- Chief Executive Officer

But the volume demand -- the highest volume short term, medium term, and I believe long term, is RFSOI as that's the type of markets that it serves. And the power management is an area that we've really got through as -- very significant breakthrough technology, but there is a lot of prototyping activity and a big win, a very big win that we had had, that's still growing obviously. That will demand quite a bit of capacity. At the image sensing, most of the capacity growth there, is needed at the end of 2020 and 2021, 2022.

Oren Shirazi -- Chief Financial Officer, Senior Vice President of Finance

So if I can complete the answer, Quang. So the year-over-year organic growth so for Q2 actually historically, year-over-year organic is positive 1% and for Q3 guidance the mid-point year-over-year will be an additional 12% positive increase.

Quang Le -- Credit Suisse -- Analyst

Thank you.

Operator

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

Rajvindra Gill -- Needham & Company -- Analyst

Yes, tank you and congrats as well. Question on the gross margin profile. As we kind of shift through Panasonic and we kind of offset the Panasonic impact, how do we kind of think about the gross margin drivers as we go into calendar '20? You'll be benefiting from a better mix shift, the Panasonic headwinds will be behind you. Just wanted to get a sense of how do we think about gross margins next year, and do we have kind of maybe a long-term picture of what the margins would look like in a more normalized level?

Oren Shirazi -- Chief Financial Officer, Senior Vice President of Finance

Yeah. I think you see already the Q2 '19 P&L, for example, the gross margin is almost 17.5% and EBITDA margin, I think this Q2 '19, forms a very nice baseline from where we will, of course, improve it significantly -- not significantly, the -- incrementally significant, because what Russell mentioned before, Uozu ramp is one big driver there for growth. And margins, of course, are -- the incremental margin are, of course, better than 17.5%. They are much better. And for 2020, considering expectation for 5G recovery and data center recovery, the margins there are even better even than the Uozu fab margins incrementally, over the variable. So, of course, it will improve and if you want to model it, I would assume that any additional dollar that you are assuming in the revenue, will result in 50% to 55% blended additional gross profit.

Rajvindra Gill -- Needham & Company -- Analyst

Okay, got it. And in terms of, Russell, the strong growth you're seeing in RF mobile, you had mentioned kind of strong design wins that you won back in '17, 2018. Just wanted to get a sense in terms of any more details in that segment. Is it -- if you were to kind of weight it in terms of what's driving the growth this year, is it more market share gains, RF content in the actual phones, and how do we think about 5G being a major catalyst for smartphones next year in terms of number of frequency bands, higher RF content as a catalyst next year?

Russell Ellwanger -- Chief Executive Officer

So, I believe that the present growth that we're seeing is predominantly market share and it's slots that we did not have before. So I believe it is market share. The continual belief in the growth is both continued market share and very much what you say about 5G. As you look at the sub 6 gigahertz standards, as you referred many more bans, which require more switches, more antennas, which require more switches and more LNAs. While with the LNAs, you have two same types of LNAs that are made. You have the RFSOI combined switch LNA to where the 65 nanometer has very strong advantages, because of the ability for digital shrink, and you have as well the stand-alone LNA banks that are done in silicon germanium. And I believe we're benefiting from both presently and will continue to benefit from both.

So -- and then longer term, as really the millimeter wave comes in, I believe I mentioned in the script, that at that point, we believe there will be a very strong use of the silicon germanium for the PAs that are now not being done in silicon germanium.

Rajvindra Gill -- Needham & Company -- Analyst

And housekeeping question, Oren, on the tax rate. You mentioned kind of 4% last year, 1.4% this year. Given the Israeli situation, no taxes in Israel, how do we think about the long-term tax rate for 2020? Is it around 1.4% now or is it -- will be 1.4% or will it be different?

Oren Shirazi -- Chief Financial Officer, Senior Vice President of Finance

It's a good question. I think for a model, we should assume something like a 3%, because it all depends on the specific region where the growth will come from and it was from 5G, so it's higher, because it's in Newport Beach. If I assume [Technical Issues], but considering all the NOLs that we have and the tax structure, I think 3% is conservative enough, it may even be lower.

Rajvindra Gill -- Needham & Company -- Analyst

Very good. Thank you.

Russell Ellwanger -- Chief Executive Officer

Thank you.

Operator

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

Russell Ellwanger -- Chief Executive Officer

Hi, Richard.

Richard Shannon -- Craig-Hallum Capital -- Analyst

Hi, Russell. Hey, Oren. How are you?

Russell Ellwanger -- Chief Executive Officer

We're good. Thank you.

Richard Shannon -- Craig-Hallum Capital -- Analyst

Thanks for taking my questions as well. I guess, I got a few of them here. On the third quarter guidance for sales, it wasn't clear to me whether your RF, HPA grouping, was going to grow faster or slower than the kind of mid-point of growth from second to third. I know that optical may be a little bit soft with RFSOI offsetting it. Any way you can help us out thinking though that group, how well that will grow?

Russell Ellwanger -- Chief Executive Officer

I did state that the third quarter would be the highest revenue that the Company has ever seen for RFSOI. So I think you could assume that there will be strong growth there. As far as what the exact numbers are, it's a strong double-digit. I mean, I think it's strong. It's what -- one second, just one second here.

Richard Shannon -- Craig-Hallum Capital -- Analyst

Okay.

Russell Ellwanger -- Chief Executive Officer

About 22% growth.

Richard Shannon -- Craig-Hallum Capital -- Analyst

22%, OK. That's excellent. Very helpful, thank you for that. A quick follow-up on the topic of silicon germanium. And you've talked about the 100 gig and 400 gig transitions going on here. Russell, just want to make sure that your positioned, that you are expecting 400 gig is going to be at least as good from a share point of view as you did in 100 gig, is that fair to think?

Russell Ellwanger -- Chief Executive Officer

I think it's fair to think that, that's how we're thinking. Like it's very hard to forecast a market share that's going to hit its peak, maybe two years from now. But I see no reason it shouldn't stay the same and although we have a very strong market share presently, the customer base that we have is working with us on the advanced platforms that will serve the 400 gig. I mean, it's probably going to be a 4/100. So I believe that, that's the case.

Richard Shannon -- Craig-Hallum Capital -- Analyst

Okay.

Russell Ellwanger -- Chief Executive Officer

Again, I don't find really forecasting a market share, but I see no reason that the market share should be disruptive.

Richard Shannon -- Craig-Hallum Capital -- Analyst

Okay, fair enough. And I want to follow up on the topic of gross margins, looking out a few quarters here. Ever since we had the reset of Panasonic, want to get a sense of where gross margins could go as you get a more fuller capacity? And only one way to compare this is to be looking back at your historicals from 2016 and '17 where you hit the kind of peak near-term gross margin in the 26% range. If we exclude the -- exclude the buildup of capacity in the Uozu fab, is there any reason why we can't get to that or approach that as you get to a more fuller utilization with your current capacity?

Russell Ellwanger -- Chief Executive Officer

I think that there is no reason at all that we shouldn't approach it or exceed it.

Richard Shannon -- Craig-Hallum Capital -- Analyst

Okay. Fair enough. Last question from me, kind of the M&A opportunity as you've talked about from time to time in the last several quarters. But A, I want to get your thoughts on appetite there, and B, what do the opportunities look like, both either from a Maxim or Panasonic type of opportunity or something else, like a flat-out acquisition of a company?

Russell Ellwanger -- Chief Executive Officer

The appetite is very good. The financial position of the Company is very good to fulfill the appetite, and I think there is some very good opportunities that are being looked at in our -- at various positions in an acquisition funnel, if you would have it. Certainly the model that has been very nice for us, and I think has been a good win-win was a Panasonic model. The Maxim type model, I mean, both are very good models. I think that there's opportunities out there of similar models without going into more detail. But I think that's a very good way to be going about growth that both parties can benefit from, that minimize the upfront investment and maximize the financials of both partners.

So I think that, again, as I state, there is appetite and there is opportunity. It's difficult because you can never forecast closure of an M&A, but I think there is appetite, opportunity and interest [Indecipherable] on both sides for things of that -- of that order. There is also still strong opportunity for greenfields in certain geographic areas where you can set up a model that you're going to co-invest some amount of money at the onset, grow -- I'm talking specific 300 millimeter at this point, grow our capacity and not take responsibility for a P&L until you reach a point that you really can't be P&L positive, so it's not a burden on the entire Company during the first four years to six years of any greenfield as you're driving it to build the capacity, build the utilization after you've built the capacity, and reach a P&L positive and maybe even more importantly, before he gets the P&L positive to reach a cash flow positive.

So I think that those models exist as well, and I believe that there is interest to pursue those from both us and the other sites. So both type models are like very, very real right now. And as far as outright buying a company, there's certain acquisitions that we'd be looking at for buying a company, but it would not be necessarily the capacity type of activity that we're looking at here. That would be for incremental capability moving into the news -- into a new served market. But with -- for an outright acquisition, I can honestly say that there is nothing on the workbench right now, that is a full-out acquisition for a large capacity. The models that we would be going after is to gain capability with capacity in an area that we don't serve right now on an outright acquisition. So I think that's a fairly detailed answer, Richard, is that suffice or...?

Richard Shannon -- Craig-Hallum Capital -- Analyst

That more than suffices. Thank you very much for that, Russell, and that is all my questions today.

Russell Ellwanger -- Chief Executive Officer

Thank you very much.

Operator

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

Russell Ellwanger -- Chief Executive Officer

Hi Mark.

Mark Lipacis -- Jefferies -- Analyst

Hi, guys. Thanks for taking my question. I was hoping, Russell, you might be able to characterize your competitive situation, competitive positioning on -- in the RFSOI market and the silicon germanium market? And maybe as part of that, if you could talk about what you think the capacity available is in the market in those two areas?

Russell Ellwanger -- Chief Executive Officer

Okay. As far as the silicon germanium, our competitiveness, I believe we're obviously highly competitive. In the optical side, I believe that we sit somewhere around 60% market share. So competitiveness is quite strong. As far as the capacity in the market you're asking, or what is the capacity question?

Mark Lipacis -- Jefferies -- Analyst

Yes, the capacity in the market, I'm trying to understand to the extent that we -- when we do see orders come back, to what extent is there capacity in the market outside of TowerJazz, either at your customers or at your competitors? Trying to understand what kind of upside you guys could say should we see that orders come back?

Russell Ellwanger -- Chief Executive Officer

In the area of silicon germanium, we don't have a single customer that has internal capacity. For the area of the optical, I believe that, that's probably 98% correct. I can think of one customer that does have some internal capacity, but they are a very small customer. But for the most part, everyone that we serve with regard to the optical, what we make there, the TIAs, the CDR and the laser drivers, I don't believe any has internal capacity.

So, there is no leveraging of one of our customers right now keeping something inside, and just doing an overflow to us as a foundry supplier. The entire market comes to us for whatever they have, and for the most part, we are the sole supplier for most of the customers in that market segment. And as far as outside of us, the other players are fairly well known. If we have 60% market share, we've stated what our capacity is. So that's pretty straightforward. I don't really want to get into talk about who our competitors are. I think, now that's not really my place to state, but there is predominantly only two other people that serve into that market. One other is a foundry and the other is an IDM that has its own products.

Mark Lipacis -- Jefferies -- Analyst

Thank you.

Operator

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

Lisa Thompson -- ZACKS Equity Research -- Analyst

Hi. I have just two questions. The first is, is there some way to quantify perhaps what percentage of your revenues go to products in the 5G market in 2019, and how that might change in 2020, 2021?

Russell Ellwanger -- Chief Executive Officer

I suppose there is a way to try to quantify it, I don't have the answer for you. And I'm not sure that we would really get the answer from our customers who, for the most part, are not the phone makers themselves. So I don't have a specific answer for you, how much is right now going into content that's sold as a 5G capability. But certainly, that is only going to increase the more advanced platforms that we sell. It's predominantly set to be able to be used in 5G standards. But I couldn't give you an answer off the top of my head and it's not necessarily an easy answer to get.

Lisa Thompson -- ZACKS Equity Research -- Analyst

Right. You can get increases as a percent or just ROI?

Russell Ellwanger -- Chief Executive Officer

Both. The content -- as we talked about a little bit earlier, the content goes up for the first implementation of the 5G, which is the sub 6 gigahertz, because of more bans and more switches and more antennas, hence more switches and LNAs. So content definitely goes up. And -- so that's definitely the case. Does the dollar amount go up per device that you sell? That has a double type of bit answer. As we get into -- as we move to 65 nanometer, we were able to shrink digital content, so one of the benefits for the customer is for an LNA to be able to have a smaller area and make more devices per unit area than you could at a larger 0.18 micron, for example.

So if we're able to add more value to the customer, we're going to be getting more dollars per unit silicon, which really makes sense. So our unit content capability also drives up the selling price, as well every technology node that you do, because it gives greater capability. You reset and go to the top of the curve, over time any platform has pricing reduction year-over-year. So one of the reasons that it makes very good sense to be in areas that requires constant innovation is that something that you released three years ago, four years ago, will have had some amount of selling price erosion, but the new platform goes at least to the top of the previous curve, if not higher. And typically it goes higher if you could add more value by integrating more devices on to the same unit area silicon.

So both is the case. I mean the percent of the mix that's going into this 5G. Obviously as 5G starts -- standards start coming up, you're going to be selling less LTE. So, that percentage goes up, the dollar value goes up for what you're selling, and certainly the content is going up because of demand for more switches and more LNAs.

Lisa Thompson -- ZACKS Equity Research -- Analyst

Okay, thank you. And my last question is, could you just give us an update on what's happening in China if anything or nothing?

Russell Ellwanger -- Chief Executive Officer

This is specific to the projects in Nanjing, the 200 millimeter project question or just in general?

Lisa Thompson -- ZACKS Equity Research -- Analyst

Yes, yes. The project.

Russell Ellwanger -- Chief Executive Officer

Okay. So the -- we have not released anything, and from our standpoint, there has not been a major movement, meaning a next milestone having been achieved or anything of the sort. The government is very involved and we are still involved in helping the government move forward with different investment groups. Actually, I think there's been a lot of excitement there recently, and some possibly very viable routes that the fab would be built. But as stated earlier, we are not willing to be the primary investor in this factory, that was never the model nor the intent to be a partner with the government and to, again, do the things that we had stated at the onset, when we had first released moving forward.

We're still very involved and very interested to do that, and in the very big picture, maybe some progress has been made. In the very immediate picture, there is nothing that's been signed, nor any milestone that's been achieved. So it's nothing that we would talk about as there is no material event that would impact short-term, mid-term or long-term revenues.

Lisa Thompson -- ZACKS Equity Research -- Analyst

Okay, great. Thank you for the update.

Russell Ellwanger -- Chief Executive Officer

Thank you very much. Good questions. Thank you.

Operator

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

Russell Ellwanger -- Chief Executive Officer

Yes. To begin with, I thank everyone for participation. I thank everyone that asked questions. I think they were very good questions and enjoyed them. We have several events that are coming up very shortly. There is the Oppenheimer 22nd Annual Technology Internet Communication Conference in Boston at the Four Seasons Hotel on August 6th of 2019. Dr. Racanelli, the Senior Vice President, General Manager of the Analog IC Business Unit will be there giving a presentation of one-on-one meetings. Welcome anyone to come to that. There is the Jefferies Semi Hardware Communications Infrastructure Summit August 27, 28 at the Ritz-Carlton in Chicago. Dr. Racanelli will also be attending that. Anyone that is in that area is very welcome to sign up for one-on-one meetings. And then there is the 20th Credit Suisse Asian Technology Conference, September 4 at the Grand Hyatt in Taipei set aside for many of one-on-one meetings, I'll be attending that. So that's within the next two months, and very happy to meet any or all of you at these different conferences for a face-to-face.

As always stated, any questions that you would have or further communications, clarifications or just general discussions on vision and our view of what's going on and how we're moving forward, please contact Ms. Noit Levy and we'll be very happy to set up calls whenever you would wish.

Just a summary statement. There has been many, many good things happening in the Company. The questions about gross margins are very interesting questions. I believe that in 2020, we'll see, for us specifically, a very strong rebound and as utilization rates go up across the board, as well as higher value platforms get implemented, that has a very, very strong impact on margins, and we look forward to all of that happening through 2020. I think the activities that we've been able to do throughout this year in spite of several actions that have been outside of anybody's control, I think have been very good. We're very pleased to have made up for the -- the bulk of the reduction in the Panasonic revenues, and believe that over the next few quarters, we'll continue to make up for that on revenue and on a full-margin basis.

So with that, I really thank everyone, and again, our excitement is there and we look forward to continue to update. Thank you very, very much.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Noit Levy -- Vice President of Investor Relations and Corporate Communications

Russell Ellwanger -- Chief Executive Officer

Oren Shirazi -- Chief Financial Officer, Senior Vice President of Finance

Cody Acree -- Loop Capital -- Analyst

Quang Le -- Credit Suisse -- Analyst

Rajvindra Gill -- Needham & Company -- Analyst

Richard Shannon -- Craig-Hallum Capital -- Analyst

Mark Lipacis -- Jefferies -- Analyst

Lisa Thompson -- ZACKS Equity Research -- Analyst

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