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Tower Semiconductor Ltd (NASDAQ:TSEM)
Q3 2019 Earnings Call
Nov 13, 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 Third Quarter 2019 Results Conference Call. Following management's prepared statements, instructions will be given for the question-and-answer session.

[Operator Instructions]

As a reminder, this conference is being recorded, November 13, 2019. 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, Investor Relations and Corporate Communications. Ms. Levy, please go ahead.

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

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

Please note that the third quarter of 2019 financial results have been prepared in accordance with US GAAP.

The financial tables and data in today's earnings release and in this earnings call also include certain adjusted financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as established with the Securities and Exchange Commission. The financial tables include a full explanation of these measures and the reconciliations of these non-GAAP measures to the GAAP financial measures.

Now I'd like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.

Russell C. Ellwanger -- Chief Executive Officer and Director

Thank you, Noit. Welcome to our conference call. During the third quarter of 2019, our revenues were $312 million with EBITDA of $75 million and free cash flow of $30 million. These numbers represent quarter-on-quarter up 4% and year-over-year, 11% organic revenue growth being defined as total revenue excluding revenues from Panasonic and the TPSCo fabs and revenues from Maxim in the San Antonio fab .

In addition, the recorded sequential increase in gross and operating profit, EBITDA, net profit and free cash flow. This profit and cash flow generation continue to strengthen our balance sheet, and at quarter end, we recorded record shareholders' equity of over $1.32 billion as compared to $1.24 billion at year's begin [Phonetic] with over $400 million in net cash.

Our fourth quarter guidance is $312 million with an upward or downward range of 5%. Oren will provide full financial details later in the call.

Now to discuss our businesses. First, the analog IC Business Unit. The third quarter saw solid quarter-over-quarter growth in our RF mobile segment led by a steep production ramp in 300 millimeter RFSOI which has now resulted in the highest RFSOI revenue in the company's history.

Looking into 2020, a strong design win pipeline in both 200 millimeter and 300 millimeter RFSOI coupled with the 300 millimeter capacity expansion announced last quarter positions us for good growth throughout the year.

Growth in this segment for us has been a function of market share gain in both US and China as well as overall market growth with expanded RF front-end content in 5G handsets, which are expected to be deployed, starting in 2020, and anticipated to continue and accelerate through the next several years.

In addition, we are working on breakthrough RF technologies such as RF MEMS being the only foundry to select -- successfully deliver RF MEMS having delivered into many millions of handsets together with Cavendish Kinetics. With Qorvo's recent purchase of Cavendish Kinetics, we now work directly with the market leader with this leapfrog technology rendering higher assurance of strong market adoption over time.

Looking forward to Q4 in the infrastructure segment, our strong SiGe market share optical fiber transceivers has led to growing orders for 5G infrastructure where optical fiber connections are being upgraded from a 10 gigabit per second to a 25 gigabit per second throughput.

These orders will help offset any further inventory related downside from the data center market, stabilizing our silicon germanium revenue. According to our customers, the the excess data center inventory should be consumed within the next three months to five months. Hence, we expect to see a rebound as we move into 2020 as well as the resumption of growth in data center silicon germanium shipments .

Longer term, we expect that our silicon photonics platform will have strong growth contribution. This platform is currently in volume production, expected to reach significant volumes over the next years being integral to 400-gigabit per second connection speeds.

We are well positioned to demonstrate strong market leadership, as the cycle platforms ramp . Our power management business has seen strong quarter-over-quarter growth mainly due to a strong ramp in new electrical vehicle battery management products.

Looking further out to 2020, the expanded 300 millimeter capacity will position us for growth in our highly differentiated 65 nanometer BCD technology. We have a good pipeline of design wins from Tier 1 customers ranging from data center to mobile applications .

We have also gained multiple wins in our high-voltage technologies, 140 volt RESURF and 200 volt SOI, which expands our available market to a voltage range not previously covered by our technologies providing further opportunities for market growth.

Looking at our sensor business, we have new projects in the pipeline with large customers on our 65 nanometer global shutter platform that we expect to materialize toward the end of next year, while sales of the existing products are still growing. On those soft year-to-date, the industrial sensor market is beginning to recover and we foresee double-digit growth through 2020.

Our recent announcement of our wafer stacking backside illumination flow connecting a top thin BSI imaging wafer to a bottom CMOS wafer on a 65 nanometers 300 millimeter technology has generated much interest. We're in various engagements with significant customers for projects using this technology, in the time of flight market mainly for face recognition .

We also continue our work with multiple customers on optical fingerprint solutions for under OLED and under LCD displays. As well as we are seeing good adoption of our stitched single die 300 millimeter substrate X-ray sensors.

Looking at our TOPS business, although the worldwide discrete market remains soft, the Automotive portion is growing for our Tier 1 customers and this has translated to an increased rate of new automotive co-develop product flows Aside from discrete, multiple -- multiple other predominantly customer per tire -- proprietary flows are moving along including advanced differentiated, micro display technology, DNA sequencing and others.

Looking at our co-developed, tunnel magneto resistant sensor technology, the overall market for TMR sensors is taking off across many different market segments, including industrial, automotive, consumer and medical. And signals the shift of the demand for this new advanced technology providing higher performance, greater sensitivity and less power consumption, hence higher efficiency sensors.

Third quarter 2019 for the following utilization rates. In Migdal Haemek, Israel, fab one, our six-inch foundry was down at 60%, with a decrease from the previous quarter, driven by the market slow down in power discrete.

Fab two, our eight-inch foundry was 80% similar to that of the previous quarter . Newport Beach, California, fab three was at about 50% utilization, predominantly due to the low present demand from data center and as mentioned earlier, expecting to ramp a bit in Q4 and then throughout 2020.

Our San Antonio foundry fab nine was at 55% utilization, an increase from the previous quarter. Looking at our TPSCo fabs in Japan. Starting this quarter we'll report our utilization as a percentage of all allotted foundry capacity allocation, according to the new manufacturing agreement .

Our eight-inch foundry business utilization was at about 50% rate similar to the previous quarter. Our 12-inch foundry business utilization was 60%, a 20-point solid increase over the previous quarter. We are now bottleneck constrained, albeit it is non-photolithography bottleneck .

This will be addressed with the new tools for the recently announced capacity expansion program in that facility, which should be fully qualified within the first half of 2020 .

This capacity expansion is already fully covered by existing customer demand forecast. Important to note, the available 200 millimeter capacity in Tonami and San Antonio as a present base should be well consumed toward our 85% utilization model in 2020, as a result of recent and present activities.

With that, I would like to turn the call over to our CFO, Oren Shirazi. Oren, please.

Oren Shirazi -- Chief Financial Officer

Thank you, Russell, and welcome everyone. Thank you for joining us today. I will start by providing the P&L highlights for the third quarter of 2019 and then discuss our balance sheet.

Revenues for the third quarter were $312 million, representing both year-over-year and quarter-over-quarter organic growth. We achieved strong results for the third quarter. Demonstrating quarter-over-quarter improvement in all our margins and cash flow indicators. Revenue for the third quarter of 2019 were $312 million as compared to $306 million in the prior quarter.

Compared to 2018, revenues for the first nine months of 2019 reflect organic growth of 7% and revenues for the third quarter of 2019, reflecting 11% organic growth as compared to the third quarter of 2018.

Note, we define organic revenue as total revenue excluding revenue from Panasonic in the TPSCo fabs and revenue from Maxim in the San Antonio fab. This 11% organic year-over-year revenue growth and some efficiency measured -- measures enabled us to mitigate a large portion of the Panasonic revenue and margins reduction caused by the March 2019 contract amendment as announced on March 26, 2019.

Gross profit for the third quarter was $58 million up, $4.9 million when compared to the second quarter of 2019 gross profit, reflecting 80% incremental gross margins as compared to the revenue increase. Operating profit for the third quarter was $23 million which is $5 million higher than prior quarter operating profit, reflecting 82% incremental operating margins as compared to the revenue increase.

EBITDA for the third quarter was $75 million, up $5.2 million when compared to the prior quarter, reflecting 86% incremental EBITDA margins as compared to the revenue [Indecipherable].

Net profit for the quarter was $22.2 million, and diluted earnings per share was $0.21 higher than $20.9 million and $0.20, respectively, recorded in the previous quarter.

I will now provide the cash flow highlights for the third quarter and the balance sheet analysis as of September 30, 2019.

During the third quarter of 2019, the company generated $73 million in cash from operations and invested $43 million in fixed assets, net. This is compared to $72 million of cash from operations and $44 million investment in fixed assets, net in the previous quarter.

Looking at the balance sheet, total short-term debt and long-term debt presented in the balance sheet as of September 30, 2019, increased as compared to December 31, 2018, mainly due to the implementation of Accounting Standard Update ASU 2016-02 "Leases", effective January 1, 2019. In relation to lease rights of use assets and lease liabilities, which implementation also increased fixed assets balance. Additional details regarding ASU 2016-02 are included in Note 2Y to our previously filed 20-F and annual financial statements for the year ended December 31, 2018.

In addition, the first two principal payments in the total amount of $37 million scheduled to be paid in 2020 for the series G bonds, which were issued in 2016 are included as short-term debt as of September 30, 2019 .

Shareholders' equity as of September 30, 2019, reached a record of $1.32 billion, an $87 million increase as compared to December 31, 2018, mostly due to the net profits we generated so far in 2019.

Total balance sheet increased from $1.79 billion as of December 31, 2019 to a record $1.90 billion, reflecting shareholders' equity to total assets ratio of 69% and our current assets ratio of 4.5x.

Moving on to elaborate on the tax line in the P&L. I would like to describe our applicable and effective tax rate. Our US affiliate Jazz Semiconductor and TowerJazz Texas which own our Newport Beach and San Antonio Fabs, respectively, were taxed at 21% rate, starting in 2018, following the US tax reform as compared to 35% prior to that reform.

TPSCo's profits from the Japanese operations are subject to an approximate 32% tax rates. Our profits in Israel from Fab one and Fab two operations were 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 NOLs, still to be utilized, which can be carried favor -- 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 approximately 1% in 2019 to-date.

With regards to hedging activities, in relation to the euro currency, we have almost zero business in euros, hence no exposure to the euro. In relation to Japanese yen, since the majority portion of TPSCo's revenue is denominated in yen and the vast majority of TPSCo's cost 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.

This zero-cost cylinder transaction hedge currency fluctuations to be contained in a narrow range as compared to the spot exchange rate, hence while the yen rate against the dollar may fluctuate, the impact on our margins is limited. In addition, in relation to the Japanese yen impact on the balance sheet, we have a natural hedge on cash and loan balances since the loans and the cash are both yen denominated. This helps to protect us from potential impact on -- of yen fluctuations.

Lastly, in relation to fluctuations in the Israeli shekel currency, we have no revenues in this currency and while less than 10% of our cost are denominated in the Israeli currency, we hedge a large portion of this currency risk using cylinder -- zero cost cylinder transactions as well.

And the last note on our share count as of September 30, 2019, we had 107 million outstanding ordinary shares. We no longer have any capital notes outstanding, since all were converted in the past into equity. 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. [Operator Instructions] The first question is from Cody Acree of Loop Capital. Please go ahead.

Cody Acree -- Loop Capital -- Analyst

Hi, guys. Thank you very much for taking my questions. First off, Russell, could you just talk about, excuse me, puts and takes that went into your December quarter guidance. I think given what we've been hearing out of some component vendors, but largely out of the end-OEMs in both the data center and in the RF markets, where there is same sort of naturally lead [Phonetic] to some more growth, if not in the September, definitely in the December quarter. Could you speak to that please?

Russell C. Ellwanger -- Chief Executive Officer and Director

Certainly. So, as stated, we have not yet seen a rebound in data center. I am not sure we will be referring to that as quoting strengths within data center from our end customers. But the strengths that they might be seeing again is off of inventory that they already have in hand. So...

Cody Acree -- Loop Capital -- Analyst

Yeah.

Russell C. Ellwanger -- Chief Executive Officer and Director

-- as stated in direct communications with lead customers, they believe now that they have somewhere over quarter to a bit more than a quarter of inventory to burn off. So our order level in data center is not yet rebounded even close to what it had been in the run rate of, the end of 2018. I did state that we are seeing some stabilization there due to the fact of 5G infrastructure, but the amount of parts for 5G infrastructure and the size of the parts, is at this point, not enough to compensate fully for the reduction that we've seen within data center. But that data center, we are very optimistic about from recent dialogues and updates that the orders will be coming back within Q1, and the shipments will be coming and ramping in Q2, throughout the year of 2020.

So that's one area. And the other area that I had mentioned that we had had very, very nice growth in -- well, OK, so that's a downside. The other strong area of down for us is within Power discretes.

And it's been press released who our main customers are within there. And, but it's not just our main customers. The entire power discrete market remains weak. That will also pop back at some point here, but it is weak at this moment. So those were two of the bigger, or maybe the two biggest downs that we have against our base revenue that we were having its run rates in 2018, and maybe even at the beginning of this year.

So that's the down part of it. The up part of it where I refer to the organic growth, and the organic growth end means that you already have to make up for multiple 10s of millions of the base having fallen out, so in organic that I'd say a 4% quarter-over-quarter or 11% year-over-year, and that's a very, very big growth and that came in very, very strongly within the RFSOI .

As well as within power management, and I believe I said it during the script, one of the bigger upsides within power management deals with electric vehicle battery management.

So those are quite substantial for us on the upside. And now, if you look at the RFSOI as a whole, I had stated that's one of our big growths there in Q3, was the fact of a ramp in 300 millimeter where we have just really an outstanding platform, and very, very strong customers. The statement was also made, however, that we are now bottleneck constrained at the 60% utilization level, being a 50% increase over the last quarter on utilization, or a 20 point increase of actual from 40 to 60, but that the capacity expansion that we spoke to last year, I'm sorry, last quarter of the circa $100 million investment will relieve those bottlenecks, other non-photo bottlenecks, and that would be then qualified within the first half of the year, and plan to be fully qualified by the end of the first half, and hence, the RFSOI on the 300 millimeter, which is a big portion of the growth will continue to grow there. As well as on 200 millimeter, we have very advanced platforms that are being qualified at this time. That should also show very, very strong growth and we believe that those numbers would be quite positive.

So if you were to say that the industrial sensor market, which is one that's also decreased and flat, we see that rebounding in 2020. And I can't say at this point, how quickly the discretes will rebound. I really don't know, but the data center, I believe strongly will be on a ramp on shipments in Q2, Q3, hitting levels of the past and up, beyond it in Q4.

So with that base coming back, then the other activities that we have in the increased capacity at 300 millimeter, we foresee 2020 being a very strong growth here, which I think I had stated in the press release and and all financials. So hopefully, that's a pretty detailed answer for you, Cody.

Cody Acree -- Loop Capital -- Analyst

Yes, it is. Thank you, Russell. Oren, for you if you would, you may had [Phonetic] followed those -- that same walks with gross margins. If things happen as in the timing expectations that Russell laid out. What -- how do you expect the quarterly trends of gross margins to follow ?

Oren Shirazi -- Chief Financial Officer

Yeah, I believe our model will sustain the same incremental about 50%, 55% incremental margin if -- if the growth is from 5G, and also it should be above 50%, 55% and other business like power discrete , it's a little bit below but average is 50% to 55% incremental gross profit to any incremental revenue.

Cody Acree -- Loop Capital -- Analyst

Very good. Thank you, both.

Operator

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

Quang Le -- Credit Suisse -- Analyst

Hi, thank you for taking my question. Russell, you mentioned that your capacity will be installed in the middle of 2020. In that case, am I right to say that your first half of 2020 was to be run sluggish in terms of revenue. I can see that the first quarter normally is down quarter-over-quarter, with Q2 was slightly up. Is that what we should be expecting in 2020 as well?

Russell C. Ellwanger -- Chief Executive Officer and Director

So, I have not yet guided the first quarter. And you're correct. First quarter is typically seasonally down for the entire market. However, the capacity that you're speaking of it's not 100% correct. I said it would be fully qualified by within the first half of the year. There is incremental capacity increases throughout the entirety of [Technical Issues] shipments, will have certain step functions, but I suppose over the -- on a start basis it will be somewhat monotonic increase throughout January, February and March thereabout, throughout the entire first half.

So, no. Now, a sluggish first half I don't really believe at all, meaning there is a good amount of activity as is stated to drive up utilizations in our 8-inch factories and I believe that that will all occur.

So the 60% utilization in Ozu [Phonetic] is right now a bottleneck at 60%. As the year goes on, meaning the 2020 year goes on, those utilization levels will come up against the present photo capacity and it won't just be the fact of them -- that starting Q3, that utilization would go up, will go up throughout the year, meaning throughout the first half.

But there is many, many other activities that are equally accretive to our business. The big thing that will have a momentous impact is the consumption of the present inventory and data center silicon germanium and that has a very good impact in both ways, increases utilization, it's also extremely high-value parts.

So I don't -- hopefully I answered the question. But no, I do not expect a sluggish first half, but I have not guided to Q1.

Quang Le -- Credit Suisse -- Analyst

I see. Got it. And can I ask for your silicon germanium revenues that you had this quarter and what do you expect next quarter?

Russell C. Ellwanger -- Chief Executive Officer and Director

I really don't want to give specific numbers. I don't typically do that. We did in the Q&A last quarter, state what we thought the SiGe revenue would be. I said 32 [Phonetic] and that number was actually exceeded slightly. So it was above the 32 and there will be against whatever the Q3 number turned out to be, which as I state is -- I did give the 32 answer in the Q2 Q&A. So, it's above the 32, but Q4, at this point, looks like it will be to about 10% higher.

Quang Le -- Credit Suisse -- Analyst

Got it. Thank you.

Operator

Your next question is from Raj Gill of Needham & Company. Please go ahead.

Raj Gill -- Needham & Company -- Analyst

Yes, thank you and congrats. A lot of good momentum on some of these new products. For me [Phonetic] -- yeah, my pleasure. The ramp in 300 millimeter for RFSOI, I wonder if you could kind of describe some of the dynamics there.

Is this being driven by 5G smartphone ramps that you're seeing. Is it being driven by kind of market share gains. You had mentioned some market share gains in the US and China. I just wanted to get a little bit more color on the record revenue that you've gotten in smartphone 300 millimeter RFSOI.

And then, as we go into next year, there's been a lot of positive commentary about the overall 5G smartphone market in terms of overall units and replacement cycles, etc. And we know that the RF content is going to be going up, so just any kind of qualitative color on how we should be thinking about RFSOI, the smartphone component going into next year. After a pretty strong year, this year. Thank you.

Russell C. Ellwanger -- Chief Executive Officer and Director

Two very good questions. So, the 300 millimeter RFSOI ramp is, I believe, very close to a 100% market share gain for us. The biggest portion of it is dealing with one customer who has gained a good market share for themselves, in areas that we weren't serving previously. So, that I believe if it's not 100%, it's very close to that. As far as the growth there being market share gain. Now, how much of it is market growth within the market share gain, it's a little bit hard for me to state. If I look at 5G as a whole, it would appear that, and this is from a Yole [Phonetic] report that is different from what some large, front-end module makers are saying, but Yole is talking about us -- about a 17% increase in RF content on 5G, in the -- for the next years. And I believe it's probably correct because it's not just the fact that 5G is competing against 4G. 5G is actually eating up the previous 2G and 3G market. And where people had stayed with 2G or 3G, didn't move to 4G, then the 2, 3 -- 2G and 3G, I think, is pretty much dying out. So the 5G is really being compared not just a 4G content, but predominantly, or at least to a good extent to 2G and 3G.

So, I think the 17% growth in RF units is probably somewhat correct. And that's a Yole number. It's not my number. But -- and that being said, I would foresee that as our capacity increases, 300 millimeter as well as -- as the new 200 millimeter platforms, which are now in early qualification stages, as they're qualified, we would continue to see a very strong growth where we have a 17% CAGR. I don't know, but I would expect a good double-digit growth next year in RFSOI.

Raj Gill -- Needham & Company -- Analyst

Okay. Yeah, it's very helpful, very interesting in terms of the 2G, 3G countdown . And then, the next question from me in terms of the data center. So you expect that some of this excess inventory from the data center customers will start to be burned through over the next several months. And just so I understand, you're expecting kind of shipments in SiGe -- that market to rebound in kind of Q1 of next year, and then kind of continue from there in Q2. So by Q1, we should have the risk of excess inventory being cleared out, and then, the benefit of a restocking plus the deployment of this 25 gig, and maybe 100 gig for the optical transport layer, and kind of it is double, you know, positive impact potentially in Q1, Q2?

Russell C. Ellwanger -- Chief Executive Officer and Director

Exactly as you were saying the -- again, it's not my expectation. It's really based on what our large customers are telling me about their inventory at this point. So, they are saying that it's a three months to five months inventory level that they have. If that's the case, then orders should be coming in within two months to four months. And then for the SiGe, it's -- we're running at very good cycle times, although it's many, many layers, but it's so within quarter term on the shipment from start to ship. So, if we were starting to increase the data center orders in the beginning of Q1, and then, we would start to see if it's really the very beginning of Q1, you start to see some increase at the end of Q1. But predominantly, the one ramp in the starts would be shipping in Q2.

Raj Gill -- Needham & Company -- Analyst

Okay, very good. And then [Speech Overlap]

Russell C. Ellwanger -- Chief Executive Officer and Director

The first part. The second part was also a good statement that you had made on certainly the case that if you have an infrastructure 5G infrastructure part of 25 gigabit per second, it's a smaller part than a 4x25 [Phonetic] that you're putting into a 100 gigabit per second data center application. So, the infrastructure portion, it's good to have, and it's a very nice business and we like it, but as far as the amount of wafers, for the even equal amount of units. Certainly, the 4x25 is -- it's larger, right. It's more wafers.

So, you're correct as the data center snaps back and the movement to 100-gigabit per second, you have a double benefit on it.

Raj Gill -- Needham & Company -- Analyst

All right. Okay, that's helpful. And then last question from me, you had talked about industrial sensors, a little bit slow, primarily because of China, I would presume, and power discretes being a bit weak. Both those areas you're expecting to kind of bounce back. Is there is a specific -- you -- specifically you mentioned industrial sensors growing double-digits throughout 2020.

So, some of that kind of positive commentary about a bounce back, is that based on dialogue from your customers where they have, maybe have cleared out any inventory that they overbuilt, perhaps last year, are they starting to see some snap back in China, industrial specifically. Any kind of commentary on the power discrete -- what's -- give you a little bit more confidence that could potentially rebound? Thanks.

Russell C. Ellwanger -- Chief Executive Officer and Director

The second part of the question first. I said I didn't have a specific timing in mind as to when the power discretes will rebound. That we've not been told and customers are still just leery, and I honestly, don't fully understand truly why the power discrete market is down, I don't, because the power management market is not.

Raj Gill -- Needham & Company -- Analyst

It's all right. There's a little contradiction there.

Russell C. Ellwanger -- Chief Executive Officer and Director

So I don't know, but it's obvious that -- if you look at the top five power discrete makers, none of them are talking about gangbuster sales. So, but it's -- that is the case. But now on the second part in the industrial sensors. Yes, I mean, everything that I say really deals off of customer interaction and customer forecasts. .

So, customers are now talking about coming back with certain orders. There is obviously, and I said this in the script, we have a variety of new products that are well under way in qualification. But the old products that are in manufacture -- in volume manufacturing now, customers are forecasting an increase. So if I look at our Q1, Q2, Q3, Q4 forecast in the industrial sensor market, it's very strong. Now , how much can I take that to the bank. Again, I'm not giving a target right now for 2020 .

I believe 2020, overall is a very, very strong year. So, but the customers, as a rule, that we're selling into that market and we have a very -- that's a big portion of our image sensor business, they're very optimistic of the numbers they're giving us .

Raj Gill -- Needham & Company -- Analyst

Thank you.

Operator

Your next question is from Joe Flynn of Craig-Hallum. Please go ahead.

Joe Flynn -- Craig-Hallum Capital Group -- Analyst

Hi, guys. Congrats on the strong results.

Russell C. Ellwanger -- Chief Executive Officer and Director

Thank you.

Joe Flynn -- Craig-Hallum Capital Group -- Analyst

Just my first question is, I guess, on the incremental gross margin upside. I think around 80% , you guys did in the third quarter. We want to -- to what degree that would be directly related to 300 millimeter pickup and what kind of levels we should be expecting going into the fourth quarter? I know you guys just mentioned that you're maintaining your longer-term target of 50% to 55%. But I was wondering if RF -- RFSOI keeps ramping, if you could possibly see of any near-term upside.

Oren Shirazi -- Chief Financial Officer

Yeah, obviously, 80% is great, that we had the incremental margin this quarter. But we don't assume that it will continue this pace, and it's attributed both to the 300 millimeter ramp and other some exchanges. But from this baseline, I don't believe you can assume additional 80% incremental, 50% to 55% will be a reasonable conservative assumption.

Joe Flynn -- Craig-Hallum Capital Group -- Analyst

Okay, great. And then, just one question. If -- you guys mind walking us through what kind of revenue levels you'd be able to support on the current capacity if, let's say, it was utilize at -- caused [Phonetic] 100%, and if you mind breaking that up between the total revenue level across all the fabs and specifically the 300 millimeter?

Russell C. Ellwanger -- Chief Executive Officer and Director

Follow it armed [Phonetic] going to swag at it. But to start with, you have to understand our model, 100% is not doable for us. There are fabs that -- or companies that will from time to time talk about 130% utilization, that's because they report utilizations with a lot of takeaways in it. For us 100% utilization is the absolute maximum that you can load in the factory on the photolithography.

So you can't run at 100% utilization without having a cycle time that just expands and expands. Our target is somewhere between 85% to 88%. So that's the number. When I talk about an 80% utilization, that's five points off from the maximal utilization that we can do, it's not that 80% utilization is 20 points off of the maximum. And again, I think it's a very important point to make. So the utilization levels -- if I -- again as I talked about Fab two, an 80% level is very close to max utilization .

There are times that we will run at 90% utilization, but if you were to run at 90% utilization in the way that we calculate utilization for long periods of time. Your delivery cycle times increase, so to maintain a good cycle time, the model that we have is again 85% to 88%. So that's just the first part. Then, Oren?

Oren Shirazi -- Chief Financial Officer

Yeah. So, I believe that the 88% utilization or 90%. We can reach maximum of $1.6 billion at the current capacity. I mean the current including the new 100 -- maybe [Speech Overlap] Yeah. $1.6 billion to $1.65 billion.

Joe Flynn -- Craig-Hallum Capital Group -- Analyst

Great, that's helpful. That's all from me.

Russell C. Ellwanger -- Chief Executive Officer and Director

Thank you.

Operator

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

Lisa Thompson -- Zacks Investment Research -- Analyst

Hi, Oren, I was wondering given what's going on in Japan, have you give some thought to what next year's tax rate and minority interest might be?

Oren Shirazi -- Chief Financial Officer

So, with Panasonic we signed in March 2019, a new contract which is relevant for the coming three years until March 2022, at least. And so I expect 2020 to be the same run rate and performance as you -- as it is now. I mean in Q2, Q3'19. I don't expect significant changes .

Lisa Thompson -- Zacks Investment Research -- Analyst

Right. And if you're investing more or that mean lower profits and [Technical Issues].

Oren Shirazi -- Chief Financial Officer

No. It should bring, of course, higher profits because the time that we will start to depreciate the new tools will be pretty much the time that we will enjoy the fruits of the investments and this should be quickly showing fruits, because, light of, I think Russell mentioned, with all the explanation about the fact that actually, Rosen [Phonetic] is bottleneck constrained now. So, every additional tool and wafer that we can manufacture is really spoken for by customers. Let's really wait for that.

So, I believe it will -- the profitability will improve from the revenue improvement. That will bring from those new tools, but I was thinking your question was about Panasonic demand, which we believe will be -- remain flat like this, like I did the comment on it [Phonetic].

Lisa Thompson -- Zacks Investment Research -- Analyst

So keep the tax rate at 1%?

Oren Shirazi -- Chief Financial Officer

The overall tax rate for the company, well, 1% is a very big achievement for us. I mean, it's not a high number compared to the fact that it should be theoretically an average, or our weighted average between the 7.5% from the [[Indecipherable] paid in Israel and the rates between 21% and 32% of the affiliates, it should be by model be bigger than 7.5%, but since we have some credits and and deductions, and benefits from the specific location of the factory, maybe you can assume 3% or 4%.

I mean '18 was 4%, '19 is 1%, averaging between 1% to 4% is reasonable, if you want to be conservative. You can put 4%. We will try to achieve 2% or 3%.

Lisa Thompson -- Zacks Investment Research -- Analyst

Okay, great. Thank you very much.

Russell C. Ellwanger -- Chief Executive Officer and Director

Thank you.

Operator

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

David Duley -- Steelhead Securities -- Analyst

Yes, just one clarification. You mentioned that you thought that your SiGe revenue would exceed its peak late in 2020 of -- particularly, achieved late in 2018 . Could you just remind us what the peak revenue was on a quarterly basis in late 2018?

Russell C. Ellwanger -- Chief Executive Officer and Director

Yeah, we are focused on achieving a $200 million annualized run rate. So is about $50 million level.

David Duley -- Steelhead Securities -- Analyst

Okay. And as far as capex goes for 2020. Could you just remind us what you -- what the total capex number is going to be? I think you're going to spend incremental money there in Japan to increase capacity. Could you just remind us what the total should be for 2020?

Oren Shirazi -- Chief Financial Officer

Yeah, it should be exactly the model -- the current model of for $160 million to $170 million a year plus the -- our $100 million that we announced in July for the new capex in Japan like you mentioned. So the total is the summary of the two numbers.

David Duley -- Steelhead Securities -- Analyst

And as far as the -- the $100 million that you're spending in Japan. Could you help us understand the dollar content of capacity that you'll get from that or how -- help us understand the metrics about how much capacity increase you're going to get for this $100 million ?

Oren Shirazi -- Chief Financial Officer

Yeah, it's -- we're talking about a potential -- I mean when fully -- when spoken for should be about $70 million annual run rate of revenue and the margins from that, you can assume, a bit better than the average, which is 50% to 55%. So you can do the calculation.

David Duley -- Steelhead Securities -- Analyst

Okay. And on -- as far -- when 5G phones and infrastructure are really in the full ramp. Could you take a -- help us understand, there is a pretty significant content increase of the types of products that you make in both handsets and in the base stations. Could you help us -- do you have an idea about the percentage increase in content that you might be seeing in for 5G both in phones and infrastructure versus 4G?

Russell C. Ellwanger -- Chief Executive Officer and Director

I don't know an exact number for the amount with an infrastructure of 5G versus 4G. I really couldn't give an answer on that off the top of my head. On the mobile platform side, in the front-end module. That's what we had stated and this is in accordance with Yole. It's about a 17% overall increase, I guess, but as I stated that is not just against 4G, that's against 2G and 3G that the 5G will be replacing.

If you were to look at the change between 5G and 4G, there is others that think that that specifically somewhere about an 8% or a 9% increase in RF content.

David Duley -- Steelhead Securities -- Analyst

Okay, thanks.

Operator

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

Russell C. Ellwanger -- Chief Executive Officer and Director

Yes, certainly, thank you. So again, I thank everybody for their interest, for the very good questions. Q3, we really did post solid results. We are happy for that. But as stated in the PR, and not at the moment, tangible in dollar signs, but believe that it will be over the next period of time. We made very substantial progress, really achieved multiple milestones across all of our business units. Had stated that we had major activities contracts within display, major contracts within BSI, working on extremely exciting things and customer qualification, big-end customer qualification with our SiPho platform. Continual design wins at 300 millimeter RFSOI, continual design wins at 200 millimeter RFSOI, very advanced RFSOI. And much progress within the Power Management sector with the activities on the 65 nanometer BCD platform. So things are really moving very, very strongly for the company.

We have continued strong activities, pursuing very accretive growth strategies, and we have very strong outlook. Very positive outlook for 2020, as we approach the year and -- and I'll talk in a minute about the conferences we'll be presenting at, but typically at the Needham Conference in mid-January, in New York.

We'll give our target for the next year. I think it will be a very positive one. So that being said, we're -- I believe in of -- an amazing position right now, activity-based and also financial base with the opportunity and capability to do many things that are really being pursued and milestones being achieved with.

In the very short term, in December 4, we'll be attending the Credit Suisse 23rd Annual Technology Conference in Arizona, and Dr. Racanelli will be there. It's a whole series of one-on-one meetings that I believe is highly subscribed. But we'd love to see as many as you as we can. Needham Conference, I mentioned, that's January 14, 15, in New York. Presentation of one-on-one meetings. Look forward to see whoever would like to meet with us there, and then, I mean the [Phonetic] -- so on the fourth -- in the first quarter, we'll be doing a large event at NASDAQ that we'll be announcing shortly. And we'd look forward to see everyone at that event.

So many good things happening and we look forward to updating you on them as they occur. And thank you very, very much.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

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

Russell C. Ellwanger -- Chief Executive Officer and Director

Oren Shirazi -- Chief Financial Officer

Cody Acree -- Loop Capital -- Analyst

Quang Le -- Credit Suisse -- Analyst

Raj Gill -- Needham & Company -- Analyst

Joe Flynn -- Craig-Hallum Capital Group -- Analyst

Lisa Thompson -- Zacks Investment Research -- Analyst

David Duley -- Steelhead Securities -- Analyst

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