Russell Ellwanger: Thank you.
Operator: The next question is from David Duley of Steelhead Securities. Please go ahead.
David Duley: Congratulations on nice execution and…
Russell Ellwanger: Thank you, David.
David Duley: Sure. I just had a couple of questions. I guess, they’re more housekeeping. Oren, you gave us a bunch of CapEx numbers, but they seem to kind of be over a multiyear period. I was wondering if you’d give us your best guess as to what CapEx is going to be in 2024?
Oren Shirazi: So, I mean, it’s pretty straightforward from what I said. I mean, $200 million a year maintenance CapEx. So it’s $50 million a quarter, plus we said $160 million is remained this year and next year. You can assume about $30 million, $40 million a quarter for Agrate, and you saw it in Q1 that the CapEx is $98 million, which means that on top of the $50 million baseline, there was probably $40 million to $50 million for Agrate. So you can assume this will be also for the next quarter.
David Duley: So $40 million or $50 million a quarter for Agrate?
Oren Shirazi: Yeah. Yeah.
David Duley: Okay.
Oren Shirazi: Now for Intel Fab 11X, I don’t want to speak about it. It’s also related to Intel business CapEx that we buy from them and that they buy from Pentos [ph] and sell to us. And I don’t want to enter into the number. I just said that it’s a $300 million that will start this quarter, Q2 2024, for the coming two and a half years. If you want, you can divide the $300 million by 10 quarters, which is two and a half years, and reach $30 million, but everybody can make it assumption. I don’t want to enter into specific numbers. And that’s all.
David Duley: And then you will spend some more on SiPho and 5G, right?
Oren Shirazi: Yeah. SiPho, 5G capability tools. I said it’s multiple dozens of, multiple tens of millions of dollars. This year, if you average it over a few quarters, it’s almost a quarter of that, but it will not be material amounts this year, because we are now ordering those tools for capability and most of the payments will not be this year.
David Duley: So that sounds like it adds up to somewhere like around $125 million a quarter, CapEx?
Oren Shirazi: It could be. We don’t give a guidance for that. It’s a reasonable calculation. Although it’s not something that is linear, but.
David Duley: Just along the same lines, I’m looking at your cash flow statement and your press release. The depreciation expense was down like $6 million quarter-over-quarter. First of all, why was this depreciation down so much with you ramping up CapEx? And then if you could help us understand what that depreciation number is going to do on a quarterly basis for the balance of the year, I’d appreciate it?
Oren Shirazi: Yeah. On the depreciation, as you can see in the — you’re looking at the appendix to the cash flow, it’s a $60 million average per quarter. So a year ago it was $62 million, a quarter ago it was $65 million, now it’s $60 million, so it’s pretty much the same numbers. The fact that it was down is not attributed to new CapEx, of course, that you are justifiably pointing out that it’s going up. It’s a result of tools that finished their depreciation 15 years ago. So, yeah, so, I didn’t say 15 years ago?
Russell Ellwanger: From 15 years ago.
Oren Shirazi: Ah! I think, yeah. So…
Russell Ellwanger: $40 million to $50 million…
Oren Shirazi: … anyway, it’s probably tools that were purchased in 2009 and finished their depreciation, but that the — that $60 million is the baseline and you’re right that you should add to that whatever amount of new CapEx that should be now depreciated. Will not change a lot.
David Duley: But what do you think that will be for the balance of the year, because it’s kind of important for your gross margin, so…
Oren Shirazi: Yeah. So I don’t think it will go up much above the $60 million, maybe $65 million maximum, because one reason is that, as I mentioned, both, I mean, the Intel CapEx index, for Fab 11 CapEx, this is, will not be starting to be depreciated this year, right, until it will start production. And the other tools, until we start to be in play, also, it’s not that we are paying and immediately start depreciation. First, you’re paying. Unfortunately, you get the tools after a few quarters, until it’s qualified, and then start depreciation. It’s usually sometimes a year delay. There will be an impact from the aggressive tools that will start depreciation, right? And the Russell refer to that as one of the reasons for the headwind. So I would assume $65 million the new level.
David Duley: Okay. And then just final question from me and it has a lot to do with these depreciation questions, is going forward you’re ramping up your CapEx, and obviously, depreciation’s going to be going up and during that timeframe, I’m kind of wondering what you think the drop rate of the business is going to be. You’ve always given us a target drop rate, but that’s not when you’re spending $125 million a quarter in CapEx. So I’m kind of wondering, when we’re at these elevated CapEx levels, what the drop rate to gross margin is you expect with revenue growth through the balance of the year? Thank you.
Oren Shirazi: So we believe strongly in our financial model that we published in November and it already included, baked into that all those CapEx of Agrate for sure, 11X for sure, and also the additional capability tool. And the margins are outlined there very clear. I mean, that we expect to be $500 million at $2.66 billion, so it’s almost 20% net profit margin and you have the growth and operating, so.
David Duley: I don’t — I can’t see that right now, so what — could you just please articulate what you think the gross margins drop rate is going to be this year?
Oren Shirazi: This year? We didn’t give a guidance for this year.
David Duley: Okay. So longer term, you think the drop rate’s going to be what again?
Oren Shirazi: According exactly to the slide, which is publicly filed with the financial model.
David Duley: Yeah. I can’t see the slides right now, Oren, that’s why I’m just asking.
Oren Shirazi: We can have it in front of us either, but we’ll pick it up.
David Duley: Okay. One second. All right. That’s great. Thank you.
Oren Shirazi: So the financial model clearly states, I’m just reading the publicly filed document, that the gross profit’s supposed to go up from $347 million baseline that was in the end of last year to $740 million a year gross profit out of $2.66 million, which is 32% incremental margin. Operating profit to go from less than $200 million to $560 million a year, which is 30% incremental. And net profit from $200 million to $500 million, which is a $2.4 billion growth, which is 24% incremental margin.
Operator: There are no further questions at this time. Mr. Ellwanger, would you like to make your concluding statement?
