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Operator: Good day, and thank you for standing by. Welcome to the Tower Semiconductor Second Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Noit Levy. Please go ahead.
Noit Levi-Karoubi: Thank you. Hello, everyone, and thank you for joining us. Welcome to Tower Semiconductor's Second Quarter of 2026 Financial Results Conference Call. With us today are Mr. Russell Ellwanger, Chief Executive Officer; and Mr. Oren Shirazi, Chief Financial Officer. Before we begin, please note that certain statements made during today's call may be forward-looking and are subject to risks and uncertainties that could cause actual results to differ materially. Tower assumes no obligation to update forward-looking statements. Our second quarter 2026 results are prepared in accordance with U.S. GAAP.
Some data presented may include non-GAAP financial measures as defined under SEC Regulation G. Reconciliation to GAAP figures and full explanations are provided in today's press release and financial tables. For your reference, a supporting slide deck is available on our website and integrated into this webcast. With that, I'd like to turn the call over to our CEO, Mr. Russell Ellwanger. Russell?
Russell Ellwanger: Hello, everyone. Thank you for joining our call today. I'm truly excited to share with you the status, progress and future outlook potentials for Tower. The second quarter was quite significant, setting substantial company records across all key metrics. These results continue to validate the growing value of our technology portfolio and the powerful operating leverage embedded in our business model. Our revenue is on a fervent growth trajectory with an accelerated flow through into earnings. Second quarter revenue was $460 million, with a particularly positive profitability, 30% gross margin, 20% operating margin and 20% net margin, all being company records, excluding nonrecurring accounting items and representing, respectively, 58%, 55% and 55% quarter-over-quarter contribution from the increased revenue.
These results stand as the first step of continual margin expansion we expect over the next years, driven by market-leading customer partnerships, which dictate a very rich product mix backed by strong operational execution. Looking ahead, we guide the third quarter of 2026 midrange revenue to be $520 million, representing an annualized revenue run rate of above $2 billion. We began the year stating that Tower will have a very strong second half as the previously announced capacity investments become qualified and converted into shipments. Beginning the second half of 2026 with a $2 billion run rate turns the page into multiple new exciting chapters for the company.
The strength of our customer demand, our growing partnerships, our proven execution capabilities and the strategic investments that we have and still continue to announce provide a powerful catalyst to accelerate our short, mid- and long-term growth. Due to direct and growing customer demand representing the scale of the market opportunity and more importantly, our ability to capture it, we have updated our 2028 model to be $3.6 billion in revenues, $1.63 billion in gross profit or 45% gross profit margin and $1.2 billion in net profit or 33% net profit margin.
Very important, the profitability gains we delivered in the second quarter are not a one-time achievement, but rather just an initial step towards profitability expansion and cash generation as represented in our updated 2028 model. Equally important, as can be seen in Slides 4 and 5, this growth is accompanied by even greater efficiency. Today, we operate at about a 10 percentage point difference between gross margin and operating margin, a highly efficient structure for a company investing strongly in future growth. As revenue expands, we drive greater efficiency with operating expenses as a percentage of revenue, lowering to approximately 7%, 30% lower than current levels. This improvement is not the result of limiting investment in R&D. To the exact opposite. The model includes an increase of R&D investment by over 40% against present levels.
3 weeks ago, we announced a dual-track 300-millimeter capacity strategic expansion in Japan for our silicon photonics, silicon germanium and advanced optical packaging capabilities, having gained the support of the Government of Japan through the Ministry of Economics, Trade and Industry, METI. Track 1 of this dual track adds significant new 300-millimeter silicon photonics capacity with full production readiness expected during the fourth quarter of 2027. It consists of repurposing the Arai facility, formerly Fab 6, for 300-millimeter silicon photonics capacity and advanced packaging capabilities and as well as maximizing the company's Fab 7, 300-millimeter output in Uozu. This Track 1 is the driver for updating the 2028 business model. Track 2 will commence in parallel with the first track and consists of constructing an additional 300-millimeter manufacturing facility adjacent to Fab 7.
This facility is expected to provide a 4x increase in our Japanese 300-millimeter manufacturing output, focusing on silicon photonics, silicon germanium and related advanced optical packaging, positioning Tower to continue to support our accelerating customer demand for emerging AI and data center applications, driving next-generation optical connectivity requirements and is planned to provide a seamless path for Tower and our customers for continued growth post 2028.
Our RF infrastructure revenues for the second quarter represented 49% of corporate revenue with approximately 43% of quarter-over-quarter growth and over 140% year-over-year growth. The full ramp of wafer starts in these investments is anticipated to occur within the fourth quarter of 2026, creating a wafer start capacity over 3x higher than the second quarter silicon photonics revenue shipments with full financial effect anticipated to be in the second quarter of 2027.
The data center industry is undergoing a fundamental transformation as AI performance is no longer defined solely by compute. It is increasingly determined by how efficiently data moves between processors. High bandwidth, low latency, energy-efficient optical connects have become a critical enabler of AI infrastructure. While geographically distributed deployment has become equally important to hyperscalers, these trends align directly with Tower's core strengths. Silicon photonics has emerged as a leading platform for 800G and 1.6T pluggable optical interconnects, which have, for the most part, already replaced copper for scale-out connections outside the rack.
The next frontier is enabling optical interconnects for scale up, either within a single rack or across multiple racks and once again, silicon photonics with Tower is well positioned to lead this transition with several near package optics, NPO deployments planned over the next year and many more in design. NPO delivers much greater bandwidth density and reduced energy per bit compared to pluggable optics, and yet it leverages the same established ecosystem as pluggable overcoming the reservation from hyperscalers and data center operators about reliability, serviceability or multisource flexibility. We announced customer contracts representing approximately $1.3 billion of silicon photonics revenue for 2027 with even higher growth for 2028.
To support the long-term growing demand, we announced the Track 2, a most significant expansion of our manufacturing footprint in Japan, which is expected to more than quadruple its 300-millimeter capacity, positioning Tower well to support not only today's workhorse pluggable optics and our rapidly growing near package optics, but also the additional future market for co-packaged optics.
Capacity alone, however, is not enough. Our future growth will also be driven by the next generation of enabling technologies that are already moving through development pipeline. Over the next 1 to 2 years, we expect several of these technologies to transition into high-volume manufacturing, including and especially heterogeneous integration of III-V materials on silicon photonics for integrated lasers, advanced modulators and optical signal processing. In support of this road map, we entered into a multiyear epitaxial wafer supply agreement with IQE securing a strategic supply of III-V epitaxial material while continuing to internalize key manufacturing steps that enhance both performance and supply chain control.
Our silicon germanium business continues to benefit from growing demand for low latency, low power efficient analog drivers and transimpedance amplifiers across traditional pluggables as well as linear pluggable optics and linear receive optics architectures. Our 100G per lane and 200G per lane products are in high-volume production across all three 200-millimeter fabs as we advance towards near package optics as well as 400G per lane solutions requiring tighter electrical IC, photonics IC integration and codesign.
Our RF mobile revenue represented 12% of our second quarter corporate revenues. Our RFSOI business is undergoing a strategic transition from 200-millimeter to 300-millimeter manufacturing, enabling higher performance, greater integration and stronger value for our customers. In addition, we are consolidating 300-millimeter RFSOI manufacturing to Fab 10, freeing up Fab 7 capacity for a rapidly growing SiPho and silicon germanium business. A road map replete with best-in-industry figures of merit has gained market excitement and engagement, driving an expected 3x RFSOI increase and 300-millimeter wafer starts by mid-2027 against the Q2 '26 shipments.
Tower management revenue for the second quarter represented 14% of corporate revenues with year-over-year revenue growth and strong demand for both our 200-millimeter and 300-millimeter BCD offerings. Our technology focus on power delivery for high-performance computing, gives us a leadership position in load gate charge and low RDSon LDMOS devices.
Sensor display for the second quarter represented 12% of our corporate revenue in our image sensor business. Year-over-year revenue is predominantly flat. However, we're seeing a sharp surge in demand, particularly in the machine vision market for high-end, high-resolution sensors used in semiconductor inspection, driven by the accelerated build-out of DDR and HBM memory assembly lines. And as well in the automotive industry, especially for EV battery inspection.
Looking at utilization. During a period of high capacity ramp, Fab 2, Fab 3 and Fab 9, 200-millimeter fab operated utilization rates between 80% and 85%. Fab 5 in Japan was at 75% utilization. Fab 7 continues to be fully utilized, well above our 85% utilization model. Now I'd like to turn the call to our CFO, Mr. Oren Shirazi.
Oren Shirazi: Thank you. Hello, everyone. Earlier today, we released our financial results for the second quarter of 2026. Revenue for the second quarter of 2026 was $460 million, a record in the company's history, representing 11% quarter-over-quarter growth compared to $414 million in the first quarter of 2026 and 24% year-over-year growth compared to $372 million in the second quarter of 2025.
Gross profit for the second quarter of 2026 was a record $138 million, reflecting a 30% gross margin and an increase of 72% compared to $80 million in the second quarter of 2025. Operating profit for the second quarter of 2026 was $90 million, 2.26x the operating profit in the second quarter of 2025. Net profit for the second quarter of 2026 was $91 million, reflecting a 20% net margin and an increase of 95% or $44 million compared to net profit of $47 million in the second quarter of 2025.
Earnings per share for the second quarter of 2026 were $0.80 per share basic and $0.79 diluted, almost double the $0.49 basic and $0.41 diluted in the second quarter of 2025.
As we previously announced, we received $290 million in prepayments from SiPho customers in the first quarter of 2026, mostly towards 2027 capacity reservation. As of the end of June 2026, our assets totaled $3.8 billion, primarily comprised of $1.6 billion in net fixed assets, predominantly fab machinery and $2 billion of current assets. Our current ratio remains very strong at about 4.9x, while shareholders' equity reached a record of $3.1 billion at the end of June 2026.
Regarding the Japanese yen, since the majority of TPSCo's revenue is denominated in yen and the vast majority of TPSCo's costs are also in yen, we have a natural hedge over most of our Japanese business and operations. To mitigate part of the remaining yen exposure, we execute zero-cost cylinder transactions to hedge currency fluctuations.
Now moving to our CapEx investment plan. This investment is on track in terms of purchase orders issued, technology and process qualification, equipment arrivals and ramp plans. Approximately 50% of this $920 million CapEx investment has been paid to date and is included in our cash flow for investing activities for the reporting period through the second quarter of 2026, while the remaining 50% is expected to be paid during H2 '26 and full year 2027.
Business model. The company updated its business model, which now includes the planned investment in the Arai facility, formerly Fab 6, to repurpose it for 12-inch type of wafer manufacturing, thereby maximizing the company's 12-inch wafer output in Japan, supported by METI, Japan's Ministry of Economic Trade and Industry. The model is based on forward-looking operational business and financial assumptions, including the assumption that all fabs will operate at 85% utilization post the full installation and qualification of the $920 million in SiPho and SiPho CapEx investment.
Under the updated model, we target $3.6 billion in annual revenue, which is $760 million higher than the February model target, reflecting 27% revenue increase. $1.63 billion annual gross profit, resulting in a 45% gross margin as compared to 39% in the prior model. This annual gross profit is $510 million higher than the prior February 2026 model, representing 67% incremental gross profit derived from the incremental $760 million revenue, reflecting our enhanced product mix. $1.38 billion of annual operating profit, resulting in a 38% operating margin as compared to 32% in the prior model. And lastly, $1.2 billion in annual net profit, resulting in a 33% net margin as compared to 26% in the prior model and as compared to 20% in the second quarter of 2026.
That concludes my prepared remarks. Now I'd like to turn the call back to the operator so we can take your questions.
Operator: [Operator Instructions] And now we're going to take our first question, and it comes from the line of Cody Acree from Benchmark StoneX.
Cody Grant Acree: Congrats on another great quarter and just great execution. Just a point of clarification and then a couple of quick questions. Did you update the SiPho bookings number for '27, the $1.3 billion? Would you give a new version of that?
Russell Ellwanger: No, no, I did not. I stated in the script that the Q4 start rate, which would be fully realized in Q2 '27 revenue was 3x higher than the Q2 shipment. So that number is... the $1.3 billion is on customer committed prepayments or on customer committed contracts. Additionally, as stated, the capacity growth is spoken for. Is it all booked? No, but it's spoken for.
Cody Grant Acree: With that level of visibility, you've been able to put up some record sequential and annual growth rates. Can you maybe just handicap the likelihood of being able to sustain this kind of growth rate or even accelerate from here?
Russell Ellwanger: Well, we gave the 2028 financial model and stated that it is our expectation to reach those numbers at a minimum by run rate nominally in the full year in 2028. So I think you could estimate what the growth rate is off of a $3.6 billion 2028 revenue level.
Cody Grant Acree: And then lastly, Russell. Maybe, if you can just help me to get a scale on the Japanese projects, the Track 1 and Track 2. I'm trying to understand the wafer volumes or the revenue support that ultimately will be available out of Japan. Is the fiscal '28 model assuming full utilization of that Track 1 build-out?
Russell Ellwanger: Yes, at 85% utilization, correct. We stated that the Track 2 would quadruple the 300-millimeter capacity and that is predominantly for SiPho and SiGe. We didn't give specific numbers. Part of the reason for not giving numbers is that we're in final negotiations, strong negotiations, not on the pricing part of it, just on the timing part to complete the facility. Our target is that everything is installed and functioning by Q4 2028. As stated in the script, it then provides a seamless growth trajectory into 2029. We're including Fab 6 in that 4x number.
Operator: Now we're going to take our next question, and the question comes from the line of Mehdi Hosseini from SIG.
Mehdi Hosseini: Yes. I do have a couple. Russell, I just wanted to better understand the evolving end market demand. As we look into next year, and NPO becomes material, does that give you ability to increase your content per given transceiver?
Russell Ellwanger: To the extent I understand your question, I would say no. It basically would be we would be selling an NPO in those cases rather than selling pluggable, and in many instances, most likely be selling both. But the content itself, no.
Mehdi Hosseini: I'm trying to better understand if there is synergy here, especially as you — at some point, the PIC itself will require a stacking of SiGe and SiPho. And that's where the question is originating from, if we have more of a heterogeneous structure, a PIC-based structure, would that be more positive for you?
Russell Ellwanger: I think you're in the correct frame of mind, and I think the answer is yes. But I believe that focus is more not on NPO, but on next generation. So when we talked about the advanced packaging, a good amount of the advanced packaging that we're putting in place is die-to-wafer and wafer-to-wafer bonding.
Mehdi Hosseini: Okay. And then second question, regarding your manufacturing footprint, given your emphasis in Japan and how you have this Phase 1 and Phase 2. Should I assume that majority of your U.S.-based customers would be supported through facilities in Japan?
Russell Ellwanger: We have and we continue to increase capacity in both Newport Beach and in San Antonio, and we're still planning to increase further capacity in both sites. But one of the reasons for having chosen Japan is its geopolitical neutrality. There's no issues for somebody to be supplied out of Japan. So it's a very good place to grow.
Operator: And now we're going to take our next question, and the question comes from the line of Richard Shannon from Craig-Hallum Capital Group LLC.
Richard Shannon: Excellent. Congratulations on wonderful results. My first question is going to be a follow-on from a couple of Cody's questions here and trying to think about the ultimate silicon photonics and SiGe 300-millimeter capacity after you finish Track 2 and you use the statements of 4x increase in capacity. I was wondering if you could answer that quantitatively or at least qualitatively to help us think about that more specifically.
Russell Ellwanger: I would say that, to begin with, after '27 mid '28, all of the growth that we have in SiGe and SiPho, and definitely in SiPho, will be in 300 millimeter. The 4x increase in capacity in Japan, the agreement with METI is really focused on optics and it's on the silicon photonics and silicon germanium. So as a minimum, we would intend to be adding 20,000, 25,000 wafer per month silicon photonics capacity, that can go much, much higher than that.
Richard Shannon: My follow-on question here is on NPO. And I'd love to get a sense of the degree to which this will be a meaningful contributor in SiPho revenues in 2027. Is this going to be — how would you characterize the size either quantitatively or qualitatively, please?
Russell Ellwanger: I think it will be significant. The exact percent, I don't yet know. But I would think it will be in the — not in the single digits, but in the tens of the percentage of what we'll be shipping, especially in the second half of the year.
Richard Shannon: And then my last question is on advanced packaging here. I think there's a little bit of contribution in the Track 1 investments in Japan, but I think a bigger part of Track 2. How much of your silicon photonics revenues are going to be packaging related?
Russell Ellwanger: We're not trying to compete with packaging houses. We're bringing more capability in-house that we have control over the end result and certainly much more control over the start to ship time of wafers rather than to depend on the supplier. We're not going to separate a packaging revenue. We're not focused on it as a packaging revenue rather than as an enabler for our silicon photonics platform.
Operator: And now we'll go and take our next question, and the question comes from Cody Acree from Benchmark StoneX.
Cody Grant Acree: Quick follow-up. Russell, with all the capacity additions that have been happening around the industry from some of your peers at the GlobalFoundries. If you can look out 12, 18, 24 months, can you maybe just frame your opinion of the supply/demand health of the industry with all of these different tranches coming in line?
Russell Ellwanger: Supply is certainly increasing. We have a definite benefit of anyone right now in that we're qualified at the lead customers worldwide with very strong contracts lasting through '28. And at this point, given additional capacity coming online, strong interactions and discussions to maintain contracts well beyond that. The most important thing is something I talked about within the script, and that is speed. So as long as we have programs going on for not just next generation, but generation plus 2 in many cases, generation plus 3. Those programs always enable you to come to the market faster, stronger than anyone else. There's typically exclusivity agreements on both sides. And we would enable a lead customer to have a head start, especially for any module that's joint developed and we would request 100% market share.
Cody Grant Acree: And Russell, is there — just for my own edification, a figure of merit stratification that you can point us to that would be a good reference point so we can just keep an eye on your continued leadership in the industry?
Russell Ellwanger: We differentiate in figure of merit. Insertion loss is probably one of the biggest things that one could look for. And if you have at this point a best-in-breed insertion loss, you really help the integrator, number one, by not needing to buy more expensive CW lasers because of greater output, but also the ability to reduce the amount of lasers that's in the package. That becomes really the biggest differentiator that we can have is to lead the industry a figure of merit.
Cody Grant Acree: And then lastly, you did mention InnoLight. I don't know if you've had a chance to see some of the press reports that the administration is maybe looking to limit exports of Chinese technology into the U.S. from an optical standpoint. Just wondering if you have any thoughts there?
Russell Ellwanger: Many thoughts, but nothing that I would want to say publicly.
Operator: And we're going to take our final question for today, give us a moment and the question comes from the line of Lisa Thompson from Zacks Investment Research.
Lisa Thompson: I just have a couple of two questions. First off, are you experiencing any shortages or supply chain issues for your own production? I know you were worked on the indium phosphide issue.
Russell Ellwanger: Big picture, no. We're in very good position on across the board with starting materials and with what we would call variable materials that are needed to manufacture. We were under somewhat of a crunch for indium phosphide starting material. And we believe that we have addressed that very nicely with the contract with IQE. But other than indium phosphide, which we had several ways that we went after to increase the amount of substrates during a difficult period. And I think that, that we've gotten resolved as well. No, we're in very good shape on supply.
Lisa Thompson: Okay. And then my last question is if we're going to do, say, an error analysis on your business model, where do you think the most variability of outcomes is? Is it going to be expenses or timing or the prices you forecast you'll get for your products? Where is the risk?
Oren Shirazi: Yes. I think I addressed it in my prepared remarks that we are based on a few assumptions which are important. One of them is the selling price per wafer. The second is the cost assumptions, the time of installation and qualification. And the third one is that we will utilize 85% of the Fab. And this is the basic assumptions for the model.
Lisa Thompson: Which has the biggest range of outcome that could be the most important to look at?
Oren Shirazi: Usually per wafer because if you have more or less quantity, so you have more or less variable costs associated with that. But if the price goes up, it goes all the way to the bottom line and vice versa. So usually, the selling price is just 100% reflection over the margin.
Operator: Dear speakers, there are no further questions for today. I would now like to hand the conference over to Russell Ellwanger for any closing remarks.
Russell Ellwanger: Firstly, as I started the call, I'll end it with the same statement. I am extremely excited with where we're at, what we're doing, our future prospects. If we look at the financial model, if we look at achieving a 33% net profit, just very, very thrilled about where we're at, where we're going. And all of these opportunities in front of us. We're really at an amazing place. We look forward to engaging with the investment community at the upcoming Jefferies conference, August 25, 26 in Chicago, and at the Benchmark StoneX Annual Conference in New York on September 10. So with that, I'd like to close and just thank you for your interest and for your support. Thank you. Bye-bye.
Operator: Thank you for your participation today. This concludes today's call. You may now disconnect.