Tower Semiconductor Ltd Aktie

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.

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. These risks are detailed in our SEC filings, Form 20-F and 6-K as well as filings with the Israeli Securities Authority, all available on our website. 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?

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. Please see Slides 4 and 5. Very important, the profitability gains we delivered in the second quarter are not a onetime 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. Rather, this improvement reflects the enhanced efficiency achieved through our support functions as we grow scale.

Speed and execution are one of the primary differentiators for high-tech success. We must continue to invest in R&D. This is a core capability. But as well, there must be a focus to streamline context, all of the SG&A functions. We are doing this and likely with numbers that rival or exceed the otherwise best in the industry. Efficiency, driving the speed of execution, of course, yields strong margins. But more importantly, it enables sustained business success through the speed of execution.

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. By combining Tower's specialized technology leadership and our best of the best worldwide workforce into Japan's unparalleled manufacturing expertise and quality output, its world-class research institutions and deeply committed workforce, we are building a strategic platform that will drive innovation, economic growth and semiconductor leadership for decades to come.

Track 1 of this dual track add 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.

Moving to our businesses. Please refer to Slide 6 as referenced for Q2 revenue breakdown. 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. Silicon photonics revenue itself increased by over 60% quarter-over-quarter and over 270% year-over-year, hitting a Q2 annualized run rate of over $680 million, targeting a $1 billion run rate in Q4 '26 as the previously announced capacity expansion continues to be qualified.

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. After kicking off the year with several breakthrough technology milestones, the second quarter was about further propelling Tower's leadership position in silicon photonics as an added foundation to the next phase of growth. We focus on expanding capacity, advancing our technology capabilities and deepening our engagements with strategic customers aligned to their long-term road maps.

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 and the communities, these trends align directly with Tower's core strengths. As AI clusters scale from thousands to hundreds of thousands of XPUs, electrical interconnects are rapidly approaching their practical limits. 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. With what we've stated about Track 1 investment, substantial additional 300-millimeter capacity will be added throughout 2027. This added 300-millimeter capacity is already requested by and committed to several lead customers, reflecting their confidence in Tower's ability not only to scale manufacturing capacity rapidly but to continue to execute on highly differentiated technology road maps required for future networking architectures.

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 [ 35 ] 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 [ 35 ] epitaxial material while continuing to internalize key manufacturing steps that enhance both performance and supply chain control. Our long-standing collaboration with Marvell reached an important milestone as the number of SiPho-based coherent optical modules crossed over into multimillion. This achievement demonstrates Tower's ability to manufacture some of the industry's most complex silicon photonics [ ICs ] at high-volume production scale.

Looking ahead, coherent photonics is expected to play an increasingly important role in scale across AI architectures where multiple data center campuses operate as a single AI factory while distributing power, cooling and infrastructure requirements across geographically diverse locations. 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 [indiscernible] optics architectures. Our 100G per lane and 200G per lane products are in high-volume production across all 3, 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. We're also seeing strong customer pull for our next-generation 300-millimeter silicon germanium platforms.

Our RF mobile revenue represented 12% of our second quarter corporate revenues. As we discussed last quarter, 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 7, freeing up -- I'm sorry, to Fab 10, freeing up Fab 7 capacity for a rapidly growing SiPho and silicon germanium business. These factors resulted in a 14% decrease in our 300-millimeter year-over-year RFSOI revenues.

Looking forward, we have realized a very strong design win momentum for our 300-millimeter platform, particularly for premium smartphones. A road map repeat 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.

Power 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. Our latest generation power technology enables our customers to develop high frequency, high efficiency, DC to DC converters for a variety of growth segments.

During this quarter, we experienced increased demand from existing customers and also saw very strong new customer acquisitions across our power portfolio. This momentum is primarily driven by growth sectors where power density and thermal efficiency are mission-critical. Through close collaboration with our lead customers, we continue to advance our next-generation power management road map.

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.

This strong demand is expected to continue to grow over the next 2 years. We are well positioned to support it with a range of products our lead customers have developed on our state-of-the-art global [indiscernible] 300-millimeter platform.

Looking at utilization. During a period of high capacity ramp, Fab 2, Fab 3 and Fab 9, 200-millimeter Fabs 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. Please, Oren. Thank you.

Thank you. Hello, everyone. Earlier today, we released our financial results for the second quarter of 2026. I will now review the highlights of these results as well as the balance sheet CapEx investments and our updated business model.

First, looking into the P&L. 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 a 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.

Moving to our balance sheet. As we previously announced, we received $290 million in prepayments from SiPho customers in the first quarter of 2026, mostly towards 2027 capacity reservation. These customer prepayments are included in the balance sheet as of the end of June 2026 as liabilities under short- and long-term customer advances and are included in the cash flow report for Q1 '26 and for H1 '26 as cash from operating activities.

Our balance sheet continues to be strong, evidenced by the following indicators and financial ratio. As of the end of June 2026, our assets totaled $3.8 billion, primarily comprised of $1.3 billion in net fixed assets, predominantly fair 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.

Hedging. I would like now to describe our currency hedging activities. Regarding the Japanese yen, since the majority of TPSCo's revenue is denominated in yen, and the vast majority of TPSCo's cost 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 0 cost cylinder transactions to hedge currency fluctuations. And while the yen exchange rate against the dollar may fluctuate, there is limited impact on our margin.

Regarding the Israel shekel, while we have no revenue in this currency, a portion of our cost in Israel is denominated in shekel. So we also hedge a large portion of that currency risk by entering into 0 cost cylinder transactions to mitigate this exposure. And while the shekel exchange rate against the U.S. dollar may fluctuate, the impact on our margin is limited as seen over the past few quarters, during which the shekel appreciated strongly against the U.S. dollar.

Now moving to our CapEx investment plan. As previously announced, in order to support the increasing SiPho and SiGe demand, we are executing a $920 million investment plan to expand capacity and capability of SiGe and SiPho equipment across our 8-inch plants in Israel, Newport Beach and Texas as well as our 12-inch Uozu fab in Japan. This investment is on track in terms of purchase orders issued, technology and process qualification, equipment arrivals and ramp plans. Approximately 50% of this $20 million CapEx investment has been paid to date, and this 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. As recently announced and presented earlier today by Russell, 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 SiPho 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 additive 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. We continue to execute to ramp up SiPho and SiGe capacity and capability in our Fab 2, 3, 5 and 7, and post the planned repurposing of the Arai facilities and qualification of the new equipment tools to be installed there.

Another assumption is the assumption regarding forward-looking wafer selling prices for existing and future products and flow. And an assumption, forward-looking assumptions regarding cost and completion date for the successful qualification of tools to be installed, process technologies to be qualified and customer products to be qualified and ordered from the company.

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. This annual operating profit is $480 million higher than the prior February 2026 model, representing 63% incremental operating profit derived from the incremental $760 million revenue, again, reflecting our enhanced product mix. 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. The final net profit is $450 million higher than the prior February 2026 model, representing 59% incremental net profit derived from the incremental $760 million of additional revenue, reflecting our enhanced product mix.

That concludes my prepared remarks. Now I'd like to turn the call back to the operator so we can take your questions.

[Operator Instructions] And now we're going to take our first question, and it comes from the line of Cody Acree from Benchmark/StoneX.

Congrats on another great quarter and just great execution. Congrats, everybody. 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?

No. No, it 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...

Yes, this can be [ 680 times 3, ] but this is capacity. While the $1.3 billion is on customer committed prepayments or on customer committed contracts.

As stated additionally, the capacity growth is spoken for. Is it all booked? No, but it's spoken for.

Is it fair to -- I mean, a touch up?

No, I was just going to state that I think there was no update given on the contracts and the bookings, but there was an update given pretty much on what is started or will be started for shipments.

Okay. Excellent. And then just with that level of visibility, you've been able to put up some record sequential and annual growth rates both on a percentage and on a dollar basis, it's been pretty impressive. With this level of visibility, can you maybe just handicap the likelihood of being able to sustain this kind of growth rates or even accelerate from here?

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.

Okay. 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, not so much Track 1. I think that's clear in your fiscal '28 model that, that is assuming full utilization of that Track 1 build-out. Is that the right way to think about it?

Yes, at 85% utilization, correct.

Okay. And so then how do we think about the scale of Track 2?

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 and complete the facilitization of the facility and then the negotiations with the suppliers on the equipment itself. So budgets, everything is approved, everything is there. We're focused on covering everything with internal cash creation. So it sits nicely in our hands. We're not looking at anything being gated or leveraged by a fundraising event or anything of that sort. There's no dilution within the plans.

But we don't yet, at this point, have the final schedule of tool installations and tool qualification. Our target is that everything is installed and functioning by Q4 2028. And as stated in the script, that it then provides a seamless growth trajectory into 2029, having reached the full potential of the Track 1 development in 2028. So our target would be to have that grow from there. The exact numbers of how much we would get from that, that we haven't said, and it's not necessarily our desire to give quarterly updates and financial models.

But you could expect that within the first quarters as we get into 2027 that we'll update our long-term financial model, depending upon how it actually turns out on the final build-out of the factory and the amount of tools that we can fit into the built-out factory. So some of that, even some of the building plan is not yet finalized.

Okay. Excellent. And then just to be clear, the 4x quadrupling of the capacity of Track 2, that is just the Uozu facility? Or is that quadrupling accounting Fab 6?

We're including Fab 6 in that 4x number. So whatever we would be doing incrementally in Fab 6, which predominantly we'll be using as an epicenter and also for specialty packaging tools. But yes, the Fab 6 incremental that you see in Track 1 is included into the 4x.

Now we're going to take our next question, and the question comes from the line of Mehdi Hosseini from SIG.

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?

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, at least to the extent that I understand your question.

Sure. I'm trying to better understand if there is synergy here, especially as you -- I'm under assumption that 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 -- I imagine that would be more positive for you, and I just want to see if I'm in the right frame of mind.

I think you're in the correct frame of mind, and I think the answer is yes. But I believe that, that focus is more not on NPL, 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.

Okay. And I imagine that would also require you to increase SiGe capacity and that's already embedded in the Phase 1 of the capacity expansion, right?

To some extent, it's mainly embedded into the Phase 2. I'm sorry, Phase 1 is focused very, very strong directly on SiPho expansion where we, as stated, all of that growth that we're doing in Phase 1 is already spoken for.

Okay. Great. And then second question, regarding your manufacturing footprint, given your emphasis in Japan and how you have this Phase I and Phase 2. Should I assume that majority of your U.S.-based customers would be supported through facilities in Japan or U.S. would -- or is there another area where you eventually have to increase capacity?

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, sorry, 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. I mean there's multiple reasons to one that we chose Japan. We have truly a remarkable workforce there. Most of the R&D that we have in Japan was a derivative of Panasonic hires back when Panasonic was the creme de la creme. I mean a top 3 Japanese company and hiring their choice of people, predominantly from Tokyo University. So we still have an extremely, extremely capable core workforce as far as R&D.

Additionally, anybody in the world that's ever been around Japanese manufacturing, the quality of it is just outstanding. It's part of a Japanese mentality. I mean, ancillary here, but we lived in Japan for a number of years when our youngest daughter was going through kindergarten. And it's a very, very interesting thing. Already at 3.5, 4 years of age, when a kindergarten student goes to school, part of their uniform is a plastic container with a wash cloth in it called an oshibori, and the school day starts by taking out that washout and wiping down their desk. And the school day ends by taking out that wash cloth and wiping down their desk.

The honoring of the workplace is a very, very big, big thing in Japan. And that culture when you started 3.5, 4 years of age, learning to honor the workplace, that stays with you forever. I mean I did a film once, so it's kind of funny, just about the procedure of returning your tray and dishes after lunch. And the activities in Japan, it's more or less of an assembly line. There's absolutely no degradation of a quality mentality versus when they're in the regular factory. So when it deals with very, very high-quality manufacturing, I think Japan is really the best of the best.

So those are multiple reasons for going there. It was the taxonomy that we have of workforce is fantastic. Quality culture in Japan is fantastic. Education in Japan is amazingly good. And it's geopolitically neutral.

Got it. And just a very quick follow-up. When should RF mobile revenue stabilize? Your prepared remarks suggest that you're continuing to consolidate move manufacturing to 300-millimeter. Would those changes in your manufacturing footprint stabilize into the second half? Or is this something that is going to carry on into '27?

I wouldn't use the term stabilize, stabilize would mean going into an area where you're not having incremental growth. But I believe I had stated that from the tape-outs activity, the design activity that we've already won that we would see Q2, Q3 of next year, having the largest 300-millimeter manufacturing that we've ever done for RFSOI. But I wouldn't say stabilizing, it's just getting to a point of continued growth and then additional plans, how do we grow it beyond that. But yes, I would think that for the Fab 10 factory where we're manufacturing, it will be very, very full come second, third quarter of next year.

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.

Excellent. Congratulations on wonderful results. Keep up the good work here. 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 think, at least 4x capacity. So it seems like we need to understand and characterize how much of the capacity to that point is 200 millimeter versus 300 millimeter. So I was wondering if you could answer that quantitatively or at least qualitatively to help us think about that more specifically.

Honestly, I'm not sure I understand the question. Could you just restate it, please?

Sure. You've said that after Track 2, you're going to -- it's going to increase your 300-millimeter silicon photonics and SiGe 5G capacity by -- or quadruple. So in order for us to quantify this, I think we need to understand what that position -- what that mix of capacity between 200 millimeter and 300 millimeter would be at that point before starting that capacity increase. So trying to figure out -- I wonder if you could answer what that split of capacity is at that point, so we can try to calculate that.

Yes. I just have to [indiscernible] real quick, sorry. I'll be right back. Sorry, 1 second, sorry.

Sorry, Richard. I would say that, to begin with, after I would say, '27 mid '28, all of the growth that we have in SiGe and SiPho, and definitely in SiPho, will be in 300 millimeter. The ForEx 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. And that's the desire of the company -- I mean, of the country. So if you multiply that by 2.25, you're dealing with very, very big amount of wafer capacity versus 200-millimeter.

So although I'm not sure why it's so important for you to know that ratio to model something. The growth in silicon photonics is quite big and the predominant portion coming out of Track 1, almost 100% of it will be silicon photonics. You have the delta numbers in revenue from the previous model to the present model. And then when we go into the 300-millimeter facility, the actual split, we've not yet announced, but the predominant portion of everything of that 4x growth will be in silicon photonics. And on the next biggest portion of it will be in silicon germanium.

Okay. I'll just state also, I think everyone is trying to figure out what the next update on the business model looks like. I think you said you'll update us kind of earlier or some point next year here. So we're all trying to do that work ahead of time. So we'll look forward to more detail when you're able to give it.

My follow-on -- one of my follow-on questions here is on NPL. 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?

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.

Okay. Great. That's very helpful. 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. So I'm going to ask a little bit longer term question here, Russell, which is I think in the fulsome of time here, after everything is built and how you think the market is going to evolve, how much of your silicon photonics revenues are going to be packaging related?

That's a very good question. I'm not sure how much of it necessarily is packaging related versus being packaging enabled. So even right now for the integrated laser, for an indium phosphide laser, we would see next year several tens of millions of revenue from integrated laser. The integrated laser is a chip to wafer bonding. That's packaging. It's right now outsourced, but we'll be bringing that in-house. So it's not that we're getting paid per se for packaging, and 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 no matter how good they are.

But we are not looking at per se competing in packaging. We're looking at packaging being an enabler to grow our core business at the highest quality, best speed to production of any supplier that there would be. Hopefully, that answers your question, Richard. 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.

And now we'll go and take our next question, and the question comes from of Cody Acree from Benchmark/StoneX.

Quick follow-up, guys. Russell, with all the capacity additions that have been happening around the industry from some of your peers at the GLOBALFOUNDRIES.

Can you pick up on the first part? I apologize. Could you start again?

It's fine. With all the capacity additions around the industry from some of your peers, GLOBALFOUNDRIES, STMicro, Samsung have all made announcements about planned capacity additions. 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?

Supply is certainly increasing. We have a definite benefits of anyone right now, and 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, I don't necessarily have too good of a feeling for how much added capacity will be coming into the market. I've honestly not followed up on that so strongly. Our focus has really just been how we maintain full share or majority share of our lead customers, and we're in very good shape there.

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.

Tied to that, what's very, very real from a business standpoint, if we're working with a very large customer, and we're putting substantial resources into next-generation or multiple generation of future developments, 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.

So I don't -- again, for part of your question, I can't -- I don't really have a good feel for how much capacity is additionally coming into the market. What I think we have a much better feel on is the market share that we'll be maintaining with our lead customers and we believe that will stay extremely high.

And Russell, is there -- just for my own edification, a figure of merit stratification, I guess, 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?

The figure of merit that you're referring to is what? I mean, typically, a figure of merit is a technical achievement. What are you looking for? You're looking for something to measure our leadership?

No, I guess I'm just trying to gauge some of the industry rhetoric about differing capabilities from your different competitors around the industry. And I'm just trying to see if there's something you can help us with to help us better understand where it is that Tower really differentiates.

Sorry, I don't want this to sound facetious, but 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.

We have press released before. It was a press release with InnoLight about our insertion loss being an enabler to have the amount of [ CW ] lasers that they need in the package. So those are -- I believe was having it. I have to go back to the PRs a couple of years ago. But that becomes really the biggest differentiator that we can have is to lead the industry a figure of merit. If you're looking at next-generation modulators at the OFC conference, we did a joint PR with Coherent about being able to have done a 400G modulator in silicon. And there is no secret that we and maybe some others are working with thin film lithium niobate. We also are working with indium phosphide for a modulator. So the best way that one could be looking at maintaining market share is, how close are you in working with the next generation and/or 2 generations out? And how is your performance in those areas. So does that answer your question, Cody? Hopefully, it does.

It does. That was very helpful. And then lastly, you did mention InnoLight. I don't know if you've had a chance, I know you're busy this morning, but 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?

Many thoughts, but nothing that I would want to say publicly.

And we're going to take our final question for today, and the question comes line of Lisa Thompson from Zacks Investment Research.

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 phosphate issue.

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.

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?

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, I can say.

Which has the biggest range of outcome, which has the biggest range of outcome that could be the most or to look at?

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 maybe usually, but it's a general statement. So usually, the selling price is just 100% reflection over the margin.

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.

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, enjoyed being able to share them with you.

One of the most exciting things about being involved in high-tech business and maybe in particular, being in management or the CEO is the fact that in high-tech, normally, your interfacing, interacting with groupings of people that are from any statistical standpoint in the upper end of intelligence. And that's a wonderful thing, a wonderful place to be dealing with. When you couple that with people a very high character, it becomes fantastic, and it's wonderful, wonderful interaction.

I can really state that if I look at across the board in business, but right now, specifically on silicon photonics, every one of our customers that we have there with really out exception are just outstanding people that we deal with. And every interaction, it's more than joyful, it's a partnership to where you have open communication, you work with each other. And off of that, you go into the next generation. We've had a very good call the other day with a big customer with regard to having now announced -- well, not announced, but having a very strong additional 300-millimeter capability. And the partnership feeling the way that we're growing together, it's really an amazing place to be. And one of my really greatest joys about leading Tower is the ability that I have daily inside the company to be dealing with very smart people that are of high character and being able to interact with customers that are very smart, of high character and seeing the integration of both together towards making new things.

We've talked multiple times and it was in the script as well, not just of Tower's growth, but of Tower and our customers' growth. and looking at things in that regard in that respect, it's a fantastic way to be. So I truly -- 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. The really an extremely wonderful adventure that we're entering into Japan to build out hub of optical excellence for the SiPho, for the silicon germanium.

We're really at an amazing place that everyone, not that we haven't in the past, but people come to work now even more excited than they did before. There's so much happening. And that's an amazing place to be. So in stating that, my invitation to everyone that's an investor, reach out, we'd love to talk to you. We'd love to have as much interaction as we can, help you better understand what we're doing, where we're at, and be able to share with you the strong results that we're having in the company.

That being said, 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. The invitation for interactions with investors, it's real. And the better you understand our story, the better you understand where we're at, where we're going, we think the best for everybody.

So with that, I'd like to close and just thank you for your interest and for your support. Thank you. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.

Good day, and thank you for standing by. Welcome to the Tower Semiconductor First Quarter 2026 Results Conference Call. [Operator Instructions] Please be advised that this conference is being recorded.

I would now like to hand the conference over to your first speaker today, Noit Levy. Please go ahead.

Thank you. Hi, everyone, and thank you for joining us today. Welcome to Tower Semiconductor's First Quarter of 2026 Financial Results Conference Call. With us today are Mr. Russell Ellwanger, our Chief Executive Officer; and Mr. Oren Shirazi, our 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. These risks are detailed in our SEC filings, Form 20-F and 6-K as well as filings with the Israeli Securities Authority, all available on our website. Tower assumes no obligation to update any such forward-looking statements.

Our first quarter 2026 results are prepared in accordance with U.S. GAAP. Some that are presented may include non-GAAP financial measures as defined under SEC Regulation G. Reconciliations 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?

Thank you, Noit. Hello, everybody. Thank you for joining our call today. The first quarter of 2026 was solid, providing a strong foundation for the high growth we expect this year. We maintained strong financial performance with continued execution of our strategic priorities. Our first quarter 2026 revenue was $414 million, 15% year-over-year growth. First quarter net profit was $65 million, 62% year-over-year growth, yielding 16% net margin, up from 11% in the first quarter of 2025. Looking ahead, we guide the second quarter of 2026 to be the highest revenue in the company's history with a mid-range revenue guidance of $455 million, plus or minus 5%, representing a 22% increase as compared to the second quarter of 2025 and a 10% growth quarter-over-quarter. We strongly reiterate our target of quarter-over-quarter revenue and margin growth throughout 2026.

We continue to strengthen our alignment and partnerships with our photonics customers through the execution of long-term customer commitments, contractually representing $1.3 billion revenue in 2027 with significantly larger valued contracts for 2028, backed by approximately $290 million in prepayments already received from our largest SiPho customers. This reflects the strength of our offerings and our customer partners' confidence in our ability to meet the continued growing demand of next-generation AI data center architectures.

Importantly, these reservations do not represent the entire expressed demand of these customers nor the extent of our planned shipment to these customers, and do not include additional wafer shipments to our broader base of more than 50 active SiPho customers serving various end market applications. These commitments, together with our continued technology leadership and strategic expansion of 300-millimeter and global manufacturing capacity, provide us with enhanced revenue visibility and confidence in sustained profitable growth.

Our recently announced restructuring deal in Japan in TPSCo marks the significant milestone in advancing our long-term 300-millimeter strategy. By transitioning to full ownership of the 300-millimeter factory Fab 7 in Uozu, we are creating a more focused and scalable platform to support growing customer demand, particularly in our differentiated optical photonics technologies. Full ownership allows us to expand and build upon a facility that is running multiple fully qualified, high-volume application flows and importantly, at present volumes is already profitable.

The 300-millimeter expansion tied to the approval of METI grants is designed to be strategic, operational and capital efficient. With access to adjacent land, we expect to further build out and scale up to 4x current levels, generating a meaningful long-term growth engine anchored in high-value technologies. This approach leverages existing customer qualifications with increasing demand, allowing incremental capacity to translate into revenue and cash flow almost immediately as new tools are installed.

This positions our 300-millimeter platforms not only as a key driver of future growth, but also as a structurally stronger contributor to profitability, reinforcing our overall financial model and long-term value creation. Additionally, we have entered into a long-term supply agreement with Nuvoton for Fab 5 Tonami. This will ensure manufacturing continuity for our 200-millimeter customers under terms that are mutually beneficial.

Moving specifically to first quarter of 2026 performance. This year has begun in a very strong fashion, led by Silicon Photonics with a revenue growth of 3x year-over-year, all major technology offerings demonstrated year-over-year growth with imagers up 9%, RFSOI up 12%, power management up 10% and silicon germanium up 24% year-over-year. Please see Slide 4 as reference for Q1 revenue breakdown by technology.

Focusing on RF infrastructure, last quarter was truly amazing, both in our team's execution of aggressive capacity expansion as well as in demonstrating new breakthrough technology milestones. First, we continued a strong ramp of 200 gigabit per second products for multiple customers while continuing to support strong demand in older products by taking full advantage of new capacity coming online. We are in the midst of a SiPho production ramp in each of Fab 2 Migdal Haemek, Fab 3 Newport Beach, Fab 9 San Antonio and Fab 7 Uozu Japan 300-millimeter. Among this, we successfully achieved in Q1 first flow cycle revenue shipments from both Fab 2 and Fab 7, the latter having achieved impressive 95% yield for the first SiPho wafers leaving the factory.

Our expansion remains on track to grow SiPho capacity 5x from the base of our Q4 '25 wafer revenue shipments by the end of this year 2026. In 2027, we anticipate our focus will turn primarily to additional 300-millimeter capacity expansion in the Uozu factory supported by the expected full factory ownership.

Next, we achieved a number of next-generation technology breakthroughs working with several of our key customers. This quarter, we announced the demonstration of an all-silicon 400-gigabit per lane Mach-Zehnder Modulator with our strong partner and optical industry leader Coherent. Coherent being one of our customers having signed a high-volume, long-term contract.

With OpenLight, we recently announced a heterogeneously integrated 400-gigabit per lane indium phosphide electro-absorption modulator on our silicon PH18DA platform. In addition, we made strong strides towards bringing thin-film lithium niobate to high-volume manufacturing and announced our partnerships with Lightwave Logic and NLM Photonics to bring organic polymers to high-volume production for next-generation compact modulators.

Just prior to the Optical Fiber Conference, we announced our partnerships with Salience Labs and Oriole Networks to manufacture advanced silicon photonics-based optical circuit switches, both using our PH18DA platform with heterogeneous integrated indium phosphide optical amplifiers to achieve high bandwidth and ultra low-latency optical switch solutions for AI data center scaling.

Last but certainly not least, our partner, SCINTIL Photonics announced availability of the world's first heterogeneous integrated dense wavelength division multiplier, DWDM laser sources, designed for near-package optics and CPO-based AI infrastructures. Most market analysts forecast that pluggable optical transceivers will remain the dominant format through the end of this decade. We do see extra dense pluggable optics, XPO being led by Arista with the aim to extend the served generations of pluggables and highlighted by Andy Bechtolsheim in his Optical Fiber Conference Executive Forum panel presentation and near-package optics, eventually also co-package optics, emerging and coexisting with pluggables for the next several years and are thus preparing to ramp these technologies as well. At this year's OFC, Tower Silicon Photonics was on display in leading XPO and near-package optics demonstrations. We are already seeing strong demand for MPO products in 2027.

Given the strong customer traction, it's our expectation that Tower SiPho will continue to lead in these new optical form factors. NPO is likely to ramp over the next several years and precede a significant ramp in CPO for our primary customers. However, we are investing heavily in several CPO technologies, namely in-house 200-millimeter and 300-millimeter hybrid bonding with Through-Silicon Vias to seamlessly attach SiPho to electrical ICs, laser sources for both more traditional as well as DWDM architectures for use in CPO implementations and reduced size high-performance modulators for use in space-challenged CPO form factors.

In addition to SiPho, our silicon germanium platform is experiencing unprecedented demand for use in drivers and transimpedance amplifiers for optical transceivers and also for active copper cables that can be an attractive alternative to optical for short distance scale-up architecture. Additionally, our RF silicon germanium technology is in the midst of a strong ramp for LNAs in a Tier 1 mobile platform. In silicon germanium, we recently announced our partnership to produce high-power U.S.-made silicon germanium beam-forming ICs designed for defense radar and satellite communication applications. Fabricated at our U.S. sites, these chips aim to secure domestic supply chains, offering superior performance for critical next-generation defense systems. As our sites turn to space, whether for data centers or for global satellite connectivity, we see our silicon germanium platform being well suited to support these growing applications.

Looking at RF mobile, we continue to move our RFSOI 200-millimeter technologies to 300-millimeter to take advantage of finer line and other enhanced capabilities offered at 300-millimeter, whilst repurposing this 200-millimeter capacity for higher-margin SiPho and SiGe capabilities. Substantial improvements of our Ron-Coff relative to competitors and reduced layer count is creating a strong design win momentum that positions our 300-millimeter RFSOI platform for sustained growth over the next multiple years.

In power management, we have seen year-to-year revenue growth in both our 200-millimeter and 300-millimeter BCD offerings. In the last quarter, we announced the release of our latest power platform, Gen3, achieving on-resistance below 1.5 milli-ohm millimeter squared for key devices with operating voltages above 10 volts. Such low on-resistance enable high power conversion efficiency in a variety of applications and places our offering at a very competitive position relative to other foundry offerings.

Using our technology, our lead customers have demonstrated a 15% reduction in power conversion losses, quite significant as compared to the highest efficiency alternatives. Some of the end markets where we have seen revenue growth have included consumer mobile and automotive. In addition, as the AI data center power delivery market transitions to 800 volts DC bus at the rack level, we see a significant growth opportunity ahead in smart power stages and point-of-load converters designed with our BCD offerings. Lastly, in consideration of the value we are offering, our 200-millimeter BCD pricing has increased by 13%.

Image sensors, the fastest-growing CIS segments are automotive, industrial, machine vision and high-end video cameras. Growth in each of these areas is concentrated in the high-end portion for high-resolution, high dynamic range with sensitivity to low light and global shutter technology are required. Tower's global shutter technology, combined with its wafer-to-wafer hybrid bonding provides best-in-class performance in terms of low noise and high sensitivity and allows high resolution. Additionally, we are developing an ultra-high-density in-pixel capacitor to provide best-in-class dynamic range, especially for the automotive market. We won a second high-performance automotive product this past quarter. Significantly, we are fully qualified with the next-generation high-end video sensor with a leading high-end photography camera maker awaiting their product launch.

Turning to utilization. For the first quarter, utilization rates for Fab 2 at around 60% utilization as SiPho and SiGe qualifications continue. Fab 3 operated at 80% utilization. Utilization was slightly constrained due to adding newer SiPho and SiGe processes. We expect utilization and output to increase back in the second quarter. Fab 5 was at 75% utilization. Fab 7 continues to be fully utilized, well above our 85% utilization model. Fab 9 utilization was at 80%.

With that, I'd now like to turn the call over to our CFO, Mr. Oren Shirazi. Oren, please?

Hello, everyone. Earlier today, we released our financial results for the first quarter of 2026. I will now review the highlights of these results as well as the balance sheet and CapEx investments. Looking into the P&L. Revenue for the first quarter of 2026 was $414 million, representing 15% year-over-year growth compared to $358 million in the first quarter of 2025. Gross profit for the first quarter of 2026 was $111 million, an increase of 52% compared to the first quarter of 2025. And operating profit was $65 million, 96% higher year-over-year.

Income tax expense line of $6.5 million in the P&L reflects an all-in 9% effective tax rate, which is better compared to our model for which we estimate all-in tax rate to be above 15% following Pillar Two regulations. The reason for it is the inclusion of a nonrecurring income tax benefit recorded for the first quarter of 2026 in relation to TPSCo, our Japanese affiliate. Net profit for the first quarter of 2026 was $65 million, an increase of 62% or $25 million compared to net profit of $40 million in the first quarter of 2025, reflecting 16% net margins compared to 11% net margins for the first quarter of 2025.

Earnings per share for the first quarter of 2026 were $0.58 basic and $0.57 diluted, which is 61% and 63% higher year-over-year, respectively. As we announced, we received $290 million of SiPho customer prepayments towards 2027 capacity reservation. These customers prepayments are included in the balance sheet as of the end of March 2026 as short- and long-term customer advances and are included in the cash flow report for Q1 '26 cash from operating activities.

Continuing on the balance sheet, our balance sheet continues to be strong, evidenced by the following indicators and financial ratios. As of the end of March 2026, our assets totaled $3.7 billion, primarily comprised of $1.5 billion in fixed assets net, predominantly comprised of fab machinery and $2 billion of current assets. Current assets ratio is very strong at about 5.6x, while shareholders' equity reached a record of $3 billion at the end of March 2026. Additional evidence of the strong balance sheet and financial position is the Standard & Poor's Maalot, an S&P Global Ratings fully owned company, which on May 5, 2026, completed its annual rating review for the company, reaffirming its ilAA rating and raising its outlook for the company from a stable outlook to a positive outlook.

I would like now to describe our hedging activities. In relation to the Japanese yen, since the majority 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. To mitigate part of the remaining yen exposure, we are executing 0 cost cylinder transactions to hedge currency fluctuations. Hence, while the yen rate against the U.S. dollar may fluctuate, there is limited impact on our margins.

In relation to the Israeli shekel currency, while we have no revenue in this currency, since a portion of our cost in Israel is denominated in shekel, we also hedge a large portion of such currency risk by engaging 0 cost cylinder transactions to mitigate this exposure. Hence, while the Israeli currency rate against the U.S. dollar may fluctuate, there is a limited impact on our margins as indeed, we have experienced over the past few quarters in which period the Israeli currency appreciated strongly compared to the U.S. dollar.

Now moving into the CapEx investment plan. As we announced in recent quarters, in order to support the increasing SiPho and SiGe demand, we are executing a $920 million investment plan in capacity and capability of SiGe and SiPho in our 8-inch fabs in Israel, Newport Beach, Texas and also in our 12-inch Uozu fab in Japan. This investment is on track in terms of purchase orders issued, technology and process qualification and the ramp plan. Approximately 40% of the above-mentioned $920 million CapEx has already been paid and is included in our cash flow for investing activities for past reported periods, while the remaining 60% are expected to be paid throughout 2026 and 2027.

All these CapEx, current and future investments, are fully reflected in the model we presented in February 2026. Under this model, we target $2.8 billion in annual revenue, $1.12 billion in annual gross profit, $900 million in annual operating profit and $750 million in annual net profit.

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] Now we're going to take our first question and it comes from the line of Mehdi Hosseini from Susquehanna Financial Group.

Yes. A couple for me. Russell, if you just think about the big picture and the longer-term trends, is there any way you can help us understand how opportunities for Tower as it relates to Silicon Photonics and Silicon Germanium changes as we migrate from a pluggable transceiver to optical? In other words, how does your content change as you make this transition from a traditional pluggable transceiver to optical?

As stated as we go forward, as far as content itself, I mean, certainly, you'll still need lasers. We're driving integrated lasers. We're driving different material modulators for higher speeds. And as well driving, as I had mentioned, Through-Silicon Via to be able to do some 3D packaging and tie the silicon photonics to the electrical ICs. And as far as XPO, there's just many more channels that are being done. And as far as MPO, again, many more channels being done, so greater modulation.

Sure. I asked the question because the way we, in the investment community, see the optical transceiver manufacturing evolving, there are several different solutions by different foundries. And I was just trying to understand if Tower has become a leading foundry, a partner for transceiver manufacturing for pluggable, how does that change as we move into optical where there are alternative technologies?

As stated, we expect that what we have with pluggables will transfer nicely into NPO and will extend as well into CPO, which will be several years down the road. If you look at the SiPho ports itself, it's very interesting. From 2025, the amount of SiPho ports, and this is according to a report by LightCounting, the amount of SiPho ports was $30 million, driving to 2028 SiPho ports to $137 million. Now at the same time, the total ports goes from $90 million to $205 million. So this is a function of the data center buildup, build-out, et cetera, but the amount of ports becomes much, much greater.

Pluggables are not going away at all. Pluggables will stay extremely strong at least through the 2030. As stated in the script, we expect that the first things to come on at a higher rate is the near-package optics where we have multiple design wins presently and stated that we have a reasonable volume that we'll be shipping in 2026, 2027. And we have as well, I think, a very, very strong position in the XPO that was highlighted by Andy at the OFC, as I mentioned, having had two strong demonstrators at OFC using our SiPho.

So if you just look again, the growth of SiPho ports is 4.5x from '25 to '28. And that entire amount of port growth is added from '28 to 2030. So a lot of room for a tremendous amount of SiPho growth. We are, I believe, by far, the leader in pluggables. I don't see any reason that, that should change. And in the short term, the XPO and the MPO form factors should transition nicely with Tower maintaining leadership.

Great. And just a quick follow-up. I understand investment communities focused on silicon photonic. And thank you for identifying revenue opportunities, especially what you have contracted for '27. Is there any way to think about the ratio between SiPho and silicon germanium because silicon germanium is also using transceiver. So if you have extended visibility on the SiPho, would that gives you a visibility on the SiGe? And is there a ratio that we could use to understand opportunities that you have focusing on SiGe?

Yes, you're correct. It's very much hand in hand. So as the ports increase and the movement to SiPho increases, that obviously, the SiPho grows. As the ports increase as well, the need for TIAs and drivers increases pretty much at the same ratio. The difference between the two comes into the advancement of the SiPho technology and the fact that although they both demand very good margins, SiPho is demanding a higher margin than the SiGe. So the SiGe revenue growth is lower than the SiPho revenue growth. But as far as the amount of units, they pretty much go hand in hand.

Now we're going to take our next question, and the question comes from the line of Cody Acree from Benchmark.

Congrats on just a stellar quarter in guidance. Russell, maybe could you just give a quick clarification on the $1.3 billion commitment, excuse me, is that for wafers to be delivered in fiscal '27? Or is that wafer started that then would extend delivery to '28? Just trying to get my model correct.

Wafers delivered in '27 and the -- what I stated about a higher volume for '28 is wafers delivered in '28. But again, and I think it's very important to note, although I did say it in the script, the $1.3 billion is a contractual commitment. It is not even with those customers that we have that contractual commitment from and with, it is not their full volume demand. So the $1.3 billion, if you look at it, what were we in 2025, I think somewhere about $230 million. So it's a 2-year from a $230 million to $1.3 billion, but that $1.3 billion is not what we're forecasting for SiPho in 2027, meaning we're just forecasting substantially higher. But yes, to answer your question directly, that is for wafer shipments.

I guess that then just begs the next question. With that level of visibility, what degree of visibility would you have to have to feel comfortable increasing your recently increased long-term model?

It's a very good question, Cody. And when you say long-term model, it was a 2028 model, which in my mind is somewhat of a midterm model. But I talked about our focus for 2027 will be increasing 300-millimeter SiPho capacity, the strategic focus and hand-in-hand comes the SiGe capacity as well, the 300-millimeter. But that is not included in any model right now. So the visibility, I think, will be fairly short term. The timing of updating a model to higher numbers, I would believe, will be within the next quarters.

Well, that's excellent, Russell. And a correction, it's long term versus midterm. And then one last question, if I may. What is your view on integration of indium phosphide lasers? I know there's been a lot of industry concern about the reliability of the integrated laser as we move towards CPO versus an externally sourced laser alternative. I know that, that's a strength of yours. Can you maybe just talk about the reliability steps that you've been able to make?

We see no reason that the integrated laser is any less reliable -- nor any more reliable than a discrete laser. As far as reliability, the major thing that we're focused on is just the integration -- a strong integration of the laser into the silicon photonics IC. And hence, that there is no potential downside of integrating the two. And I think that is pretty seamless at this moment. The activities there was with OpenLight and the OpenLight platform, and it's going very well.

So I would say that from our standpoint, we're very bullish about the integrated laser and additionally about an indium phosphide integrated modulator for 400 gig. But our platforms can allow both, right? If whatever customer wants a form factor with external lasers, great. If they want to go with us on the integrated laser, equally great. That as far as their direction that they wish to go, we're somewhat agnostic other than the fact that we're really pushing very strong on very advanced 400G modulation. And if you look at advanced modulators, the indium phosphide has tremendous advantages on form factor.

And Russell, if I may, since you brought it up, I guess I'll just sneak one last one in here. And then with the modulation schemes that you mentioned in the subsequent press release to your earnings release, you mentioned a wide variety of modulation technologies that you're pursuing. Would you handicap or prioritize any one of those over the other as being a better fit for Tower in the intermediate to long term?

No, I think we're equally confident in all. It's -- the thin-film lithium niobate has multiple different ways to architect it. You can do -- I'm not saying it's simple, but you can do a separate lithium niobate modulator that's its own wafer and have that side-by-side to the PIC or you integrate it as a chiplet onto the PIC. And we're pursuing both form factors there with different customers. As far as the indium phosphide, obviously, that's an integrated onto the PIC. But we're somewhat agnostic as to which one a customer would use. However, as you get to many channels, the indium phosphide really has a benefit on form factor.

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.

Apologies for the ambient noise here, I'm just about ready to board a plane here. So if it's too loud, I'll try to call in later. But I guess I just have two basic questions here. The first one is regarding your capacity expansion in Japan. Kind of a two-parter here. The first part here is how do we think about the potential revenue capacity scale for silicon photonics as you get at least the first part of the tranche, the tranches I'm sure you're building there. And then do you have any worries about being short of capacity in silicon photonics before that Japan capacity expansion has started?

Excellent question. We're looking and hoping and believing that we'll, in the very short term, receive the METI approval. And we've already obviously begun with contractors to get planning done, to get everything done. Once we have the METI approval, we'll most likely put in for the permits. But that is probably 1.5 years type of a time frame between breaking ground and having a facility that can be accepting tools and starting ramping the tools. So where does that put us? That puts us in best case in the first half of 2028 for that capacity.

And then when you say worries -- I mean, worry is an interesting question. Worries are also excitement depending on how you turn it around. The excitement right now is increasing within existing footprint, our capability with silicon photonics in Fab 7, which is the existing factory. And we have approved capital spending for that for the first phase of it, which we've not publicly announced. I don't want to get into the numbers at this point. We probably will within 2, 3 quarters in line with what Cody asked about updating a financial model.

But -- and then we have an ability to go further before the shell is completed by taking advantage of an existing factory within the TPSCo complex. It was one that we announced a couple of years ago that we had shut down, and that was the RI factory, which is under the ownership of Nuvoton Winbond. But to put a certain amount of tools and a very specific set of tools within that factory to grow capacity relatively quickly within existing footprint, if you will.

So our plans is not to miss out on any upside or not to be able -- our plan is certainly to meet customers' demand within '27 while developing. Developing meaning building the shell that is substantially big. So it would be an interim step. The beauty of the interim step is that any of the tools that we buy is applicable to the entire build. Even things that we would put initially into another factory would over time, come back into the existing geography, meaning -- or not the existing, but the existing and built out geography. Hopefully, that was not too obtuse of an answer, a lot of playing parts on it. But does that make sense, Richard?

It does. I'll revisit your comments and look at it more closely, but that was very detailed and helpful. My second question, and I'm going to go on mute after this one and listen to your response is on your announcement on the 400-gig per lane silicon modulator for Silicon Photonics, you announced it with Coherent. Two-part question. First of all, can you use this technology or something similar with other customers? And then as you look across the 400-gig per lane generation, how much of your business will be silicon versus TFLN versus indium phosphide versus any other modulator technology?

On the first question, certainly, the 400G modulator that we had press released with Coherent was off of a Coherent design. What we know and our know-how and our IP is available for any customer. This specific modulator performance was because of Coherent's design tied to our platform. So if that makes sense, it's not something that we can give to anyone else, it's Coherent's IP. But Coherent on having designed it to our platform, other customers that would have or potentially could get the same capability as Coherent would be able to design something on our platform. As it stood, it was Coherent that did it and Coherent that had the design capability to do so. That's number one.

Number two, I think you're asking me for what I think would be the first technologies to be utilized. My personal view, and this is my view, and I'm certainly not a market analyst. I think the lithium niobate will come in fairly strong for one generation. I don't think it will last for many generations, I think it will go to an indium phosphide.

Now we're going to take our next question, and it comes from the line of Lisa Thompson from Zacks Investment Research.

I was wondering if you could talk a little bit about gross margins. It seems surprising how much they increased in the first quarter given revenues were sequentially down. Can you talk a little bit about how the margins went up? Was it more product, product mix, higher prices? How does that turn out?

Yes. Basically, it's consistent with our model that we published last quarter. In our model, you'll see that we assumed incremental revenue coming at 59% to the gross profit over a baseline, which was 20% a year ago. So last year, as you see in this report, Q1 '25 gross profit was 20%. And in our model, we assumed the incremental would come at 59%. And the fully built-out model will reach to 39%. This quarter, we already achieved 27%. So like you said, it's very nice that we already are up from the 20% to 27%. And that's the linear progression that we expect towards the 39% when we achieve the $2.8 billion.

So it's really just selling more newer, higher-margin products?

Yes.

Okay. And then just going back to the technology. Is there anything that you're concerned about as opposed to your capacity, maybe being able to get parts or be constrained? I know indium phosphate is hard to get and is constrained. Is that going to change anything? Or do customers just switch to something else?

You are correct that indium phosphide right now is constrained. In our case, not necessarily the end laser product is the constraint, the starting material is the constraint. But no, I think we have good plans and good supply chain activities so that whatever constraint issues there might be, we're working through. And as these products ramp, which they should be ramping on the indium phosphide integrated laser, it should be ramping this year. I believe that we'll be in good position to meet the demand.

Now we're going to take our next question, and the question comes from the line of Krish Sankar from TD Cowen.

I had two of them, Russell. One is I'm just kind of curious where you think your silicon photonics market share is today and where you think it will be in the next couple of years given your longer-term contractual contracts from your customers? I'm asking in light of the fact that GlobalFoundries is ramping scale and TSM is ramping the COUPE platform. So I'm just curious where you think your market share could head from today through the next 2 years? And then I have a follow-up.

That's a very, very interesting question. There's other people that claim very high market shares, I don't see how it's possible at all. I'm not going to give a percentage market share at present, but I think that we're certainly the leading market share and by far, the leading market share in silicon photonics presently. And I see no reason why that should change.

Got it, Russell. And then just to follow up on the technology side of advanced packaging. Clearly, you do have experience with hybrid bonding and CMOS image sensors. When do you think that ports over to the silicon photonics side? And is that a real advantage in the short term? Or is this something more of a longer-term story?

I think it's a very strong advantage, mid- to long-term, not so important for this year.

Now we're going to take our next question, and the question comes from the line of Mehdi Hosseini from Susquehanna Financial Group.

Just a couple of follow-ups. RF mobile was down almost 36% Q-over-Q. Obviously, it sets up a low base, and I expect growth for the remaining of the year. But how should I think about the RF mobile in 2026 versus '25? And I have a follow-up.

Yes. I just know that indeed, Q4 '25 was an exceptional growth in SOI compared to previous quarters. So year-over-year, it was not reduced, it just really was a specific ramp in Q4 '25. But Russell will address '26.

As stated, we're moving away from our 200-millimeter RFSOI and customers as well and transitioning to newer 300-millimeter design wins. The design win cycle is extremely strong. And if we look at the multiyear forecast, I see the RFSOI increasing as a total on the 200 [ plus ] 300, but the 200 is almost gone. In the very short term, not everything has transitioned to 300 yet. So you are correct, it was down. And if I look at the full year -- let me just see to be more accurate. Yes, I would see the whole year being down against the previous year even at 300-millimeter. But then I would expect that in '27 and '28, it will be record growth for the RFSOI at 300-millimeter. We have multiple design wins that have been awarded, but they're for phone models that first come out in '28. I mean that's how the industry works, which means that they would start needing to be bought in the third quarter of '27.

Got it. Okay. And then one follow-up. When I look at the overall industry and analog foundry and outside of RF infrastructure, it seems like the overall utilization rate for the industry is improving. Some of your peers have actually talked about higher prices -- higher wafer prices like-for-like. And what I wanted to ask you a better understand is how should we separate the mix, obviously, RF infrastructure, higher growth rate, higher margin. But outside of RF infrastructure, should we also assume that there is some pricing power that is coming to you?

Pricing power is particularly done by having best-in-class platforms in my mind. So if you have something that allows the customer to gain advantages by using your platform, you pay -- you can charge a premium for it. We are not a company that likes to indiscriminately raise prices because of the capacity constraint. I think that, that's honestly not a partnership model. There's times that potentially customers might have to go on allocation because there's too much demand. But I think that it's not necessarily a good practice as far as relationship and integrity to raise prices just because there's a demand constraint.

So in general, our pricing benefits are with new generation platforms for new technologies. And every time that we put out a new platform, the starting price point is certainly higher than the platform that's being sold for that technology presently. I did mention that at the 200-millimeter power management, it did realize a 13% price increase for -- starting, I think, this quarter or throughout this year. That was really in evaluating what is the value of the platform itself as compared to potential price reductions that have been given over the past years and that just truly needed a reset. But it wasn't based upon looking at a capacity constraint and forcing a customer because they have no other choice, it was basically just reevaluating what is the value of what we're selling and what should the pricing be.

And now we're going to take our last question for today, and it comes from the line of Cody Acree from Benchmark.

Just a couple of quick ones. Russell, maybe thematically, can you talk about the move to CPO and the industry's larger integrated player in the market of Taiwan Semi and their CMOS integration of the SiPho side of things and their leverage of being a one-stop shop for somebody like an NVIDIA long term? And how does Tower compete with that on a long-term basis with your hybrid strategy?

I think for part of your question, you want me to do a marketing for TSMC, and that's really not my job, but -- on a serious basis. As I stated, the NPO, XPO, pluggable will stay the primary demand at least into the beginning of the next decade as CPO starts to get greater traction. On the CPO side, I believe that the big benefit that we will add is by having PICs that are extremely beneficial because of the performance of the PIC itself. I mean there's -- in theory, there's no reason that TSMC wouldn't be buying our PIC for their COUPE if our PIC was much superior to everything else.

So now there is one thing -- well, multiple things you said, that's 100% accurate. I mean TSMC as a one-stop shop, I think there's nobody that can compete with TSMC with what they're doing on the extreme deep digital content. That is not something we have. So that's not something we could take them on or try to work at or look at. But as far as having modulation with 3, 5 and other material that's much better than anyone else could have, that's where we would add value in that. And that's one of the big things I mentioned on our CPO road map is really a very strong focus on modulation.

All right. Great. And then maybe lastly for Oren. Can you help us out with any thoughts on future tax rate, interest income, noncontrolling interest lines, any of the ancillary items of the income statement?

Yes. Financing and other income line, which is about $10 million a quarter, I would expect will remain the same. Tax line, so like I said in my prepared remarks, should be on a run rate -- I mean, on a regular model, at least 15% because of Pillar Two, which is applicable to all regions and up to maybe 18% because we have some regions that are higher than 15% like U.S. 21%, Japan, Italy. So I would assume between 15% to 18% on the tax.

And the noncontrolling interest line?

That should be pretty much like it is now. I mean this quarter, we had a specific upside there, which I mentioned because of the Japan related income tax benefit, which is nonrecurring item. But excluding that, it should be like the previous period. So it was about very small amount, right? It's not impacting in there.

Yes. Cody, I just wanted, if I could, to clarify what I said. When I refer to there's nothing that would prevent TSMC from buying our PICs. What I'm including in that is that we become the reference design for the major integrators, and that would be part of what they'd be using with TSMC.

And Russell, maybe can you expand on that with your relationship -- your recent relationship with NVIDIA at 1.6T. And obviously, they have been using Taiwan Semi for their history, but they are also partnering with you going forward.

Yes. Cody, I really honestly wish that I could. I don't have freedom to talk about specific programs with customers other than the PR that we did with NVIDIA. It was fairly clear that he talked about us as a development partner.

Dear speakers, I have no further questions for today. I would now like to hand the conference over to Russell Ellwanger for any closing remarks.

Yes. Thank you very much. So really appreciate your continued trust and support. I want to thank our teams, the Tower teams around the world whose dedication has made the progress that we reported possible and the progress that we expect to have over the next year and years possible. It's a very exciting thing. Success begets success. And the more success we have with our customers, the more excited they are, the more that inspires our own people, and it becomes a partnership that is an incredible partnership. Had mentioned Coherent as one, but we have extremely good relationships with multiple of the optical customers, I would think with all of them. And it's a very exciting thing to have because when the customer is really happy with you and your performance, the interactions become very inspiring for next-generation to generation of developments. So I thank our teams, and I really thank our customers.

As far as the equity stakeholders, I truly appreciate your continued trust and support. And we would look forward to seeing you over a variety of events that we have planned for the coming months. On May 18, we'll participate in the 27th Annual Oppenheimer Israeli Conference in Tel Aviv. On May 27, we'll attend the 54th Annual TD Cowen Technology, Media and Telecom Conference in New York. On May 28, we'll participate in the 23rd Annual Craig-Hallum Institutional Investor Conference in Minneapolis. On June 9, we'll attend the 2026 Mizuho Global Tech Conference in New York. If you have availability to be at any of these, we'd certainly love to meet with you. And as well, as always, our Investor Relations is very open to accepting calls and setting up video calls with anyone that would wish further updates and understandings about what we think is an extremely exciting activity and a very, very rich road map. Thank you very, very much.

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.

Good day, and thank you for standing by. Welcome to the Tower Semiconductor Fourth Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to turn the conference over to your first speaker Noit Levy, Investor Relations and Corporate Communications. Please go ahead.

Thank you. Good day, and thank you, everyone, for joining us today. Welcome to Tower Semiconductor's Fourth Quarter and Full Year 2025 Financial Results Conference Call. With us today are Mr. Russell Ellwanger, our Chief Executive Officer; and Mr. Oren Shirazi, our Chief Financial Officer. Before we begin, please note that certain statements made during today's call may be forward-looking and subject to risks and uncertainties that could cause actual results to differ materially. .

These risks are detailed in our SEC filings, Form 20-F and 6-K as well as filings with the [indiscernible] Securities Authority, all available on our website. Tower assumes no obligation to update any such forward-looking statements. Our fourth quarter and full year 2025 results are prepared in accordance with U.S. GAAP.

Some that are presented may include non-GAAP financial measures as defined under SEC Regulation G. Reconciliations 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? .

Thank you, Noit. Hello, everybody. Thank you for joining our call today. Very pleased to share our results for the fourth quarter and full year of 2025. Additionally, we are extremely excited to present how these results have redefined our financial milestones and accelerated the time line for achievement of the same.

The updated financial model, which we will present is the result of already strong partnerships with our lead customers having grown into deeply trust rooted supplier customer partnership technical alliances. We ended our fourth quarter of 2025 with a company revenue of $440 million an 11% quarter-over-quarter growth, 14% year-over-year growth, fulfilling our beginning of the year target of quarterly sequential growth.

In addition to the top line, we achieved bottom line growth throughout the year. Fourth quarter net profit was $80 million or 18% net margin, up from 11% in Q1 '25, 13% in Q2 '25 14% in Q3, indicative of a value-based growth being driven by technology mix enrichment.

The revenue growth from Q1 to Q4 of 2025 was $82 million, of which there was a $40 million net profit drop down and almost 50% to the exact 48.78% and this due to the high value of the incremental Photonics revenue. Revenue for the full year was $1.566 billion, $130 million or 9% increase as compared to 2024 revenue.

Now to review our 2025 revenue breakdown and discuss the key trends, please see Slides 5 and 6 as referenced. We achieved year-over-year growth across our key technology platforms, namely power management, image sensors and 300-millimeter RFSOI on top of which record achievements and unprecedented growth of our market-leading optical transceiver offerings, silicon germanium and SiPho advanced platforms has propelled us into a favored and unique position, both driving our growth for 2026.

And additionally, giving us the ability to redefine our financial model, which I will present at the end of my comments. RF infrastructure showed a 75% revenue increase, 2025 over 2024 being our fastest-growing application in '25 driven by hyperscaler rapid adoption of silicon photonics and 800G and 1.60 pluggable transceivers. Silicon germanium and silicon photonics revenues represented 27% of our corporate revenues were $421 million, up from $241 million or 17% in 2024.

SiPho revenues alone were $228 million in 2025, up from $106 million in 2024. Specific to the fourth quarter, RF infrastructure revenues were 32% of corporate revenue, with SiPho having achieved $95 million or a $380 million annual run rate. Included in this number is some non-wafer NRE to enhance future developments for Gen1 and Gen2.

As highlighted in our recent announcement with NVIDIA, the insatiable demand for compute bandwidth in both scale-up and scale-out architectures and Tower's exceptional ability to scale the capacity flawlessly in partnership with our customer has made 1.6 terabyte per second, the fastest-growing silicon photonics node in the industry to date, with Tower being by far the majority supplier of 1.60 silicon PICs.

The partnership announced with NVIDIA as with all our direct module customers, underscores our commitment to deliver best-in-class technology and the manufacturing agility required to meet such an exceptional demand trajectory. In addition to Fab 3 Newport Beach, this past year, we successfully ramped silicon photonics production in Fab 9 San Antonio, Fab 7, [indiscernible] Japan, and are on track to ship the first production, a very large SiPho ramp in 2026 and from Fab 2 Migdal Haemek. Given an even stronger customer demand than was known at our last quarterly release, we have increased our CapEx bond for 2026 and with multiple customer requests to enter into capacity reservation agreements through 2028, enabling our customers to, in turn, give firm commitments to their customers having ensured their supply.

For next-generation 400-gigabit per lane, we continue to make strong progress with heterogeneously integrated indium phosphide on silicon and other material systems. We are playing a key role, partnering with our lead customers to define the material systems that will be chosen, refining the flow and hence ensuring manufacturability readiness and immediate ramp capability upon 3.20 market introduction.

We also see co-packaged optics as a substantially incremental opportunity for us in the coming years as optics gets adopted and scale of interconnects as well as XPU to high-bandwidth memory interconnects that are today largely copper.

In Q4 '25, we announced the expansion of our mature 300-millimeter wafer bonding technology to enable wafer Tay for integration of silicon photonics ICs and silicon germanium electrical ICs. In addition, we continue to work with several customers on dense wavelength division multiplexing laser sources, which are a critical component of many CPO implementations and can significantly expand our served optical market by now including the laser source. Beyond optical transceivers, our silicon photonics platform continues to be the technology of choice for physical AI applications, particularly frequency modulated continuous wave LiDAR.

Ahead of CES, 2 of our FMCW, LiDAR partners, EVA and Light IC publicly announced their collaboration with us in bringing to market disruptive products. The proven robustness of our silicon photonics platform supported by many tens of thousands of high-yielding, high-quality wafers ship to date is enabling silicon photonics to capture growing share in the LIDAR market, unlocking new automotive and robotics opportunities.

Our silicon germanium platform delivered strong growth year-over-year in 2025 of 43%, remaining the optimal platform solution for low-power, low-latency, high-performance components such as drivers, [ Trasimpitam ] amplifiers for pluggables, LPOs and active copper and active optical cables. Alongside our silicon photonics production, our silicon germanium platform is now running in high volumes across Fab 3 Newport Beach, Fab 9 San Antonio, Fab 2 Migdal Haemek, and we have shipped 300-millimeter prototypes from Fab 7 in [indiscernible]

RF mobile represented 23% of our 2025 corporate revenue and 24% of our Q4 25 revenues. 300-millimeter RF SOI was up 5.5%, while the RF mobile as a whole was down 15% year-over-year.

Those are primarily due to our proactively working with our customer partners to responsibly reduce exposure to lower margin controller offerings in favor of higher-value optical and RF mix in the fabs and also influenced with the front-end module market shift from 200-millimeter to the higher digital content better served with more advanced nodes in 300-millimeter.

Our latest technology, which we presented last quarter, with substantial improvement of our NSO relative to the competition and reduced layer count, therefore, higher overall value per customer dollar continues to see robust customer adoption.

Lead customers have recognized it as best-in-class and are preparing to ramp to high volumes. Across the board, we continue to see strong design win momentum that positions our 300-millimeter RF SOI platform for sustained secular growth. In 2025, we achieved major wins, namely 3 of the top 4 Tier 1 and RF front-end module providers. One has begun production with all planning for strong ramp in 2027 towards achieving appreciable revenue volumes in 2028.

Power Management grew 20% year-over-year, demonstrating strong year-over-year revenue growth in both 200-millimeter and 300-millimeter offering representing 16% of our 2025 corporate revenues and 15% of our Q4 '25 revenues.

In 300-millimeter, this includes the wrap of the Tier 1 handset envelope tracker previously announced, which is expected to continue to gain share in the years to come. Overall, our revenue growth in 300-millimeter power has significantly outpaced the rate of growth for both the power market as well as the mobile handset market, demonstrating the strength of our offering and share gains in this significant space.

Sensors and displays grew 10% year-over-year, representing 16% of our 2025 corporate revenue, 15% of the fourth quarter revenue.

We have seen strength and continue to see strength in the machine vision market with new advanced products wrapping to production alongside existing products that continue to gain share. We also expect our first ramp in the -- I'm sorry, in the AR display segment with our silicon back plane for OLED on silicon, which has started production this past quarter.

We are tracking this first adoption and its overall market carefully and with optimism as it may have significant value for Tower in the following years. Mixed signal CMOS represented 7% and discrete represented 11% of our 2025 corporate revenues.

Year-on-year, we've seen decreases of 18% and 14%, respectively, supporting our value-driven growth strategy, allowing additional capacity for the higher margin and the highest margin platform to replace these 2 application set. Regarding capacity expansion. During our previous earnings release in November 25, we announced an increase of investment for silicon photonics and silicon germanium growth targeting a tripling of SiPho capacity against our targeted Q4 25 silicon photonics actual shipments. Having stated a target that this would be online to begin silicon starts in the second half of 2026.

Due to continued growth in demand, we are announcing today additional CapEx investment of $270 million on top of the previously announced $650 million capacity expansion plan.

This total capacity is targeted to yield capacity growth greater than 5x of the actual fourth quarter monthly wafer shipments of silicon photonics wafer shipments to be compared to the 3x target that we gave during the Q3 public release.

And over 70% of the total SiPho capacity is either presently reserved or in the process of being reserved through 2028, firmly backed with customer prepayment. For the fourth quarter, utilization rates were Fab 2 operated at about 60% utilization as we are now in the final stages of silicon germanium and silicon photonics capacity qualification for a variety of flows.

Fab 3 maintained our model full utilization of 85% and still adding capacity for increasing silicon photonics capability. Fab 5 was a 75% utilization. Fab 7 was fully utilized, well above our 85% utilization model. Fab 9 was at 65% utilization presently in the silicon photonics and silicon germanium ramp.

As stated in our press release, Intel has expressed its intention not to perform under the September 23 Fab 11X agreement. We are presently in a mediation process. All flows, which have been transferred or are in the process of being transferred to Fab 11X were originally qualified in our Japanese 300-millimeter factory Fab 7. Customers are being redirected to be supported by this fab in Japan.

For guidance, we guide our first quarter of 2026 midrange revenue to be $412 million, plus/minus 5%, representing a 15% increase as compared to the start of 2025. We target quarter-over-quarter revenue and profitability growth throughout 2026.

Based upon the thriving corporate ecosystem we've developed intertwined with deeply trusted customer partner alliances, we are pleased to provide a revised financial model. This new model demonstrates our value-driven growth strategy please refer to Slide 7.

First, the assumptions. Beyond the $920 million CapEx plans that have been released, no additional CapEx and clean room space or otherwise additional monies are required to achieve this model. This model is based on utilizing tower owned capacity at an 85% utilization level. Intel Fab 11X is not included in this model. Revenue, $2.84 billion, which will create 39.4% gross margin 31.7% operating margin, a 7.7 point drop from gross to operating margin, demonstrating a highly efficient business and if not the very best, certainly among the best in our industry.

Such efficiency is seen in more than just margin dollars. It is reflective to the speed of decision-making and execution. Speed is a sustainable differentiator. Net profit is $750 million or 26.4% net profit margins. All tools and customer qualifications are planned to be fully completed within 2026.

Hence, and most importantly, we target to achieve this model in the calendar year 2028. Now I'd like to turn the call to our CFO, Oren Shirazi. Oren, please.

Hello, everyone. Earlier today, we released our financial results for the fourth quarter of 2025 and for the full year and also released our balance sheet and cash flow reports. Now I will review the results highlights as well as the highlights of our CapEx investment and afterwards, I will present our updated target financial model, resulting in higher revenue and profit margins than the prior model.

Let's first look into the P&L. In 2025, we achieved quarter-over-quarter revenue increase during the year, which has accelerated in the second half of 2025, resulting in record revenue of $440 million in the fourth quarter of 2025. Reflecting a year-over-year revenue increase of 14% and a quarter-over-quarter revenue increase of 11%. Gross profit for the fourth quarter of 2025 was $119 million, an increase of $25 million or 26% compared to the prior quarter.

And operating profit was $71 million, 40% higher as compared to the prior quarter. Net profit the fourth quarter of 2025 was $80 million, an increase of $26 million or 49% compared to net profit of $54 million in the prior quarter. And earnings per share were $0.71 basic and $0.70 diluted per share compared to $0.48 basic and $0.47 diluted earnings per share reported for the per quarter.

Please note that income tax expenses line in the P&L includes a nonrecurring tax benefit recorded in the fourth quarter of 2025, resulting in an all-in 2% effective tax rate. For 2026 and beyond, as required by Pillar 2 regulation, we estimate all-in tax effective rate to be at least 15% in all our manufacturing sites.

For the full year 2025, we reported revenue of $1.57 billion, 9% higher as compared to $144 billion in 2024. Gross profit and operating profit for 5 were $364 million and $194 million, respectively, compared to $339 million and $191 million in 2024 respectively. Net profit for 2025 was $220 million or $1.97 basics and $1.94 diluted earnings per share. compared to $208 million net profit in 2024.

Moving to our balance sheet. Our balance sheet is very strong, evidenced by the following indicators and financial ratios. As of end of December 2025, our assets totaled over $3 billion, primarily comprised of $1.5 billion in fixed assets. Predominantly comprised of Fed machinery and $1.7 billion of current assets.

The recent increase in other long-term assets as compared to past periods is mostly attributed to the Newport Beach Fab lease extension, prepayment, as was announced in November 2025 and paid which is presented as an asset as required by GAAP. Current assets ratio is very strong at about 6.5x, while shareholders' equity reached a record number of at the end of December 2025.

Hedging, I would like now to describe our currency hedging activities. In relation to the Japanese yen, since the majority of TPSCo's revenue is denominated in the yen and the vast majority of TPS costs are in yen, we have a natural hedge over most of our Japanese business and operations.

To mitigate part of the remaining yen exposure, we are executing 0 cost cylinder transactions to hedge currency fluctuations. Hence, while the yen rate against the dollar may fluctuate, there is limited impact on our margin. Similar concept goes to the Israeli shekel.

In relation to the Israeli shekel currency, while we have no revenue in this currency. Since a portion of our cost in Israel is denominated in Shekel, we also hedge a large portion of such currency risk by engaging 0 cost in inter transaction to mitigate this exposure.

Hence, while the shekel rate against the dollar may fluctuate, the impact on our margins is limited. Now moving into our CapEx investment plan and its impact on our financial model. As we announced today, in order to support the increasing [indiscernible] and 5G demand, we are allocating an additional $270 million of cash to invest in capacity and capability side for equipment, which would result in a total of $920 million cash investments in CapEx, including the $660 million we already announced during 2025.

These $920 million CapEx investment will expand our fab capacity in our 8-inch fabs in Israel, Newport Beach, Texas and also in our 12-inch [indiscernible] in Japan. This CapEx plan includes a large portion of capability CapEx for advanced development and high-end RF technology-related projects.

Approximately 28% of the above stated $920 million CapEx investments were already paid to date. While the remaining 72% of the 920 are expected to be paid in 2026 and 2027. Moving to the financial model. Following these investments, which are expected to drive greater revenue and incremental margins as compared to our prior model, which we released more than 2 years ago, we are providing another target financial model resulting in significantly higher revenue, profitability and margin targets.

Please note, the model is based on many forward-looking operational business and financial assumptions including the assumption that all our sales will operate at 85% utilization post installation and qualification of the $920 million equipment tools we are investing in, assumptions considering a modest average wafer selling price reduction of existing products and/or flows that we target will be offset by new products and outflows introductions.

Assumptions that our cost estimates will not differ significantly from our current assumptions. And lastly, please note that the model does not include Fab 11X capacity, revenue and margin. Now any possible additional fabs and/or new capacity that has not yet been obtained, established or announced to date.

Under this model, which you may see in the slide for your reference, we are targeting $2.84 billion in annual revenue, which is $1.27 billion higher 81% higher in revenue than our actual full year 2025 revenue. $1.12 billion in gross profit, which is more than tripling our 2025 gross profit.

This level of gross profit reflects approximately 40% gross margin, which reflects a 59% incremental gross profit that are derived from the incremental revenue when comparing the model to FY 2025 actual results.

It also states $900 million in annual operating profit, which is 4.6x our actual FY '25 operating profit, reflecting 32% operating margin. This reflects 55% incremental operating profit margins that are derived from the incremental revenue when comparing the model to FY 2025 actual results.

And lastly, on net profit, $750 million, more than tripling the full year 2025 net profit, reflecting 26% net margin, like Russell stated, which reflects 42% incremental net profit margins that are derived from the incremental revenue when comparing the model to FY 2025 actual results.

To summarize, comparing this updated financial model to the previous financial model that we presented more than 2 years ago, gross profit, operating profit and net profit are much higher, 50%, 60% each higher as compared to the prior model, mostly driven by the higher [indiscernible] 5G mix and the additional value we bring to our customers. That concludes my prepared remarks.

Now I'd like to turn the call back to the operator so we can take your questions.

[Operator Instructions] The questions come from the line of Mehdi Hosseini from Susquehanna Financial Group.

A couple of questions from me. Russell, I want to dive into the announcement that you had last Thursday, increased collaboration with NVIDIA. The press release was making a reference to module. And I want to better understand what that implies.

Does this mean that you will be manufacturing a transceiver for NVIDIA or the module is more of a broader -- a reflection of the broader services that you would provide for this customer? And I have a follow-up.

No, part of our role in the module is the output parameters of our photonics or of the TIA or of the drivers or of the -- for the pluggable or as well for the copper or optical cable. But the partnership is referring to the fact of alignments in needs directly and through our module customers and understandings of supply needs and commitments on supply shipments.

Okay. And your 5x capacity increase for silicon photonics, silicon germanium, is that -- does that include incremental demand from NVIDIA and partners?

Yes, that's referring to total demand. Well, I wouldn't say it's necessarily referring to total demand. It's an answer to demand, but it's the actual capacity that we're building. So if you look at what we had referred to as the $380 million run rate that we had in Q4, take off of that some small amount of NRE, which we don't specify, the silicon wafers that we shipped for the fourth quarter, that exact amount of silicon wafers by capacity, we plan to have 5x more of that in the fourth quarter of 2026.

Got it. Okay. And then on your power business line, does -- would you be able to also help prospective customers on the high voltage, especially as the next generation of AI server rack will require 800-volt DC?

We have a variety of road map activities. We don't, at this moment, have an 800-volt platform on an IC. We do have 800-volt capabilities in SET, but not in an IC, but we do have higher voltage IC capabilities with and without SOI.

and the next questions come from Tavy Rosner from Barclays.

Just following up on the NVIDIA question. So just to clarify, you're not actually shipping directly to NVIDIA, you're shipping through resellers that will just send new technology on to them.

That is correct. As far as the photonics itself, we do not ship that directly to NVIDIA. And as far as specifics of projects or activities that we're doing with NVIDIA, that anything that was not specifically stated in the PR, I would not be at liberty to talk about. But as far as the present photonics, silicon-based photonics ICs, they are all being designed by and shipped through other module makers or integrators.

Okay. Understood. And then around CPU, I mean, you spoke about the opportunity. I think I recall last quarter or maybe it was a different conversation, you guys spoke about the ability to add value to the ecosystem through lasers, power, connectors and you guys also doing any R&D on the actual CPU as well, maybe through like third-party packaging in order to have your kind of own end-to-end offering at some point?

Direct packaging of the CPU, no, we're certainly working on multiple architectures of CP -- and certainly, the XPU would be or could be incorporated into the CPO. But the specific activity right now of our engagement -- well, that's not even 100% true. Yes. I mean we're certainly working with XPU makers on CPO strategies.

The capacity qualification ramp will be happening throughout the year. So it will -- the biggest portion of this $920 million should easily be online I mean, fully qualified within the third quarter on or before the third quarter with growth happening in the first and the second quarter as well. The most recent orders that we've done also have tools that are coming in, in the second quarter.

But what we've stated is that what I just stated is that expect and target that by December, everything will be fully qualified in order to be able to do customer starts. In order to have everything fully qualified by December, the tools really have to arrive before the end of the third quarter and nominally by the mid-third quarter.

So that's where you could be thinking of is that linear or not, there will be a distribution of tools. Some have already arrived, and the bulk of this 920 will be arriving between now and mid-third quarter.

We are now going to proceed with our next question. And the question comes from the line of Cody Acree from Benchmark.

Congrats on the steady and impressive progress Russell, maybe could you just give us a little more color on your expectations for your silicon photonics contribution in '26 and '27, specifically with the 70% commitment already talking about prepaid. It looks like your visibility should be pretty solid for the next couple of years.

Yes, definitely. The demand is there. Certainly, we're very aware of the demand. Right now, if your question is really on the ramp profile, the ramp profile is pure operational execution at this moment. I mean there's some technical execution still.

There's some flows that still would need to be qualified, be it San Antonio or be it Migdal Haemek that are not yet qualified that are in the first order not the first order, but solely qualified in Newport Beach as that was the fab that most all of this development was done at -- so you have some more technical work has to be done, but that's, for the most part, behind us on the technical work.

From the time that everything is ready to be qualified, you still have several months for life testing in order to have customers qualify the flow themselves, if you know what I mean. So in some cases, it goes through HTA and whatever other life tests the customer requires in its own commitments to their end customers but the bulk of this is just operational execution.

I think that's one reason that we're so bullish and confident on where we're at and where we're going on this model that we just gave of the 2.8 -- what was it 2.84 and the 750 net profit. When your target and your plans are to have everything online, for wafer starts in December. Okay, let's say, worst case, you miss it by 1 month, 2 months, 3 months, okay, maybe, but it's there.

So if it's -- will you have the full start capability in December, we target to have that, and I believe that we will. Can it push out that 1 or 2 tools isn't fully qualified for whatever reason. Obviously, this is a lot of equipment coming from suppliers. And although we're very good and the suppliers are very good at doing a final test at the supplier site, the tools are all disassembled and shipped during the disassembly and shipment.

There can be something that's broken or goes wrong, that isn't identified immediately during the, what's called Tier 1, Tier 2 start-up at our site. So it's possible that, that could take a little bit longer and 1 or 2, 3 tools can be delayed beyond the plan.

It's also possible that for whatever reason, the supplier themselves misses their initial target, and that can happen. The same as not that tower would ever do it, but sometimes wafer manufacturers miss their commitments to just a joke there.

But the point being, whether it's December or January, maybe February, I don't know. It could also be -- I mean we've released that we tend to have everything up and running in December.

People that want to make sure that future commitments will always give targets where they believe they have some leeway. So the internal target should probably be more aggressive than the express target to the Street, right?

But the big point I'm trying to make in maybe too many words is that whether we hit the full qualification of start capability in December or whether it's November or whether it's January or February, it will be hit. And the demand is there, it's committed, and it will be used.

So the model will be hit. Now from the time that you start all the starts, it's some period of time to get everything ramped and qualified. And then it's some amount of months before you can ship and get the revenue.

So we feel very comfortable in talking about the 2028 to hit our model because the demand is there. Customers have committed to that demand to the extent we did not ask customers for reservation fees, they wanted it.

They know how precious, especially from tower SiPho demand is as we are truly by far, the leader in silicon PICs.

So they want the wafers and it's just really in our hands as far as operational execution. Now I'd like to say it's 100% in our hands. It also is in the hands of our suppliers. But they're good suppliers. And we have a good relationship with our suppliers.

We really focus on having strong relationships with our customers to have a good relationship with the customer, you must also have that same model with your suppliers, right? I mean what goes around comes around. So you can't easily be someone that has a mentality to not treat a supplier well and expect a customer to treat you well and vice versa.

So I think, Cody, maybe any -- too many words. But our plans are very firm, very strong. Can something be impacted by a month or 2, one way or the other, of course. But the plans are there. And if it is impacted by a month or 2, it's not impacted by the bulk of the capacity growth there will be 1 or 2 tools or I don't know, a handful of tools that sometimes are called a lemon tool. It's not necessarily a lemon tool.

It means that there's a problem that wasn't found immediately. That can delay something. But there will always throughout this year, we will definitely have incremental capacity growth.

Maybe can I just continue on with your mobile business. Any concerns about the ongoing memory shortages or the increased prices that have been called out by some of your peers in the industry and the impact to potential unit volumes in the handset market?

Cody, I mean there's always a concern when you have something in the market that you yourself have no say in or control of. So yes, there's definitely a concern there. We work with our customers closely to understand what their inventory levels are. They try to understand what their customer inventory levels are.

And to be as convinced as possible that the plan that we have for -- our start plan for the year can be hit. But are we I'd love to be able to say that there's no concern we're impervious to it.

We're not -- there's -- there are factors in the market that always play that you never want to be a victim, so you try to do as good a planning as you can. And in the best case to have alternatives should a certain capacity not be used in the fab that it can be replaced with something else where we talked about the fact of intentionally working out some lower-margin products to allow room for higher-margin products.

The lower margin products are still in demand and there's always the possibility if there is a gap in the fab because a demand of what you thought would be there is not there, we have the opportunity to backfill it with something else.

And that something else is maybe not preferred because it's not the same margin profile, but it can be done. So at least you're absorbing your fixed cost.

We are now going to proceed with our next question. the questions come from the line of Richard Shannon from Craig-Hallum Capital Group.

This is Tyler on for Richard. Sorry to disappoint. I have a question. I know, I know he's flying right now. I had a question on this model that you gave and the 2028 time line. Is this a run rate in 2028? Or is this the full year?

Yes. No, certainly, we will achieve it by run rate. and we target to get a full year. But what we stated is that it would be achieved within the year. So we're -- our target and what I've stated is that is our target. One could definitely believe that we will hit it by run rate. And nominally, we'd love to hit it for full year. And it's possible.

Okay. Great. And then the silicon photonics, I know you just mentioned you could backfill other things. But at this point, with all of the CapEx investments that you make is this going to put the fabs at fully utilize the tin for that model?

No, silicon photonics would not bring any of the factories to the full photo utilization. But it's not the silicon photonics that I was talking about as far as backfilling. That question was the specific question with regard to the RF mobile because of fear of the high-bandwidth memory manufacturers focusing on that for data center rather than supplying it elsewhere.

And without the memory that it might not -- that there could be a decline in the overall mobile integrator by not having the memory they need for their phones. That was what the question was.

So I was saying if that was the case, that capacity is fungible.

Got it. But with this, I think what I'm really getting at is with this CapEx spend that you're adding today does that bring us to the 85% utilization.

It does providing that the other flows are used to the prescribed capacity that we allotted to them. So no, it's not -- if it was only silicon photonics it would not be 85% utilization. But must understand as well, and this is an important point. We're focusing on the silicon photonics, our commitments around the silicon photonics where I say that the RF SOI, if you will, for the most part, that's pretty fungible to power.

I mean there are some layers that are different, but relatively fungible for power, relatively fungible for imaging. The silicon photonics is under different ratios, but it's very fungible to silicon germanium.

We are now going to proceed with our next question the questions come from Lisa Thomson from Zacks Investment Research.

I have a few accounting questions for Oren. First off, could you tell us exactly what the dollar amount was for the onetime tax benefit in Q4 .

It's approximately the difference between if we had 15% tax or 16% or 17% by the model, which is about from the $81 million pretax income we should have like have a tax expense of about 15% to 17% of that, so about like $12 million, $13 million. Instead of that, we have $1.5 million. So the gap is about $10 million.

Okay. And can you explain exactly what did you get for the $105 million for the lease extension?

We got additional 3.5 years of lease of Newport Beach facility. We are on November 2025 press release instead of that it was supposed to be ending in the beginning of '27. It is now until the end of 2030.

Okay. And you paid the $105 million upfront cash?

Yes, yes. Yes. And it's included in the cash flow operations of Q4, which is the reason why it is a onetime lower by 15 than any model. But we announced it in November. So it's not new, no.

Right, right, right. And then I'm just curious as the change in the U.S. depreciation rules of what you can write off -- has that changed your model at all or changed your depreciation expectations going forward?

No. No impact on us.

No, not at all. Okay. Great.

Thank you. This concludes the question-and-answer session. So I will now turn back to Russell for closing remarks. Thank you.

Thank you very much. 2025 marked the completion of my 20th year at Tower. So I thought I would give a little bigger picture view of what towers about where we're going, what we're doing. For the year 2025, we had a corporate theme. And the theme was bold growth limitless impact, infinite reach. I love that team and put a lot of thought into it and truly would be my great honor if my life's journey would be worthy to have those words in my epitaph included, obviously, to loving, honorable, loyal, husband father, grandfather and friend.

But if that was written on my epitaph, wow, what a value-add life I would have led. If you look at bolt growth, at least to me, it means being undaunted and creating a legacy much accretive to one's birth situation.

In the case directly of corporate leadership, it would mean expanding the enterprise much, much beyond the situation from when one arrived. If you talk about limitless impact, that would mean that the individual or the corporate leader has been successful in importing knowledge and creating opportunities for employees, colleagues, community for one family to have an advancing growth trajectory much beyond what they otherwise would have had, what otherwise would have been.

Infinite Reach is a very interesting concept, I first encountered the term in David Deutsche's book, the beginning of Infinity and the meeting that he put it forward meant that truth discovered in any severe if indeed a truth holds in all spheres.

And it is very interesting. If you look at learning, there are many things which truly cannot be taught, but rather must be learned and where the learning comes only through doing. And I thought about that quite a bit. It really -- many, many things can be taught, but those things that can be told are tools. Things that can be learned are principles and values and it really only is learned through the doing.

I have a very, very fervent belief that work is the laboratory where one can and should learn and develop themselves in all capabilities, principles and values needed to become the person that they aspire to be.

Anybody worth their salt spends the bulk of their wakened dollars at work. What a meaningless activity if that isn't the place where one develops as a person. And I thought very much that a good company must allow for financial and professional growth, but a great company allows for the same with the addition of personal growth.

Years back, earlier in my career, I had the great pleasure to reflect and thank Dr. Dan Medan at the time the President of Applied Materials, and this is directly what I wrote in. When I came to Applied I believe I was a good person. Thank you for creating an environment that has allowed me to become a better person.

Tower aspires to be such a high -- switch a company. We focus on hiring most capable and passionate people and of equal importance to develop and nurture an environment where passionate and capable people can further grow in capability, in passion and as well in virtue.

We acknowledge and drive an understanding that the strongest catalyst for increased capability and enhanced passion or close collaborations with our customers and the excitement enjoy that is earned and truly earned from sharing in each other's successes. There's a quote of uncertain origin. If 2 people agree on everything, one of them is unnecessary. We treasure diversity -- we treasure diversity of opinions, but only if it's directed to single miss and purpose and actions.

Organizational Anarkist do not do very well at Tower. But no matter what and how diverse the opinion is, if it's directed towards making things better, it's highly appreciated. I don't think a much different than anyone else. I don't like it when people disagree with me but I truly value it. And it's a very strong thing, and that's the culture that we have. So we have worked hard to be a company that really does allow people to grow.

And if you allow people to grow, you have an environment and a spirit in the company where the company has become truly a masterpiece. Now I don't know the attraction of any single piece of art or music to those on the call. But I can say that I cannot walk by a da Vinci without being drawn to it. That's the impact of a masterpiece.

It's the same thing with the company. If a company has extremely passionate people. and they're of the highest character and their capable, knowledgeable people. They are a magnet for the customer and the customer wants to be with them. And that's what allows for corporate growth.

That is one of the things that allows for bold growth that allows a company to have limitless impact, and it's based on the infinite reach of people as soon as you take on big responsibilities, and you take full ownership on those responsibilities. You learn so many truths.

And what is true in 1 sphere is true in everything. The principles that allow you to be a successful business leader allows you to be a successful father a successful husband, a successful mother, successful life, successful center daughter, successful and value-added friend. So those are the things that Tower has truly worked on that we continue to work on. Ex U.S. President, Bill Quinton, had a quote that on first hearing sounds very nice, and it says old age is when your memories outweigh your dream.

I'm not a spring chicken, so those are the type of things that I think about. And at first, again, it sounds very good, but certainly, having dreams in no way define vibrant youth. So the statement maybe is correct as far as if your memories outweigh your dreams, it shows that you're old.

But having dreams does not show that you're youthful. Many, many people, even at a young age, only have dreams, they do nothing to try to make the dreams real. So I added to this quote and took the liberty old age is when your memories outweigh your dreams and consequent actions to achieve them.

Tower is in no way an aged company. We work off of the experience and knowledge that comes only through age, but with the full vibrance and excitement of use, and that's a combination that's unbeatable and is truly a catalyst for customers to want to engage with your company. We showed this new financial model, which as having stated multiple times and being questioned about as well, it's our target to achieve it, be it by run rate or be it in the full year, but to achieve this model in 2028, relatively short term.

The model or went through all of the incremental margins -- but what it is, it's a revenue CAGR of 22%. It's a very nice CAGR in our industry, a very nice foundry CAGR. So a 3-year CAGR of 22%. But it's a net profit CAGR of 50.5%, and that's really incredible to have a 2.5% off of the 22% CAGR to have a 2.5% increase on the CAGR of the net profit, which isn't something that's talked about often because most people don't have CAGRs on net profit. But from the present state to achieving this model, it's 50.5%.

That is not an agent company. That is a company that is full, full of useful exuberance based upon the capability of age based upon experience based upon having developed multiple years of strong, extremely strong relationships with customers.

So to close, we entered 2026 with very strong momentum towards gold growth, limitless impact and infinite reach. Thank you. for being with us. Thank you for continuing to be with us as we track towards the achievement of the $750 million net profit model. Thank you very much.

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Tower Semiconductor Third Quarter 2025 Earnings Conference Call.

[Operator Instructions]

I must advise you that this conference is being recorded today.

I would now like to hand the conference over to your speaker today, Ms. Noit Levy, Senior Vice President of Investor Relations and Human Resources. Please go ahead, madam.

Thank you. Good day, and thank you, everyone, for joining us. Welcome to Tower Semiconductor's Third Quarter 2025 Financial Results Conference Call. With us today are Mr. Russell Ellwanger, our CEO; Dr. Marco Racanelli, our President; and Mr. Oren Shirazi, our CFO.

Before we begin, please note that certain statements made during this call may be forward-looking and are subject to risks and uncertainties that could cause actual results to differ materially. These risks are detailed in our SEC filings, Form 20-F and 6-K as well as filings with the Israeli Securities Authority, all available on our website. Tower assumes no obligation to update forward-looking statements. Our third quarter 2025 results are prepared in accordance with U.S. GAAP. Some data presented may include non-GAAP financial measures as defined under SEC Regulation G. Reconciliations 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?

Hello, everyone. Thank you for joining this earnings call. We are in the best position growing our core technologies, Power Management, CMOS image sensors, 65-nanometer RF mobile, each of which demonstrating year-over-year revenue growth, providing an excellent foundation on top of which the extreme AI-driven data center demand for our silicon photonics and silicon germanium RF platforms is driving unprecedented company growth. We ended our third quarter with revenue at $396 million, resulting in net profit of $54 million.

We guide our fourth quarter to be a revenue record of $440 million, plus/minus 5%, fulfilling our beginning of year target of quarter-over-quarter growth throughout the year with strong acceleration in the second half. This underscores the increasing demand momentum we see in our served markets and is as well the result of further manufacturing capabilities, namely the very first step of a large ramp having repurposed with added capacity for factories towards new and/or stronger silicon photonics and silicon germanium capabilities.

The fourth quarter guidance indeed demonstrates the burgeoning trajectory we are on. In the following minutes, we will present the successes that we share with our customers, driving top and bottom line growth over the years to come.

Now to review our third quarter of 2025 revenue breakdown and discuss the key trends, please see Slide 4 as reference. Our RF infrastructure business continues to deliver exceptional growth, increasing its contribution to corporate revenue from $67 million or 18% of corporate revenue in the third quarter of last year, to $107 million or 27% for the third quarter of this year. For the full year, we expect this business to grow by 75% with silicon photonics more than doubling from the 2024, $105 million. This significant expansion reflects the strong customer adoption of our advanced technology and validate our strategic investments in these markets.

The momentum we are seeing positions RF infrastructure, silicon photonics and silicon germanium platform as a key pillar for our long-term growth, fortified and propelled by deep partnerships based innovations with the foremost industry titans. Our silicon photonics business grew in the third quarter to $52 million approximately 70% growth as compared to the third quarter of 2024. Market demand for silicon photonics continues to surge driven by a stronger-than-anticipated RAP and 1.6 products on top of a robust 400G and 800G demand.

We have expanded capacity with our advanced SiPho platform in Fab 9, San Antonio, having shipped revenue wafers in the third quarter and expecting multiple thousands to be shipped in the fourth quarter of this year. We are in advanced stages of qualifications in Fab 2 Israel, expecting our first production shipments in the first quarter of 2026. In 300-millimeter, we have started wafer production for the innovative receive products we announced last quarter and anticipate revenue contribution from 300-millimeter silicon photonics to start in the fourth quarter of this year. Our capacity growth is fully aligned with and spoken to by our customer demand outlook.

Silicon Photonics continues to increase market share over EML solutions given its significant cost advantage. SiPho typically requires half the number of lasers as an equivalent EML product with performance benefits, especially seen at 1.6, as such, we anticipate this market share shift to be permanent. Hence, we are, at this point, going to add additional CapEx to address an even increase surging demand. Looking at next-generation 3.2 T data rates, which will require a doubling of speed for each lane from the current 200 gigabit per second to 400 gigabit per second, we have multiple programs with industry leaders to both extend silicon capability, but we are also pursuing integrating indium phosphide modulators for our previous announcements with Open light and as well are investigating other material systems to ensure that our customer partnerships are not just ready, but leading the transition to next-generation requirements for 3.2T and 6.4T.

In the past quarter, in partnership with Escape Photonics and NVIDIA backed startup, we delivered the industry's first optically pumped on-chip multi-wavelength laser platform for AI data center fabrics. This innovation further expands our participation in the laser market, particularly for co-packaged optics applications, a significant adjacent opportunity, leveraging our high-volume SiPho platforms. We showcased these advancements, along with others at a highly successful Tower technical symposium event in China with approximately 300 attendees, where -- delivered the keynote addressing Tower's role in supporting phenomenal market growth.

Later this month, we anticipate another great TGS event in Santa Clara with Broadcom's President, Charlie Cao, delivering the invited customer keynote. Looking at silicon germanium, silicon germanium transimpeden amplifiers and laser drivers are essential components for optical transceivers. The growth in SiGe demand is a function of data center build-outs be it SiPho or EML-based solutions with an additional accelerator the adoption of linear pluggable optics. Due to the elimination of the DSP in the LPO module, LPO requires both the driver for transmit the TIA for receive to have an added function of continuous time linear equalizer, which significantly adds to the silicon area of each of the TIA and drivers.

Hence, nicely increasing the amount of silicon needed per unit. Multiple SiGe customers have begun material LPO production volumes, indicating a clear upward trend in this market. We started silicon germanium production in Fab 2 of our most advanced ID platforms and are seeing eager adoption by lead customers, driving meaningful additional contributions to SiGe capacity and shipments projected to wrap throughout 2026 and delivering high volumes thereafter. In addition to infrastructure, we have secured a new filling a germanium, low noise amplifier designed for a Tier 1 handset customer with an initial ramp in Q4 '25 and then proceeding through 2026 and beyond, adding a significant new growth opportunity to our existing leading market share in optical transceivers as discussed, itself being a high-growth market.

Moving to RF Mobile. It represented about 26% of our Q3 '25 corporate revenue. RF SOI has shown steady quarter-over-quarter demand increases with our more advanced 65-nanometer 300-millimeter platform at higher than 20% increase second half 2025 over second half 2024. We released this quarter and updated RFSOI technology that not only provides double-digit that are on CF relative to our competitors as measured by multiple Tier 1 customers, but also reduces layer count by 15%, improving our customers and our margins, hence enhancing our market share. This technology also allows customers the freedom to make a trade-off between the better our [indiscernible] off to enable a smaller die size or to have higher power handling. And as such, we are seeing strong customer traction, providing much confidence in multiyear growth.

This quarter, we made important advancement in our sensor and display technologies which represented 14% of our third quarter corporate revenue and expected to show mid-teens full year-over-year growth. We received our first production PO for Q1 '26 shipments for OLED display backplane silicon and continue to enhance this offering, having added high-speed logic and high-speed SRAM capabilities, enabling support for 120 Hertz refresh rates critical for next generation of VR and MR applications. Medical and photography, sensor revenue remained stable, while the majority of our growth and strongest position is in machine vision, we resupply the second largest player in this market, in addition to other key customers.

Power Management represented 17% of our third quarter corporate revenue. Our Power business has performed well, targeting a year-over-year growth of 15%, with disproportionately higher growth for our advanced 300-millimeter platforms, 1 driver of which being the strong ramp of the handset envelope tracker ETC volume expected to continue through the next multi-years. Targeting the growing market of data center power, we have recently demonstrated 60-volt operating voltage devices with more than 40% lower RDSon than prior technology and as well introduced new elements to a 1.2 3.3 volt 65-nanometer BCD flow, improving power conversion efficiency aligned to our key customer needs.

The wireless charger IC market is growing rapidly and demanding higher voltage LDMOS. To that end, working closely with lead customers, we have provided a 40-volt extension to our 300-millimeter BCD process. Specific to automotive and battery management applications, we have multiple engagements for a differentiated 140-volt reserve flow allowing higher voltages without the need for the added high expense of SOI substrates. We've continued to add to the competitiveness of this platform, greatly reducing the cell size through added features and optimized architecture.

Moving to utilization. At years begin, we announced a repurposing of several of our factories predominantly towards higher capacities for our infrastructure, namely silicon germanium and silicon photonics. To update on the progress, qualification and initial ramps are going well with hundreds of silicon germanium wafers shipped in Q2 and thousands in Q3 from Fab 9 in San Antonio. We met our first internal milestone of customer cycle shipments in Q3 from San Antonio, with several thousand plan to ship in Q4. Fab 2 Migdal Hani Israel is on track to ship our first and meaningful number of silicon germanium wafers in Q4 '25 and silicon photonics wafers in Q1 '26.

Additionally, we expect to see our first production revenue for SiPho at 300-millimeter in Fab 7 in this present quarter, Q4. Therefore, while we are in the final qualifications and initial ramp of the repurposed fabs and added capacity, our third quarter utilization level, Fab 2 in Israel operated at about 65% utilization Fab 3 maintained our model full utilization of 85% with growing activities for SiPho capacity, Fab 5 was at 75% utilization. Fab 7, 300-millimeter was fully utilized well above our 85% utilization model. Fab 9 was at 60% utilization. In summary, what a position to be in with all our core technologies demonstrating year-over-year revenue growth, the right technologies, growing with the right customers.

On top of this, our long-term silicon germanium leadership for optical transceivers, coupled with correct market insights, namely believing in the benefits of silicon photonics having begun 8 years ago with the right partner and adding those who have become the most momentous adopters of this technology has enabled us, by far, to be in the lead position for silicon photonics manufacturing and development. This has proven timely to meet the soaring demand of data center technology, road map and build out. A present and future pathway for unprecedented growth for Tower. In close collaboration with our customers, we have advanced both capacity increases and technology road map deliverables real time addressing the rocketing requirements for AI infrastructure.

Specific to demand-driven capacity expansion, we target 2025 silicon photonics revenue to be above $220 million, up from $105 million in 2024. And very importantly, at a Q4 '25 annualized revenue run rate exceeding $320 million. The $320 million SiPho run rate is enabled by the very first steps in qualification and ramp of the previously announced $350 million investment. We have begun an additional investment of $300 million for further substantial SiPho capacity expansion and next-generation capabilities in Fab 3, Fab 9, Fab 2 and Fab 7, this investment targeted to achieve full volume in wafer starts in the second half of 2026. The total capacity is fully aligned to and directly requested by our customers. The resulting capacity should increase our SiPho shipments by over 3x against our targeted fourth quarter '25 qualified utilized capacity.

With that, I'd like to turn the call to our CFO, Mr. Oren Shirazi. Oren, please.

Hello, everyone. Earlier today, we released our quarterly financial results and balance sheet. For the third quarter of 2025, we reported revenue of $396 million reflecting a year-over-year revenue increase of 7% and a quarter-over-quarter revenue increase of 6%. Gross profit for the first quarter was $93 million, 16% higher compared to $80 million in the second quarter, and operating profit was $51 million, 27% higher sequentially compared to $40 million in the second quarter.

Net profit for the quarter was $54 million, 15% higher compared to net profit of $47 million in the second quarter. And earnings per share were $0.48 and $0.47 diluted as compared to $0.42 basic and $0.41 diluted earnings per share reported for the second quarter. Newport Beach fab lease extension. As mentioned in today's press release, to address the continuous and growing 5G demand and given the full utilization of our Newport Beach Fab, we are extending the Newport Beach fab lease by up to an additional 3.5 years beyond its previous 2027 term. An upfront lease payment of $105 million will be recorded as cash used for operating activities in our Q4 '25 statement of cash flow, with corresponding impact on our balance sheet cash amount, while the resulted P&L impact would be, as announced earlier today, $6 million per quarter to be recorded over a 5-year period as required by GAAP in the COGS line.

Hedging, I would like now to describe our currency hedging activities. In relation to the Japanese yen, since the majority of TPSCo's revenues is denominated in the end, and the vast majority of TPSCo cost are in hand, we have a natural hedge over most of our Japanese business and operations. To mitigate part of the remaining yen exposure, we are executing 0 cost cylinder transactions to hedge the currency fluctuations. Hence, while the yen rate against the dollar may fluctuate, there is limited impact on our margins.

In relation to the Israeli shekel currency, while we have no revenues in this currency, since a portion of our cost in Israel is denominated in the shekel currency. We also hedge a large portion of such currency risk by engaging 0 cost cylinder transactions to mitigate this exposure. Hence, while the shekel rate against the dollar may fluctuate, the impact on our margins is limited.

Moving to our balance sheet and future cash and cash burn -- CapEx and cash burn. As I noted earlier, our balance sheet remains very strong as evidenced by the following indicators and financial ratio. As of the end of September 2025, our assets totaled over primarily comprised of $1.4 billion in fixed assets net, mainly comprised of Fab machinery and $1.8 billion of current assets. Current asset ratio is very strong at about 7x, while shareholders' equity reached a record of $2.8 billion at the end of September 2025.

Our strong financial position allows us to invest in strategic opportunities that support our corporate vision as follows: for our high-margin CPG business, we previously announced plans to invest $350 million to expand our capacity in our 8-inch fab in Israel and Texas and in our 12-inch [indiscernible] Fab in Japan. This CapEx includes a large portion of comfortability CapEx for advanced development and high-end RF technology-related projects. 50% of this amount has been paid today, while the remaining 50% are expected to be paid in the coming years.

In addition, as we announced earlier today, we have decided to allocate an additional $300 million investment for capacity growth and next-generation capability, mainly for machinery for additional SiPho and SiGe capacity growth for our 8-inch fabs and for our 12-inch. This would put total SiPho and SiGe capacity and capability related CapEx plan at an aggregate of $650 million. All of these investments are fully reflected in our previously presented strategic and financial model. Under this model, we are targeting $2.7 billion in annual revenues at full loading of our existing fed and qualified capacity, including the previously stated capacity expansion plan. $560 million in annual operating profit and $500 million in annual net profit. That concludes my prepared remarks.

Now I'd like to turn the call back to the operator so we can take your questions.

[Operator Instructions]

First question, it comes the line of Cody Acree from Investment Bank.

Congrats on the progress. Oren, if I can just get a quick clarification. You said that the 300 -- the [indiscernible] incremental $300 million was already considered in your $2.77 billion total revenue expectations long term. Is that right?

Yes. Yes. It may mean that we will achieve this target earlier than somebody previously expected, but yes, it is included.

Okay. So if no incremental upside, then what's the accelerated pace do you expect, I guess, what's the give and take of that extra CapEx?

Acceleration of achievement towards the $500 million net profit emanate, which, as you know, we are still not there. So we'll accelerate the achievement. And of course, -- the accelerated achievement will enable higher profit sooner.

Okay. Great. And then maybe, Russell, can you just talk about some of the applications that you see driving the aggressive growth that you're seeing in RF infrastructure?

Yes, the biggest and strongest is just really the need for build-out specifically, I think, AI driven, but it continues for high volumes of 400 gigabit per second, very high volume of 800 gigabit per second in multiple formulations of it, both DR8 and 2 by FR4. And then as stated, a very high volume right now going into 1.6 gigabit where we're seeing somewhere about 30% of all of our starts being dedicated to that platform presently. So it's really just for the continual build-out of data center and a big movement right now going into the 1.6 G.

We're going to take our next question Tavy Rosner from Barclays.

Congratulations on the strong results. I wanted to ask 2 quick ones on the silicon photonics, please. You mentioned the leading position of Tower. So who do you see as your main competitors these days? And -- given the supply-demand imbalance, at the moment, are you able or considering to raise prices?

Able is probably the answer to that would be yes. But considering, no, we're very close with our customers. We understand what their needs are. We have long-term road maps, and we're not opportunistic, if you would look at it that way of because demand is very, very tight to gouge somebody for an extra couple of wafers. I think that's the surest way to losing goodwill and partnership. What we are seeing, however, is extremely strong demand. And having stated that, that's the reason for after having invested $350 million, which is -- we're seeing the first signs of that ramp right now to increase another $300 million of investment.

I had stated that we're targeting a Q4 SiPho revenue shipment run rate of over $320 million. And against the qualified capacity that we're shipping the Q4 against, we're increasing that by over 3x in start capability within the next 4 quarters, expecting to have that entire 3x plus available for starts in the second half of 2026. So that's quite a bit, if you were to say, 3x of a $320 million run rate. That's quite a substantial growth in SiPho that we're projecting for ourselves. So having come from, what, plus minus $28 million in '23, to $105.4 million '24. So this year, we're targeting over $220 million for the full year, with the 320 plus run rate in Q4, but bringing that to well above $900 million by target.

And that target is really spoken to by customers. That's not field of dreams, if you build it, they will come, that's customers saying, "please build it, we need the capacity. And so I think we sit very strong with our relationships with SiPho. Now also as stated and that in the script, that we're doing quite a bit on capability, not just for present 1.6T generation but to make sure that our customers are in a leading position for the capabilities needed for 3.2T or for 6.4T specifically the needs for a faster capable modulator of 400G. And those activities are very real time. So we're investing real time on increasing capacity, which is really being demanded by the industry.

And fortunately, as stated, we are by far in the leading position on manufacturing, but we believe also to be in the leading position as far as developing next-generation platform with the leaders so that we're both prepared well before the demand actually arises. Did that answer your question, I hope?

Yes. Just for the first part, do you see any changes in competitive dynamics, anyone else to growing capital in that field to try and take some share away from you guys?

I believe that most people would like to take share from us. It's growth market with good, strong customers. The point is really to the question that you asked, to be opportunistic on pricing would be probably a good invitation for our customers to say hey, we don't want to be a long-term partner, go look for someone else that you could leverage us with pricing on and they don't have to do that. We're working very closely with our customers to be reasonable and to have win-wins on both sides.

So -- but yes, I'm sure that there's others that are trying to eat into where we're at. It's very difficult to somebody to break into our position right now. Fortunately, and really for this call, have with us Marco Racanelli, the RF activities report directly under him. I don't know, Marc, if you had any color you wanted to add to that?

Yes. I think on the pricing discussion, as you say, we're not taking advantage of the situation just because capacity is tight in the industry today. but we are adding value in our advanced platforms. And so in that regard, we do price higher technologies that deliver more value to customers. So in that aspect, over time, we do anticipate some price improvement as customers migrate to these more advanced technologies.

And I will say as well that siph oSIFO is already very accretive in margin. So it's -- we do get paid for the value that we add, and that's how things should be based. We stated very strongly that SiPho has a very strong benefit for our customers against P&L. So for our customers to be using our platforms now. And if you look at a having of lasers, it's a big deal. You have as well at this point then for the 1.6T, the use of silicon modulator that's inside of the PIC itself, first meeting an indium phosphide modulator that cost much more money in quite a bit of 3, 5 area. So there's value in the platforms. And obviously, we both share in whatever value is created.

Now we're going to take our next question and it comes the line of Richard Shannon from Craig-Callum Capital Group.

Congrats on some very nice numbers here. Let me start off with a few questions here on silicon photonics. Russell, you made an interesting comment that I probably didn't transcribe my own notes here very well, but you mentioned something about a shift to silicon photonics, it's permanent. Can you explain what you mean by that, please?

Yes, what we stated in the script, it's very cost-conducive against EML. It takes half the lasers. So if you look at twofold, the cost of 3.5 and also the capacity constraint of 3.5 in that's both a big benefit to be able to use silicon photonics at the 400, 800, 1.6T and potentially, depending on development, even at 3.2T going to SiPho you have a silicon modulator, which is also very cost-conducive against needing to have a 3.5 modulator. So yes, by stating that there's a cost benefit that certainly drives long-term stickiness. But in addition to the cost benefit, there's performance benefit as well. And when you combine cost and performance, that's really an absolute winning combination for market share stickiness, right?

Okay. My second question is -- looking at 1.6 here. Obviously, we're seeing module makers talk about some nice ramps here starting next year. What kind of mix do you expect to have a 1.6 versus slower speeds in your business, I don't know, next year or a particular point? Just trying to get a sense of how fast this is scaling versus the older slower technologies.

Right now, the 1.6 is close to 1/3 of our starts. So that gives you a feel for where we're at right now, and that's up from almost nothing this at the beginning of the year. So it's a very quick ramp movement to the 1.6T I would expect that will go to over 50% within the first multiple quarters of the next year.

Okay. That is helpful. My last question on Silicon Photonics here is following up on your comments as well as 1 of the questions here about reaching 3x. I think it was a capacity comment in silicon photonics from the run rate of this current fourth quarter. What kind of time frame do you expect to be able to get to your full utilization level on that? It sounds like it could be this year -- or excuse me, '26, but I just want to get your sense of what you're expecting there.

The demand is there or will be there by customer forecast. By planning, we should be fully installed within the first half of '26 and having all the tools up and running, being able to hit the full start capability within the second half. So the shipment level really depends at what point in the second half, we do the wafer starts. You'll typically be looking at somewhere of a 3- to 4-month cycle between the starts and the shipment given whatever the -- size of the POs are. So we certainly would foresee seeing a portion of this increased capacity coming into revenue within the second half of '26.

But take into account that the first ramp that we're doing has not been realized yet either. So the previous $350 million investment is right now in its first stages of ramping. So within the first half and predominantly in the second quarter, we should see a very big pickup in our silicon photonics shipments, revenue and that should continue in the third and fourth quarter. When we hit the full 3x or 3-plus x shipment capacity in 2026 that I really don't know The demand is there. It's a question -- and I do believe that we'll start the full amount within the second half of the year. The shipment could dragged on into Q1 plus/minus. But I think we'll see -- we should see a good amount of it. I mean that's why we're doing the investment. And certainly, that's why we're accelerating it.

Okay. Perfect. One last question for me, I'll jump out of line. Oren, can you talk about kind of gross margin fall through in the next few quarters? Obviously, knowing that Silicon Photonics is a margin-accretive business for you, and it sounds like that will be your major driver here. How do we think about this going forward here? And I want to get a sense of also when additional depreciation builds in here to think about that going forward.

Yes. So I think currently, the gross profit in Q3 was 24%, $93 million over $396 million, that's the actual number. And it should be better as you see our long-term financial model and which has higher percentages. And usually, we speak about incremental margin of 50% and of course, because of the SiPho. It will be higher, nicely. And it will be offset by 2 elements. One is the Newport Beach lease amount that we said that we will pay additional $6 million -- we'll pay a total of $6 million. And the second is what you mentioned here correctly, the depreciation from the additional CapEx -- the total additional CapEx is $600 million over 15 years. So it's about $10 million a quarter. But some of that already started. So it's a gradual ramp to grow the $10 million.

Now we're going to take our next question. And it from the line of Mehdi Hosseini Rosen from SFG.

A couple of follow-up. And I apologize I joined the call late, I apologize if I'm repeating some of the questions already covered. Russell, when you look at the opportunities associated with transceiver, are you also baking in increased content -- in other words, I'm under assumption that most of opportunities currently on the transmit side and whether receive side the transmitter would also give you opportunity to increase content.

Certainly to increase volumes, both had stated that really a very nice immediate upside was a pretty advanced platform that's shipping at 300-millimeter received SiPho in the fourth quarter. And we'll go into some several formulations beyond what we're doing in the fourth quarter in 2026. So yes, the receive is incremental served market that right now, most -- well, everything we're doing other than this first 300-millimeter activities is for transmit. So very good question.

Is there any way we could kind of think about how this SiPho capacity increased by would be split into increased content versus units of transceiver shipped to the end market?

I'm not really sure exactly what you mean by increased content, but it is -- it's units being used in transceivers. So -- and at the 1.6 -- I'm sorry, go ahead.

Right, as you increase the mix of receive and transmit within the same transmitter, how much of that is baked into capacity increase of 3x?

Right now, the increase of 3x is including very little receive -- that's most all transmit.

So would you need to increase capacity again as your customers migrate to receive size with SiPho?

Yes, and we'd be really thrilled to do so. We have platforms that are doing it. I mean it's not that we're not proactive against it. It's that right now, the transmit demand is so high. But yes, receive -- but receive really comes into very strong capabilities with DMUX and that's a big area that we're focused on.

Okay. Just a quick follow-up. In the longer term, where are we with packaging? I think a couple of quarters ago, you highlighted doing R&D, so you would extend your addressable market to include some packaging. Is there an update you can share with us?

We have an activity with a leading packaging house focused on formulating a CPO, a full, CPO. We certainly have other activities around NPO, big activities with through silicon via that's required for NPO and potentially for CPO as well. So we're making progresses there. It's not that there's a lot of CPO being used right now, it's not, but we're making good progress. We also have other activities driving additional really strong capabilities. We're talking multiple generations down the road, but a really big program focused on 51.2T to have very, very advanced modulation that would possibly be required within a PIK structure or whatever CPO would be used.

Okay. And these opportunities are more -- if they materialize into revenue more later be decade, it would take a couple of years for commercialization, right?

I think it's a couple of years before CPO has strongly commercialized period, independent of Tower.

And the question comes the line of Lisa Thompson from Zacks Investment Research.

I was wondering if you could talk a little bit about 3.2T. It seems like the technology may not be able to go from 1.6 to 3.2. Can you tell us kind of where they are specifically with trying to solve that problem? And is there still a risk that an entire new technology might be needed?

I don't think an entire new technology will be needed. There are certain issues even around the DSP that's being worked on. But no, I don't think a new technology. From our standpoint, the thing that's really required is the modulation as mentioned at 400G. And as stated in the script, we're working on 3 different pathways, depending on customers' needs and desires to do the 400G modulator. So from the pure modulation standpoint, I think we're addressing it very strongly with very good progress. From the entire transceiver, the build-out or CPO, I mean those are other issues, but I don't think that they're not attackable or solvable. So I don't think that 3.2T will be held up now.

Okay. And let me just clarify, is the revenues from SiPho totally gated by capacity as the demand there if you can build it?

Yes.

Okay. And then 1 small question. When are you going to start reporting Agrate utilization? Is that way far off.

As need and be. We could start reporting it any time. We just haven't we were in the midst of the first ramp there. So -- but we could start reporting it. There's no reason that we wouldn't.

And now we're going to take our last question for today. And it comes the line of Richard Shannon from Craig-Hallum Capital Group.

Great. Russell, kind of big picture, looking across your business with the obvious angle also inclusive of silicon photonics. How do you think about 300-millimeter? You obviously have some through a couple of joint ventures or whatever the right term is there with Intel and ST and then have some capacity in Japan here. But how do you think about acquiring more of that? It seems very important for you to have here and obviously, very important for Silicon Photonics, it's clearly our big growth driver here. Is this something where you can find more partnerships like you have with the 2 partners you've already announced in the past? Or do you see greenfield? Or how do you intend to address that?

Richard, it's an excellent question, and it's 1 that we're focused on. No, I don't think that we'll be addressing it through partnerships such as what we have with ST or what we have with Intel, we'd be addressing it somewhat organically should we go forward there. But I think it's an excellent presence to be excited for our Q4 release. And we'll be talking more to it at that point.

That does conclude our Q&A session. I would now like to turn the call to Mr. Russell Ellwanger for any closing remarks.

Well, Truly, thank you for continued interest in Tower. Thank you for the support of Tower. Certainly, appreciate the questions that were asked as well during the call. really, we're very excited to update you over the coming quarters as this more than 3x capacity that we talk about for the SiPho 5G growth as that comes online and to update you about the other progresses and activities. Again, very good question, question about how this CapEx investment impacts the financial model, where Oren mentioned about it bringing in the time line of reaching certain revenue levels. then it's accelerating the time line at -- due to the SiPho as mentioned accretive margins, doing it at a somewhat different financial model.

So we're very excited to update on all of these things. And as we get ready and prepare and give the end of year comments, which is always a summary of the year and an outlook of what we're doing in the coming years. I think there's many exciting things that we'll be talking about with you about the direction of the company and how all of these accretive actions really turned out to be a very strong benefit and a strong ROI. If we look at what we're doing with SiPho as far as CapEx, the really nice thing with the SiPho and CapEx is that it's truly from the time that you start shipping wafers, you're dealing with the half year ROI on the CapEx that you put into the tool. So that's not from the time of ordering the CapEx.

But from the time of actually being qualified and shipping wafers and doing that ramp, ROIs are very, very quick. So as Oren stated, knowing that we're doing a very big expansion, knowing that, that expansion is spoken to by customers requesting the capacities and seeing the quick turn with this market on an ROI, you can see then how the timing of revenue is really greatly accelerated. And I hope to give -- well, not hope, we will be giving much color on that as we get the end of year and the forward-looking statements when we release Q4.

So again, very looking forward to going over that with you. an extremely exciting time for the company, extremely exciting, I think, for our customers and for us in the midst of customer partnerships with people that trust us and that look for us for their solution and for growing their own businesses. Very excited to host our 2025 Technical Global Symposium in Santa Clara next week, be November 18, open for all customers. Very happy that you would be coming and listening to us. As stated, Dr. Charlie Coles from Broadcom will be giving the customer invited talk there. It should be extremely interesting. I've heard him speak at times before and a great speaker with a tremendous amount of knowledge and capability. Dr. Racanelli will be giving an in-depth overview. It sounds like contradictory, but an in-depth overview of all our technologies.

And I'll give the introductory talk really talking about the culture of Tower where we're going and what is the basis of what I believe to be 1 of the kind customer partnership.

Now in addition to this technical symposium, on December 10, we'll be participating in the 23rd Barclays Annual Global Technology Conference in San Francisco; on January 13 and 14 in the 28th Annual Needham Growth Conference in New York. And of course, any of you as investors or analysts that wish to have additional calls with the company. Please contact [indiscernible] and very happy to accommodate those according to your needs and desires. So with that, I'll end the call. And again, thank you, a very exciting time.

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.