Tower Semiconductor Ltd 2026 Q2 Earnings Call

Hello, everyone. Thank you for joining us. Welcome to Tower Semiconductor 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 Israel 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 US 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 non-recurring 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 mid-range 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 four and five. Very important, the profitability gains we delivered in the second quarter are not a one-time achievement, but rather just an initial step towards profitability expansion and cash generation as represented in our updated 2028 model. Equally important, as can be seen in slides four and five, 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. 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. Three 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 Economy, 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 one of this dual track adds significant new 300-millimeter silicon photonics capacity with full production readiness expected during the fourth quarter of 2027.

It consists of repurposing the Arai facility, formerly Fab 6, for 300-millimeter silicon photonics capacity and advanced packaging capabilities, as well, maximizing Tower Semiconductor's Fab 7 300-millimeter output in Uozu. This track one is the driver for updating the 2028 business model. Track two 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 Semiconductor 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 Semiconductor and our customers for continued growth post-2028. Moving to our businesses, please refer to Slide 6 as reference 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 2026 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 three times 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 Semiconductor'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 roadmaps. 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 Semiconductor'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 the leading platform for 800G at 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. Once again, silicon photonics with Tower Semiconductor is well positioned to lead this transition with several Near-Packaged Optics, NPO, deployments planned over the next year and many more in design. NPO delivers much greater bandwidth density at reduced energy per bit compared to pluggable optics, and yet it leverages the same established ecosystem as pluggables, overcoming the reservations from hyperscalers and data center operators about reliability, serviceability, or multi-source 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 roadmaps required for future networking architectures. To support the long-term growing demand, we announced a 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-Packaged Optics, but also the additional future market for co-package 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.