Tower Semiconductor Ltd.

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 Elwanger, 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 20F and 6K, 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 fourth quarter and full year 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 gap 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 Elwanger. Russell?

Thank you, Noe. 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 timeline 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 and 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 2025, 13% in Q2 2025, 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 be 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 five and six as reference. We achieved year-over-year growth across our key technology platforms, namely power management, image sensors, and 300-millimeter RF SLI, on top of which record achievements and unprecedented growth of our market-leading optical transceiver offerings, silicon germanium, and SIFO 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 in 800G and 1.6T pluggable transceivers. Silicon germanium and silicon photonics revenues represented 27% of our corporate revenues, or $421 million, up from $241 million, or 17%, in 2024. SIFO 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 SIFO 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 Gen Plus 1 and Gen Plus 2. 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 1.6T 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 Wosu Japan, and are on track to ship the first production of very large SIFO ramp in 2026 from Fab 2 Migdal Hammock. Given an even stronger customer demand than was known at our last quarterly release, we have increased our CAPEX plan for 2026 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 3.2T market introduction. We also see co-packaged optics as a substantially incremental opportunity for us in the coming years as optics gets adopted in scale-up 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-to-wafer integration of silicon photonics ICs and silicon germanium electrical ICs. In addition, we continue to work with several customers on dense wavelengths 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, two of our FMCW LIDAR partners, AVA 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 shipped 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, transimpedium 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-Hemek, and we have shipped 300 millimeter prototypes from FAB 7 in . 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 RF mobile as a whole was down 15% year over year. This was 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 on-see-off 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 and momentum that positions our 300 millimeter RF SOI platform for sustained secular growth. In 2025, we achieve major wins, namely three of the top four tier one 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 200mm and 300mm offerings, representing 16% of our 2025 corporate revenues and 15% of our Q425 revenues. In 300mm, this includes the ramp 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 AR display segment with our silicon backplane 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 platforms to replace these two application sets. 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 SIFO 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, 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 SIFO 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 FAB2 operated at about 60% utilization as we are now in the final stages of silicon germanium and silicon photonics capacity qualification for variety of flows. PHAB 3 maintained our model full utilization of 85% and still adding capacity for increasing silicon photonics capability. PHAB 5 was at 75% utilization. PHAB 7 was fully utilized, well above our 85% utilization model. FAB9 was in 65% utilization, presently in a silicon photonics and silicon germanium ramp. As stated in our press release, Intel has expressed its intention not to perform under the September 23 FAB11X agreement. We are presently in a mediation process. All flows which have been transferred or are in the process of being transferred to FAB11X were originally qualified in our Japanese 300 millimeter factory FAB7. customers are being redirected to be supported by this FAB in Japan. For guidance, we guide our first quarter of 2026 mid-range 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 seven. First, the assumptions. Beyond the 920 million CapEx plans that have been released, no additional CapEx, cleanroom 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 sheets and cash flow report. 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&S. 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 $118 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 for 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 71 cents basic and 70 cents diluted, cents per share compared to 48 cents basic and 47 cents diluted earnings per share reported for the prior quarter. Please note that income tax expenses line in the P&L includes a non-recurring 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 2025 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 basic 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 FEB 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 FEB lease extension prepayment, as was announced in November 2025 and paid, which is presented as an asset as required by GA. Current assets ratio is very strong at about 6.5x, while shareholders' equity reached a record number of $2.9 billion 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 TPS cost revenue is denominated in yen and the vast majority of TPS cost 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 zero-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 zero-cost cylinder transactions 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 CIFO and CIGI demand, we are allocating an additional $270 million of cash to invest in capacity and capability-sized equipment, which would result in a total of $920 million cash investments in CAPEX, including the $650 million we already announced during 2025. These $920 million CAPEX investments will expand our FEBS capacity in our 8-inch FEBS in Israel, Newport Beach, Texas, and also in our 12-inch WOSU FEBS 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 two years ago, we are providing an updated 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 modest average wafer selling price reduction of existing products and or flows that we target will be offset by new products and or flows introductions. Assumptions that our cost estimates will not differ significantly from our current assumptions. And lastly, please note that the model does not include FEV11x capacity, revenue, and margin. nor any possible additional FEBs 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 or 81% higher in revenue than our actual full-year 2025 revenue. $1.12 billion in gross profits, 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 profits. which is 4.6x our actual FY25 operating profit, reflecting 32% operating margins. This reflects 55% incremental operating profit margins that are derived from the incremental revenue when comparing the model to FY2025 actual results. And lastly, our 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 prior financial model that we presented more than two years ago, gross profit, operating profit, and net profit are much higher, 50%, 60% each higher, as compared to the pre-owned model, mostly driven by the higher Cypher and Cygimix and the additional value we bring to our customers. That concludes my prepared remarks. Now I'd like to send the call back to the operator so we can take your questions.