Tower Semiconductor Ltd. (TSEM) Earnings

Management highlights

- Overall Financial and Operational Milestones * Q2 2026 set company records across all key metrics: 30% gross margin, 20% operating margin, and 20% net margin (excluding non-recurring accounting items), with 58%, 55%, and 55% of these margins coming from incremental QoQ revenue growth respectively. * 200mm fabs (Fab 2, Fab 3, Fab 9) operated at 80-85% utilization; Fab 5 in Japan operated at 75% utilization; Fab 7 is fully utilized, well above the 85% baseline target. * The balance sheet remains strong, with $3.8 billion in total assets, a 4.9x current ratio, and a record $3.1 billion in shareholders' equity as of Q2 end 2026. - Strategic Japanese 300mm Capacity Expansion * Announced a dual-track 300mm capacity expansion in Japan supported by Japan's METI, focused on silicon photonics (SIFO), silicon germanium (SIGI), and advanced optical packaging to meet growing demand for AI and data center optical connectivity. * Track 1 repurposes the existing Arai (ex-Fab 6) facility and maximizes output at Fab 7 in Wosu, with full production readiness expected Q4 2027. This expansion is already included in the updated 2028 business model. * Track 2 involves constructing a new adjacent 300mm fab that will quadruple total Japanese 300mm output, with full completion targeted Q4 2028 to support growth post-2028. All plans are fully funded by internal cash with no expected equity dilution. - Silicon Photics Business Progress * Announced $1.3 billion in customer-committed silicon photonics revenue for 2027, with further growth expected in 2028. All additional Track 1 capacity is already committed to lead customers. * The ramp of new capacity is on track to deliver 3x higher wafer starts by Q4 2026 versus Q2 2026 levels, with full financial impact expected in Q2 2027, targeting a $1 billion annualized run rate by Q4 2026. * Reached a key milestone with long-time partner Marvell, with multi-million units of SIFO-based coherent optical modules shipped. Entered a multi-year III-V epitaxial wafer supply agreement with IQE to secure material for next-generation integrated laser technologies. - Other Segment Developments * RF mobile is undergoing a strategic transition of RFSOI manufacturing from 200mm to 300mm, with 300mm production consolidated at Fab 10 to free up Fab 7 capacity for growing SIFO and SIGI. Strong design win momentum for 300mm RFSOI for premium smartphones is expected to deliver 3x higher wafer starts by mid-2027 versus Q2 2026 levels. * Power management holds a leading position in LDMOS devices for high performance computing power delivery, with strong new customer acquisition driven by demand for high power density and thermal efficiency in growth segments. * Sensor display is seeing surging demand for high-resolution image sensors for DDR/HBM memory assembly line inspection and EV battery inspection, supported by the company's 300mm global shutter platform, with growth expected over the next two years. - Capital Expenditure * A $920 million capacity expansion plan for SIFO and SIGI across global fabs is on track, with 50% of the capital expenditure paid as of Q2 end 2026, and the remainder expected to be paid in H2 2026 and full year 2027.

Guidance

- Q3 2026 revenue is guided to a midpoint of $520 million, representing an annualized revenue run rate above $2 billion. - Management updated its long-term 2028 business model to target $3.6 billion in annual revenue (a 27% increase from the prior February 2026 target), $1.63 billion in gross profit (45% gross margin), and $1.2 billion in net profit (33% net margin). This represents a 59% increase in annual net profit versus the prior model. - The 2028 model assumes all fabs operate at 85% utilization after full completion of the $920 million SIFO/SIGI capital expenditure plan and Track 1 expansion, and includes a 40% increase in R&D investment from current levels, with operating expenses as a share of revenue expected to fall to ~7% (30% lower than current levels) due to scale efficiencies. - Near-package optics (NPO) deployments are planned to launch over the next year, and are expected to contribute a double-digit percentage of silicon photonics shipments in H2 2027.

Segment performance

Total Q2 2026 revenue was a company record $460 million, 11% quarter-over-quarter (QoQ) and 24% year-over-year (YoY) growth. The performance for each product segment is as follows: 1. RF Infrastructure: $225.4 million, 49% of total corporate revenue, with ~43% QoQ growth and over 140% YoY growth. Within this segment, silicon photonics revenue grew over 60% QoQ and over 270% YoY, hitting an annualized run rate of over $680 million. 2. RF Mobile: $55.2 million, 12% of total corporate revenue. 300mm RFSOI revenues decreased 14% YoY due to an ongoing strategic manufacturing transition from 200mm to 300mm. 3. Power Management: $64.4 million, 14% of total corporate revenue, with YoY revenue growth driven by strong demand for 200mm and 300mm BCD offerings. 4. Sensor Display: $55.2 million, 12% of total corporate revenue. Image sensor revenue was flat YoY overall, but demand is surging for high-end high-resolution sensors for semiconductor inspection and EV battery inspection.

Risks & headwinds

- Forward-looking statements, including the 2028 business model, are subject to risks and uncertainties that could cause actual results to differ materially from projections, with key risks detailed in the company's SEC and Israeli Securities Authority filings. - The 2028 business model relies on core assumptions: successful on-time completion and qualification of capacity expansion projects, 85% fab utilization, and projected wafer selling prices. Wafer selling price volatility is cited as the largest source of potential variability for model outcomes, as changes in pricing flow directly to bottom-line margins. - Final scheduling for tool installation and qualification for the Track 2 Japanese expansion is still in negotiation, so specific full revenue contributions from Track 2 have not yet been finalized.

Analyst Q&A

• Q: Analyst Cody Acree asks for clarification on the difference between the $1.3 billion 2027 committed silicon photonics contract number and the updated capacity figures, then asks what revenue growth the company expects after Q2 2026, and what scale Track 2 will add beyond what is already in the 2028 model. /

  A: Management confirms the $1.3 billion figure is customer-committed contracted revenue, while the 3x higher wafer start number reflects total available capacity after the ramp, with all additional capacity already spoken for by customers. The 2028 model already includes full 85% utilization of Track 1 capacity. Track 2 will quadruple total Japanese 300mm capacity (including Track 1's incremental capacity) and is targeted for full completion by Q4 2028, enabling seamless growth post-2028, with full financial details to be updated in early 2027. All Track 2 plans are fully funded by internal cash with no equity dilution.

• Q: Analyst SIG asks when RF mobile revenue will stop declining from the manufacturing transition and stabilize, and confirms that additional SIGI capacity for next-generation heterogeneous NPO integration is primarily included in Track 2. /

  A: Management confirms that most additional SIGI capacity for next-generation packaging is included in Track 2, while Track 1 focuses primarily on SIFO expansion. RF revenue will not stabilize but will return to growth, with 300mm RFSOI wafer starts expected to reach a new all-time high by Q2-Q3 2027, when Fab 10 will be full and transition-related declines will end.

• Q: Analyst Richard Shannon asks how large of a contribution NPO will make to 2027 SIFO revenue, and how much future silicon photonics revenue will come from advanced packaging. /

  A: Management expects NPO will contribute a double-digit percentage of SIFO shipments in H2 2027, an amount larger than single-digit. The company does not target packaging as a separate revenue stream; instead, advanced internal packaging capability is an enabler to grow the core SIFO business by improving quality, reducing lead times, and enabling next-generation product integration, rather than competing with external packaging houses.

• Q: Analyst Cody Acree asks how the company views industry supply-demand balance given peer capacity additions, and how Tower differentiates its technology from competitors. /

  A: Management notes that while industry supply is increasing, Tower is already qualified at major global customers with long-term contracts through 2028 and beyond. The company differentiates via industry-leading technical figures of merit (most notably lower insertion loss, which reduces customer component costs) and sustained investment in next and next-next generation technology, often with exclusive joint development agreements that secure high market share with lead customers.

• Q: Analyst Lisa Thompson asks if the company is experiencing any supply chain shortages, and what is the largest source of variability in the 2028 business model. /

  A: Management confirms there are no material ongoing supply chain issues, with the prior indium phosphide substrate shortage resolved via the new IQE supply agreement. The largest source of outcome variability is wafer selling prices, as changes in pricing flow directly through to bottom-line margins, making it the biggest driver of deviation from model projections.