Tower Semiconductor Ltd. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• CEO Russell Ellwanger noted core technologies (Power Management, CMOS Image Sensors, 65-nanometer RF Mobile) are growing year-over-year, with strong demand for silicon photonics and silicon germanium due to AI-driven data center needs.
• Q3 2025 revenue was $396 million, net profit $54 million. Guided Q4 revenue to be a record $440 million ±5%.
• Silicon photonics advancements include partnership with Xscape Photonics and NVIDIA, and plans for capacity expansion. Silicon germanium growth driven by data center build-outs and LPO production.
• RF Mobile and Power Management updated on technology advancements and market growth, including RFSOI technology improvements and power management solutions for data center and automotive applications.

Segment Performance

• RF Infrastructure: Revenue increased from $67 million (18% of corporate revenue) in Q3 2024 to $107 million (27% of corporate revenue) in Q3 2025. Full-year growth expected at 75%, with silicon photonics more than doubling from 2024's $105 million.
• Silicon Photonics: Q3 2025 revenue was $52 million, ~70% year-over-year growth. Targeting 2025 silicon photonics revenue above $220 million, with Q4 '25 annualized revenue run rate exceeding $320 million. Added $300 million investment for capacity expansion.
• Silicon Germanium: Demand driven by data center build-outs. Multiple customers have begun material LPO production volumes. Started production in Fab 2 of advanced SiGe platforms.
• RF Mobile: Represented 26% of Q3 '25 corporate revenue. RFSOI showed steady quarter-over-quarter demand increase, with updated technology providing better Ron-Coff and reduced layer count.
• Sensor and Displays: Represented 14% of Q3 corporate revenue. Expect mid-teens full-year year-over-year growth. Received first production PO for OLED display backplane silicon.
• Power Management: Represented 17% of Q3 corporate revenue. Targeting 15% year-over-year growth, with advanced 300-millimeter platforms driving growth.

Guidance

• Guided Q4 2025 revenue to be a record $440 million ±5%.
• Target 2025 silicon photonics revenue above $220 million, with Q4 '25 annualized revenue run rate exceeding $320 million.
• Announced additional $300 million investment for silicon photonics and silicon germanium capacity expansion, targeting full volume wafer starts in the second half of 2026.

Risks

• Currency Fluctuations: Natural hedges and zero-cost cylinder transactions mitigate impact, but currency fluctuations could still affect margins.
• Competitive Dynamics: Other companies may try to gain market share, though Tower is in a strong position.
• Dependence on Customer Demand: Capacity utilization and revenue growth depend on customer demand for silicon photonics and other segments.

Question and Answer

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

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

• Q: 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?

A: I believe that most people would like to take share from us. It's a good 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 can 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, though, for somebody to break into our position right now.

• Q: Congrats on the progress. 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?

A: 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 cycle, 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 -- not additional, we will 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 towards the $10 million.