Tower Semiconductor NASDAQ: TSEM reported record second-quarter 2026 revenue and profitability, citing accelerating demand for silicon photonics and related data-center connectivity products. The company also raised its 2028 financial model and detailed a two-track expansion plan in Japan intended to increase 300-millimeter manufacturing capacity for silicon photonics, silicon germanium and advanced optical packaging.
Second-quarter revenue reached $460 million, up 11% from $414 million in the first quarter and 24% from $372 million a year earlier. Chief Executive Officer Russell Ellwanger said the quarter established company records across key financial measures, excluding non-recurring accounting items.
Gross profit was $138 million, producing a 30% gross margin, while operating profit totaled $90 million. Net profit was $91 million, or a 20% net margin, compared with $47 million in the prior-year quarter. Diluted earnings per share were $0.79, compared with $0.41 a year earlier.
Chief Financial Officer Oren Shirazi said the company’s second-quarter gross profit increased 72% year over year, while operating profit was 2.26 times the year-earlier level. Tower ended June with $3.8 billion in assets, including $1.6 billion of net fixed assets and $2 billion of current assets. Shareholders’ equity reached $3.1 billion, and the current ratio was approximately 4.9 times.
Third-Quarter Outlook and Updated 2028 Model
Tower forecast third-quarter 2026 revenue of approximately $520 million at the midpoint of its guidance range. Ellwanger said that outlook would represent an annualized revenue run rate above $2 billion.
The company updated its 2028 model to target $3.6 billion in annual revenue, $1.63 billion in gross profit and a 45% gross margin. The model also calls for $1.38 billion in operating profit, representing a 38% operating margin, and $1.2 billion in net profit, or a 33% net margin.
Shirazi said the revised revenue target is $760 million above Tower’s February 2026 model, while the projected gross profit is $510 million higher. The company attributed the increase to an enhanced product mix and expected operating leverage as revenue grows.
The model assumes all fabs operate at 85% utilization after equipment installation and qualification, as well as assumptions regarding wafer selling prices, costs, completion dates for equipment and process qualifications, and customer product qualifications and orders. During the question-and-answer session, Shirazi said wafer selling prices typically carry the greatest potential variability because changes in selling prices flow directly to margin.
Japan Expansion Targets Optical Connectivity Demand
Tower recently announced a dual-track 300-millimeter capacity expansion in Japan, supported by Japan’s Ministry of Economy, Trade and Industry, or METI. The first track involves repurposing the Arai facility, formerly Fab 6, for 300-millimeter silicon photonics production and advanced packaging capabilities, while maximizing output at the company’s Fab 7 facility in Uozu.
Full production readiness for Track 1 is expected in the fourth quarter of 2027. Ellwanger said the project is a driver of the company’s updated 2028 model and will add substantial capacity during 2027.
Track 2 involves constructing an additional 300-millimeter facility adjacent to Fab 7. Tower said this project is expected to more than quadruple its Japanese 300-millimeter manufacturing output, including the incremental capacity from the Arai project. The facility is intended to support silicon photonics, silicon germanium and related advanced optical packaging applications.
Ellwanger said the company’s target is for the Track 2 facility and equipment to be installed and operational by the fourth quarter of 2028, providing a growth path beyond that year. He added that the precise equipment installation schedule remains under negotiation, though budgets have been approved and Tower intends to fund the project through internally generated cash rather than a capital raise.
Silicon Photonics Drives Growth
RF infrastructure accounted for 49% of second-quarter revenue and grew approximately 43% sequentially and more than 140% year over year. Within that segment, silicon photonics revenue increased more than 60% from the prior quarter and more than 270% from a year earlier, reaching an annualized second-quarter run rate above $680 million.
Tower is targeting a $1 billion silicon photonics run rate in the fourth quarter of 2026 as previously announced capacity expansion is qualified. The company expects the full ramp of wafer starts from those investments during the fourth quarter, with the full financial impact expected in the second quarter of 2027.
Ellwanger said Tower has announced customer contracts representing approximately $1.3 billion in silicon photonics revenue for 2027, with higher growth expected in 2028. He said additional capacity planned through Track 1 has been requested and committed by several lead customers, though not all of it is formally booked.
The company said demand is being supported by AI data-center infrastructure, where optical connectivity is increasingly required to move data among processors. Tower highlighted near-packaged optics, or NPO, as an emerging opportunity and said several NPO deployments are planned over the next year. Ellwanger said NPO could represent a significant, rather than single-digit, percentage of silicon photonics shipments by the second half of 2027.
Tower also entered a multiyear epitaxial wafer supply agreement with IQE for III-V materials used in its silicon photonics roadmap. The company said its long-standing collaboration with Marvell reached a milestone in which the number of silicon-photonics-based coherent optical modules exceeded several million.
Other Business Segments and Investment Spending
RF mobile represented 12% of second-quarter revenue. Revenue from 300-millimeter RF silicon-on-insulator products declined 14% year over year as Tower transitions manufacturing and consolidates production. However, Ellwanger said the company has secured design-win momentum in premium smartphones and expects 300-millimeter RF SOI wafer starts to be three times second-quarter 2026 shipment levels by mid-2027.
Power management accounted for 14% of revenue, with year-over-year growth driven by demand for 200-millimeter and 300-millimeter BCD offerings. Sensor display represented another 12% of revenue. Image-sensor revenue was largely flat year over year, though Tower reported increased demand for high-resolution machine-vision sensors used in semiconductor and EV battery inspection.
The company is executing a $920 million capital expenditure program to expand silicon photonics and silicon germanium capacity across fabs in Israel, Newport Beach, Texas and Japan. Approximately half of that investment had been paid through the second quarter, with the remainder expected to be paid during the second half of 2026 and throughout 2027.
About Tower Semiconductor (NASDAQ:TSEM)
Tower Semiconductor, traded on NASDAQ under the symbol TSEM, is a specialty foundry company that provides analog and mixed-signal semiconductor manufacturing services to a broad array of customers worldwide. The company focuses on delivering tailored process technologies for high-growth markets, including radio frequency (RF), power management, imaging, automotive electronics, and Internet of Things (IoT) applications. By combining deep process know-how with flexible manufacturing capabilities, Tower Semiconductor supports the development and volume production of advanced semiconductor devices for fabless and integrated device manufacturer customers.
The company's technology portfolio spans standard and specialty processes such as CMOS, BiCMOS, high-voltage, radio frequency, silicon photonics, micro-electromechanical systems (MEMS) and image sensor production.
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