Tower Semiconductor Q3 Earnings Call Highlights

Key Points

• Record Q3 performance: Revenue rose 33% year over year to $526 million, while net profit increased to $120 million and diluted EPS reached $1.05. Management expects approximately $600 million in Q4 revenue, implying about $2 billion in 2026 revenue.
• Silicon photonics is driving expansion: Q3 silicon photonics revenue reached roughly $240 million, with annualized capacity expected to exceed $1.1 billion in Q4. Tower is expanding production across four sites and expects 2027 capacity to support a run rate above $2.8 billion, backed by customer commitments extending through 2029.
• Strong outlook and investment plan: Tower is developing near-packaged optics and advanced heterogeneous-integration products while investing $920 million in additional capacity. The company raised its long-term model to $3.6 billion in annual revenue, $1.38 billion in operating profit and a 33% net margin.

Tower Semiconductor NASDAQ: TSEM reported record third-quarter results for 2026, citing accelerating demand for silicon photonics used in AI infrastructure and data-center connectivity, along with growth across its broader analog technology portfolio.

Revenue for the quarter reached $526 million, up 33% from $396 million in the third quarter of 2025 and 14% from $460 million in the prior quarter. Net profit rose to $120 million, or a 23% net margin, compared with $54 million and a 14% margin a year earlier. Diluted earnings per share were $1.05, compared with $0.47 in the prior-year period.

Chief Executive Officer Russell Ellwanger said the company expects fourth-quarter revenue at the midpoint of its guidance to reach $600 million. That result would bring full-year 2026 revenue to about $2 billion, compared with $1.57 billion in 2025.

Silicon Photonics Drives Growth Plans

Tower said silicon photonics revenue totaled approximately $240 million in the third quarter, representing an annualized rate near $1 billion. Ellwanger said the company expects its fourth-quarter silicon photonics annualized run rate to exceed $1.1 billion.

The company is expanding silicon photonics production across four manufacturing sites to meet demand from customers serving AI-related optical interconnect markets. Tower expects year-end capacity to be about double the level that supported third-quarter silicon photonics revenue, with the additional capacity intended to support a revenue ramp during the first and second quarters of 2027.

Tower is also advancing its Track-1 300-millimeter expansion in Japan. Ellwanger said all tools for the expansion have been ordered and scheduled, with full production starts targeted for the third quarter of 2027. Including that expansion, the company expects silicon photonics start capacity to reach three times the level supporting third-quarter shipments.

Management said that capacity is substantially covered through signed agreements and contracts in advanced negotiation stages. Customer commitments now extend into 2029, when Tower expects its Track-2 expansion in Japan to be underway. The company said its planned expansions will continue to be self-funded.

In response to an analyst question, Ellwanger said capacity expected by the third quarter of 2027 could support a silicon photonics run rate “somewhere a bit above a $2.8 billion” on a start-rate basis. He noted that figure does not include potential revenue from integrated laser products and other initiatives.

New Product Opportunities

Tower highlighted growing customer activity around near-packaged optics, or NPO, a technology that can more tightly integrate optical and electrical functions than conventional pluggable transceivers. The company said it is prototyping NPO products with more than 10 top customers and expects NPO products to carry a higher initial average selling price than pluggable products.

Ellwanger said the company expects an “appreciable amount” of NPO shipments in the second half of 2027, though the timing will depend on market adoption. Tower’s NPO customers are currently a subset of its existing pluggable-transceiver customer base, he said.

The company also discussed heterogeneous integration efforts, including initial production for NewPhotonics using indium phosphide laser chiplets attached to silicon photonics wafers. Tower said it is deploying similar die-to-wafer attachment techniques with materials including thin-film lithium niobate for next-generation 400-gigabit-per-lane products.

President Marco Racanelli said Tower expects competition in the expanding silicon photonics and silicon germanium markets, but cited the company’s production yields, customer relationships and technology roadmap as factors supporting its position. He said customers have extended long-term agreements through 2029, providing visibility into future capacity requirements.

Other Businesses and Utilization

Beyond optical technologies, Tower reported its highest quarterly RF-SOI revenue to date from its 300-millimeter Agrate, Italy, production corridor. The company also recorded a new high in product tape-outs for Fab 10, which serves its RF-SOI business.

Demand for Tower’s BCD technologies grew about 10% year over year, according to Ellwanger, supported by AI and cloud data-center applications as well as mobile and automotive markets. Several strategic customers have entered long-term agreements at higher average selling prices, with Tower forecasting blended BCD pricing in 2027 to be 20% above 2026 levels.

In image sensors and displays, Tower began production of a high-speed global shutter sensor for high-end video cameras and said it is preparing capacity for expected customer demand in OLED-on-silicon displays during 2027.

All of Tower’s 200-millimeter fabs operated at utilization rates of 85% to 90% during the third quarter, while its 300-millimeter fab remained fully utilized and above the company’s 85% utilization model.

Margins, Capital Spending and Long-Term Model

Chief Financial Officer Oren Shirazi said gross profit increased 92% year over year to a record $179 million, while operating profit rose 2.5 times from the prior-year period to $127 million.

Tower is executing a previously announced $920 million capital investment program for silicon photonics and silicon germanium capacity and capabilities across facilities in Israel, Newport Beach, Texas and Japan. About 65% of the investment had been paid through the third quarter, with the remaining 35% expected to be paid in the fourth quarter of 2026 and the first half of 2027.

Shirazi said Tower expects a full return on investment from the $920 million program within one year. He added that quarterly incremental gross margin of roughly 62% was elevated because not all new equipment had begun depreciation, and reiterated a longer-term expectation for incremental gross profit margins of 55% to 58%.

The company updated its long-term financial model to target annual revenue of $3.6 billion, gross profit of $1.63 billion and operating profit of $1.38 billion. The model calls for annual net profit of $1.2 billion, representing a 33% net margin, based on assumptions including 85% fab utilization after planned capacity installations and qualifications are completed.

About Tower Semiconductor (NASDAQ:TSEM)

Tower Semiconductor Ltd. is an Israeli specialty semiconductor foundry that manufactures integrated circuits for fabless semiconductor companies, integrated device manufacturers and system companies. The company provides process technologies and production services rather than selling branded end-user electronics.

Its offerings include analog and mixed-signal technologies, radio-frequency and high-voltage circuits, power management solutions, image sensors, and specialty memory products.

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