Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Tower Semiconductor Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Ms. Noit Levy, Senior Vice President of Investor Relations and Human Resources. Please go ahead, madam.

Thank you. Good day, and thank you, everyone, for joining us. Welcome to Tower Semiconductor's Third Quarter 2025 Financial Results Conference Call. With us today are Mr. Russell Ellwanger, our CEO; Dr. Marco Racanelli, our President; and Mr. Oren Shirazi, our CFO. Before we begin, please note that certain statements made during this call may be forward-looking and are subject to risks and uncertainties that could cause actual results to differ materially. These risks are detailed in our SEC filings, Form 20-F and 6-K as well as filings with the Israeli Securities Authority, all available on our website. Tower assumes no obligation to update forward-looking statements. Our third quarter 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 GAAP figures and full explanations are provided in today's press release and financial tables. For your reference, the 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 Ellwanger. Russell?

Hello, everyone. Thank you for joining this earnings call. We are in the best position, growing our core technologies, Power Management, CMOS Image Sensors, 65-nanometer RF Mobile, each of which demonstrating year-over-year revenue growth, providing an excellent foundation on top of which the extreme AI-driven data center demand for our silicon photonics and silicon germanium RF platforms is driving unprecedented company growth. We ended our third quarter with revenue at $396 million, resulting in net profit of $54 million. We guide our fourth quarter to be a revenue record of $440 million, plus/minus 5%, fulfilling our beginning of year target of quarter-over-quarter growth throughout the year with strong acceleration in the second half. This underscores the increasing demand momentum we see in our served markets and is as well the result of further manufacturing capabilities, namely the very first step of a large ramp, having repurposed with added capacity for factories towards new and/or stronger silicon photonics and silicon germanium capabilities. The fourth quarter guidance indeed demonstrates the burgeoning trajectory we are on. In the following minutes, we will present the successes that we share with our customers, driving top and bottom line growth over the years to come. Now to review our third quarter of 2025 revenue breakdown and discuss the key trends, please see Slide 4 as reference. Our RF infrastructure business continues to deliver exceptional growth, increasing its contribution to corporate revenue from $67 million or 18% of corporate revenue in the third quarter of last year to $107 million or 27% for the third quarter of this year. For the full year, we expect this business to grow by 75% with silicon photonics more than doubling from the 2024 $105 million. This significant expansion reflects the strong customer adoption of our advanced technologies and validates our…

Hello, everyone. Earlier today, we released our quarterly financial results and balance sheet. For the third quarter of 2025, we reported revenue of $396 million, reflecting a year-over-year revenue increase of 7% and a quarter-over-quarter revenue increase of 6%. Gross profit for the first quarter was $93 million, 16% higher compared to $80 million in the second quarter, and operating profit was $51 million, 27% higher sequentially compared to $40 million in the second quarter. Net profit for the quarter was $54 million, 15% higher compared to net profit of $47 million in the second quarter and earnings per share were $0.48 basic and $0.47 diluted as compared to $0.42 basic and $0.41 diluted earnings per share reported for the second quarter. Newport Beach fab lease extension. As mentioned in today's press release, to address the continuous and growing SiPho and SiGe demand and given the full utilization of our Newport Beach fab, we are extending the Newport Beach fab lease by up to an additional 3.5 years beyond its previous 2027 term. An upfront lease payment of $105 million will be recorded as cash used for operating activities in our Q4 '25 statement of cash flows with corresponding impact on our balance sheet cash amount, while the resulted P&L impact would be, as announced earlier today, $6 million per quarter to be recorded over a 5-year period as required by GAAP in the COGS line. Hedging, I would like now to describe our currency hedging activities. In relation to the Japanese yen, since the majority of TPSCo's revenues is denominated in yen and the vast majority of TPSCo's costs 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…

[Operator Instructions] And we're going to take the first question and it comes from the line of Cody Acree from Investment Bank.

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?

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

Okay. So if no incremental upside, then what's the accelerated pace do you expect? I guess, what's the give and take of that extra CapEx?

Acceleration of achievement towards the $500 million net profit run rate, which, as you know, we are still not there. So we will accelerate the achievement. And of course, the accelerated achievement will enable higher profit sooner.

Okay. Great. And then maybe, Russell, can you just talk about some of the applications that you see driving the aggressive growth you're seeing in RF infrastructure?

Yes. The biggest and strongest is just really the need for build-out, specifically, I think, AI-driven, but it continues for high volumes of 400 gigabit per second, very high volume of 800 gigabit per second in multiple formulations of it, both DR8 and 2xFR4s. And then as stated, a very high volume right now going into 1.6 gigabit where we're seeing somewhere about 30% of all of our starts being dedicated to that platform presently. So it's really just for the continual build-out of data center and a big movement right now going into the 1.6 G.

Now we'll go and take our next question -- and it comes from the line of Tavy Rosner from Barclays.

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?

Abel is -- probably the answer to that would be yes. But considering no, we're very close with our customers. We understand what their needs are. We have long-term road maps, and we're not opportunistic if you would look at it that way of because demand is very, very tight to gouge somebody for an extra couple of wafers. I think that's the surest way to losing goodwill and partnership. What we are seeing, however, is extremely strong demand. And having stated that, that's the reason for after having invested $350 million, which is -- we're seeing the first signs of that ramp right now to increase another $300 million of investment. I had stated that we're targeting a Q4 SiPho revenue shipment run rate of over $320 million. And against the qualified capacity that we're shipping the Q4 against, we're increasing that by over 3x in start capability within the next 4 quarters, expecting to have that entire 3x plus available for starts in the second half of 2026. So that's quite a bit, if you were to say 3x of a $320 million run rate, that's quite a substantial growth in SiPho that we're projecting for ourselves. So having come from, what, plus/minus $28 million '23 to $105 million in '24. So this year, we're targeting over $220 million for the full year with a $320 million plus run rate in Q4, but bringing that to well above $900 million by target. And that target is really spoken to by customers. That's not field of dreams, if you build it, they will come. That's customers saying, please build it, we need the capacity. And so I think we sit very strong with our relationships with SiPho. Now also I stated that in the script that we're doing quite a bit on capability, not just for present 1.6T generation, but to make sure that our customers are in a leading position for the capabilities needed for 3.2T or for 6.4T, specifically the needs for a faster capable modulator of a 400G. And those activities are very real time. So we're investing real time on increasing capacity, which is really being demanded by the industry. And fortunately, as stated, we are by far in the leading position on manufacturing, but believe also to be in the leading position as far as developing next-generation platforms with the leaders so that we're both prepared well before the demand actually arises. Did that answer your question, I hope?

Yes. Just [indiscernible] the first part, do you see any changes in competitive dynamics? Anyone else deploying capital in that field to try and take some share away from you guys?

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. Fortunately, and really for this call, have with us Marco Racanelli, the RF activities report directly under him. I don't know, Marco, if you had any color you wanted to add to that.

Yes. I think on the pricing discussion, as you say, we're not taking advantage of the situation just because capacity is tight in the industry today. But we are adding value in our advanced platforms. And so in that regard, we do price higher technologies that deliver more value to customers. So in that aspect, over time, we do anticipate some price improvement as customers migrate to these more advanced technologies. And I will say as well that SiPho is already very accretive in margin. So it's -- we do get paid for the value that we add, and that's how things should be based. We stated very strongly that SiPho has a very strong benefit for our customers against EML. So for our customers to be using our platforms now, and if you look at a halving of lasers, it's a big deal. You have as well at this point then for the 1.6T, the use of a silicon modulator that's inside of the PIC itself versus needing an indium phosphide modulator that costs much more money and quite a bit of 3.5 area. So there's value in the platforms. And obviously, we both share in whatever value is created.

And it comes from the line of Richard Shannon from Craig-Hallum Capital Group.

Congrats on some very nice numbers here. Let me start off with a few questions here on silicon photonics. Russell, you made an interesting comment that I probably didn't transcribe in my own notes here very well, but you mentioned something about the shift to silicon photonics is permanent. Can you explain what you mean by that, please?

What we stated in the script, it's very cost conducive against EML. It takes half the lasers. So if you look at twofold, the cost of 3.5 and also the capacity constraint of 3.5, that's both a big benefit to be able to use silicon photonics at the 400, 800, 1.6T and potentially, depending on development, even at 3.2T, going to SiPho, you have a silicon modulator, which is also very cost conducive against needing to have a 3.5 modulator. So yes, by stating that there's a cost benefit that certainly drives long-term stickiness. But in addition to the cost benefit, there's performance benefit as well. And when you combine cost and performance, that's really an absolute winning combination for market share stickiness, right?

Okay. My second question is looking at 1.6 here. Obviously, we're seeing module makers talk about some nice ramps you're starting next year. What kind of mix do you expect to have of 1.6 versus slower speeds in your business, I don't know, next year or in a particular point? Just trying to get a sense of how fast this is scaling versus the older slower technologies.

Right now, the 1.6 is close to 1/3 of our starts. So that gives you a feel for where we're at right now, and that's up from almost nothing at the beginning of the year, but a very quick ramp movement to the 1.6T. I would expect that it will go to over 50% within the first multiple quarters of the next year.

Okay. That is helpful. My last question on silicon photonics here is following up on your comments as well as one of the questions here about reaching 3x. I think it was a capacity comment in silicon photonics from the run rate of this current fourth quarter. What kind of time frame do you expect to be able to get to your full utilization level on that? It sounds like you could be this year -- or excuse me, in '26, but I just want to get your sense of what you're expecting there.

The demand is there or will be there by customer forecast. By planning, we should be fully installed within the first half of '26 and having all the tools up and running, being able to hit the full start capability within the second half. So the shipment level really depends at what point in the second half we do the wafer starts. You're typically be looking at somewhere of a 3- to 4-month cycle between the starts and the shipment, given whatever the PO -- the size of the POs are. So we certainly would foresee seeing a portion of this increased capacity coming into revenue within the second half of '26. But take into account that the first ramp that we're doing has not been realized yet either. So the previous $350 million investment is right now in its first stages of ramping. So within the first half and predominantly in the second quarter, we should see a very big pickup in our silicon photonics shipments revenue, and that should continue in the third and fourth quarter. Will we hit the full 3x or 3-plus x shipment capacity in 2026, that I really don't know. The demand is there. It's a question -- and I do believe that we'll start the full amount within the second half of the year. The shipment could drag on into Q1, plus/minus, but I think we'll see -- we should see a good amount of it. I mean that's why we're doing the investment. And certainly, that's why we're accelerating it.

Okay. Perfect. One last question for me, I'll jump out of line. 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?

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.

Now we're going to take our next question and it comes from the line of Mehdi Hosseini from SIG.

A couple of follow-ups, and I apologize, I joined the call late. I apologize if I'm repeating some of the questions already covered. Russell, when you look at the opportunities associated with transceiver, are you also baking in increased content? In other words, I'm under assumption that most of the opportunity is currently on the transmit side and whether receive side of transmitter would also give you opportunity to increase content.

Certainly, to increase volumes. But had stated that really a very nice immediate upside was a pretty advanced platform that's shipping at 300-millimeter receive SiPho in the fourth quarter. And we'll go into some several formulations beyond what we're doing in the fourth quarter in 2026. So yes, the receive is incremental served market that right now, most -- well, everything we're doing other than this first 300-millimeter activities is for transmit. So very good question.

Is there any way we could kind of think about how this SiPho capacity increase by 3x would be split into increased content versus units of transceiver shipped to the end market?

I'm not really sure exactly what you mean by increased content, but it's units being used in transceivers. So -- and at the 1.6 -- I'm sorry, go ahead.

Right, right. As you increase the mix of receive and transmit within the same transmitter, how much of that is baked into capacity increase of 3 times -- or 3x?

Right now, the increase of 3x is including very little received. It's most all transmit.

So would you need to increase capacity again as your customers migrate to receive SiGe with SiPho?

Yes, and we'd be really thrilled to do so. We have platforms that are doing it. I mean it's not that we're not proactive against it. It's that right now, the transmit demand is so high. But yes, receive, but receive really comes into very strong capabilities with DEMuX, and that's a big area that we're focused on.

Okay. Just a quick follow-up. In the longer term, where are we with packaging? I think a couple of quarters ago, you highlighted doing R&D, so you would extend your addressable market to include some packaging. Is there an update you can share with us?

We have an activity with a leading packaging house focused on formulating a CPO, a full CPO. We certainly have other activities around NPO, big activities with through silicon via that's required for NPO and potentially for CPO as well. So we're making progresses there. It's not that there's a lot of CPO being used right now. It's not, but we're making good progresses. We also have other activities driving additional really strong capabilities. We're talking multiple generations down the road, but a really big program focused on 51.2T to have a very, very advanced modulation that would possibly be required within a PIC structure for whatever CPO would be used.

Okay. And these opportunities are more -- if they materialize into revenue more later this decade, it would take a couple of years for commercialization, right?

I think it's a couple of years before CPO is strongly commercialized period, independent of Tower.

And the question comes from the line of Lisa Thompson from Zacks Investment Research.

I was wondering if you could talk a little bit about 3.2T. It seems like the technology may not be able to go from 1.6 to 3.2. Can you tell us kind of where they are specifically with trying to solve that problem? And is there still a risk that an entire new technology might be needed?

I don't think an entire new technology will be needed. There are certain issues even around the DSP that's being worked on. But no, I don't think a new technology. From our standpoint, the thing that's really required is the modulation, as mentioned at 400G. And as stated in the script, we're working on 3 different pathways depending on customers' needs and desires to do the 400G modulator. So from the pure modulation standpoint, I think we're addressing it very strongly with very good progresses from the entire transceiver, the build-out or CPO, I mean those are other issues, but I don't think that they're not attackable or solvable. So I don't think that 3.2T will be held up.

Okay. And let me just clarify, is the revenues from SiPho totally gated by capacity? I mean is the demand there if you can build it?

Yes.

Okay. And then one small question. When are you going to start reporting Agrate utilization? Is that way far off?

It needn't be. We could start reporting it any time. We just haven't. We're in the midst of the first ramp there. So -- but we could start reporting it. There's no reason that we wouldn't.

And now we're going to take our last question for today. And it comes from the line of Richard Shannon from Craig-Hallum Capital Group.

Great. Let me ask one more question here. Russell, kind of big picture, looking across your business with the obvious angle also inclusive of silicon photonics. How do you think about 300-millimeter? You obviously have some through a couple of joint ventures or whatever the right term is there with Intel and ST and then have some capacity in Japan here. But how do you think about acquiring more of that? It seems very important for you to have here and obviously, very important for silicon photonics. It's clearly a big growth driver here. Is this something where you can find more partnerships like you have with the 2 partners you've already announced in the past? Or do you see greenfield? Or how do you intend to address that?

Richard, it's an excellent question, and it's one that we're focused on. No, I don't think that we'll be addressing it through partnerships such as what we have with ST or what we have with Intel, we'd be addressing it somewhat organically should we go forward there. But I think it's an excellent preface to be excited for our Q4 release, and we'll be talking more to it at that point.

That does conclude our Q&A session. I would now like to turn the call to Mr. Russell Ellwanger for any closing remarks.

Well, truly, thank you for continued interest in Tower. Thank you for the support of Tower. Certainly appreciate the questions that were asked as well during the call. Really, we're very excited to update you over the coming quarters as this more than 3x capacity that we talk about for the SiPho, SiGe growth as that comes online and to update you about the other progresses and activities. Again, very good question, a question about how this CapEx investment impacts the financial model, where Oren mentioned about it bringing in the time line of reaching certain revenue levels, and it's accelerating the time line at -- due to the SiPho was mentioned accretive margins, doing it at a somewhat different financial model. So we're very excited to update on all of these things. And as we get ready and prepare and give the end of year comments, which is always a summary of the year and an outlook of what we're doing in the coming years, I think there's many exciting things that we'll be talking about with you about the direction of the company and how all of these accretive actions really turn out to be a very strong benefit and a strong ROI. If we look at what we're doing with SiPho as far as CapEx, the really nice thing with the SiPho and the CapEx is that it's truly from the time that you start shipping wafers, you're dealing with a half year ROI on the CapEx that you put into the tools. So that's not from the time of ordering the CapEx, but from the time of actually being qualified and shipping wafers and doing that ramp, ROIs are very, very quick. So as Oren had stated, knowing that we're doing a very big expansion, knowing…

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.