Earnings Call Highlights: Tower Semiconductor (TSEM) | FY25 Q4

1. Summary | Tower Semiconductor's silicon photonics hits an inflection point, with operating profit set to triple by 2028

Tower Semiconductor delivered a strong fourth quarter of 2025, with record revenue of $440M, up 14% YoY. Helped by a richer mix of high-value products such as silicon photonics (SiPho) and SiGe, net margin doubled from 11% at the start of the year to 18%. Management showed strong confidence, formally raising its 2028 long-term financial targets to revenue of $2.84B and net income of $750M. The core driver is AI supercomputing centers' urgent demand for 800G/1.6T optical modules, along with deep technology alliances with tier-one customers such as NVIDIA. With its capacity expansion plan raised to $920M, Tower has positioned itself as a cornerstone of global AI optical connectivity.

2. Financials (non-GAAP)

• Revenue: $440M (QoQ +11%, YoY +14%).

• Gross margin: 26.8% (QoQ +260 bps).

• Operating margin: 16.1% (QoQ +330 bps).

• EPS: $0.70 (diluted).

• Financial details: Opex: $47M (efficient operations maintained, with its share of revenue continuing to fall).

  • Cash position: cash and liquid assets of about $1.7B, an extremely strong balance sheet.

  • CapEx: full-year plan raised to $920M (from $650M).

• Segment revenue performance:

  • RF Infrastructure (SiGe/SiPho): 32% of revenue, the fastest-growing segment (YoY +75%).

  • RF Mobile: 24% of revenue (YoY -15%), mainly from proactively phasing out low-margin controller products.

  • Power Management: 15% of revenue (YoY +20%).

  • Sensors & Displays: 15% of revenue (YoY +10%).

3. Outlook (2026 Q1 / 2028 financial model)

• 2026 Q1 guidance: revenue expected at $412M ±5% (YoY +15%), with 2026 revenue and profit expected to grow sequentially through the year.

• 2028 long-term targets: annual revenue: $2.84B (up 81% vs. 2025).

  • Gross margin target: 39.4%.

  • Net income target: $750M (net margin 26.4%).

• Growth sources: capacity utilization expected to reach 85% by 2028, excluding any potential contribution from Intel Fab 11X.

4. Product line updates

• Silicon Photonics (SiPho):

  • 2025 full-year revenue of $228M, doubling YoY.

  • 1.6T PIC (Photonic IC) is currently the fastest-growing node, with Tower a primary supplier in the market.

  • NVIDIA collaboration: confirms its supply position in the 1.6T product line and secures priority capacity allocation.

• Silicon Germanium (SiGe):

  • 2025 full-year revenue up 43% YoY.

  • Mainly used in LPO (Linear Drive Pluggable Optics), TIAs, and drivers.

• 300mm RF-SOI:

  • Has won orders from three of the world's top four RF front-end module (FEM) suppliers.

  • The new technology's Ron-Coff beats competitors, with ramp expected in 2027 and meaningful revenue contribution in 2028.

• Power & Sensors:

  • OLED on Silicon: began producing silicon backplanes for AR displays in Q4.

  • FMCW LiDAR: partnering with Aeva and LightIC to enter automotive and robotics sensing markets.

5. Looking ahead

• Capacity multiplication plan: announced an additional $270M in capital expenditures, bringing total investment to $920M. The goal is to raise SiPho capacity to more than 5x the 2025 Q4 level.

• Capacity reservation agreements: more than 70% of the new SiPho capacity is already covered by customer prepayments and signed capacity reservation agreements, with visibility extending to 2028.

• Global footprint: SiPho production has expanded from Newport Beach to San Antonio (Fab 9) and Uozu, Japan (Fab 7), with Fab 2 in Israel expected to join in 2026.

• Vertical technology integration: advancing Indium Phosphide (InP) on Silicon heterogeneous integration to define the materials standard for the 3.2T era, and developing the DWDM laser sources needed for CPO.

6. Q&A highlights

• NVIDIA collaboration details: core question: does Tower ship directly to NVIDIA?

  • Management response: Tower supplies optical components and technical support. While it does not ship modules directly to NVIDIA, the two have formed a direct alliance on demand forecasting and capacity alignment, with delivery completed through module makers (integrators).

• CapEx conversion timeline: core question: when will equipment arrive and capacity be released?

  • Management response: most of the equipment in the $920M investment will arrive before 2026 Q3, with full-line qualification completed by year end and full revenue contribution in 2027.

• Handset market pressure: core question: will memory shortages/price increases hurt phone production and in turn Tower?

  • Management response: the risk is real, but Tower has built a fungible capacity mechanism; if handset demand slows, it can quickly shift capacity to Power or high-margin SiGe.

7. Risks and watch points

• Supply chain bottleneck: a large volume of precision equipment is due for delivery in 2026; supplier delays or installation and tuning problems could delay the capacity ramp.

• Tax changes: from 2026, under Pillar Two, the effective tax rate will rise from its current very low level to at least 15%.

• Customer concentration: while reserved capacity is good news, revenue depends heavily on the AI infrastructure spending cycle of large hyperscalers.

• Intel collaboration variable: the Fab 11X agreement with Intel has entered mediation, and Tower has redirected orders back to Fab 7 in Japan to reduce supply disruption risk.

8. Bottom line

• Positioning in one sentence: Tower is in the "growth sweet spot" of transforming from a traditional specialty foundry into a key supplier of AI infrastructure.

• Core moat: it owns the world's most mature, scaled Silicon Photonics (SiPho) production platform, plus a technology moat deeply tied to AI giants.

• Takeaway: benefiting from the cascading effect of the 800G-to-1.6T migration, Tower has very strong profit leverage. The 50.5% net income CAGR implied by the 2028 model suggests substantial room for upward revisions; the capacity qualification timeline is the key thing to watch.