Earnings call transcript: Tower Semiconductor Q3 2025 results beat expectations

Tower Semiconductor (NASDAQ:TSEM) reported its third-quarter earnings for 2025, surpassing analysts' expectations with an EPS of $0.55 against a forecast of $0.54. The company's revenue reached $395.7 million, slightly above the anticipated $394.97 million. Following the announcement, Tower Semiconductor's stock rose by 15.34% in pre-market trading, reflecting investor confidence in the company's performance and future outlook.

Key Takeaways

• Tower Semiconductor exceeded EPS and revenue forecasts for Q3 2025.
• Stock surged by 15.34% in pre-market trading.
• Silicon photonics revenue saw a 70% year-over-year increase.
• The company plans significant capacity expansions with a $650 million investment.
• Long-term goals include $2.7 billion in annual revenues.

Company Performance

Tower Semiconductor demonstrated robust performance in Q3 2025, achieving a 7% year-over-year increase in revenue to $396 million. The company also reported a net profit of $54 million, marking a 15% sequential increase. This growth is attributed to strong demand in silicon photonics and RF infrastructure, positioning Tower Semiconductor favorably against industry competitors.

Financial Highlights

• Revenue: $396 million, up 7% year-over-year.
• Earnings per share: $0.48 basic, $0.47 diluted.
• Net Profit: $54 million, a 15% sequential increase.
• Gross Profit: $93 million, a 16% sequential increase.

Earnings vs. Forecast

Tower Semiconductor's Q3 2025 earnings per share of $0.55 exceeded the forecasted $0.54, resulting in a 1.85% surprise. The revenue of $395.7 million also surpassed the expected $394.97 million, albeit by a modest 0.18% margin. This marks a continuation of the company's trend of slightly outperforming market expectations.

Market Reaction

In response to the earnings report, Tower Semiconductor's stock price increased by 15.34%, reaching $87.72 in pre-market trading. This price movement is significant, considering the company's 52-week range of $28.64 to $97.19. The positive market sentiment reflects investor optimism about the company's growth prospects and strategic initiatives.

Outlook & Guidance

For Q4 2025, Tower Semiconductor projects revenue of $440 million, with a margin of ±5%. The company's long-term financial model targets $2.7 billion in annual revenues and $560 million in operating profits. The ongoing capacity expansion, supported by a $650 million investment, aims to triple silicon photonics shipments by the second half of 2026.

Executive Commentary

CEO Russell Ellwanger highlighted the company's strategic positioning, stating, "We are in the best position growing our core technologies." He also emphasized the competitive advantage in silicon photonics over EML solutions, noting, "Silicon photonics continues to increase market share over EML solutions."

Risks and Challenges

• Supply chain disruptions could impact production schedules.
• Market saturation in core segments may slow growth.
• Macroeconomic pressures, such as inflation, could affect operating costs.
• Technological advancements by competitors may challenge market share.
• Regulatory changes in key markets could pose compliance challenges.

Q&A

During the earnings call, analysts inquired about the company's pricing strategy, with executives emphasizing a focus on long-term customer relationships. Questions also addressed the development of 3.2T technology, with management expressing confidence in overcoming modulation challenges. The potential growth of receive-side silicon photonics was highlighted as a future opportunity.

Full transcript - Tower Semiconductor Ltd (TSEM) Q3 2025:

Conference Operator: Afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Tower Semiconductor Q3 2025 earnings conference call. At this time, all participants are in listen-only mode. There will be a presentation followed by the question-and-answer session, at which time, if you wish to ask a question, you will need to press 11 on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today. I would now like to hand the conference over to our speaker today, Ms. Noit Levi, Senior Vice President of Investor Relations and Human Resources. Please go ahead, Madam.

Noit Levi, Senior Vice President of Investor Relations and Human Resources, Tower Semiconductor: Thank you. Good day, and thank you, everyone, for joining us. Welcome to Tower Semiconductor Q3 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 Q3 2025 results are prepared in accordance with US 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, a 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.

Russell Ellwanger, CEO, Tower Semiconductor: 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 Q3 with revenue at $396 million, resulting in net profit of $54 million. We guide our Q4 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 Q4 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 Q3 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 Q3 last year, to $107 million, or 27% for Q3 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 strategic investments in these markets. The momentum we are seeing positions RF infrastructure, silicon photonics, and silicon germanium platforms as a key pillar for our long-term growth, fortified and propelled by deep partnerships-based innovations with the foremost industry titans. Our silicon photonics business grew in Q3 to $52 million, approximately 70% growth as compared to Q3 of 2024. Market demand for silicon photonics continues to surge, driven by a stronger-than-anticipated ramp in 1.6T products on top of a robust 400G and 800G demand.

We have expanded capacity with our advanced SiPh platforms in Fab 9, San Antonio, having shipped revenue wafers in Q3 and expecting multiple thousands to be shipped in Q4 of this year. We are in advanced stages of qualifications in Fab 2, Israel, expecting our first production shipments in Q1 of 2026. In 300mm, we have started wafer production for the innovative receipt products we announced last quarter and anticipate revenue contribution from 300mm silicon photonics to start in Q4 of this year. Our capacity growth is fully aligned with and spoken to by our customer demand outlook. Silicon photonics continues to increase market share over EML solutions, given its significant cost advantage. SiPh typically requires half the number of lasers as an equivalent EML product, with performance benefits especially seen at 1.6T. As such, we anticipate this market share shift to be permanent.

Hence, we are at this point going to add additional CapEx to address an even increased surging demand. Looking at next-generation 3.2T data rates, which will require a doubling of speed for each lane from the current 200 gigabit per second to 400 gigabit per second, we have multiple programs with industry leaders to both extend silicon capability, but we are also pursuing integrating indium phosphide modulators for our previous announcements with OpenLite, and as well are investigating other material systems to ensure that our customer partnerships are not just ready, but leading the transition to next-generation requirements for 3.2T and 6.4T. In the past quarter, in partnership with Escape Photonics, an NVIDIA-backed startup, we delivered the industry's first optically pumped on-chip multi-wavelength laser platform for AI data center fabrics.

This innovation further expands our participation in the laser market, particularly for co-package optics applications, a significant adjacent opportunity leveraging our high-volume SiPh platforms. We showcased these advancements along with others at a highly successful Tower Technical Symposium event in China with approximately 300 attendees, where eOptolink delivered the keynote addressing Tower's role in supporting phenomenal market growth. Later this month, we anticipate another great TGS event in Santa Clara with Broadcom's President, Charlie Kowal, delivering the invited customer keynote. Looking at silicon germanium, silicon germanium transimpedance amplifiers and laser drivers are essential components for optical transceivers. The growth in CIG demand is a function of data center buildouts, be it SiPh or EML-based solutions, with an additional accelerator, the adoption of linear pluggable optics.

Due to the elimination of the DSP in the LPO module, LPO requires both the driver for transmit and the TIA for receive to have an added function of continuous time linear equalizer, which significantly adds to the silicon area of each of the TIA and drivers, hence nicely increasing the amount of silicon needed per unit. Multiple CIG customers have begun material LPO production volumes, indicating a clear upward trend in this market. We started silicon germanium production in Fab 2 of our most advanced CIG platforms and are seeing eager adoption by lead customers, driving meaningful additional contributions to CIG capacity and shipments, projected to ramp throughout 2026 and delivering high volumes thereafter.

In addition to infrastructure, we have secured a new silicon germanium low-noise amplifier designed for a Tier 1 handset customer with an initial ramp in Q4 2025 and then proceeding through 2026 and beyond, adding a significant new growth opportunity to our existing leading market share in optical transceivers, as discussed, itself being a high-growth market. Moving to RF mobile, it represented about 26% of our Q3 2025 corporate revenue. RF SLI has shown steady quarter-over-quarter demand increases with our more advanced 65-nanometer 300mm platforms at higher than 20% increase Q2 2025 over Q2 2024. We released this quarter an updated RF SLI technology that not only provides double-digit better RONCOF relative to our competitors, as measured by multiple Tier 1 customers, but also reduces layer count by 15%, improving our customers and our margins, hence enhancing our market share.

This technology also allowed customers the freedom to make a trade-off between the better RONCOF to enable a smaller die size or to have higher power handling, and as such, we are seeing strong customer traction, providing much confidence in multi-year growth. This quarter, we made important advancements in our sensor and displays technologies, which represented 14% of our Q3 corporate revenue and expected to show mid-teens, full-year over-year growth. We received our first production PO for Q1 2026 shipments for OLED display backplane silicon and continue to enhance this offering, having added high-speed logic and high-speed SRAM capabilities, enabling support for 120 Hz refresh rates, critical for next generations of VR and MR applications. Medical and photography sensor revenue remained stable, while the majority of our growth and strongest position is in machine vision, where we supply the second-largest player in this market in addition to other key customers.

Power management represented 17% of our Q3 corporate revenue. Our power business has performed well, targeting a year-over-year growth of 15%, with disproportionately higher growth for advanced 300mm platforms, one driver of which being the strong ramp of the handset envelope tracker ETIC volume, expected to continue through the next multi-years. Targeting the growing market of data center power, we have recently demonstrated 16V operating voltage devices with more than 40% lower RDSON than prior technology and as well introduced new elements to our 1.2-3.3V 65-nanometer BCD flow, improving power conversion efficiency aligned to our key customer needs. The wireless charger IC market is growing rapidly and demanding higher voltage LDMOS. To that end, working closely with lead customers, we have provided a 40V extension to our 300mm BCD process.

Specific to automotive and battery management applications, we have multiple engagements for a differentiated 140V reserve flow, allowing higher voltages without the need for the added high expense of SLI substrates. We've continued to add to the competitiveness of this platform, greatly reducing the cell size through added features and optimized architecture. Moving to utilization, at year's beginning, we announced a repurposing of several of our factories, predominantly towards higher capacities for RF infrastructure, namely silicon germanium and silicon photonics. To update on the progress, qualification and initial ramps are going well, with hundreds of silicon germanium wafers shipped in Q2 and thousands in Q3 from Fab 9 in San Antonio. We met our first internal milestone of customer SiPh shipments in Q3 from San Antonio, with several thousand planned to ship in Q4.

Fab 2, Migdal HaEmek, Israel is on track to ship our first and meaningful number of silicon germanium wafers in Q4 2025 and silicon photonic wafers in Q1 2026. Additionally, we expect to see our first production revenue for SiPh at 300mm in Fab 7 in this present quarter, Q4. Therefore, while we're in the final qualifications and initial ramp of the repurposed fabs and added capacity, our Q3 utilization levels, Fab 2 in Israel operated at about 65% utilization, Fab 3 maintained our model full utilization of 85% with growing activities for SiPh capacity, Fab 5 was at 75% utilization, Fab 7, 300mm was fully utilized, well above our 85% utilization model, Fab 9 was at 60% utilization. In summary, what a position to be in with all our core technologies demonstrating year-over-year revenue growth, the right technologies growing with the right customers.

On top of this, a long-term silicon germanium leadership for optical transceivers, coupled with correct market insights, namely believing in the benefits of silicon photonics, having begun eight years ago with the right partner and adding those who have become the most momentous adopters of this technology, has enabled us by far to be in the lead position for silicon photonics manufacturing and development. This has proven timely to meet the soaring demands of data center technology roadmap and buildout. A present and future pathway for unprecedented growth for Tower. In close collaboration with our customers, we have advanced both capacity increases and technology roadmap deliverables real-time, addressing the rocketing requirements for AI infrastructure. Specific to demand-driven capacity expansions, we target 2025 silicon photonics revenue to be above $220 million, up from $105 million in 2024, and very importantly, at a Q4 2025 annualized revenue run rate exceeding $320 million.

The $320 million SiPh run rate is enabled by the very first steps in qualification and ramp of the previously announced $350 million investment. We have begun an additional investment of $300 million for further substantial SiPh capacity expansion and next-generation capabilities in Fab 3, Fab 9, Fab 2, and Fab 7. This investment targeted to achieve full volume in wafer starts in the second half of 2026. The total capacity is fully aligned to and directly requested by our customers. The resultant capacity should increase our SiPh shipment by over 3X against our targeted Q4 2025 qualified utilized capacity. With that, I'd like to turn the call to our CFO, Mr. Oren Shirazi. Oren, please. 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 SiPh and CIG 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 2025 statement of cash flows, with corresponding impact on our balance sheet cash amount, while the resultant P&L impact would be, as announced earlier today, $6 million per quarter to be recorded over a five-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 TPS revenues is denominated in yen and the vast majority of TPS 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 to hedge the currency fluctuations. Hence, while the yen rate against the dollar may fluctuate, there is limited impact on our margins. In relation to the Israeli shekel currency, while we have no revenues in this currency, since a portion of our cost in Israel is denominated in this shekel currency, we also hedge a large portion of such currency risk by engaging zero-cost cylinder transactions to mitigate this exposure. Hence, while the shekel rate against the dollar may fluctuate, the impact on our margins is limited.

Moving to our balance sheet and future cash and cash plans, CapEx and cash plans, as I noted earlier, our balance sheet remains very strong, as evidenced by the following indicators and financial ratios. As of the end of September 2025, our assets totaled over $3 billion, primarily comprised of $1.4 billion in fixed assets net, mainly comprised of Fab machinery, and $1.8 billion of current assets. Current assets ratio is very strong at about 7X, while shareholders' equity reached a record of $2.8 billion at the end of September 2025. Our strong financial position allows us to invest in strategic opportunities that support our corporate vision as follows. For our high-margin SiPh and CIG business, we previously announced plans to invest $350 million to expand our capacity in our 8-inch Fabs in Israel and Texas, and in our 12-inch UMC Fab in Japan.

This CapEx includes a large portion of capability CapEx for advanced development and high-end RF technology-related projects. 50% of this amount has been paid today, while the remaining 50% are expected to be paid in the coming year. In addition, as we announced earlier today, we have decided to allocate an additional $300 million investment for capacity growth and next-generation capabilities, mainly for machinery for additional SiPh and CIG capacity growth for our 8-inch Fabs and for our 12-inch Fabs. This would put total SiPh and CIG capacity and capabilities-related CapEx plan at an aggregate of $650 million. All of these investments are fully reflected in our previously presented strategic and financial model.

Under this model, we are targeting $2.7 billion in annual revenues at full loading of our existing Fab and qualified capacity, including the previously stated capacity expansion plan, $560 million in annual operating profits, and $500 million in annual net profit. That concludes my prepared remark. Now, I'd like to turn the call back to the operator so we can take your questions. Thank you, dear participants. As a reminder, if you wish to ask a question, please press 11 on your telephone keypad and wait for your name to be announced. To withdraw a question, please press 11 again. Mr. Bauer will compile the Q&A row state. This will take a few moments. Now we're going to take up the first question. It comes from the line of Cody Acree from Investment Bank. Your line is open. Please ask your question. Hi, Cody.

Yeah, thanks for taking my question. Hey, guys. Good morning and thanks for taking my questions. 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? Yeah. Yeah. It may mean that we will achieve this target earlier than somebody previously expected, but yes, it is included. Okay. If no incremental upside, then what's the accelerated pace you expect? I guess what's the give and take of that extra CapEx? Acceleration of achievement towards the $500 million net profit target, which, as you know, we are still not there. We will accelerate the achievement. Of course, the accelerated achievement will enable higher profit sooner. Okay. Great. Thanks, guys.

Maybe Russell, can you just talk about some of the applications that you see driving the aggressive growth you're seeing in RF infrastructure? Yeah. The biggest and strongest is just really the need for buildout, 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. 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. It is really just for the continual buildout of data center and a big movement right now going into the 1.6G. Great. Thanks, guys. I appreciate the time. Thank you. Now we're going to take our next question. It comes to the line of Table Ross from Barclays.

Your line is open. Please ask your question. Hi. Thanks for taking my question and congratulations on the strong results. Thank you. Thank you. I wanted to ask two quick ones on the silicon photonics, please. You mentioned the leading position of Tower. Who do you see as your main competitors these days? Given the supply-demand imbalance at the moment, are you able or considering to raise prices? Able 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 roadmaps, and we're not opportunistic, if you would look at it that way, 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.

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 SiPh revenue shipment run rate of over $320 million. Against the qualified capacity that we're shipping the Q4 against, we're increasing that by over 3X in start capability within the next four quarters, expecting to have that entire 3X plus available for starts in the second half of 2026. That is quite a bit. If you were to say 3X of a $320 million run rate, that is quite a substantial growth in SiPh that we're projecting for ourselves.

Having come from, what, plus minus $28 million 2023 to $105 million 2024, to 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. That target is really spoken to by customers. That's not a field of dreams. If you build it, they will come. That's customers saying, "Please build it. We need the capacity." I think we sit very strong with our relationships with SiPh. I also stated 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. Those activities are very real-time.

We're investing real-time on increasing capacity, which is really being demanded by the industry. 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? Yeah. Just to close with 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 your long-term partner. Go look for someone else that you can leverage us with pricing on." 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. Yeah, 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, I 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. Yeah.

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. In that regard, we do price higher technologies that deliver more value to customers. In that aspect, over time, we do anticipate some price improvement as customers migrate to these more advanced technologies. I will say as well that SiPh is already very accretive in margin. We do get paid for the value that we add, and that's how things should be based. We stated very strongly that SiPh has a very strong benefit for our customers against EML. 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. Great. I appreciate it. Go back to the queue. Thank you. Thank you. Now we're going to take our next question. It comes to the line of Richard Shannon from Craig Hallum Capital Group. Your line is open. Please ask your question. Thanks, Russell and Oren, for taking my questions and 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 did not 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? Yeah. What we stated in the script, it is very cost-conducive against EML. It takes half the lasers. If you look at twofold the cost of 3, 5 and also the capacity constraint of 3, 5, it is 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 SiPh, you have a silicon modulator, which is also very cost-conducive against needing to have a 3, 5 modulator. By stating that there is a cost benefit, that certainly drives long-term stickiness. In addition to the cost benefit, there is performance benefit as well.

When you combine cost and performance, that's really an absolute winning combination for market share stickiness, right? Okay. Thanks for that. My second question is, looking at 1.6 here, obviously, we're seeing module makers talk about some nice ramps here 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 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 one-third of our starts. That gives you a feel for where we're at right now, and that's up from almost nothingness at the beginning of the year. It's a very quick ramp movement to the 1.6T. I would expect that we'll 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 three times, 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 it could be this year or, excuse me, in 2026, but 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 2026 and having all the tools up and running, being able to hit the full start capability within the second half.

The shipment level really depends at what point in the second half we do the wafer starts. You'll typically be looking at somewhere of a three to four-month cycle between the starts and the shipment, given whatever the size of the POs are. We certainly would foresee seeing a portion of this increased capacity coming into revenue within the second half of 2026, but take into account that the first ramp that we're doing has not been realized yet either. The previous $350 million investment is right now in its first stages of ramping. 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 from 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'll be your major driver here. How do we think about this going forward here? I want to get a sense of also when additional depreciation builds in here to think about that going forward. Thank you. Yeah.

I think currently the gross profit in Q3 was 24%, $93 million over $396. That is the actual number. It should be better. As you see, you know our long-term financial model, which has higher percentages. Usually, we speak about incremental margin of 50%. Of course, because of the SiPh, it will be higher nicely, and it will be offset by two elements. One is the Newport Beach lease amount that we said we will pay, a total of $6 million. The second is what you mentioned here correctly, the depreciation from the additional CapEx. The total additional CapEx is $600 million over 15 years. It is about $10 million a quarter, but some of that already started. It is a gradual ramp towards the $10 million. Okay. Perfect. I'll jump out of line, guys. Thank you.

Thank you, Richard. Thank you. Now we're going to take our next question. It comes to the line of Malti Hosseini from SIG. Your line is open. Please ask your question. Yes. Thanks for taking my question. A couple of follow-ups. I apologize. I joined a colleague. 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, 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. Had stated that really a very nice immediate upside was a pretty advanced platform that shipping at 300 mm receives SiPh in the fourth quarter.

We will go into several formulations beyond what we are doing in the fourth quarter in 2026. Yes, the receive is incremental serve market that right now most, well, everything we are doing other than this first 300 millimeter activities is for transmit. Very good question. Thank you. Thank you. Is there any way we could kind of think about how this SiPh capacity increase by 3X would be split into increased content versus units of transceiver shipped to the end market? I am not really sure exactly what you mean by increased content, but it is units being used in transceivers. At the 1.6, I am sorry. Go ahead. Right, 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 three times or 3X? Right now, the increase of 3X is including very little receive.

It's most all transmit. Would you need to increase capacity again as your customers migrate to receive side with SiPh? Yes. 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. Yes, receive really comes into very strong capabilities with DMUX, and that's a big area that we're focused on. Okay. Thank you. Thanks for the detail. Just 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. We're making progresses there. It's not that there's a lot of CPO being used right now. It's not. 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 very, very advanced modulation that would possibly be required within a PIC structure for whatever CPO would be used. Okay. 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. Yeah. Okay. Thanks for the detail and congrats. Thank you. Thank you.

Now we're going to take our next question. Just give us a moment. The question comes to the line of Lisa Thompson from ZACKS Investment Research. Your line is open. Please ask your question. Yes. Hi. 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? 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. No, I don't think a new technology. From our standpoint, the thing that's really required is the modulation as mentioned at 400G.

As stated in the script, we're working on three different pathways depending on customers' needs and desires to do the 400G modulator. From the pure modulation standpoint, I think we're addressing it very strongly with very good progress. 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. I don't think that 3.2T will be held up, no. Okay. Let me just clarify. Is the revenues from SiPh totally gated by capacity? I mean, is the demand there if you can build it? Yes. Okay. One small question. When are you going to start reporting Agate utilization? Is that way far off? It needn't be. We could start reporting it anytime. We just haven't. We're in the midst of the first ramp there. We could start reporting it.

There's no reason that we wouldn't. Okay. Great. That's it. That's all my questions. Thank you so much. Thank you. Thank you. Now we're going to take our last question for today. It comes to the line of Richard Shannon from Craig Hallum Capital Group. Your line is open. Please ask your question. Great. Thanks for letting 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 300mm? 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. 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 your big growth driver here. Is this something where you can find more partnerships like you have with the two partners you've already announced in the past, or do you see Greenfield, or how do you intend to address that? Thank you. 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 a partnership 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. 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. All right. I look forward to that call then. That's all for me, guys. Thank you. Thank you. Thank you. That does conclude our Q&A session.

I would now like to turn the call to Mr. Russell Ellwanger for any closing remarks. 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 SiPh/SiGe growth as that comes online, and to update you about the other progresses and activities. Again, very good question. Question about how this CapEx investment impacts the financial model. We already mentioned about it bringing in the timeline of reaching certain revenue levels, and it's accelerating the timeline due to the SiPh, it was mentioned, accretive margins, doing it at a somewhat different financial model. We're very excited to update on all of these things.

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 SiPh as far as CapEx, the really nice thing with the SiPh 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. 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.

As Oren had stated, knowing that we are doing a very big expansion, knowing that that expansion is spoken to by customers requesting the capacities and seeing the quick turn with this market on an ROI, you can see then how the timing of revenue is really greatly accelerated. We will be giving much color on that as we give the end-of-year and the forward-looking statements when we release Q4. Again, very much looking forward to going over that with you. An extremely exciting time for the company, extremely exciting, I think, for our customers and for us in the midst of customer partnerships with people that trust us and that look for us for their solution and for growing their own businesses.

Very excited to host our 2025 Technical Global Symposium in Santa Clara next week, be November 18th, open for all customers. Very happy that you would be coming and listening to us. As stated, Dr. Charlie Kowal from Broadcom will be giving the customer-invited talk there. Should be extremely interesting. I've heard him speak at times before, and a great speaker with a tremendous amount of knowledge and capability. Dr. Racanelli will be giving an in-depth overview. It sounds like contradictory, but an in-depth overview of all our technologies. I'll give the introductory talk, really talking about the culture of Tower, where we're going, and what is the basis of what I believe to be one-of-a-kind customer partnerships. Now, in addition to this technical symposium, on December 10th, we'll be participating at the 23rd Barclays Annual Global Technology Conference in San Francisco.

On January 13th and 14th, at the 28th Annual Needham Growth Conference in New York. Of course, any of you as investors or analysts that wish to have additional calls with the company, please contact Noit, and very happy to accommodate those according to your needs and desires. With that, I'll end the call. Again, thank you. A very exciting time. This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.

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