Good morning, good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Tower Semiconductor Financial Results for the Third Quarter of 2024 Conference Call. [Operator Instructions]. I must advise you that this conference is being recorded today. Joining us today are Mr. Russell Ellwanger, CEO; and Mr. Oren Shirazi, CFO. I would now like to turn the conference over to Ms. Noit Levy, Senior Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to Tower financial results conference call for the third quarter of 2024. Before we begin, I would like to remind you that some statements made during this call may be forward-looking and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected. These uncertainties and risk factors are fully disclosed in our Forms 20-F and 6-K filed with the Securities and Exchange Commission as well as filings with the Israeli Securities Authority. They are also available on our website. Tower assumes no obligation to update any such forward-looking statements. Please note that the third quarter of 2024 financial results have been prepared in accordance with U.S. GAAP. The financial tables and data in today's earnings release and in these earnings call also include certain adjusted financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as established with the Securities and Exchange Commission. The financial tables include a full explanation of these measures and the reconciliation of these non-GAAP measures to the GAAP financial measures. We have a supporting slide deck that complements today's conference call. This presentation is accessible on our company's website and is also integrated into today's webcast for your convenience. Now I'd like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.

Thank you, Noit. And welcome, everybody. Thank you for joining our third quarter 2024 earnings conference call, a quarter in which we delivered a strong financial performance. During this quarter, our high-speed data center offerings reached a record revenue. We've seen an increase in our customers' short-term and midterm demand for this offering that should result in an incremental dollar growth unprecedented as compared to any other product offering in our history, mainly driven by our unique offerings fulfilling AI requirements. Revenue for the third quarter reached $371 million, a 6% quarter-over-quarter and 3.5% year-over-year growth with a net profit of approximately $55 million representing net margin of about 15%. At years begin, we stated a target of sequential quarterly growth, which we have achieved through the third quarter. We're pleased to guide the fourth quarter to continue this trend with a mid-range guidance of $387 million and a range of plus/minus 5%. Fitch midpoint represents about 10% Q4 versus Q4 year-over-year growth and 18% within the year growth. We continue to experience very strong growth in our RF infrastructure business, representing approximately 18% of our corporate revenues in the third quarter and close to doubling in Q3 '24 over Q3 '23 revenue, primarily driven by the increase in optical transceiver demand used in high-speed data communication for AI and other data center applications. We serve this market with both silicon germanium for electrical amplifiers, such as TIA and drivers and with Sipo fretegrated optical components, such as modulators and photodiodes. Silicon photonics continues to see rapid adoption at the higher data rates. Today, we are shipping 800 keep products in high volume, resulting in a 2024 expected revenue of approximately $100 million for silicon photonics. This being a new growth market where Tower will have over 3x revenue growth,…

Thank you, Russell. Hello, everyone. Earlier today, we released our quarterly financial results and balance sheet. For the third quarter of 2024, we reported revenue of $371 million, gross profit of $93 million, operating profit of $56 million and net profit of $55 million, reflecting 15% net margin. Revenue for the third quarter of 2024 were $371 million compared to $351 million in the second quarter of 2024. I'm pleased to report that we achieved our stated 2024 target of quarter-over-quarter revenue growth considering our reported revenue for the past quarter and today's fourth quarter midrange revenue guidance of $387 million. Gross profit for the third quarter of 2024 was $93 million compared to $87 million in the prior quarter. Operating profit was $56 million compared to $55 million in the prior quarter, which included $6 million restructuring income in relation to Japan operations reorganization. Net profit was $55 million, reflecting 15% net margin or $0.49 basic and diluted earnings per share compared to a net profit of $53 million, reflecting $0.48 basic and diluted earnings per share in the second quarter of 2024, which included $2.6 million of net income from our Japan operations reorganization. Moving to balance sheet and future CapEx and cash plan. As of the end of September 2024, our balance sheet assets totaled $3.1 billion as compared to $2.9 billion at the end of 2023, primarily comprised of $1.3 billion of fixed assets net of depreciation, predominantly comprised of fab equipment and $1.7 billion of current assets. Current asset ratio, reflecting the multiple by which current assets are larger than short-term liabilities is very strong at about and shareholders' equity reached a record of $2.6 billion at the end of September 2024. Our strong financial position enables us to plan the following investments in strategic…

[Operator Instructions]. The questions come from the line of Mehdi Hosseini from Susquehanna International Group. Please ask your question.

Thanks for taking my question. Two follow-ups here. I want to go to Slide number 6 and better understand revenue and gross profit opportunities, especially with 400 gig and plus. Should we assume that because of the ASP premium, the revenue mix is much higher than the wafer mix? And I have a follow-up.

I'm sorry, I didn't quite understand the question. The what mix is higher than the what next?

On the Slide number 6, you have the wafer mix between 400 gig -- less than 400 gig and more than 400 gig. I'm under assumption that for applications above 400, wafer ASP is higher. And therefore, the same slide but presented with the revenue mix would have a significantly higher mix of higher than 400 gig? Is that a fair assumption?

It's a fair assumption, but I'm not sure that you're seeing the slide properly. This is only for active copper cable. The slide is not the overall silicon germanium mix. So certainly, the SIG platforms itself that we are using for 800G or a more advanced platform higher FTF MAX than we would be doing at a 400 or 100G. For cables, it also ties to an extent, but most of the cables that we're selling are already going for above 400G or as I stated in the script, mainly for 800G. So yes, the case that we're selling are had a very good ASP, but it's because of the higher-end platform. But most of what we're doing is for advanced speed.

Okay. All right. And then just looking at the overall silicon photonics market. In the past, you have highlighted $80 million revenue opportunity in 24 and doubling to $160 million in it seems like you are tracking above those targets. Can you give us an update here?

I don't mean to tug and shape, but I think I did. Yes, the revenue is expected to hit about $100 million this year. So certainly -- sorry, as I stated at the beginning, short term, midterm, we're seeing ever-increasing customer demand and for the midterm, ever-increasing customer forecast. So, we'll be leaving the year providing we go according to forecast in our ship plan with about 150 million silicon photonics run rate already leaving 2024. And without giving anything about the 2025 guidance or targets, 1 could expect that if I had -- I think I said more than doubling, but that the -- from 80 to above 160%, if already Q4 is at a $150 million run rate, then I think it's very safe to say that we're tracking above the forecast we have given a quarter ago.

Great. Thank you.

Very good question, though. Thank you.

The questions come from the line of Cody Acree from the Benchmark Company. Please ask your question.

Thanks for taking my question and congrats guys on the progress. Extremely impressive guidance. Glad to see it. Maybe, Oren, can we just get one clarification. You said the $350 million would start when in installment payments and did say '26 or '28.

No, end of 2016. It will be spread. You may assume pretty linearly between now and the end of 2026.

Great. You just tailed off a little bit when you were making that comment. Can you maybe talk about the level of revenue that, that $350 million is expected to support if you just add incrementally to your slide, your $2.66 billion, what is the $350 million represent?

No, that's included in the model. Like I said in my closing remarks, this is within the model and towards achieving the model, we needed to do that investment. By the way, also the CapEx is included in that model. So, there is no additional depreciation because of that. These are the steps that we needed to do in order to achieve this long-term 2.66 in the numbers.

I think on the big point is that the model obviously was reliant upon certain technologies that customers would be needing and wanting that were aligned to road map activities that we have with them and the fact that the investment steps are going and the important part is to say that it's all was foreseen in the model, but it was aligned to long-term road map partnership and that -- and going forward on it shows that what we had expected to happen is truly indeed occurring.

Okay. Great. So just more detail then to the 2.66. Maybe if you can talk about the types of agreements that you have with your customers for your SOI capacity, obviously, that's getting ready to ramp and you've got a significant amount of capacity out there to fill. What kind of customer agreements or if not contracts, what kind of assurances do you have that they're going to be there for you to support that capacity?

Within the area of the RF SOI, at present, I don't think there's a single take-or-pay agreement. There are very, very strong relationships and track records that we see customers having performed to. Is there a take-or-pay involved? No. But I think in many areas, take-or-pays are not a good thing to have. in bad times, trying to hold somebody to buy things that they don't need is not good. But our assurance is really off of seeing how -- I mean you cover many people within the space, the specific front-end module market at this moment is not overly strong. But the fact that we're seeing very big growth believe in Q3 over Q3, we had very good double-digit 300-millimeter RF SOI for advanced platforms. Probably if we look at the fourth quarter forecast, versus the fourth quarter a year ago for the 300-millimeter platforms, it will be well above a 50% year-over-year growth. So, the point being that customers that we're working with themselves are gaining market share in a market that doesn't have the type of growth that we're seeing. So as long as we're tied with people on multi-generation road map and serve them well, we're quite convinced that they stay with us. In the short to midterm, very difficult to qualify someone else in form fit and function for a front-end module. In the long term, the assurance is simply if we perform well and they perform well in the short to midterm, then we stay together in the long term. But the biggest thing is having PDKs that really match the output performance. So, customers are more or less guaranteed first-time success. And to work very closely to go through any issues real time during the initial design protocycle so that they come to market quick and that we both benefit from that. Hopefully, that answers the question, Cody. But if you're asking if we have long-term take-or-pay agreements that we do not.

Okay. That's very helpful. And then lastly, we've been hearing some grumblings in the market regarding the potential uptake for active copper cables with some changes that are speculated in their NVL 36x2 platform at NVIDIA. Are you seeing any volatility in your wafer activity? Obviously, your you're seeing a lot of strength given what you've been saying today, but just any color might help.

Very perceptive of you and we have some wafers in line that indeed have been put on hold at a certain level to offer a mass change.

What does that entail Russell as far as your volume output?

I think it's not going to make much difference at all. It's just a question of keeping wafers at a certain inventory point waiting for a new mask.

So, changes at the mass level would change how the copper cables are going to be deployed? Is that the way to think about it?

We'll change the output parameters.

Any other color there, Russell?

No, I think that's Pretty good color, actually.

The questions come from the line of Richard Shannon from Craig-Hallum Capital. Please ask your question.

Thanks, Russell for taking my question. Great results. Great to see the infrastructure doing so well here. I guess my first question is on the silicon germanium side here, talking about 1.60. I guess wondering if that's going to be a material contributor noticeable contributor revenues by the end of next year. Is that timing -- is that the timing that you expect to be material? Or is it still growing from a small base at that point, do you think?

I honestly think it will be material. If you look at analyst reports for 2024 from 2 years ago, they all really had 100G being 80% of the market where probably 800G is 85%, 90% of the market for this year. So, I think the fact that we have good working samples, of course, the end data center maker, the hyperscaler has to be willing to implement. But I do think the road map on speed is very, very fast now. So yes, I believe it will be a material amount of revenue in the second half of next year and maybe starting in the second quarter.

Okay. Perfect. That's very helpful, Russell. Maybe a question for Oren on gross margins here. Just looking at the fall-through quarter-on-quarter. I know it's probably not great to look at it just on that short-term basis here. But last quarter, you saw a very nice fall-through margin. This quarter was a bit less here, 30 -- I calculated about 31% or so. Last quarter, you said the benefit was coming from silicon photonics yet. It seems like silicon photonics is doing very well. So, I can't resolve those two that seem to contradict each other. Can you help us understand why the big difference here?

Yes. I think Russell related to that in his remarks, he mentioned that the CIS, the Masensor was not like we expected, and the CIS, as you know, is also high margin like the SIFO. So, the increase in SIFO so which is very nice. Impact on margin in Q3 was somehow offset by [indiscernible].

I didn't mean to interrupt you, Oren.

No, no.

Okay. Russell, maybe looking forward here, trying to help people think about their growth expectations kind of linearity through next year. I know you probably don't get anything quantitative, but just kind of a framework to think about here. Generally, your first quarter is seasonally down. Wondering if you expect normal seasonality here? And then how do we think about growth going into next year. I mean the RF infrastructure looks utterly fantastic power is doing pretty well, and it sounds like your sensor and image businesses is poised to inflect here and I guess we can all project what RF-SOI can do -- or excuse me, in RF mobile, but it seems like a pretty good growth year here. How would you help us think about these dynamics as we put our models together?

So, I certainly believe that the infrastructure markets served by the SIG and the SIFO will grow and grow very strong. Oren mentioned that the SIFO realizes very high margins. It actually comes in substantially higher than the imaging, which is also extremely high margin. So, I think as far as the contributions of the SIFO growth, it will be quite substantial and 5G will continue to grow throughout the year as well from everything that we see in customers are forecasting. On the imaging, we had mentioned earlier that Q1 was a low for us. Q2 was a substantial increase over Q1, and we stated at the Q2 level, but we had expected a very good growth forecasted by our customers, particularly for machine vision in the third and fourth quarter, which did not happen. I'm not going to give a target or a guidance in the third quarter for 2025. We'll certainly be giving good color on that when we release the fourth quarter. But that being said, for our plans right now, we're not putting into any of our plans. The believed forecasted customer demand increases for the imaging, but our plans would have imaging staying at the same level as they were as they are now as we hit in Q2. And within our own plans, if imaging comes up at 25% or 50% increase, that would be fantastic, but it's not what we're counting on. On the RF-SOI, the market itself has stated is not overly strong. Our customers are gaining market share. We would expect that there will be growth in RF-SOI. There will certainly be growth in 300-millimeter versus 300-millimeter. 200-millimeter that we're doing. I'm not sure that, that will be growing. I don't know how much the overall market will grow next…

That is helpful for us and we understand it's early, but your best perspective is always helpful. Thanks so that. My final question, I'll jump on the line here is just looking at the balance sheet and noting there's a very strong cash position and obviously, you've been growing cash and expect to by all measures here going forward here. So, I'm wondering what you're thinking about for cash usage going forward here? And I guess maybe I'll also turn this to more of a strategic thought process with your company, do you see any potential for M&A in any way, either operations or technology or anything to augment certain areas that you have silicon photonics power, et cetera, to realize that.

I'll start with the second part of your question, then Oren could talk to the first because I think he ended his portion talking about a lot of cash needs in the company to fulfill this circa $2.7 billion plan. But as far as M&A, we're always truly actively engaged in betting multiple M&As. Now there are a lot of speculations about us going into a foreign country and building a big factory, et cetera, et cetera. We're engaged all the time at looking at opportunities, some opportunities appear at first slide to be extremely positive. But always -- I think there's an honest risk/reward look that has to be done. And as soon as we see things that make sense and are truly accretive to the company, meaning very few capacity acquisitions that you would do. Certainly, no greenfield builds that a person would do, however, cash accretive for the first year, and it takes multiple years to get to net profit positive within any greenfield. So, the conditions of doing one of a greenfield activity, which could make sense in different geographies, has to have certain conditions with either the government or with certain customers or with a partner that would not have our shareholders suffer from the cash loss of the first 7 years, 8 years. And that takes a lot of consideration and activities. That's why for such capacity -- large capacity increases, it's always smarter to take over a going concern than it is to do a greenfield on a pure financial basis. As far as looking at technology acquisitions, again, we're very engaged in those and to say what we're engaged in right now maybe set false expectations and to release anything, the 4/1 is required to release, which means before it becomes material, it then can come off and look like one was ineffective at closing on a deal, which is not the case. It's very good to always be open and look at deals. And I would say there's rarely a time when there aren't at least 4 to 8 activities that we're pursuing and engaged in. But before closing them, they really have to be something that is accretive to shareholders and is accretive to our road map and hence to our customers or would contain customers that our other products can help grow on top of what you're buying. But that's a long answer, and I apologize that it's so long. It's just -- it's not an easy digital yes or no. It's a lot of qualifications in it. But we are actively looking. We have been actively looking. We were very close to maybe doing something within the past month. that ultimately, we could not come to agreements that would be viable for shareholders and hence, for the company. And I think that no matter how excited one is about something, you must always be grounded in the numbers. And if something doesn't pencil, it doesn't pencil.

I appreciate all that detail, Russell as always. Congratulations on the great results. I will jump on the line.

The questions come from the line of Nicola Doyle from Needham. Please ask your question.

Thanks for taking my questions. Also, a question on ACC. So, you're seeing the short-term and midterm strength in your silicon germanium business enough to invest significantly for new capacity and some of that not all is related to ACCs. And I think the answer you gave to Cody earlier was related to this rack to rack a horizontal opportunity. But I'm assuming the strong demand and the CapEx decisions can go beyond would mean that this demand would go beyond one application at one customer. So, we've heard applications using Nick to tour or a vertical use case and also a newer inner rack use case at higher speeds. So, can you give any color on what the other applications could be? Thanks.

To begin with, the bulk of our silicon germanium is not for ACC, right? It's for the TIAs and drivers. So that's the bulk. ACC is incremental revenue. Now the lead customers that we have for the optical transceivers itself are also those that are doing the active copper cables. Within that incremental revenue that they have demand for the ACC I cannot exactly say what application they're going after within Rack, within the pizza box itself, rack-to-rack many cases rack-to-rack active copper cable is not sufficient. But I don't think I'm in a position to give real good color as to what our lead customers that are using SiGe at very high volumes for the transceivers and are also now buying SiGe for the ACC, what is their entire gamut of applications that they're serving with the ACC, I couldn't really state that with tremendous granularity.

Okay. Still helpful. And then the next one, just a basic question on utilization. Fab 3 is at 65%, I believe, you mentioned. And that is, I guess, full SiGe and SiPho capacity with a 20% target increase. So just a little explanation on 20 points. just an explanation on how that is going to happen. I guess you're taking out certain capacity and refilling it with this Big G and SiPho demand, and that's contemplated in the $350 million, and that's how you'll increase this utilization?

A very good question. There's bottlenecks that we have. There are other mixes that were done in that fact previously. There's bottleneck specific from having moved from silicon germanium to doing a certain amount of silicon photonics. And by adding and qualifying certain processing chambers, you're relieving the bottlenecks, enabled them to move up to use the full photo capacity. The Fab, we always present utilization against Max photo capacity of the factory. Processing tools can gate for a certain flow of the photo capacity what you have in any fab is processing tools that are unique to certain flows that are capped at whatever the volume is, plus some certain percent. Otherwise, you have tools at nertutilized and using fab space ineffectively. In this case, as we've moved to having such a demand for the SiGe and the SiPho. We're doing very little in that factory other than SiGe and SiPho to maximize that output, but we've come into bottlenecks on certain steps, which you could maybe say certain niche steps, et cetera. or maybe certain deposition steps. So, we've added chambers or adding chambers or repurposing some chambers in order to be specific to the SiGe and SiPho. And hence, relieving the bottlenecks to get closer to the full photo capacity, which, over time, will get to the full float of capacity, which in our model is an 85% operation. So, 85% of the full photo allows a fab to still be moving at good cycle times, and that's what our target is. We also are using some capabilities in other factories, and that's part of the $350 million to enable further usage of any given factory. We have the ability to be transferring to start doing a deposition early on in the line in one factory. And if that deposition is a deposition that's constrained elsewhere, to free up the constraint in the other factory by doing the early deposition in 1. So that's part of the $350 million as well is relieving bottlenecks through optimizing the fleet.

The questions come from the line of Lisa Thompson from Zacks Small-Cap Research. Please ask your question.

Welcome you back to revenue growth.

Thank you.

I have one financial question, Oren. This year, we were supposedly thinking that your tax rate was going to be 15% -- 14% for the year. But unless you pay a really big chunk in Q4 that's not going to happen. What do we think about Q4 taxes? And also, what you're thinking about next year's tax rate given all your varied activity in different countries.

Yes. No, there is no any expectation to a big chunk of payment for tax. I mean our tax model First, our tax regime is that the parent company in Israel, that's a 7.5% tax because we are in a what's called in Israel a preferred zone. Because of the location of the factory. So, this is our preferred tax rate of only 7.5%. In U.S., it's 21%; in Japan, it's 30%. In Italy, it's 24%, but I wouldn't expect because of those headwinds that Russell spoke about in previous calls, headwinds that we will start to have when we will start to operate Agrate. So, we expect not to have profits in Agrate in the coming quarter for sure and in the coming year also. So, we will not pay those 24%. And so, we are left with the 7.5% in the parent company. 21 in U.S. and 30 in Japan. As you can see in our financials, we're very efficient, I believe, modestly that our average tax rate is usually 10% and between 8 to 14 depends on the quarter. It depends from which region is the income. So, we manage it and succeed to have it at around 10% usually. For this year, there was a onetime in Q1 that we had a tax benefit from a settlement that we reached with respect to one audit that we had, which was very successful results. So, we had a onetime benefit in Q1 '24, which was a onetime Q2 and Q3 tax rate are already, as you see, reasonable. For example, this quarter was about 12%. The previous quarter was about 10%. So that's exactly what I said. So, bottom line, if you just exclude Q1, which has a onetime benefit, we are at the 10% to 12%, and I think it's good to model that 10%, 12%, 14% for the coming year. Very reasonable.

This concludes our Q&A session. I will now turn the conference back to Mr. Russel Ellwanger for his closing remarks.

Thank you, and thank, everyone, for participating. I thank all of the analysts for really a very good group of questions. To conclude today's call, 2024 has been in promises to end as a strong performance year for the company, both in our financials and in extreme strategic customer activities, securing the future. We are confident to continue to execute on the exciting growth opportunities before us. Our unique capabilities in silicon photonics and silicon germanium paired with deep first year customer collaboration, enable us to maintain leadership as a trusted foundry partner. As the demand for higher data speeds intensifies, our innovations and investments are setting a strong foundation for future expansion, especially in advanced RF and power management segments. Our strong balance sheet puts us in a position to act quickly on a variety of accretive investments be it capacity or capability CapEx or partnerships. We're excited about our future and remain committed to driving exceptional value for our stakeholders. Moving into the holiday season. We wish everyone peace, happiness in security. We thank our employees worldwide for their continual capability-based and passioned efforts and our customers worldwide for their faith in us in placing their success in a partnership with us. Thank you all very much. On January 14 and 15, 2025, we'll will participate at the 27th Annual Needham Growth Conference in New York. It will be our pleasure to meet you at this conference. Again, thank you for your support and for joining us today.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Thank you.