Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Tower Semiconductor Second Quarter 2025 Earnings Conference Call. [Operator Instructions] I must advise 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, and welcome to Tower Second Quarter 2025 Financial Results Conference Call. Before we begin, please note that certain statements made today may be forward-looking and 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 Israel Securities Authority, all available on our website. Tower assumes no obligation to update forward-looking statements. Our second 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. Please note that we have a supporting slide deck that 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?

Thank you, Noit. Thank you all for joining us today for our second quarter 2025 earnings call. We delivered strong results in the second quarter with revenues of $372 million and result in net profit of $46.6 million. We guide our third quarter revenues to be $395 million, plus/minus 5% and additionally, target a $40 million-plus revenue increase for the fourth quarter over the third quarter. Q3 guidance and Q4 expectations validate our onset 2025 target of sequential quarter-over-quarter growth throughout the year with acceleration in the second half. We announced at years begin, a repurposing of multiple factories, predominantly towards higher capacity for RF infrastructure, namely Silicon Germanium and Silicon Photonics. This is well underway with Q3 and Q4 expected growth being the first fruits of the execution of this strategy. Demand not only remains very strong but is consistently growing as is our increase in both silicon germanium and SiPho capacity and associated customer qualifications. We continue to invest in capacity and also R&D advanced capability CapEx throughout 2025, with further capacity and capability growth planned for 2026 aligned to our customers' forecasted demand, confident in maintaining our #1 market share position in this growing and significant optical transceiver market. Let's review our second quarter 2025 revenue breakdown, along with some context that highlights key trends, momentum shaping our performance for the full year. Kindly refer to Slide #4 for a detailed breakdown of our quarterly revenue figures. Most notable is growth in our RF infrastructure business, attributed to data center and AI expansions served by our Silicon Photonics and Silicon Germanium technologies Our quarterly revenue figures. Most notable is growth in our RF infrastructure business, attributed to data center and AI expansions served by our Silicon Photonics and Silicon Germanium technologies predominantly for optical fiber communication. In…

Hello, everyone. Earlier today, we released our financial results for the second quarter of 2025. For the second quarter of 2025, we reported revenue of $372 million representing $21 million or 6% year-over-year revenue increase compared to the same quarter in 2024 and a $14 million or 4% quarter-over-quarter revenue increase compared to the prior quarter. Gross profit and operating profit for the second quarter of 2025 were $80 million and $40 million, respectively, each higher than the prior quarter by $7 million. Net profit for the second quarter of 2025 was $47 million, also $7 million higher quarter-over-quarter, representing $0.42 basic and $0.41 diluted earnings per share. Financing and other income net in Q2 '25 was $14.4 million compared to $10.6 million in the prior quarter. This $3.8 million increase was mainly attributable to gain recorded as a result of zero-cost cylinder transaction we executed to hedge future foreign currency risk. In this respect, I would now like to describe our currency hedging activities. In relation to the Japanese yen, since majority of TPSCo's revenue is denominated in yen and the vast majority of EPS cost 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 U.S. dollar may fluctuate, the impact on our margins is limited. In relation to the Israeli shekel and euro currencies, while we have no revenues in such currencies since a portion of our cost in Israel is denominated in the Israeli currency, and a portion of our cost in Agrate fab in Italy is denominated in euro. We also hedge a large portion of such currencies risk by engaging zero-cost cylinder…

[Operator Instructions] And the question comes from the line of Cody Acree from Benchmark Company.

Congrats on a great quarter and a great year. It looks like shaping up so far. Maybe if I could just start with, could you give a little more detail on what segments you expect to contribute and maybe rank order them in -- for your sequential growth through the second half of the year.

So first and foremost is infrastructure as far as quarter-over-quarter deltas and absolute numbers, so the Silicon Germanium and the Silicon Photonics. We had stated at the year's onset that on SiPho, we had, had what, circa $105 million revenue in 2024, and we expect did a doubling of that in 2025. That's definitely within the second half targets that were given, maybe higher than a doubling. So that's a very important segment for us. And maybe, I don't know, in some summary comments, I might give a -- some more color on what the capacity increases that we're doing there, what that could result in increases against what we're targeting in the fourth quarter of this year. But that's the biggest. Our power management, we're expecting still strong contributions. I mentioned that in the imaging, there was an over 20% increase in the run rate of 2024 and the first 2 quarters of 2025 in the second half, at least from what we target right now from our customer forecast and that mainly due to increase in machine vision. So those are the areas of growth. But very important on a rebound is the weakness that we had cited previously in RFSOI for front-end module for mobile. That has seen a nice increase from Q1 to Q2, and we're guiding an even stronger increase in the third quarter. So the biggest, again, being infrastructure and RFSOI for mobile, power management continuing strong and CIS adding to it as well.

It sounds like a good strength across the board then, Russell. Congrats. Would you then say -- would you consider yourself now fully booked through the end of the year? And if so, do you have a -- any available capacity to support any near-term turns business that could provide any yet upside to your estimate?

We had mentioned a 60% utilization in Fab 2 and in San Antonio Fab 9. We certainly have room there for immediate upsides. But the biggest portion of both of those fabs is focused on utilizing the additional SiGe and Sipho capacity that we've built there, which is to an extent in our hands, to an extent, rests on completion of customer qualifications, but that's within the numbers of the expectations that we have. So we see those utilizations increasing. But as we're doing that, there is room to handle immediate upsides. One of the really, I think, unique features of Tower is that we have a very strong worldwide manufacturing footprint where we're in Japan, we're in multiple sites in the U.S., we're in Israel, and we're in Italy. And by definition, we cross-qualify all of our flows. So as there continues to be questions geopolitically and people get concerned a little bit here or there about tariffs and impacts of tariffs, we have the ability to move customer demands from one factory to another. One of the strong reasons of moving Silicon Photonics and SiPho, both and especially SiPho being very, very high-margin value-add products is, firstly, to have added capacity, but secondly, to be able to serve customers depending on their needs of where to ship products from. So I think we've seen some immediate-term business, especially in the Tonami Fab 5 in Japan, in the power, and we're open to get more. But fundamentally, where we're focused at this point is meeting a very strong, consistently growing demand for the infrastructure, the SiPho and the SiGe. Hopefully, that answered your question, Cody.

It does, Russell. Congratulations on progress.

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

Congratulations on some of these numbers again. Well, let's see, I think I'm going to ask one on Silicon Photonics. You made an interesting comment about in the past supporting transmit functions and now supporting -- prototyping, I think you said for some stuff on the receive side. So I'd love a little love to understand a little bit more about that, but also maybe just kind of look at the bigger picture here about what you're expecting in terms of content, both the maximum amount as well as kind of expected growth in content over the next couple of years in Silicon Photonics, please?

So for the specific receive function that we're doing now, we think -- and it's for a specific application. I don't want to get into the details here because some of it really -- it's not just what we're doing with the customer. But sometimes speaking too much can give other people hints as to what you're doing and why. But it's a specific application of receive function that we've been able to very, very innovatively address with SiPho in an extremely high-performance, cost-effective way. We think that it would add about 20% to our served market plus/minus for this specific application and receive. As far as the demand that we're seeing, in talking about our growth, which we have many times, the fourth quarter, we would expect very high amounts of Silicon Photonic shipments. We're probably seeing from our Q4 expected shipment level in SiPho by customer demand at the end of '26 a doubling of demand, a doubling of what we would have to be supplying in capacity.

Okay. Fair enough. That's one way to look at it. I appreciate those comments. So my follow-on question, Russell, is in the RF mobile space here. I guess the way I'd like to think about this is to what degree are we seeing this improvement both in the second quarter, and I think you're talking about the third quarter at least or potentially second half year here about this improvement here. To what degree is this cyclical like inventory replenishment and/or share gains here? And to what degree does that play into your comment from last quarter about seeing some strong growth in our mobile in both '26 and '27.

I don't see the 20% growth that we had in Q2 over Q1 and the 30% that we're targeting in Q3 over Q2, cyclicality it's hard to speak about cyclicality. But certainly, it's related to inventories having been consumed that had been a function of the very strong 2024. We also have multiple customers that themselves are growing their market share. So that's one way that one can always out do a market trend is by serving customers that they themselves are growing their market share against others that you might not be serving. So the Q3, Q4 numbers that we're looking at, I think that they're just very basic share gains that we have and our customers have. Some of what we would be expecting in the latter half of Q3 and Q4 deals with an existing customer that we've had for a long time that has just recently increased their forecast and their POs. What has driven that? I honestly don't know at the moment. There are POs that have come in just recently.

And the question comes from line of Mehdi Hosseini from Susquehanna Financial Group.

I have two. First one for Russell, I want a better understanding of the big picture, especially when it comes to data center infrastructure. We are migrating from copper to pluggable and at some point, migrating to co-package optic. And what I want to better understand Russell, how do you see your customers evolving? And in that context, how are you actually planning for capacity in a sense that to avoid double -- in a sense to avoid too much capacity come on online because there is also a convergence among our customers. So the transition in technology from copper to pluggable and eventually to co-package and how the mix of customers are evolving and how that impacts your capacity planning? And I have a follow-up.

The first part of your question, I don't really fully understand. I think that pluggables have been the mainstay for multiple years. I don't see it being in any competition with copper. So pluggables have been the mainstay. They are maintaining the mainstay. The major thing for SiPho is the movement from an EML solution that's been the mainstay solution to a SiPho solution. So that's the difference there. I don't really follow the copper statement. But certainly, a lead customer that we have at 1.6T has decided to do everything with SiPho versus EML because of two functions of the SiPho, one being cost, which the ability to not have to do separate indium phosphide modulator laser with a very, very complicated process and very expensive to have the modulator being made in the SiPho chip as well as integration of all the passives. So it has a strong cost benefit but they also noted a very strong performance benefit at 1.6T, and that's because of integrating everything onto the PIC. I would -- and I had said that in the script, we see this 1.6T where there's both a cost and apparently a performance benefit as being a big drive that will converge more into SiPho from EML. Presently, what is the percentage of SiPho versus EML, I couldn't tell you exactly what that is. I know that our demand for SiPho is strong and continues to grow and to grow very strongly. And at the 1.6T, it seems to be even stronger while what it doesn't just seem it is. As we move to 3.2T, stated we are working with lead customers on producing the capabilities there, which requires to do a 400 gigabit per second modulator. It requires different materials, and we're very advanced on that, pursuing 2 different material types. So I see the pluggables staying very strong for a good period of time. There are those in the industry that question if CPO will ever really come into the market. I'm not saying it won't. We have our own strategy for CPO, and I think we're pursuing it fairly well. But CPO, if it comes in, should have come in, probably as not until '29, '30. And everything we do with SiGe and everything we do with SiPho will still be in demand. So I don't see it being something that we discount that.

Great. Actually, as a follow-up to it, I want to understand how integrating the modulator into your process technology is perhaps helping you with incremental revenue per wafer? Is that how we should think about it?

For SiPho, the modulator is always part of the PIC. So we're going from using our capabilities for the photodetector and the modulator where we have strong capabilities in Germanium and Silicon obviously, to being able to provide that as part of the PIC. And that is one of the benefits of silicon photonics itself. That's one of the big drivers of it. Otherwise, you're doing things in indium phosphide outside. And as I stated previously, the process to make the indium phosphide modulator in addition to the laser, it's a very complicated process because it's different layerings for both that are done together. So it's many photosteps, asking steps and growth. Is that answer your question? I'm not sure.

Yes, absolutely. Actually, I want to highlight -- I want to make sure I understand, the indium phosphide alternative that one or two of your competitors are highlighting has a cost disadvantage and your solution is more cost effective, right?

Yes, I believe so. But most of our customers still use an EML solution, right? It's a question of that also turning to SiPho for certain speeds, and it appears that the SiPho adoption is only growing at 1.6T, and I believe will be stronger beyond.

Now we're going to take our last question for today, and it comes from line of Lisa Thompson from Zacks Investment Research.

I'm looking at the numbers, and it really seems like RF mobile has come roaring back. Do you think between RF mobile and our infrastructure, they're both going to come in pretty much the same for the year? Or can mobile even beat that?

Let me take a look. No, infrastructure will be substantially bigger, but the mobile is a good size. Understand for infrastructure, it's two different products that we're serving, that both service it, right? It's the SiGe for drivers and TIAs and in some cases, sold for CDRs and is the SiPho for the PIC. So we're -- it's 2 different products that are both needed. And for the RFSOI, which is -- and we're also doing some just plain RF CMOS for controllers, but the bulk of it is RFSOI. So now the infrastructure is bigger. But the mobile numbers, if we look at Q3, Q4, they're very high run rate, similar to past years.

That's great. If you had to describe why it's come back so much? Is it just specific customers? Or is it the market?

I think a combination of both. As stated, we have customers that they themselves are going market share against their competitors that, in some cases, we do not serve. So that's always a big thing when you're increasing your share of market. And I stated it at the beginning of the year, we had seen, I think not just us, but many people saw a pullback in mobile for the fact that '24 had been a very big growth year in mobile. Nobody wants to short-ship their end customer for the fear of losing SKUs. So they built up more inventory than is needed, not knowing when there would be a glut, so to speak, and that's how you have inventory correction. So at the beginning of the year, certainly sort of inventory correction from everything we're seeing now, it appears that most of that inventory has been eaten up.

Okay. Oren, one question for you. I mean on other income, you keep saying that number is going to fluctuate. But yet, it's steadily increased for the last 1.5 years. Should we expect it to continue to increase?

No, I think we had a good gain here, like I mentioned in my prepared remarks, that caused the majority of the $3.8 million increase, which is good in financing and other income net from the $10.6 million we presented last quarter to $14.4 million this quarter. I think the number we should expect in the future is same like the baseline of the $10.6 million. This was a gain from movement in this quarter, but 1 cannot predict the future. So I would use the same baseline, which includes all the numbers without any exceptional items or onetime, $10.6 million.

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

Let me ask a couple of follow-on questions here. Russell, one for you here. Back on the third quarter call of '23, you set out this framework from a revenue and margin or profitability perspective. I guess I have 2 questions to this. How do you think you're tracking so far to -- almost 2 years into this in terms of the margin profile here both at the gross and EBIT line here? And then maybe I'll try to stretch you here to see if you'll respond in any way here, but how do you think about a time frame for hitting this revenue goal? Any thoughts you would give us?

You're referring to the model of the $2.7 billion?

That's correct.

On a margin perspective, I think we're probably outperforming from everything that we're doing. On a time line to the $2.7 billion. Candidly, we are always looking at somewhere at '28, '29 to be there. And I think that's still what our targets are.

Okay. Great. That's helpful. My follow-up question is probably for Oren here. Oren, I'd love to get a sense of any way you'd quantify this as well a possible [indiscernible] thinking about how we -- how should we should see depreciation grow here as we're adding CapEx here? And then as kind of the correlator of the question here, thinking about free cash flow, Obviously, you're going to be negative here with the strong CapEx investment here. How do we think about next year? Is this going to be positive, nicely positive? Just any way you can characterize that would be great.

Okay. So depreciation, actually, you can see that in the one of the tables that we attached to the press release, there is a line, which is attached to the cash flow called depreciation and amortization, which includes [ RF ] amortization, but the amounts are listed there of about $65 million, $70 million a quarter. We expect those levels to remain pretty much the same, maybe slight increase because, like you mentioned, the incremental CapEx on the one hand, increasing depreciation. On the other hand, there is depreciation that goes out of the books because of investments that were in the past. Your point is valid that CapEx currently is higher than in the past. So depreciation should go up slightly, but it's -- most of that is fixed costs, and I don't believe it should grow more than the $70 million, $75 million third quarter that we present. As far as free cash flow, yes, in the last few quarters, we see the same picture that the cash from operations, which is very good, is similar number to the CapEx, and this is because of the total of $1.15 billion in CapEx that we announced, the $500 million Agrate, the $300 million 11X and $350 million SiPho, SiGe CapEx. So this $115 million, supposed to be -- I referred to that in my prepared remarks, supposed to be still paid in the coming 2, 2.5 years about more than $500 million of that was not paid yet anSo this is -- this will be part of the CapEx in the rest of '25 and surely '26, and some of that in '27. So I would expect the CapEx total level per quarter to remain like now maybe slightly go up. So to be between $100 million to $120 million a quarter, which is like now. However, the cash from operation is supposed to continue its positive trend and improve as we go up on the revenue, which Russell mentioned, the mid-range guidance, which is $395 million and the target for Q4 or even higher. So obviously, cash from operations will be higher when CapEx is supposed to remain in those levels that already reflect the new plans of $1.15 billion.

Now we're going to take our last question for today and comes from Mehdi Hosseini from Susquehanna Financial Group.

Yes, two follow-ups. One on OpEx. Should I assume that OpEx in '25 would trend flat to up on a year-over-year basis. Is that a fair assumption? And I have a follow-up.

Yes. Yes. That's -- we consider the fixed cost and OpEx should remain flat at the current run rate of about $40 million a quarter.

Okay. And then going back to the previous question regarding cash flow. You've actually done a good job of funding the CapEx and actually maintaining a stable net cash per share. Is there any plans for the cash? Or should I just assume that you would rather be conservative and just accumulate cash beyond funding the CapEx. Any additional thoughts you can share with us?

Yes. Like you mentioned, we -- the destination that we believe for our cash is for CapEx growth, which is why we approved in the last few years, the $1.15 billion CapEx spend for the [ interfab ], for the Agrate fab, and for the SiPho and SiGe total of $1.15 billion. And we believe that's the best returns for the shareholders that we invest in CapEx and see the revenue growing like Russell described, amazing growth this year quarter-over-quarter. And that's the purpose that we plan for our cash.

Dear speakers, there are no further questions for today. I would now like to hand the conference over to Russell Ellwanger for any closing remarks.

Thank you. Really to everyone on the call, thank you for your interest in the company. Thank you for the good questions that were asked. We did deliver a good second quarter. We guide a strong third quarter with a target of an even stronger best ever revenue fourth quarter. I spoke to some length, and there were some questions about increases in our Silicon Germanium and Silicon Photonics capacity. The third quarter and fourth quarter are expected to begin to see the benefits of these activities. But I wanted to kind of frame what can be expected as all of this capacity that's coming online is qualified and shipped. The end-state capacity, which should be realized in the second half of 2026 will be a capacity that is 33% higher in Silicon Germanium and 2.2x larger in Silicon Photonics than the fourth quarter '25 targeted shipments, which total revenue is targeted to exceed $435 million. And very importantly, these increases in capacity track well with our customers' forecasted demand. So it's -- I think, for us, a very strong story. We believe that the markets that we chose to work in were, are and continue to be the right markets. Our models, I think, are strong and the incremental revenue to margin, net profit ratios are good and will continue to grow. So I thank everybody for their interest in the company. It's been extremely exciting. There's multiple activities that we're involved in the next quarters. I wanted to just mention some of them. And in the short term, we would hope to see you at some of these conferences. We're excited to host our 2025 Technical Global Symposium in China this September and in the U.S. in November. TGS, this Global Symposium is our flagship technology event, bringing together customers and ecosystem partners, serving as a critical platform for showcasing our specialty analog platforms from SiPho, SiGe, RF-CMOS to power management and imaging while aligning on future road maps and enabling stronger co-development partnerships. We'll be participating in the following conferences and truly look forward to meeting and engaging with all of you at these events. On August 20, we'll attend the sixth Annual Needham Virtual Semiconductor & SemiCap 1x1 Conference. August 26, will participate in the Jefferies Semi, IT Hardware Comms Technology Conference in Chicago. On August 27, we'll attend the 2025 Evercore ISI Semiconductor, IT Hardware & Networking Conference in Chicago. On September 3, will participate at the Benchmark 2025 Tech, Media and Telecom Conference in New York. And on September 10, we will attend the Jefferies TechTrek 2025 Conference in Israel. Again, very much appreciate your interest in our company. We look forward to providing you with updates on our progress towards achieving our long-term goals in the coming quarters and in the very short term, updating our achievements in Q3 and Q4. Thank you very, very much.

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