Tower Semiconductor Ltd (TSEM) Q3 2026 Earnings Call Transcript

Sending by. Welcome to the Tower Semiconductor 3rd Quarter 2026 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you need to press star 1-1 on your telephone keypad. You will not hear an automated message advised and your hand is raised. To withdraw a question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Noet Levy, Chief People, Communications, and Invest Relations Officer.

Please go ahead. Hello, and thank you for joining us. Welcome to Tower Semiconductor's third quarter of the 2026 Financial Resource Conference. With us today are Mr. Russell Elwanger, Chief Executive Officer, Dr. Marco Rakanelli, President, and Mr. Oren Shirazi, Chief Financial Officer. Before we begin, please note that certain statements made during today's call 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 20F and 6K, as well as filings with the Israeli Securities Authority, all available on our website. Tower assumes no obligation to update forward-looking statements. Our third quarter 2026 results are prepared in In accordance with U.S. GAP, some data presented may include non-GAP financial measures as defined under SEC Regulation G. Reconciliation to GAP figures and full explanations are provided in today's press release and financial table. For your reference, a supporting slide deck is available on our website and integrated into this webcast. With that, I'll turn the call over to our CEO, Mr. Russell Elwanger. Russell?

Thank you, Noe. Hello, everyone. Thank you for joining our call. We have much to discuss. We will speak not only to the strength of our current performance, but very importantly, on what comes next, namely, the great business and financial strength with which we will be opening 2027, the visibility we have into the future demand, the realization of investments to fully capture that demand, And, 2028-2029 further customer commitments, and our significant growth in customer-aligned value creation activities for 2029 and beyond. Indeed, a long-term value creation campaign with boots on the ground providing real-time measurable financial and strategic achievements. During the third quarter, we continue to deliver record results while building upon our technology Energy leadership and expanding capacity, with increasing customer commitment to support a significantly higher level of revenue and earnings in the quarters and years ahead. At the center of this growth are our silicon photonics platforms, where accelerating AI infrastructure demand, expanding customer programs, and long-term capacity commitment continue to increase our scale and strategic position. This momentum is complemented by strong execution across our broader portfolio of differentiated analog semiconductor technologies. We are entering the strongest growth phase in our history. Our third quarter performance demonstrates that the strategic decisions we have made are translating into record revenue, expanding earnings power, and significant visibility into the years ahead. Third quarter revenue was $526 million, as compared to $396 million in the third quarter of 2025, a 33% year-over-year growth, resulting in a net profit of $120 million, or 23% net margin, up from 14% net margin a year ago. Our fourth-quarter 2026 mid-range revenue guidance is $600 million, which achievement would result in a 2026 full-year revenue of $2 billion against a full-year 2025 revenue of $1.57 billion. Achieving a $2.4 billion revenue run rate is most significant, as our demand and start plans do not indicate the typical industry first quarter seasonality. To the contrary, we expect to see continued growth. Hence, the starting point of 2027 is targeted to be higher than the $2.4 billion annual begin run rate and greater than 45% increase. as compared to the first quarter of 2026 revenue starting point. Later in the call, we will share details that underscore the strong quarter over quarter growth we are driving in 2027. Moving into our businesses, please refer to slide 4 as reference for the Q3 revenue breakdown by technology. The third quarter was another quarter of strong operational execution by our teams, Our silicon photonics business is experiencing exceptional growth. To support accelerating customer demand, we are expanding capacity across four manufacturing sites, a business that contributed approximately $240 million of silicon photonics revenue. In Q3-2026 alone, with substantial capacity coming online this quarter, we expect year-end capacity to be approximately double the level that supported the Q3-2026 silicon photonics revenue. This positions us for significant revenue ramp in the first and second quarters of 2027 as the new start rates move through the fab and ship, establishing a new substantially higher, sustainable baseline for the quarters ahead, and thereby also achieving a full ROI within one year for the previously announced $920 million CapEx investments. Additionally, the execution of our released Track 1 300mm expansion is progressing ahead of schedule, with all tools ordered and slotted, with full production starts targeted for Q3 2027. Including the Track 1 300mm expansion, our silicon photonic start capacity is targeted to increase by 3x versus the level that supported the Q3 2026 250 million SIFO, or 240 million, SIFO shipments. Importantly, this capacity is spoken for. Through a combination of signed agreements and contracts in advanced stages of negotiation, we have secured customer demand commitments for both 200mm and 300mm production, and now having extended it to include 2029, at which time our incremental Track 2 plan capacity ramp is well underway, ultimately quadrupling Our 300-millimeter Japan capacity. Of note, all expansion is planned to continue to be self-funded. In addition to serving the rapidly growing market, largely of pluggable, scale-out transceivers, we continue many activities with Tier 1 customers that take advantage of new opportunities, expanding our served market. The most significant of these is the change in form factor towards near package optics, or NPO, that promises to add scale-up opportunities to our clearly established leading position in the scale-out market. In the view of most analysts, NPO scale-out can double the optical transceiver market. To this end, we are prototyping NPO products with more than 10 of our top customers. NPO can more often integrate, transmit, and receive functions in our SIFO die, expanding our silicon SAM versus the traditional pluggable market, where normally only transmit function is built into the SIFO die. NPO can also improve our position in the electrical IC SIGI market as most implementations of NPO will replace the DSP to improve cost, power, and latency with SIGI TIAs and drivers, and at that with greater footprint due to the increased incorporation of equalizer functionality, expanding our SIGI market opportunity. To this end, we have announced this quarter a substantial capacity agreement with Semtech and are seeing further unprecedented growth opportunities for our SIGI business. Longer term, we are building Using the capability to integrate new material into our SIFO platforms to further expand our served available market. In one such example, we announced initial production for new photonics with a new technology where we integrated indium phosphide lasers within our silicon photonics die. This is done through a dyed-a-wafer attached of indium phosphide epi chiplets further processed in our factory to create a final die that incorporates indium phosphide lasers within our silicon As this technology ramps, we gain access to the laser market and additional multiples of increase in serviceable market. This dyed-awayfer technology is now being deployed with other materials, such as thin-film lithium niobate, to provide 400 gigabit per lane, next-generation, differentiated products to our Tier 1 lead customers. Beyond the optical transceiver market, our SIFO platform, combined with heterogeneous integration capability, has emerged as a go-to solution for silicon photonics-based optical circuit switches. First, silicon photonics-based solid-state OCS are emerging as a strong contender against MEMS or other niche solutions because of fast nanosecond-level switching speeds, the CMOS manufacturing scale, and compatibility with the CPO-NPO ecosystem for tighter system integration. Finally, we have been a significant player in coherent SIFO products for Marvell used in Data Center Connect applications, as we have discussed in the past. This technology is now being evaluated for inside data center scale across applications, which could as well significantly expand the sector of the SIFO market where you already have strong position and differentiated technology. Longer term, we are also investing in several We will scale up and scale in wide and slow technologies, which promise high total bandwidth by creating large parallel links at lower speed through the use of micro LEDs and or Vixels. We have several active engagements ongoing with Tier 1 customers with the potential of high volume in a new facet of the optical communication market. As stated earlier, NPO is providing an expanding market for silicon germanium TIA and drivers, resulting in unprecedented customer demand being served now from three 200-millimeter factories and one 300-millimeter factory. In tandem with our capacity expansion, we continue to advance our technology roadmap and are happy to report that our H6 next-generation silicon germanium technology is seeing strong design in momentum, already in production for the most demanding products. The strength of our technology was also reflected recently when Semtech, a strategic silicon-germanium partner of more than two decades, received an innovation award at ECOC26 for its optical interconnect solutions. Our 300-millimeter capacity corridor in Egrate, Italy, delivered its highest RFSOI revenue quarter to date. We also set new records for the number of product tape-outs for Fab10, demonstrating the strength of our long-standing customer relationships and the exceptional execution by our Fab10 team to deliver the technology roadmap, Extending the design wind momentum on our industry-leading 300-millimeter RFSOI platforms. We expect this trajectory to continue over the coming quarters. Demand for Towers' BCD technologies continues to strengthen across both 200-millimeter and 300-millimeter platforms with about 10% year-over-year growth. This growth is driven not only by the rapid expansion of AI and cloud data centers, but also by growing customer success in mobile and automotive applications. This momentum is reflected in increasing customer commitments, with several strategic accounts entering into long-term agreements at higher ASPs, resulting in forecasted 20% higher blended prices for 2027 versus 2026. In CIS and Displays, we have started production of a new high-speed global shutter sensor for high-end video cameras with one of the DSLR MLC industry leaders. Together with our lead customers, we are driving next phase of business growth, building demand toward the significant additional capacity that will come online with the WOZO expansion. We are also working closely with our OLED on silicon display customers to provide capacity for their expected steep ramp in 2027. Looking at utilization, during the third quarter, all of our 200mm fab operated at utilization levels of 85 to 90%. Our 300mm 12-inch fab continues to be fully utilized, well above our 85% utilization model. And, as stated, substantial capacity is being added to all sites in accordance with extreme growing demand. To summarize, we entered the second half of 2026 with strong business momentum, supported by broad customer demand across our differentiated technology platforms, and continued high utilization across our entire manufacturing footprint. Importantly, the strength we see extends beyond the current quarter, well beyond. Customer engagement, design activity, and demand visibility continue to reinforce our confidence and growth opportunities ahead, enabled by the unique significant value which each of our specialized analog technologies provide. Our prospects are very good and even getting better with all of our key business units experiencing increased demand with expected revenue growth throughout 2027. SIFO and Silicon Germanium are experiencing unprecedented growth, having achieved majority share of pluggable scale-out market. We are not only enjoying the substantial market growth of this segment, but by having close partnerships and cooperations with the market leaders, we are enjoying rich developments, increasing our serve market, targeting to continue proliferation of our differentiated technologies into multifaceted applications. The number of advanced NPO engagements is just one of the many indicators of rich As a summary point, our Q426 SIFO annualized run rate is expected to exceed $1.1 billion with significant target further increases in Q127. We will end this year in an extremely exciting position. With that, I'd like to turn the call to our CFO, Mr. Oren Shirazi. Oren, please.

Thank you, Rafael. Hello, everyone. The third quarter marked another significant step-up in TOWER's financial performance with record revenue, record gross profit, and strong operating leverage across the P&L. Revenue increased 36% year-over-year to $526 million, while gross profit increased by 92%. Operating profit increased by 2.5x, and net profit reached $120 million, representing 23% net margin, or 2.2x as compared to the third quarter of 2025. These results demonstrate our accelerating growth in translating into substantial earnings expansion. They also reflect the increasing contribution of our differentiated, higher-value technologies and the strength of our operating model as we scale. Importantly, we are entering this next phase of growth from a position of financial strength, evidenced by our strong balance sheet and cash position. With customer long-term contracts that secure our CAPEX investments will yield quick ROIs by providing increased visibility into our customers' future demand and high-capacity utilization. I will now review the quarterly financial performance, followed by our balance sheet, cash flow, and capital investment plan, and conclude with the financial framework underlying our long-term business model. Looking into the P&L, revenue for the third quarter of 2026 was $526 million, a record in the company's history, representing 14% quarter-over-quarter growth as compared to $460 million in the second quarter of 2026 and $130 million higher year-over-year, or 36% year-over-year growth. Gross profit for the third quarter of 2026 was a record $179 million, an increase of 92% compared to $93 million in the third quarter of 2025. Operating profit for the third quarter of 2026 was $127 million, 2.5 times the operating profit in the third quarter of 2025. Net profit for the third quarter of 2026 was $120 million, reflecting 23% net margin. Net profit is more than double the $54 million in the third quarter of 2025. Earnings per share for the third quarter of 2026 were $1.06 basic and $1.05 diluted as compared to $0.48 basic and $0.47 diluted in the third quarter of 2025. Moving to our balance sheet, prepayments received from CIFO customers mostly towards 2027 capacity reservation, including the $290 million previously announced prepayments received in the first quarter of 2026, are presented in the balance sheet as liabilities under short and long-term Our balance sheet continues to be very strong, evidenced by the following indicators and financial ratios. As of the end of September 2026, our assets totaled $4 billion, primarily comprised of $1.8 billion in net fixed assets, predominantly fab machinery, and $2 billion of current assets. Shareholders' equity reached a record of $3.2 billion, representing 80% of total assets. Our current ratio is strong at about 3.7x, and our increased long-term asset balance mainly reflects the Newport-Feb lease repayment, as well as other repayments. Hedging. I would like now to describe our currency hedging activities regarding Japanese yen, since the majority of TPS cause revenue is denominated in yen. And the vast majority of TPSCO's costs are also in yen, we have a natural hedge over most of our Japanese business and operations. To mitigate part of the remaining yen exposure, we execute zero-cost cylinder transactions to hedge currency fluctuations. Hence, while the yen exchange rate against the dollar may fluctuate, there is a limited impact on our margins. Regarding the Israeli shekel, while we have no revenue in this currency, a portion of our cost in Israel is denominated in shekel, so we also hedge a large portion of that currency risk by entering into zero-cost cylinder transactions to mitigate the exposure. Hence, while the Shekel exchange rate against the dollar may fluctuate, as seen over the past few quarters, during which the Shekel appreciated strongly against the dollar, the impact on our margins is limited. Now, moving to CapEx investment plan. As previously announced, in order to support the increasing CIFO and CIGI demand, we are executing a $920 million investment plan to expand capacity and capability of CIGI and SIFO equipment across our 8-inch FABs in Israel, Newport Beach, and Texas, as well as our 12-inch UZO FAB in Japan. These investments are progressing ahead of schedule in terms of on-schedule tool, technology, process qualification, equipment arrivals, and ramp plans, and are supported by customer contracts and prepayments. Approximately 65% of these $920 million CAPEX investments has been paid to date and is included in our cash flow for investing activities for the reporting period through the third quarter of 2026, while the remaining 35% is expected to be paid during Q426 and H127. As Russell noted earlier, we expect one-year full ROI from this investment. In addition, we are executing on the Track 1 Japan 300-millimeter CAPEX plan by issuing purchase orders for 12-inch SIFO capacity and capability tools that will significantly increase our 12-inch SIFO capacity. These CAPEX payments are scheduled for 2027 and 2028. Business model. As recently announced, the company updated its business model, which now includes the planned investment in R.I. facility, formerly Feb 6, to repurpose it for 12-inch CIFO wafer manufacturing, thereby maximizing the company's 12-inch wafer output in Japan, supported by METI, Japan's Ministry of Economic, Trade and Industry. The updated model is based on forward-looking operational, business, and financial assumptions, including the assumption that all FEBs will operate at 85% utilization, post-full installation and qualification of the $920 million in Cypher and Cyg CapEx investments. We continue to ramp up Cypher and Cygip capacity and capability in our FEBs 2, 3, 7, and 9, and in addition, we are working to repurpose the RI facility and qualify the new equipment tools to be installed there. Assumptions regarding forward-looking wafer selling prices for existing and future products and flow, and forward-looking assumptions regarding cost and completion dates for the successful qualification of tools to be installed, process technologies to be qualified, and customer products to be qualified and ordered from the company. Under this updated financial model, we target $3.6 billion in annual revenue, which is $760 million higher than the February model target, reflecting 27% revenue increase. $1.63 billion annual gross profit, resulting in 45% gross margin, as compared to 39% in the previous model. This annual gross profit is $510 million higher than the previous February 2026 model, representing 67% incremental gross profit derived from the incremental $760 million revenue, reflecting our enhanced product mix. We also target $1.38 billion of annual operating profit, resulting in 38% operating margin as compared to 32% in the prior model, and we target $1.2 billion in annual net profit, resulting in a 33% net margin as compared to 26% in the prior model, And 20% in the second quarter of 26, and as compared to 23% in the third quarter of 26. This annual net profit of $1.2 billion target is $450 million higher than the pre-February 2026 model, representing 59% incremental net profit derived from the incremental $760 million revenue, reflecting our enhanced product mix. That concludes my prepared remarks. Now I'd like to turn the call back to the operator so we can take your question. Operator?

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star 1-1 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by. We'll compile the Q&A. We'll take a few moments. And now we're going to take our first question. And it comes to the line of Cody Ackrey from StoneX Financial. Your line is open. Please ask the question.

Thanks, guys, for taking my question. Hey, guys. Hey, Russell. Hey, and congrats on the progress. It's great to see. Maybe, Russell, thanks for the exponential increases that you gave in capacity additions. Maybe if you can just help me to just work out the math there. Can you just level set us with the $920 million of CapEx program now firmly on track and ahead of schedule? Can you level set your fiscal 28 capacity support now for SIFO and SIG from a revenue standpoint?

I would prefer not to give an exact target on revenue, but I can give you a multiplication against the previous quarter revenue as far as raw capacity. So as stated, the previous quarter, Q3, was $240 million of CIFO revenue. We will finish Q4 with 2x the start capacity that drove that revenue in Q3, so 2x the starts of the Q3 shipments. That revenue will become the run rate in Q2 when there's a full Q1 of That start rate and the December, January, February, all ship within Q2. Then in Q3, we will add another 1x of that, so 3x of the Q3 shipments through the expansion that we are doing in the Fab 7 arrive factory. That will be plus-minus the SIFO capabilities off of investments that we have already announced. We are evaluating and will most likely be announcing shortly additional SIFO announcements where we've been able to identify further areas for expansion, predominantly in two of our 200-millimeter sites. And we've not yet released that. We've not yet talked about the amount of CapEx nor the amount of capacity that would increase, but it's another significant tranche on top of it. But the capacity, if you go against the multiplications that I talked about, that would give somewhere of a $2.85 to $2.9 billion CIFO run rate. As of Q3 in start rates. However, that is really not 100% accurate, because it does not include what we're doing with integrated laser. So that is outside of it and on top of it, and a substantial forecast in and of itself. So, if that kind of level sets, the baseline of CIFO revenue for everything that has been announced and will be fully implemented on start by plan as of the third quarter of 2027 is somewhere a bit above a $2.8 billion run rate.

That's very helpful, Russell. Thank you for that. That's a great place to start for Q3. Maybe with all of that, then it sounds like your summer update for your business model, your $3.6 billion and $1.2 billion in net profit that Orange just ran through may already be too conservative. Would you agree with that?

No comment? No, I think it's an aggressive target, but certainly we wouldn't be giving a target to the street that we don't have very, very high confidence that we will meet.

And then lastly, if I may, for Oren, you had a very, very high incremental margin this quarter, first time we've seen it in the 60s, let alone 62%. How sustainable do you think that level is? Is that a new baseline, or will that fluctuate as you get new tools in and start depreciating that capacity?

Yeah, exactly like you said. This quarter, still not all the tools started their depreciation schedule. From the fact that I said that 65% of the tools were paid, so you can maybe understand that approximately 65% of those 920 million tools started depreciation and the other not, and there is the second tranche of track one. So we will experience additional depreciation coming in later, and this is why the long-term model, I don't think, has the 65% incremental gross margin that we saw this quarter and has, like, 55, 58 usually. And so we repeat our same forecast of 55 to 58% incremental gross profit.

All right. Great. Thanks, guys.

Congrats.

Thank you. Now we're going to take our next question. And the question comes down from Vijay Rakesh from Mizuho. Your line is open. Please ask your question.

Yeah, hi, Russell and Oren. Just a question on the Cypher side. Obviously, you're doing multiple versions of NPO. You have external laser, internal integrated lasers. Can you talk to how you're seeing the pricing and contracts line up as you look at some of the newer layouts in NPO going up? And a quick follow-up.

It's a very, very interesting question and a good question. Our long-term contracts include pricing targets. There's been maybe some inputs from time to time that that curtails price increases, but it does the opposite. As new players possibly come into the game, one way that they try to get into market is by deeply discounting. Now, those that deeply discount typically do it because they don't compete technically, but what our contracts do is that they set a bar of a starting position, not that if market really would demand some lowering of prices that we wouldn't adhere to being reasonable with our customers, but our pricing is set very, very well in our long-term contracts, and pricing targets are within all of our contracts. NPO, I don't want to give an exact number for NPO. I don't think that that would be a proper thing to do, But NPO certainly stays with our trend of any new platform, resets a pricing curve as far as getting a higher ASP. So the way that, over time, anybody protects high margins is by being the fastest to deliver products and taking advantage of being the first in the market to help a customer grow their market by being the first with their specific end application. So I would just want to say that our pricing is solid, it's good, and it's very sustainable through the way that we have gone about our learned term agreements. NPO will have a higher starting point than a pluggable, and that makes sense as it's a more advanced technology platform. Our pluggable starting point wasn't bad and isn't bad right now, as is seen by the incremental margin drop-down.

Got it. And then on the, yeah, yeah, that's very helpful. I think one of the things that were coming up at OCP was, you know, obviously people are starting to talk more about 3.2p, 400 gig per lane. As you look at your NPO demand backlog, are you seeing more engagements start to line up at 3.2p? Is that a, you know, is that a higher dollar, you know, more complicated layout than SIFO? Like, how would you look at that mix and opportunity? Thanks.

The answer to both parts of your question is yes.

Is the mix higher than 3.2T?

Yes.

Got it. Right. Thank you.

Thank you. Now we're going to take our next question. And the question comes line of Simon Coles from Barclays. Your line is open. Please ask a question.

Hi, thanks for taking the question. There's a lot of chatter about competition on SISO given how well you guys are executing. You started ramping 12-inch yields, I think, late last year, early this year. Can you just give us an update on sort of that progress and how that's sort of helping you maintain your leadership?

I'm not sure I 100% understand your question. I'll answer what I think it is, and if you need further clarification, please ask. We indeed started shipping revenue volumes in the first quarter of 2027 at extremely high yields, really high yields. So, within our 300-millimeter platforms, we have very special applications. We have an amazing DMUX capability that I think is absolutely best in the world. So, we've added multiple new types of platforms. Most of the MPO tape outs that we're doing are being done at 300 millimeter, and, you know, those are 16 lane, 32 lane applications right now, and the pluggable that we're doing also just has incredible performance, substantially better on insertion loss than I think anyone else can be even coming close to it. So if that answers your question, the ramp that we're doing at 300 millimeter is quite substantial. We have stated that from where we'll be at in Q1 on 300 millimeter, which on equivalence is somewhere about 10K 200 millimeter, by the end of the year, we'll be increasing that by the third quarter of the year, we'll be increasing that by 3X. And then incrementally increasing as well in 2028, and ultimately a very, very big increase as the new shell is built at the end of 2028. Did that answer your question? I hope it did.

Yeah, that's great. Thank you very much.

Thank you. Now we're going to take our next question. And the next question comes to the line of Sahasik from CFL. Your line is open. Please ask a question.

Hi, thanks for taking my question. Russell, your framing was very helpful, so maybe let me build on that. You said 3Q revenue, Cypher revenue, was about $240 million. That adds, you know, and that, the 3Q27 step adds another 1x on top of that capacity through FAT7 and REI. Triples it. Sorry? Triples it. Triples it. But I guess by my math, that would be roughly 960 million a year. So that's, you know, 200 million more than the 760 million track one adds to the 28 model. So first, if I'm understanding that correctly, is that all track one, or does it include, you know, remaining capacity from the $920 million program? And then second, in those same units, has track two ramps towards the quadrupling of Japan's 300 millimeter? You know, roughly how many multiples does track two add? Is that another one, 2X, or would it be more than that as a four?

For the first question, what Russell said is that today, including, I mean, today the total revenue that the shipments of Q3 reflected is $240 million, and tripling it means $720, not $960, so $720 per quarter run rate towards, I think it was Cody's question about 2028, so Russell said Q3 27 capacity baseline can support, Capacity, $7.20 a quarter, so times four is $2.8 billion, which Russell mentioned, right? Not $9.60.

Okay, that's helpful. And then, you know, on time...

I also did state that there's additional SIFO activities that are not included in that. So I'm not saying that we are gated at the $2.8 billion. There's the integrated laser, many things that do not include into that. If we're talking specifically about the quadrupling, we're quadrupling what we're talking of the present capacity, which is somewhere about 10K wafer per month in our Fab 7 300 millimeter, and that will be quadrupled to 40,000 wafer per month, approximately. I mean, we don't know the exact numbers as of yet. The build hasn't been done. But what that does then is an extreme increase if it was all on SIFO, because you're putting 2.25 against each 300-millimeter wafer as you compare to 200-millimeter. So if you were going to 40K on 200-millimeter equivalents, you're close to 100,000 wafers.

That's very helpful. I guess, Russell, the P times Q sort of math, you know, you're pointing to the 2.25x die size increase on the 300mm, which makes sense. But track two is also, you know, predominantly going to be NPO, which means the content uplift is also there. And that sort of changes the like-for-like math, I think, that most investors are trying to do. Could you maybe give some color on that as well?

The price per wafer, again, had stated, as we go to MPO, it resets the price target, right? It resets the pricing curve. What bigger chips do is they create more silicon demand. So the MPO will, the more lanes that you put into it, the more silicon you're going to need to ship the same amount of fix. Okay, and one last... No, I said track two will be well underway in 2028. By 29.

Oh, 28, okay.

28, we'll start with the buildings. In 29, when we have our last contracts that we are signing now, again, we extended our capacity contracts to 2029, which is a very, very good thing for us, tremendous visibility and commitment. So we had stated the one-year ROI for the 920 investment that we did predominantly for 200-millimeter expansion. By having customer commitments, it really adds your confidence on short-term ROI, and the ROI that we're doing is an extremely aggressive model.

The question just being, you know, track two, I think you take ownership of Fab 7 April 1st. You know, could that start earlier? You know, meaning, I guess simply put, could track two output come in sort of second half of 28, or is it almost all a 29 driver?

Could as possible, but what we're really believing is the amount of time to build. We're quite confident that the 29 will be the expansion. If it can be accelerated by a quarter, that's certainly our target, right? I mean, any investment, the quicker that you can start shipping, the quicker you please your customers and the quicker you please your investors.

Thank you.

Thank you. Now we're going to take our next question. And the question comes line of Mehdi Hosseini from Susquehanna International Group. Your line is open. Please ask the question.

Hi, this is Bastian filling for METI. Thank you for taking my question. I guess piggybacking on the competitive landscape question into 2027, given the ramp of one of your major competitors in terms of peak capacity, how should we think about the market sharing in silicon photonics and silicon germanium for 2027 and have a follow-up?

Let me ask Dr. Rocconelli to speak to that as he's directly interacting with driving the BUs and a tremendous amount of customer contact interaction. And then if I have anything to add, I'll be happy to do so. Thank you, Russell.

So, it's hard always to pinpoint market share, particularly in the market that is growing as quickly and rapidly as this is growing, both on the silicon photonic and the silicon germanium side. And, you know, with a market that's growing at this rapid pace, there's obviously room for more than one player, and that's what we're seeing, as you described, a little bit of competition. What I can say is that we were the first to ramp in 200mm to very high, not only capacity, but also very high yields with very good performance. And as was just talked about previously, we were also the first to ramp in 300mm with very high yields and very high quality and performance. So, that is giving us confidence and giving our customers the confidence to extend the LTAs, as we talked about, into 2029. So, we're building capacity as quickly as we can, and all of that capacity is being spoken for almost immediately as we announce it, certainly well before it's even put in place, with contracts from customers. So that's a tremendous position to be in. We also continue to invest at the leading edge of technology with our customers. Having many Tier 1 customers with us, we have incredible visibility over their needs of the future. And so we're putting in place technology that will pay dividends well into the future and not just today. So we anticipate not only short-term maintaining very good market share, but certainly there will be others competing with us in the market. And with growth as it is, that's perfectly understandable and okay. But also, in addition to the short-term, our printing technology 3.2T was talked about with both silicon in the new phosphide, lithium-ion, niobate technologies, and CPO that we've talked about, both on the silicon photobiology, Thank you, Marco.

Thank you. Thank you. I think this is a very important point to add. We really are engaged in billions of dollars of long-term agreements. Customers will never sign up to being the end of 26 now, not 27, not just 28, but 2029, unless they have faith that, number one, you can ship wafers on time at the highest quality, But secondly, that you will maintain a differentiated, more than competitive roadmap. What we are shipping now to lead customers, for the most part, will not be a very big portion of what we're going to be shipping in 2029. So the confidence that the customers have off of our relationship, off of the programs that we're working on that are not just present, next, but generation plus two, and in some cases generation plus three type programs, that's what gives us the assurance there will be competition. I mean, it's a big market. It's a good market. It's a big enough market to afford competition. But we're quite confident in maintaining our leadership position because we are leaders, working with the leaders on leadership programs. And I think that that's the biggest thing that I can say. What our market share will be, I mean, presently, I think it's extremely high. And one could check that with revenue. I mean, look at just the Q3, close to a billion-dollar run rate on SIFO revenue. I think you'd be hard-pressed to find others that can come close to that. But Q4 breaking $1.1 billion, it's a pretty substantial place where we sit. But the biggest thing isn't the market share that we have now. It's the confidence in customers to sign up on long-term agreements through 2029, because those are committed. They're committed capacities. And they have to know us. We have to know them. There has to be a partnership and trust in order to go into those contracts. And that's what really, for us, gives us confidence of maintaining a very high market share, is that we are working truly with the best of the best on very advanced programs that, you know, it's a joke I have, but it's really true. I mean, for Kevin Costner, in the field of dreams, if you build it, they will come as may be true. For us, we need very strong customer partners. And if we have the best of the best in each market, and we're working with them together on next generation and generation plus two technologies, when we build it, it will be sold, because we are dealing with the leaders. And so, again, enough being said possibly, but to give a specific market share number, I know what I think it is right now, to say what it will be. Maybe at the end of 27, 28, 29, that would really be proctology. But to say that we will maintain a very high differentiated market share on high technological differentiated products, I think that that's very confident to be able to state.

Thank you for the caller. And I guess my follow-up was on another end market, the RF Mobile. I think RF Mobile is approaching the trough in the low 50s this quarter. How should we think about the trajectory of RF Mobile going into 2027, given on the last call you mentioned the tape-out activities?

Mentioned what? I'm sorry, please?

Sorry, in terms of activities. How should we think about the trajectory of RF Mobile?

For us, the trajectory is very strong. We had a bit of a dip in moving from Fab 7 to Fab 10, needing to re-qual multiple customers because of repurposing the Fab 7, really to focus on optical between the SIFO and the SIGI. It's going very well. We expect Q2, well, Q1 was the highest shipments we've had. Q3 was, Q4, Q1, Q2 should continue to grow, where Q2 will be absolute records. So I think it's, for us, it's going extremely well. Again, I don't have a specific feel of the exact market share percentage. We are working with leaders and growing market share with the leaders, and so I believe we're in very good shape. I also am quite confident that one of our programs isn't just a step function in capability, it's an absolutely opening of a new market capability itself, and that has not been formally released. We're working with at least one very lead customer on that type of figure of merit, and it's really a breakthrough figure of merit. Marco, is there anything else you would like to add there?

No, I think you said it. You know, we don't have the market share that we do in TIFO and RFSOI. There are multiple players, but we continue to lead at the very leading edge. So the market share that we have tends to be, you know, the very leading edge, the cream of the crop kind of piece of it, and that's what we're focusing on. We have limited capacity for RFSOI. Now we've dedicated FAT10, and we use it for those leading components and leading technologies.

Thank you very much.

Thank you. And now we're going to take our final question for today. Just give us a moment. And a question complaint of Richard Shadden from Craig Harlem Capital Group. Your line is open. Please ask your question. Hey, Richard.

Hey, Russell. Hey, Ron. Hey, Marco. How are you guys doing? Congratulations on great results again. Russell, let me follow up on a couple comments you made on the call regarding SIFO and specifically on the laser-attached side where it's not encompassed into the revenue model you've been talking about. Maybe you can talk about it in terms of a couple different directions, one of which is how much content ad do you have with laser integration or laser attach here, and over time, what percentage of your picks would you expect to have laser attach and whatever? I think there's multiple ways you can do it. What kind of attach rate do you see over time?

It's really multiple directions in the market. For integrated laser, it enters into a new sort of market that can be very big. There's multiple analysts that say that integrated laser will be a huge portion. There's others that really don't address it. I truly do not have a clear answer to it. Our lead customers there are very, very committed for growth with very strong forecasts, and again, those are numbers that are not yet within the model, but they can be very appreciable, especially, as one could imagine, there are appreciably higher ASPs against a very good baseline to begin with. So it's a good market to get in. The dye-attached, though, is for more than just the indium-phosphide laser. It's for an indium-phosphide 400G modulator that we've already plus-minus demonstrated, and for the lithium-niobate modulators. So the die attach that we're doing encompasses many different things, and it could be a very big portion of a 6.4T form factor of NPO or of a pluggable with a 400 gigabit modulator. Okay.

I appreciate that perspective. My follow-on question is on the topic of NPO. You've talked about greater than 10 customers on this call here. Maybe you can characterize the customer set here across pluggable transceiver suppliers, historical ones, OEMs, and even hyperscalers. And then how would you characterize kind of the competitive dynamics here and ultimately, you know, any qualitative commentary on market share that you expect in that product category over the next, you know, couple of years or so would be great to hear.

The existing customers that we have for pluggables, all of our NPO customers are a subset of that. So we're not doing NPO with anybody that we haven't done pluggables with. It's an extension or a newer capability for a broader market. It's not a different customer set whatsoever. One of the reasons I believe that we have so much engagement is, as stated, it's the confidence and trust that's been built up through the engagement with Plugable. So that was the first part of your question. We expect to see an appreciable amount of NPO shipped in the second half of this coming year. That's our expectation from targets. Will it happen? It really depends on market adaption. But it's the same set of customers that are just doing more, if you will, advanced programs with us, As stated earlier, Gen Plus 1, Gen Plus 2, Gen Plus 3 programs are readily available between us and our premier customers. Marco, any caller you'd like to add there?

Yeah, no, I think, as you say, it'll depend a little bit. How big NPO gets for us in the short term will depend on the market adoption. The beauty for us is that we have strong share in both the pluggable and NPO. So if it's not NPO and it's pluggable, that's still a tower wafer being built. So, and, yeah, I think as Russell indicated, it's most of our existing customers that are building NPO products with us. We haven't put that out in the public domain specifically with them, but we'll probably look to release some PRs so that, you know, it's in the public domain in the near future.

Okay. Sounds good. Thank you, guys.

Thank you.

Thank you. Dear Speaker, no further questions for today. I would now like to hand the conference over to Russell Elwanger for any closing remarks.

Thank you very much. Thank you for the questions. Just as a post-summary comment, we had a corporate theme that we implemented, We still have a corporate theme. It was implemented in 2025, and it was bold growth, limitless impact, infinite reach. We really adhere to that and try to breathe it in in everything that we're doing. If you're bold in your growth, if you believe that you can have limitless impact, if you try to have infinite reach, You truly inspire the customers that you're working with as your partners. We had a very successful conference in Shenzhen, China, customer conference. We have, in a week and a half or so, our customer conference in Santa Clara, California, technology conference. And it was a reunion of friends, and I can't overstate that. But, you know, when you adhere, and we really try to adhere to our values, we have what we call our value vectors, and it's, you know, leadership, partnership, impact, and innovation. When you adhere to those values and the definitions of them, I mean, the true underlying definition of leadership, I think, is something that John F. Kennedy had stated, And that was leadership and learning are indispensable to each other. If you adhere to partnership, which means truly working with your customers to adapt yourselves to what the market demands are, and quickly, really doing it quickly, it drives unbelievable relationships as you have success together. And that's what we see through our long-term agreements, is a customer acknowledgement of the success that we've had together. We get a lot of joy in it. They get joy in it. Success begets success, and it can never be overstated. Impact is very, very important. And impact really, it deals with giving your people the power, capability, and ownership to make change, to make things happen. You know, a lot of our customers are amazed at the amount of young engineers that they interface with because we focus on the development of very high-talented, high-potential people. And their growth is really dependent upon working with customers that inspire them. There are three things that really enable success, and it's capability, environment, and truly the motivation, your passion. If you have passion, you have capability, and you create an environment of partnership where the customer feels open and that they can tell you whatever they want, you won't get offended, they can criticize where it has to get better, but also where we can tell them what they have to do better, what a relationship that becomes, and what a truly blissful time it is, an inspiring time. Where we talk about impact and innovation as well, and it's very, very critical, our model has been and continues to be very, very little drop from gross margin to operating margin. I had stated it before, but at the $3.6 billion model that we put out, gross margin 45%, operating Margin's 38%, a seven-point drop from gross to operating margin. And why is that critical for us? We want to stay lean on infrastructure because it allows us to be fast. And the faster we are, the more we delight our customers. If the questions, well, not if, the questions about NPO, the questions about market share in the future, they're very, very critical. But how do we ensure that it happens? It's fast execution, and that is within our model of innovation, because within innovation, sometimes the greatest innovation is simplification, and simplification reduces the drop of gross margin to operating margin. So with that, I'd like to end the call. It's very, very exciting where we're at, where we're going. I really thank our investors for their interest in the company. I very much appreciate our customers for their faith and trust, as demonstrated by the LTAs, and our employees worldwide are amazing. They give and give and get rewards, I think, that are commensurate with what they're doing, but their biggest reward is the joy of going home at the end of the day, believing that you've been successful, having the tools to have been successful. We look forward to connecting with you at the upcoming conferences we'll be attending. Barclays 24th Annual Global Conference in San Francisco, December 10th. Nomura at CES 27 in Las Vegas, 5th and 6th of January, 27th. The 29th Annual Needham Growth Conference in New York, the 12th and 13th of January. And as always, please, analysts, investors, contact our Investor Relation Department Any time you have questions or wish to follow up, we very much enjoy your inputs. We get better through them. Thank you very much.

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