Earnings Call Transcript - TSEM Q4 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Tower Semiconductor Fourth Quarter 2025 Earnings Conference Call and Webcast. Please note that today's conference is being recorded. I would now like to turn the conference over to your first speaker, Noit Levy, Investor Relations and Corporate Communications. Please go ahead.

Noit Levy, Investor Relations and Corporate Communications

Thank you. Good day, and thank you, everyone, for joining us today. Welcome to Tower Semiconductor's Fourth Quarter and Full Year 2025 Financial Results Conference Call. With us today are Mr. Russell Ellwanger, our Chief Executive Officer; and Mr. Oren Shirazi, our 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 20-F and 6-K as well as filings with the Israeli Securities Authority, all available on our website. Tower assumes no obligation to update any such forward-looking statements. Our fourth quarter and full year 2025 results are prepared in accordance with U.S. GAAP. Some that are presented may include non-GAAP financial measures as defined under SEC Regulation G. Reconciliations to GAAP figures and full explanations are provided in today's press release and financial tables. For your reference, a supporting slide deck is available on our website and integrated into this webcast. With that, I'd like to turn the call over to our CEO, Mr. Russell Ellwanger. Russell?

Russell Ellwanger, CEO

Thank you, Noit. Hello, everybody. Thank you for joining our call today. Very pleased to share our results for the fourth quarter and full year of 2025. Additionally, we are extremely excited to present how these results have redefined our financial milestones and accelerated the timeline for achievement of the same. The updated financial model, which we will present, is the result of already strong partnerships with our lead customers having grown into deeply rooted supplier-customer partnership technical alliances. We ended our fourth quarter of 2025 with a company revenue of $440 million, an 11% quarter-over-quarter growth, 14% year-over-year growth, fulfilling our beginning of the year target of quarterly sequential growth. In addition to the top line, we achieved bottom line growth throughout the year. Fourth quarter net profit was $80 million or 18% net margin, up from 11% in Q1 '25, 13% in Q2 '25, and 14% in Q3, indicative of value-based growth being driven by technology mix enrichment. The revenue growth from Q1 to Q4 of 2025 was $82 million, of which there was a $40 million net profit drop down, almost 50%, to be exact 48.78%, and this was due to the high value of the incremental Photonics revenue. Revenue for the full year was $1.566 billion, $130 million or 9% increase as compared to 2024 revenue. Now to review our 2025 revenue breakdown and discuss the key trends, please see Slides 5 and 6 as referenced. We achieved year-over-year growth across our key technology platforms, namely power management, image sensors, and 300mm RFSOI, on top of which record achievements and unprecedented growth of our market-leading optical transceiver offerings, silicon germanium, and SiPho advanced platforms have propelled us into a favored and unique position, both driving our growth for 2026 and additionally, giving us the ability to redefine our financial model, which I will present at the end of my comments. RF infrastructure showed a 75% revenue increase, 2025 over 2024, being our fastest-growing application in '25 driven by hyperscaler rapid adoption of silicon photonics in 800G and 1.6T pluggable transceivers. Silicon germanium and silicon photonics revenues represented 27% of our corporate revenues, totaling $421 million, up from $241 million or 17% in 2024. SiPho revenues alone were $228 million in 2025, up from $106 million in 2024. Specific to the fourth quarter, RF infrastructure revenues were 32% of corporate revenue, with SiPho having achieved $95 million or a $380 million annual run rate. Included in this number is some non-wafer NRE to enhance future developments for Gen+1 and Gen+2. As highlighted in our recent announcement with NVIDIA, the insatiable demand for compute bandwidth in both scale-up and scale-out architectures, and Tower's exceptional ability to scale the capacity flawlessly in partnership with our customer, has made 1.6 terabyte per second the fastest-growing silicon photonics node in the industry to date, with Tower being by far the majority supplier of 1.6T silicon PICs. The partnership announced with NVIDIA, as with all our direct module customers, underscores our commitment to deliver best-in-class technology and the manufacturing agility required to meet such an exceptional demand trajectory. In addition to Fab 3 Newport Beach, this past year, we successfully ramped silicon photonics production in Fab 9 San Antonio, Fab 7, Uozu, Japan, and are on track to ship the first production, a very large SiPho ramp in 2026 from Fab 2 Migdal Haemek. Given an even stronger customer demand than was known at our last quarterly release, we have increased our CapEx plan for 2026, with multiple customer requests to enter into capacity reservation agreements through 2028, enabling our customers to, in turn, give firm commitments to their customers having ensured their supply. For next-generation 400-gigabit per lane, we continue to make strong progress with heterogeneously integrated indium phosphide on silicon and other material systems. We are playing a key role, partnering with our lead customers to define the material systems that will be chosen, refining the flow and hence ensuring manufacturability readiness and immediate ramp capability upon 3.2T market introduction. We also see co-packaged optics as a substantially incremental opportunity for us in the coming years, as optics gets adopted and scale-up interconnects, as well as XPU to high-bandwidth memory interconnects, that are today largely copper. In Q4 '25, we announced the expansion of our mature 300-millimeter wafer bonding technology to enable wafer-to-wafer integration of silicon photonics ICs and silicon germanium electrical ICs. In addition, we continue to work with several customers on dense wavelength division multiplexing laser sources, which are a critical component of many CPO implementations and can significantly expand our served optical market by now including the laser source. Beyond optical transceivers, our silicon photonics platform continues to be the technology of choice for physical AI applications, particularly frequency-modulated continuous wave LIDAR. Ahead of CES, two of our FMCW LIDAR partners, AVA and LightIC, publicly announced their collaboration with us in bringing to market disruptive products. The proven robustness of our silicon photonics platform, supported by many tens of thousands of high-yielding, high-quality wafers shipped to date, is enabling silicon photonics to capture growing share in the LIDAR market, unlocking new automotive and robotics opportunities. Our silicon germanium platform delivered strong growth year-over-year in 2025 of 43%, remaining the optimal platform solution for low-power, low-latency, high-performance components such as drivers, trans-impedance amplifiers for pluggables, LPOs, and active copper and active optical cables. Alongside our silicon photonics production, our silicon germanium platform is now running in high volumes across Fab 3 Newport Beach, Fab 9 San Antonio, and Fab 2 Migdal Haemek, and we have shipped 300-millimeter prototypes from Fab 7 in Uozu. RF mobile represented 23% of our 2025 corporate revenue and 24% of our Q4 '25 revenues. 300mm RFSOI was up 5.5%, while the RF mobile as a whole was down 15% year-over-year. Those are primarily due to our proactively working with our customer partners to responsibly reduce exposure to lower-margin controller offerings in favor of higher-value optical and RF mix in the fabs and also influenced with the front-end module market shift from 200-millimeter to the higher digital content better served with more advanced nodes in 300-millimeter. Our latest technology, which we presented last quarter, has substantial improvement of our processing relative to the competition and reduced layer count; therefore, higher overall value per customer dollar continues to see robust customer adoption. Lead customers have recognized it as best-in-class and are preparing to ramp to high volumes. Across the board, we continue to see strong design win momentum that positions our 300mm RFSOI platform for sustained secular growth. In 2025, we achieved major wins, with three of the top four Tier 1 RF front-end module providers. One has begun production, with all planning for strong ramp in 2027 towards achieving appreciable revenue volumes in 2028. Power Management grew 20% year-over-year, demonstrating strong year-over-year revenue growth in both 200 millimeter and 300 millimeter offerings, representing 16% of our 2025 corporate revenues and 15% of our Q4 '25 revenues. In 300 millimeter, this includes the ramp of the Tier 1 handset envelope tracker previously announced, which is expected to continue to gain share in the years to come. Overall, our revenue growth in 300 millimeter power has significantly outpaced the rate of growth for both the power market and the mobile handset market, demonstrating the strength of our offering and share gains in this significant space. Sensors and Displays grew 10% year-over-year, representing 16% of our 2025 corporate revenue and 15% of the fourth quarter revenue. We have seen strength and continue to see strength in the machine vision market with new advanced products ramping to production alongside existing products that continue to gain share. We also expect our first ramp in the AR display segment with our silicon backplane for OLED on silicon, which has started production this past quarter. We are tracking this first adoption and its overall market carefully and with optimism as it may have significant value for Tower in the following years. Mixed signal CMOS represented 7% and Discrete represented 11% of our 2025 corporate revenues. Year-on-year, we've seen decreases of 18% and 14%, respectively, supporting our value-driven growth strategy, allowing additional capacity for the higher margin and highest margin platform to replace these two application sets. Regarding capacity expansion. During our previous earnings release in November '25, we announced an increase of investment for silicon photonics and silicon germanium growth targeting a tripling of SiPho capacity against our targeted Q4 '25 silicon photonics actual shipments having stated a target that this would be online to begin silicon starts in the second half of 2026. Due to continued growth in demand, we are announcing today additional CapEx investment of $270 million on top of the previously announced $650 million capacity expansion plan. This total capacity is targeted to yield capacity growth greater than 5x of the actual fourth quarter monthly wafer shipments to be compared to the 3x target that we gave during the Q3 public release. Over 70% of the total SiPho capacity is either presently reserved or in the process of being reserved through 2028, firmly backed with customer prepayment. For the fourth quarter, utilization rates were Fab 2 operated at about 60% utilization, as we are now in the final stages of silicon germanium and silicon photonics capacity qualification for a variety of flows. Fab 3 maintained our model full utilization of 85% and is still adding capacity for increasing silicon photonics capability. Fab 5 was at 75% utilization. Fab 7 was fully utilized, well above our 85% utilization model. Fab 9 was at 65% utilization, presently in the silicon photonics and silicon germanium ramp. As stated in our press release, Intel has expressed its intention not to perform under the September '23 Fab 11X agreement. We are presently in a mediation process. All flows, which have been transferred or are in the process of being transferred to Fab 11X were originally qualified in our Japanese 300-millimeter factory Fab 7. Customers are being redirected to be supported by this fab in Japan. For guidance, we guide our first quarter of 2026 midrange revenue to be $412 million plus/minus 5%, representing a 15% increase as compared to the start of 2025. We target quarter-over-quarter revenue and profitability growth throughout 2026. Based upon the thriving corporate ecosystem we've developed intertwined with deeply trusted customer partner alliances, we are pleased to provide a revised financial model. This new model demonstrates our value-driven growth strategy. Please refer to Slide 7. First, the assumptions. Beyond the $920 million CapEx plans that have been released, no additional CapEx, clean room space or otherwise additional monies are required to achieve this model. This model is based on utilizing Tower-owned capacity at an 85% utilization level. Intel Fab 11X is not included in this model. Revenue is projected at $2.84 billion, which will create a 39.4% gross margin, a 31.7% operating margin, a 7.7 point drop from gross to operating margin, demonstrating a highly efficient business and, if not the very best, certainly among the best in our industry. Such efficiency is seen in more than just margin dollars. It is reflective of the speed of decision-making and execution. Speed is a sustainable differentiator. Net profit is projected at $750 million or 26.4% net profit margins. All tools and customer qualifications are planned to be fully completed within 2026. Hence, and most importantly, we target to achieve this model in the calendar year 2028. Now I'd like to turn the call to our CFO, Oren Shirazi. Oren, please.

Oren Shirazi, CFO

Hello, everyone. Earlier today, we released our financial results for the fourth quarter of 2025 and for the full year and also released our balance sheet and cash flow reports. Now I will review the results highlights as well as the highlights of our CapEx investment and afterwards, I will present our updated target financial model, resulting in higher revenue and profit margins than the prior model. Let's first look into the P&L. In 2025, we achieved a quarter-over-quarter revenue increase during the year, which has accelerated in the second half of 2025, resulting in record revenue of $440 million in the fourth quarter of 2025, reflecting a year-over-year revenue increase of 14% and a quarter-over-quarter revenue increase of 11%. Gross profit for the fourth quarter of 2025 was $118 million, an increase of $25 million or 26% compared to the prior quarter. Operating profit was $71 million, 40% higher as compared to the prior quarter. Net profit in the fourth quarter of 2025 was $80 million, an increase of $26 million or 49% compared to net profit of $54 million in the prior quarter. And earnings per share were $0.71 basic and $0.70 diluted per share compared to $0.48 basic and $0.47 diluted earnings per share reported for the prior quarter. Please note that the income tax expenses line in the P&L includes a nonrecurring tax benefit recorded in the fourth quarter of 2025, resulting in an all-in 2% effective tax rate. For 2026 and beyond, as required by Pillar 2 regulation, we estimate the all-in tax effective rate to be at least 15% in all our manufacturing sites. For the full year 2025, we reported revenue of $1.57 billion, 9% higher as compared to $1.44 billion in 2024. Gross profit and operating profit for '25 were $364 million and $194 million, respectively, compared to $339 million and $191 million in 2024, respectively. Net profit for 2025 was $220 million or $1.97 basic and $1.94 diluted earnings per share, compared to $208 million net profit in 2024. Moving to our balance sheet. Our balance sheet is very strong, evidenced by the following indicators and financial ratios. As of the end of December 2025, our assets totaled over $3 billion, primarily comprised of $1.5 billion in fixed assets, predominantly comprised of fab machinery and $1.7 billion of current assets. The recent increase in other long-term assets as compared to past periods is mostly attributed to the Newport Beach Fab lease extension prepayment as was announced in November 2025 and paid, which is presented as an asset as required by GAAP. Current assets ratio is very strong at about 6.5x, while shareholders' equity reached a record number of $2.9 billion at the end of December 2025. Regarding hedging, I would like now to describe our currency hedging activities. In relation to the Japanese yen, since the majority of TPSCo's revenue is denominated in yen and the vast majority of TPSCo's costs are in yen, we have a natural hedge over most of our Japanese business and operations. To mitigate part of the remaining yen exposure, we are executing zero-cost cylinder transactions to hedge currency fluctuations. Hence, while the yen rate against the dollar may fluctuate, there is limited impact on our margin. A similar concept goes for the Israeli shekel. While we have no revenue in this currency, since a portion of our cost in Israel is denominated in shekel, we also hedge a large portion of such currency risk by engaging in zero-cost cylinder transactions to mitigate this exposure. Hence, while the shekel rate against the dollar may fluctuate, the impact on our margins is limited. Now moving into our CapEx investment plan and its impact on our financial model. As we announced today, in order to support the increasing SiPho and SiGe demand, we are allocating an additional $270 million of cash to invest in capacity and capability side for equipment, which would result in a total of $920 million cash investments in CapEx, including the $650 million we already announced during 2025. These $920 million CapEx investments will expand our Fab's capacity in our 8-inch fabs in Israel, Newport Beach, Texas and also in our 12-inch Uozu Fab in Japan. This CapEx plan includes a large portion of capability CapEx for advanced development and high-end RF technology-related projects. Approximately 28% of the above-stated $920 million CapEx investments were already paid to date, while the remaining 72% of the $920 million are expected to be paid in 2026 and 2027. Moving to the financial model. Following these investments, which are expected to drive greater revenue and incremental margins as compared to our prior model, which we released more than two years ago, we are providing an updated target financial model resulting in significantly higher revenue, profitability, and margin targets. Please note, the model is based on many forward-looking operational business and financial assumptions, including the assumption that all our fabs will operate at 85% utilization post-installation and qualification of the $920 million equipment tools we are investing in. Assumptions considering a modest average wafer selling price reduction of existing products and/or flows that we target will be offset by new products and/or flows introductions. Assumptions that our cost estimates will not differ significantly from our current assumptions. Lastly, please note that the model does not include Fab 11X capacity, revenue, and margin, nor does it include any possible additional fabs and/or new capacity that has not yet been obtained, established, or announced to date. Under this model, which you may see in the slide for your reference, we are targeting $2.84 billion in annual revenue, which is $1.27 billion higher or 81% higher in revenue than our actual full year 2025 revenue. $1.12 billion in gross profit, which is more than tripling our 2025 gross profit. This level of gross profit reflects approximately 40% gross margin, which reflects a 59% incremental gross profit derived from the incremental revenue when comparing the model to FY 2025 actual results. Operating profit is projected at $900 million, which is 4.6x our actual FY '25 operating profit, reflecting a 32% operating margin. This reflects a 55% incremental operating profit margins derived from the incremental revenue when comparing the model to FY 2025 actual results. Lastly, on net profit, the projection is $750 million, more than tripling the full year 2025 net profit, reflecting a 26% net margin, which reflects a 42% incremental net profit margins derived from the incremental revenue when comparing the model to FY 2025 actual results. To summarize, comparing this updated financial model to the prior financial model that we presented more than two years ago, gross profit, operating profit, and net profit are much higher, 50%, 60% each higher as compared to the prior model, mostly driven by the higher SiPho and SiGe mix and the additional value we bring to our customers. That concludes my prepared remarks. Now I'd like to turn the call back to the operator so we can take your questions.

Operator, Operator

We are now going to proceed with our first question. The questions come from the line of Mehdi Hosseini from Susquehanna Financial Group.

Mehdi Hosseini, Analyst

A couple of questions from me. Russell, I want to dive into the announcement that you had last Thursday, increased collaboration with NVIDIA. The press release was making a reference to the module. And I want to better understand what that implies. Does this mean that you will be manufacturing a transceiver for NVIDIA or the module is more of a broader reflection of a broader service that you would provide for this customer? And I have a follow-up.

Russell Ellwanger, CEO

No, the part of our role in the module is the output parameters of our photonics or of the TIA or of the drivers for the pluggable or also for the copper or optical cable. But the partnership refers to the fact of alignments and needs directly and through our module customers and understanding of supply needs and commitments on supply shipments.

Mehdi Hosseini, Analyst

Okay. And your 5x capacity increase for silicon photonics, silicon germanium, does that include incremental demand from NVIDIA and partners?

Russell Ellwanger, CEO

Yes, that's referring to total demand. Well, I wouldn't say it's necessarily referring to total demand. It's an answer to demand, but it's the actual capacity that we're building. So if you look at what we had referred to as the $380 million run rate that we had in Q4, take off of that some small amount of NRE, which we don't specify, the silicon wafers that we shipped for the fourth quarter, that exact amount of silicon wafers by capacity, we plan to have 5x more of that in the fourth quarter of 2026.

Mehdi Hosseini, Analyst

Got it. Okay. And then on your power business line, do you think you would be able to also help prospective customers on the high voltage, especially as the next generation of AI server rack will require 800-volt DC?

Russell Ellwanger, CEO

We have a variety of roadmap activities. We don't, at this moment, have an 800-volt platform on an IC. We do have 800-volt capabilities in fabs, but not in an IC. But we do have higher voltage IC capabilities with and without SOI.

Operator, Operator

We are now going to take our next question. And the next questions come from Tavy Rosner from Barclays.

Tavy Rosner, Analyst

Just following up on the NVIDIA question. So just to clarify, you're not actually shipping directly to NVIDIA, you're shipping through resellers that will just send your technology on to them.

Russell Ellwanger, CEO

That is correct. We do not ship photonics directly to NVIDIA. Regarding specific projects or activities with NVIDIA, I cannot discuss anything that was not stated in the press release. The present silicon-based photonics ICs are all designed by and shipped through other module makers or integrators.

Tavy Rosner, Analyst

Okay. Understood. And then around CPU, I mean, you spoke about the opportunity. I think I recall last quarter, maybe it was a different conversation. You guys spoke about the ability to add value to the ecosystem through lasers, power connectors and you guys also doing any R&D on the actual CPU as well, maybe through third-party packaging in order to have your kind of your own end-to-end offering at some point?

Russell Ellwanger, CEO

Direct packaging of the CPU, no, we're certainly working on multiple architectures of CPO and certainly, the XPU would be or could be incorporated into the CPO. But the specific activity right now of our engagement, well, that's not even 100% true. Yes, I mean, we're certainly working with XPU makers on CPO strategies.

Tavy Rosner, Analyst

Okay. Understood. And then the very last one for me. The rollout of additional CapEx, I think I recall you saying it's going to be all live by end of 2026. Is there any chance that it can come in sooner depending on several factors, maybe some of them beyond your control, but like is there any chance or you have the certainty that that's not going to be online before the end of the year?

Russell Ellwanger, CEO

The capacity qualification ramp will occur throughout the year. The largest part of the $920 million should be fully qualified by the third quarter, with growth expected in the first and second quarters as well. Our recent orders include tools arriving in the second quarter. By December, we anticipate everything will be fully qualified to enable customer starts. For this to happen, the tools need to arrive by the end of the third quarter, ideally by mid-third quarter. It's important to note that while there will be a distribution of tools, some have already arrived, and the majority of the $920 million will come in between now and mid-third quarter.

Operator, Operator

We are now going to proceed with our next question. And the question comes from Cody Acree from Benchmark StoneX.

Cody Acree, Analyst

Congrats on the steady and impressive progress. Russell, maybe could you just give us a little more color on your expectations for your silicon photonics contribution in '26 and '27, specifically with the 70% commitment already talking about pre-paid. It looks like your visibility should be pretty solid for the next couple of years.

Russell Ellwanger, CEO

Yes, absolutely. The demand is certainly there, and we are fully aware of it. Currently, if your question pertains to the ramp profile, it primarily involves operational execution. There are still some technical aspects to address. Certain flows, such as those from San Antonio and Migdal Haemek, are not yet qualified, and only the Newport Beach fab has seen most of the development so far. While there is further technical work needed, most of it is behind us. Once everything is ready for qualification, there will still be several months of live testing for customers to qualify the flow themselves. This includes going through high-temperature operating life tests and any other live tests customers require for their commitments. The majority of the focus is on operational execution, which is why we feel confident about our model projecting $2.84 billion in revenue and $750 million in net profit. We aim to have everything ready for wafer starts by December. Even if we encounter a delay of one to three months, the capability will be established. Some tools may not be fully qualified on time due to various factors, including potential issues during disassembly and shipment from our suppliers. We recognize that suppliers can occasionally miss targets, just as wafer manufacturers might. Ultimately, whether the full qualification occurs in December, November, January, or February, it will happen, and the demand is strong and committed. We are well positioned to meet those commitments without asking for reservation fees since our customers understand the value of silicon photonics. It's primarily about our operational execution, although we do rely on our capable suppliers with whom we maintain good relationships. To foster these relationships, we believe in treating our suppliers well, as it reflects our approach with customers too. There is a possibility of minor delays, but our growth plans remain solid. While a month or two may affect specific timelines, it won't hinder the overall capacity growth. There may be isolated issues with a small number of tools, but throughout this year, we will certainly see incremental capacity growth.

Cody Acree, Analyst

Maybe can I just continue on with your mobile business. Any concerns about the ongoing memory shortages or the increased prices that have been called out by some of your peers in the industry and the impact to potential unit volumes in the handset market?

Russell Ellwanger, CEO

Cody, there’s always a concern when you have something in the market that you cannot control. So yes, there is definitely a concern there. We work closely with our customers to understand their inventory levels, and they also try to gauge their customers’ inventory to ensure that our plans for the year can be met. However, I wish I could say that we have no concerns and are unaffected by market factors. Unfortunately, we are not; there are always elements in the market that can impact us, and we aim to plan as effectively as possible. In the best-case scenario, we prepare alternatives in case a certain capacity in the fab isn’t utilized, allowing us to replace it with something else. We’ve discussed intentionally accommodating some lower-margin products to make space for higher-margin ones. Although demand for lower-margin products persists, if a gap arises in the fab due to unexpected demand levels, we can backfill it with other products. While those alternatives may not be ideal because of their margin profiles, they can still be implemented, allowing us to absorb our fixed costs.

Operator, Operator

We are now going to proceed with our next question. The questions come from the line of Richard Shannon from Craig-Hallum Capital Group.

Unknown Analyst, Analyst

This is Tyler on for Richard. Sorry to disappoint. I had a question. I had a question on this model that you gave and the 2028 timeline. Is this a run rate in 2028? Or is this the full year?

Russell Ellwanger, CEO

Yes, we certainly aim to achieve it by the run rate, and we are targeting a full year. What we have stated is that it will be accomplished within the year. Our goal is clear, and I believe we can reach it by run rate. Ideally, we would like to achieve it for the full year, and that is possible.

Unknown Analyst, Analyst

Okay. Great. And then the silicon photonics, I know you just mentioned you could backfill other things. But at this point, with all of the CapEx investments that you make, is this going to put the fabs at fully utilization for that model?

Russell Ellwanger, CEO

No. Silicon photonics would not bring any of the factories to full photonics utilization. But it's not the silicon photonics that I was talking about as far as backfilling. That question was the specific question with regard to the RF mobile because of fear of the high-bandwidth memory manufacturers focusing on that for data center rather than supplying it elsewhere. Without the memory that it might not that there could be a decline in the overall mobile integrator by not having the memory they need for their phones. That was what the question was. So I was saying if that was the case, that capacity is fungible.

Operator, Operator

We are now going to proceed with our next question. The questions come from Lisa Thomson from Zacks Investment Research.

Lisa Thomson, Analyst

I have a few accounting questions for Oren. First off, could you tell us exactly what the dollar amount was for the one-time tax benefit in Q4?

Oren Shirazi, CFO

It's approximately the difference between if we had 15%, 16%, or 17% by the model, which is about from the $81 million pretax income we should have like to have a tax expense of about 15% to 17% of that. So about like $12 million, $13 million. Instead of that, we have $1.5 million. So the gap is about $10 million.

Lisa Thomson, Analyst

Okay. And can you explain exactly what did you get for the $105 million for the lease extension?

Oren Shirazi, CFO

We got an additional 3.5 years of lease on the Newport Beach facility. We announced on 13 November 2025 press release. Instead of that, it was supposed to be ending in the beginning of '27, it is now until the end of 2030.

Lisa Thomson, Analyst

Okay. And you paid the $105 million upfront cash?

Oren Shirazi, CFO

Yes, yes. Yes. And it's included in the cash flow operations of Q4, which is the reason why it is a one-time lower by $105 million than any model. But we announced it in November, so it's not new, no.

Lisa Thomson, Analyst

I'm curious about whether the change in the U.S. depreciation rules regarding what can be written off has impacted your model or your depreciation expectations moving forward.

Oren Shirazi, CFO

No. No impact on us.

Operator, Operator

This concludes the question-and-answer session. So I will now turn back to Russell for closing remarks. Thank you.

Russell Ellwanger, CEO

Thank you very much. 2025 marked the completion of my 20th year at Tower. So I thought I would give a little bigger picture view of what Tower is about, where we're going, and what we're doing. For the year 2025, we had a corporate theme, and the theme was bold growth, limitless impact, infinite reach. I love that theme and put a lot of thought into it, and truly would be my great honor if my life's journey would be worthy to have those words in my epitaph included, obviously, to loving, honorable, loyal, husband, father, grandfather, and friend. But if that was written on my epitaph, wow, what a value-add life I would have led. If you look at bold growth, at least to me, it means being undaunted and creating a legacy much accretive to one's birth situation. In the case directly of corporate leadership, it would mean expanding the enterprise much, much beyond the situation from when one arrived. If you talk about limitless impact, that would mean that the individual or the corporate leader has been successful in importing knowledge and creating opportunities for employees, colleagues, community for one family to have an advancing growth trajectory much beyond what they otherwise would have had, what otherwise would have been. Infinite Reach is a very interesting concept. I first encountered the term in David Deutsche's book, The Beginning of Infinity. The meaning that he put forth meant that truth discovered in any sphere, if indeed a truth holds in all spheres. It is very interesting. If you look at learning, there are many things which truly cannot be taught, but rather must be learned, where the learning comes only through doing. I have a very strong belief that work is the laboratory where one can and should learn and develop themselves in all capabilities, principles, and values needed to become the person that they aspire to be. Anyone worth their salt spends the bulk of their waking dollars at work. What a meaningless activity if that isn't the place where one develops as a person. A good company must allow for financial and professional growth, but a great company allows for the same with the addition of personal growth. Years ago, earlier in my career, I had the great pleasure to reflect and thank Dr. Dan Medan at the time the President of Applied Materials, and this is directly what I wrote to him: When I came to Applied, I believe I was a good person. Thank you for creating an environment that has allowed me to become a better person. Tower aspires to be such a high-quality company. We focus on hiring the most capable and passionate people, and of equal importance is developing and nurturing an environment where passionate and capable people can further grow in capability, passion, and virtue. We acknowledge and drive an understanding that the strongest catalyst for increased capability and enhanced passion is close collaborations with our customers and the excitement earned from sharing in each other's successes. There’s a quote of uncertain origin: If two people agree on everything, one of them is unnecessary. We treasure diversity, but only if it's directed to a single mission and purpose with actions. Organizational anarchists do not do very well at Tower. We have worked hard to be a company that truly allows people to grow. If you allow people to grow, you have an environment and a spirit in the company where the company has become truly a masterpiece. If a company has extremely passionate people of high character, they are a magnet for customers, and customers want to be with them. That allows for corporate growth. That is one of the things that allows for bold growth, limitless impact, and is based on the infinite reach of people. As soon as you take on big responsibilities, and full ownership on those responsibilities, you learn so many truths. What is true in one sphere is true in everything. The principles that allow you to be a successful business leader allow you to be a successful father, a successful husband, a successful mother, a successful wife, a successful daughter, and a successful and value-added friend. We showed this new financial model, which, as having stated multiple times and being questioned about, is our target to achieve it, be it by run rate or in the full year, but to achieve this model in 2028, relatively short term. The model went through all of the incremental margins, but what it is, is a revenue CAGR of 22%. It's a very nice CAGR in our industry, a very nice foundry CAGR. A three-year CAGR of 22%. But it's a net profit CAGR of 50.5%, and that's incredible to have a 2.5% off of the 22% CAGR — to have a 2.5% increase in the CAGR of the net profit, which is not something that's talked about often. To close, we entered 2026 with very strong momentum towards bold growth, limitless impact, and infinite reach. Thank you for being with us. Thank you for continuing to be with us as we track towards the achievement of the $750 million net profit model. Thank you very much.

Operator, Operator

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.