Tower Q1 net profit surged 62% year-on-year, Q2 revenue guidance hits record high, silicon photonics orders locked in until 2028 | Earnings Report Highlights

```html

Israeli semiconductor foundry giant Tower Semiconductor has caused a strong stir in the capital markets thanks to an unexpectedly strong quarterly result and a record-scale AI chip supply contract.

On May 13, Tower Semiconductor announced its Q1 2026 financial report, while also disclosing a $1.3 billion supply contract for 2027 with its largest silicon photonics customer, and has already received a $290 million prepayment for capacity reservation. The company also revealed that the customer has committed to a larger wafer order for 2028, with the additional prepayment to arrive before January 2027.

After the announcement, the company's US stock surged more than 22% in one day, hitting a 25-year high.

CEO Russell Ellwanger stated after the financial report that the company is confident about reaching its 2028 financial model targets—annual revenue of $2.8 billion and net profit of $750 million. He emphasized in the conference call that the $1.3 billion contract only represents the customer's minimum commitment and does not reflect their full demand, with actual shipment expected to "substantially exceed" this figure.

Comprehensive Outperformance in Q1; Net Profit Up 62% Year-on-Year

Tower Semiconductor reported revenue of $413.6 million for Q1 2026, up 15% year-on-year and beating analysts' average forecast of $411 million. Net profit (attributable to the company) was $65.03 million, up 62% year-on-year, with net profit margin rising from 11% last year to 16%.

Gross profit was $111 million, up 52% year-on-year; operating profit was $64.57 million, up 96%. On an adjusted basis, diluted EPS was $0.65, above market expectations of $0.56.

CFO Oren Shirazi noted in the conference call that the significant improvement in gross margin aligns with the company’s previously released financial model—which assumed incremental revenue gross margin contribution of about 59% and anticipated gross margin would linearly increase to 39% with expanding revenue scale. This quarter's gross margin rose to 27% from last year's 20%, ahead of the expected pace.

On the balance sheet, as of the end of March 2026, the company’s total assets were $3.7 billion, shareholder equity reached a record high of about $3.0 billion, and the current ratio was about 5.6. S&P Global's Maalot rating agency on May 5 upgraded the company’s outlook from "Stable" to "Positive", maintaining the "ilAA" rating.

Explosive Growth in Silicon Photonics Business; AI Data Center Demand Drives Capacity Expansion

Silicon photonics (SiPho) was the star growth engine this quarter.

Russell Ellwanger revealed in the conference call that Q1 silicon photonics revenue tripled year-on-year, and the company is ramping up capacity simultaneously at Israel Fab 2, US Newport Beach Fab 3, Texas San Antonio Fab 9, and Japan Uozu 300mm Fab 7.

Both Fab 2 and Fab 7 completed their first silicon photonics wafer shipments in Q1, with Fab 7's first batch yield reaching 95%.

The company plans to expand silicon photonics capacity to five times the wafer shipments of Q4 2025 by the end of 2026.

Ellwanger stated that the strategic focus for 2027 will shift to further expanding the 300mm capacity at the Japan Uozu factory, expecting after approval from Japan's Ministry of Economy, Trade and Industry (METI), the new facility could be ready to receive equipment as soon as the first half of 2028, with ultimate capacity likely to expand to four times the current level.

On the technical front, the company jointly launched an all-silicon 400Gbps Mach-Zehnder modulator with Coherent this quarter and, together with OpenLight, released a heterogenous-integrated 400Gbps indium phosphide electro-absorption modulator.

Additionally, the company announced partnerships with Lightwave Logic, NLM Photonics, Salience Labs, and Oriole Networks to advance mass production of thin-film lithium niobate and organic polymer modulators.

Record Q2 Guidance; Clear Target for Sequential Quarterly Growth in 2026

The company guided Q2 2026 revenue at $455 million, plus or minus 5%, up 22% year-on-year and 10% quarter-on-quarter, which will set a single-quarter revenue record, and beats analysts’ average forecast of $436.4 million.

The company also reaffirmed its expectation for sequential quarter-over-quarter growth in revenue and profit margins for all of 2026.

When asked in the conference call whether the 2028 long-term financial model would be raised, Ellwanger stated that, given current order visibility, he expects to update the model to higher numbers "within the next quarter" and would redefine the 2028 target as a "medium-term" rather than "long-term" goal.

On capital expenditure, the company is executing a $920 million silicon photonics and silicon germanium capacity expansion plan covering Israel, Newport Beach, Texas, and Japan Uozu factories.

Oren Shirazi stated that about 40% of this capex has been paid in previous reporting periods, with the remaining 60% to be spent between 2026 and 2027, all included in the company’s 2028 financial model.

Multi-Tech Platform Synergistic Growth; Japanese Factory Reorganization Strengthens 300mm Strategy

Aside from silicon photonics, all other major technology platforms delivered year-on-year growth in Q1: image sensors up 9%, RFSOI up 12%, power management up 10%, silicon germanium (SiGe) up 24%.

Ellwanger noted that the silicon germanium platform benefits from strong demand for optical transceiver drivers and transimpedance amplifiers, and has seen a new ramp-up in Tier 1 mobile platform low-noise amplifier applications.

In Japan, the company announced that it would proceed with the TPSCo reorganization transaction to secure full ownership of Uozu Fab 7, aiming to build a larger-scale and more profitable 300mm manufacturing platform.

Ellwanger said Fab 7 is currently operating at full capacity, with utilization far exceeding the model’s 85% assumption, and is profitable even at current output. Meanwhile, the company signed a long-term supply agreement with Nuvoton for Fab 5 Tonami to ensure manufacturing continuity for its 200mm customers.

In terms of utilization, Fab 2 was about 60% in Q1 (impacted by ongoing silicon photonics and SiGe certification), Fab 3 at 80%, Fab 5 at 75%, Fab 9 at 80%, and Fab 7 far over 85%. The company expects utilization at Fab 2 and Fab 3 to recover in Q2.

Notably, competitor GlobalFoundries filed a lawsuit against Tower in March this year, accusing it of infringing 11 patents related to chip manufacturing for smartphones and other electronics; the lawsuit is ongoing.

Risk Warnings and DisclaimerMarket risk exists, investment needs caution. This article does not constitute individual investment advice, nor does it consider any user's specific investment goals, financial standing, or needs. Users should consider whether any opinion, view, or conclusion in this article fits their specific situation. All investment decisions are at their own risk. ```