Tower Semiconductor (NASDAQ/TASE: TSEM) reported Q2 2026 revenue of $460.1 million, up 24% year over year, while GAAP diluted EPS increased to $0.79 from $0.41. Gross and operating margins expanded substantially as gross profit grew faster than revenue, although elevated capacity investment pushed quarterly free cash flow slightly below zero.
Core financial results
Gross profit rose 72% to $137.8 million, lifting gross margin to approximately 29.9% from 21.5%. Management attributed the broader performance to demand momentum across key business units, with silicon photonics, or SiPho, showing particularly rapid growth.
Operating costs increased approximately 18%, slower than revenue growth, helping operating profit more than double. GAAP net profit attributable to Tower reached $90.8 million, while adjusted net profit was $100.7 million after excluding stock-based compensation and amortization of acquired intangible assets.
| Metric | Q2 2026 | Q2 2025 | Year-over-year change |
|---|---|---|---|
| Revenue | $460.1 million | $372.1 million | +24% |
| Gross profit / margin | $137.8 million / 29.9% | $80.0 million / 21.5% | +72%; +8.4 points |
| Operating profit / margin | $90.3 million / 19.6% | $39.9 million / 10.7% | +126%; +8.9 points |
| GAAP net profit attributable to Tower / margin | $90.8 million / 19.7% | $46.6 million / 12.5% | +95%; +7.2 points |
| GAAP diluted EPS | $0.79 | $0.41 | +93% |
| Adjusted diluted EPS | $0.88 | $0.50 | +76% |
| Operating cash flow | $177.0 million | $122.6 million | +44% |
Adjusted results are non-GAAP and excluded $9.9 million of stock-based compensation and acquired-intangible amortization, compared with $10.6 million a year earlier.
Business and product performance
SiPho was the most clearly quantified business driver. Its annualized revenue run rate increased to $680 million in Q2 2026 from $180 million in Q2 2025. This figure is an annualized run rate rather than recognized quarterly revenue, but it indicates the scale of the platform’s expansion.
Management plans for the SiPho annualized revenue run rate to exceed $1 billion in Q4 2026, followed by further growth in 2027. Tower is expanding manufacturing capacity to support this demand, including additional capacity projects announced during 2026.
Profitability, cash flow and the balance sheet
The combination of revenue growth and slower expense growth produced clear operating leverage. Total research and development and marketing, general and administrative expenses rose to $47.5 million from $40.2 million, an increase well below the growth in gross profit.
Cash generation did not translate into positive free cash flow because capital investment remained high. Operating cash flow of $177.0 million was slightly below $186.6 million of net property and equipment investment, resulting in approximately negative $9.6 million of free cash flow. A year earlier, free cash flow was approximately positive $11.9 million.
Tower ended June with $231.2 million in cash and equivalents and $1.25 billion in short-term deposits. Against total short- and long-term debt of $141.7 million, this represented approximately $1.34 billion of net cash. Deferred revenue and customer advances, including long-term customer advances, totaled $321.4 million, up from $27.5 million at the end of 2025; however, customer advances decreased by $2.5 million during Q2 after rising sharply in Q1.
Earnings guidance
Tower guided Q3 revenue to a record midpoint of $520 million, with a 5% range in either direction. The midpoint implies that management expects both year-over-year and sequential growth to accelerate from the Q2 level.
| Item | Latest outlook or target | Stated comparison |
|---|---|---|
| Q3 2026 revenue | $520 million midpoint, ±5% | +31% year over year; +13% sequentially |
| 2028 target business model | $3.6 billion revenue and $1.2 billion net profit | Raised; prior targets were not quantified in the release |
CEO Russell Ellwanger said the revised 2028 model was “fully spoken for by our customers,” linking the higher target to existing customer demand and strategic engagements.
Risks investors should monitor
- Capacity expansion and execution: Net capital investment reached $186.6 million during the quarter. Construction, equipment installation, qualification or yield delays could increase costs and slow the conversion of demand into revenue.
- Demand and customer commitments: The Q3 outlook and SiPho targets depend on customer forecasts and commitments translating into orders. A demand shortfall could result in excess capacity or inventory, while an inability to meet committed demand could lead to penalties or repayment of customer advances.
- Free cash flow pressure: Capital spending exceeded operating cash flow in Q2. Continued expansion could keep free cash flow volatile even if reported earnings continue to grow.
- Higher tax costs: Tower said the OECD’s Pillar Two rules impose a 15% minimum corporate tax rate beginning in 2026, compared with the 7.5% preferred rate previously applied to its Israeli operations, creating the potential for additional tax expense.
- Operational exposure in Israel: The company’s Israeli manufacturing operations remain exposed to regional security conditions, workforce availability and possible supply-chain or trade disruptions.
Summary
Tower Semiconductor’s Q2 2026 results combined 24% revenue growth with significant margin expansion, supported by demand momentum and the rapid scaling of SiPho. The main questions now are whether the company can deliver its higher Q3 revenue outlook, expand capacity on schedule and convert its growth investments into sustainable free cash flow.
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