SkyWater Technology, Inc.

Good morning, and thank you for standing by, and welcome to the Skywater Technology Third Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you should require any further assistance, please press star 0. I would now like to hand the conference over to your speaker for today, Ms. Heather Davis. Thank you. Please go ahead.

Heather Davis Good morning and welcome to Skywater's third quarter fiscal 2021 conference call. With me on the call today from Skywater are Thomas Sonderman, President and Chief Executive Officer, and Steve Manko, Chief Financial Officer. I'd like to remind you that our call is being webcast live on Skywater's Investor Relations website at ir.skywatertechnology.com. The webcast will be available for replay shortly after the call concludes. During the call, any statements made about our future financial results in business are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially. For a discussion of these risks and uncertainties, please refer to our filings with the Securities and Exchange Commission, including our earnings release filed on Form 8K yesterday and our prospectus filed April 22, 2021. All forward-looking statements are made as of today, and we assume no obligation to update any such statements. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release, which is available on our investor relations website. Unless noted, all comparables referenced today are versus the prior year or third quarter of fiscal 2020. With that, let me turn the call over to Tom.

Thank you, Heather, and good morning to everyone on the call. I've often spoken of and will continue to emphasize the historic nature of the post-Moores Law technology paradigm shifts that are occurring right now, as well as the role Skywater is playing to enable and drive this change. Every day we are working with our customers to co-create solutions through our highly differentiated technology as a service model. in areas such as rad-hard microelectronics, photonics, MEMS, superconducting, imaging, microfluidics, and advanced packaging. The disruptive technologies that we enable support megatrends across the economy that are shaping our world, like next-generation communication networks, advanced and quantum computing, autonomous vehicles, electrification, renewable energy, rapid biodiagnostics, genetic sequencing, smart biomedical devices, and state-of-the-art defense systems. Interestingly, In addition to technology and market-driven paradigm shifts, the supply chain challenges across industries, which you are no doubt hearing about, highlight the need for our nation to enhance domestic infrastructure. As the country is coalescing around the concept of semiconductor sovereignty, Skywater plays an increasingly critical role in supporting the vision of reestablishing the U.S. as a technology manufacturing leader. I share all this to highlight our collective excitement about Skywater's opportunity to address major needs in the industry for disruptive technologies, the unique infrastructure these technologies require to scale, and to make Skywater and the U.S. leaders in these emerging categories at the same time. In our call today, I will cover our high-level Q3 financial results, do a deep dive into our advanced technology services business, highlight several exciting areas for expected long-term growth, and then spend some time unpacking some of the challenges we see in our business today. In the third quarter, total revenue grew to $35 million compared to last year, led by increased wafer services revenue, which offset a decline in advanced technology services revenue. Supply constraints and delays in expected U.S. government funding had a near-term effect on the company and our customers, resulting in a revenue recognition delay for certain programs. We incurred higher cost of goods as we ramped up hiring and employee retention efforts to support our demand outlook. In addition, we continued investments in building our radiation-hardened and advanced packaging capabilities. These investments outpaced revenue growth in the quarter and were the primary drivers of gross margin of negative 5.2% and negative adjusted EBITDA of $2.7 million in Q3. We continue to aggressively ramp our advanced technology services and wafer services businesses and made important progress on our RADHRD and power management platform qualifications. We also completed the transfer of two ATS programs to wafer services last quarter, with another five underway. In the last 12 months, we have added 25 ATS customer programs and have substantially grown our sales pipeline. All of this gives us a strong conviction in our long-term model. As the past two quarters demonstrate, our business can fluctuate on a quarter-to-quarter basis, and due to a confluence of factors, our third-quarter results were below our expectations. We underestimated some of these factors, which are the consequences of our rapid growth, but we've learned from them and believe that this will make us stronger in the long term. In addition to what we believe are favorable market conditions for semiconductors today, we believe Skywater is well aligned to the long-term growth trends that demand services offered through our unique engagement model for the development and production of new technologies. Our approach to the market is called technology as a service, our TAS. This business model combines traditional volume manufacturing services, or what we call wafer services, with advanced technology services, which is an embedded R&D capability that enables us to monetize this competency. In the task model, customers come to Skywater with an idea, and we develop the manufacturing process together. In addition, we are a volume manufacturer, which means customers also get the benefit of high yields and automotive-level quality when their product goes into production, as well as the IP security benefits of performing development and manufacturing onshore. we have honed an exceptional proficiency creating novel and disruptive technology with our customers inside a production environment. This unique combination of advanced technology services and wafer services inside a single operation is one of our key differentiators and facilitates customer engagement throughout the development cycle, where we demonstrate and optimize their products while refining our capabilities. This symbiotic relationship allows customers to create unique offerings and allows Skywater to serve customers with differentiated technologies not easily produced elsewhere. The ability to handle development projects from R&D to volume production gives us a lot of stickiness with our customers. When faced with the requirements of establishing an operation capable of producing their device, customers typically decide that investing in their own facilities or engineering teams is not economical and simply takes too long to capitalize on the market opportunity. This is where Skywater's value maps to customer needs again and again to help them innovate, drive customization, and accelerate their time to market. We make it easy for customers to engage with us at any point in the technology and product development cycle, but our ATS projects typically initiate during concept and feasibility, technology demonstration, or process development. Ultimately, a successful ATS program will conclude with customers moving into wafer services, which is when they scale their product to volume production and do so with a process flow designed to run at Skywater. In the ATS phase of a customer engagement, we focus on margin per activity, targeting a high margin. These are all R&D programs centered around cycles of learning and validating technology. As customers move in the way for services, the margin per activity decreases as volume grows, but also requires substantially less engineering support, enabling those resources to focus on the next ATS program. The other key component of our task model is that it lowers our capital intensity. Customers invest in their development, not just for non-recurring engineering, but also for tool acquisition. If there's a program that requires tooling we do not possess, our customers typically fund the acquisition of the tool. It's not Skywater's practice to offer exclusivity, which means that we are able to use that tool not only for the lead customer, but also for other development and volume manufacturing programs. This approach enables the necessary development and subsequent production required to monetize the IP, co-develop with our customers with low capital intensity and strong mutual benefit. The positive momentum we've generated with the task model continues to grow, and we believe strongly in our highly successful approach. This is evidenced by our eight ATS wins during third quarter, bringing our total number of active customer engagements to 55, an increase from the 35 we disclosed during our IPO. It's important to recognize that it can take customers 24 to 48 months to move through the ATS funnel into buying production. Revenue generation from these programs typically accelerates as the programs mature. This year, we've begun the transition of several customers into wafer services. These new programs deliver higher margins than our legacy wafer services business. The biomedical space is one of four important growth areas for Skywater. Multiple Biohub programs are moving quickly at our company. Our highly collaborative engagement model is well aligned to needs in this space as conventional microelectronics and microfabrication technologies are rapidly merging with screening and intervention technologies This ability to co-create across fields along with Skywater's ISO 13485 medical certification brings a strong value proposition from development through production for new capabilities in the areas of rapid diagnostics, genetic sequencing, and a wide range of biomedical devices. We remain encouraged by the pipeline for ATS projects in the biomedical space. We achieved an important milestone with our radiation-hard technology platform, fabricating in Q3 the first fully integrated test wafers with copper back-end-of-line processing. Domestic production of rad-hard wafers is significant for the U.S. government in both space-based and defense applications. This work is progressing and ongoing, and we continue preparations to serve this critical high-value market. For our Florida Advanced Packaging Facility, we recently announced an agreement with DECA related to their second-generation M-Series fan-out wafer-level packaging technology. We are working with DECA to become the first pure-plate foundry to offer this competitive AP technology solution in the United States. The Gen 2 DECA technology is state-of-the-art in its ability to reduce die pitch and fan-out wafer-level packaging integration schemes. We previously announced that two Skywater Minnesota customers have selected our Florida facility for their advanced packaging needs. We continue to see increasing momentum in customer interest for our unique AP capabilities, and I'm very excited about the future of our Florida facility. The fourth growth platform for Skywater is high-performance power management and connectivity. We have partnered with several customers in this category as we work to transition them from ATS into wafer services. One of these customers is working with us to commercialize a new, innovative fin-based MOSFET architecture that will provide substantial benefit to high-speed power switching applications. This partner is currently working with their end customer on system qualification, and we anticipate that the wafer services ramp for this platform will begin with revenue generation in 2022. We believe the strategic and national importance of improving domestic manufacturing of semiconductors cannot be overstated. The CHIPS Act received bipartisan support in the Senate, and we remain confident that it will ultimately become law. Skywater continues to engage with multiple state governments to secure the matching funding necessary to capitalize on our nation's strategic investment in semiconductor research and manufacturing. Last month, we were honored to have Minnesota Governor Tim Walz tour our facility and discuss several opportunities we see to quickly increase the output and capabilities of our Minnesota fire. We believe Skywater is an excellent example of how public-private partnerships can collaborate to deliver domestically produced semiconductors for government and commercial customers. As the U.S. looks to build infrastructure in this area, we are optimistic that there are various scenarios for which we are uniquely positioned. We intend to be a leader in building our nation's manufacturing infrastructure for technologies that will be major industry drivers in the years to come. In the near term, we expect to continue to face challenges with supply chain and labor constraints. But as highlighted, there's ample opportunity for long-term revenue growth for Skywater to deliver increased shareholder value. Skilled labor is a key pillar of our growth. Starting in the second quarter of 2021, we began hiring for a range of roles key to scaling the output in our Minnesota fab in response to strong customer demand. The market for skilled labor is highly competitive in general, but the current market is as challenging as I've seen in my career. As we work through this, we are also focused on employee retention for all roles and view it as critical to our future. We're significantly expanding our learning and development capabilities to reduce the time required to achieve high levels of productivity while creating a foundation for all employees to reach their maximum potential. Skywater was not immune to the challenges in the supply chain for semiconductors this quarter. We talked about increased lead time for tools in our last call. In the third quarter, both Skywater and our customers experienced increased challenges sourcing spare parts, substrates, and the chemicals used in production, which did impact our wafer output and ATS activities in the quarter. We have now entered into multiple long-term agreements to secure supply into the future. Q3 revenue was also impacted by a significant complex multi-year ATS program that is now expected to be completed in the first quarter of next year, moving revenue recognition from 2021 into early 2022. These large-scale programs have multiple dependencies, and it's sometimes challenging to forecast the exact timing of these R&D-related milestone achievements. I'll stress that this is a movement of revenue to the right in the model. In 2021, we hired three senior operational leaders with many years of foundry experience. They are already making a strong impact, driving important performance improvements as we ramp our two paths. Output was constrained by the ongoing labor and supply chain challenges. Even so, wafer ops for the third quarter in our Minnesota FAB increased nearly 60% from the prior year. We were able to achieve this increase despite moving in new tools, improving infrastructure, and onboarding new hires. These challenges are real but well understood in our organization. We are a rapidly growing company ramping a complex business in a dynamic macro environment. These stressors continue to forge our teams and processes as we scale and optimize our operations to deliver long-term growth and increase shareholder value. I am very proud of all of our employees and what we are doing every day to co-create technology solutions with our growing list of customers. I will now turn the call over to Steve for information on our financial performance in our recently completed quarter. Steve?