SkyWater Technology, Inc.

At this time, I'll turn things over to Ms. Claire McAdams, Investor Relations of Skywater. Ms. McAdams, please go ahead.

Thank you, operator. Good afternoon and welcome to Skywater's second quarter fiscal 2023 conference call. With me on the call today from Skywater are Thomas Sonderman, President and Chief Executive Officer, and Steve Manco, 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. On our IR website, we have also posted an investor slide presentation to accompany today's call. During the call, any statements made about our future financial results and 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 discussion of these risks and uncertainties, please refer to our filings with the Securities and Exchange Commission, including our earnings release filed on Form 8-K today and our fiscal 2022 10-K filed on March 15th of this year. 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 as well as in our Q2 earnings presentation, both of which are available on our investor relations website. With that, I'll turn the call over to Tom.

Thank you, Claire. and good afternoon to everyone on the call. We are pleased to report strong second quarter financial results as we set another record for quarterly revenues at $69.8 million. Q2 revenues exceeded our expectations going into the quarter and marked an unprecedented fourth straight quarter of sequential quarterly growth. Revenues were 6% higher than the previous record set in Q1 and grew 47% from Q2 of last year. The strong revenue performance in Q2 exceeded our forecast, chiefly due to the restructuring of an existing contract with one of our commercial ATS customers. We concluded certain aspects of our development work with this customer and entered into new terms going forward. This resulted in a pull-in of $3.6 million of revenue that previously was expected to be recognized over time. Even absent this pull-in, Q2 revenues were at the upper end of our forecast, due to continued strong momentum on multiple ATS programs, where we continue to demonstrate our ability to execute on the rapidly growing demand from our customers. Q2 marked our fourth straight quarter of strong gross margin performance and positive adjusted EBITDA generation. Our trailing 12-month revenue of $253 million demonstrates growth of 50% over the prior 12-month period. We are achieving gross margin flow through well above 50% on these incremental revenues and are making solid progress towards our target financial model. We have generated $29 million of adjusted EBITDA over the last four quarters, equal to 11% of total revenues. Our strong performance year to date also provides us with greater clarity for the whole year and increased confidence that our long-term annual growth objective of 25% is achievable in 2023, despite the overall macro concerns and softening and worldwide semiconductor demand. Underlying Skywater's strong growth profile this year is our unique positioning within the semiconductor ecosystem. Our company is growing rapidly through this challenging macro environment due to our differentiated business model and diversified customer and end market portfolio. This includes a strong A&D component as well as a number of commercial A&D programs that continue to drive forward with the funding in place to support critical innovation, particularly for new technology advancements within the biohealth and advanced computing markets. Reflecting on the significant improvements in Skywater's operational execution and financial performance over the past four quarters, we are demonstrating important progress towards achieving the strong revenue growth and operational leverage objectives communicated since our IPO a little over two years ago. Now, a little more than halfway through this year, it is evident that our ATS revenue growth is proving itself to be relatively decoupled from the macro weakness affecting the overall semiconductor industry. A vital component of our strong revenue growth trajectory is the U.S. government's continued commitment to Skywater with its strategic Rathart investments. In Q2, we made additional progress on the prioritization and qualification of Skywater's 90-nanometer Rathart platform to prepare for the planned production ramp in 2025. The increased momentum we are achieving on this and other strategic government initiatives helped drive another record revenue quarter in Q2. Last quarter, we announced an increased sense of urgency and desire to accelerate the delivery of key development milestones, not only for Rad Hard, but on multiple defense programs. Our A&D customers increased the scope of multiple key programs in Q1, and with these trends continuing through the second quarter, we again have greater clarity and increased confidence in our overall revenue growth objectives. Furthermore, we believe our successful partnership with the DOD positions us to be a major beneficiary of impending federal government funding akin to the 2022 Economic Development Administration Build Back Better Award to accelerate the growth of the specialized semiconductor cluster at NeoCity Florida. In the commercial space, customer R&D investments continue through this period of overall industry tightening. We believe this is an opportunity for us to partner with the customers that are best positioned to succeed in the long run, allowing us to prioritize these specific programs accordingly. Two commercial end markets where we are seeing particularly strong investment and urgency are the biohealth and advanced computing markets. We have multiple ATS programs underway addressing multiple applications and device technologies in each of these areas. In BioHealth, we have several customers that could each contribute millions of dollars of revenue in 2023. These programs are pursuing emerging and large market opportunities in the areas of rapid diagnostics, genetic sequencing, and health wearable devices. These exciting fields are demonstrating a strong demand for innovation services where there is a growing need for microfabrication to enable technologies that have a strong value proposition for enhancing healthcare services and outcomes. While small today, these applications have a path towards high-volume production as early as next year. Skywater's leadership supporting superconducting and photonics technology flows in a 200-millimeter production fab remains a strong value proposition for the nascent and accelerating quantum computing industry. Numerous existing programs in these categories continue to expand, and additional programs are expected to kick off in the next two quarters. We are seeing increased interest and funding for advanced computing technologies, such as those incorporating superconducting films, silicon photonics, and quantum bits or qubits, which are the building blocks for the future of artificial intelligence or AI-enabled systems. Some of these advanced computing programs could exceed multi-millions of dollars in revenue for us this year. In response to those who have expressed concern over the early stage and venture-backed profile that reflects the majority of our commercial ATS customers, it's important to remind everyone that this is the very nature of Skywater's business model. Our task business model, our technology as a service, continues to attract innovators with long-tail applications addressing large TAM opportunities. We are a technology foundry and not a conventional or specialty foundry. This means our business is about developing next generation technologies that are high value and relatively low volume. We are not chasing the high volume, low mix foundry business from large, fabulous chip companies. That's the conventional foundry model, not Skywaters. As these commercial ATS programs continue to gain momentum, and as the strongest and best positioned customers redouble their efforts to accelerate the time to market for their solutions, we believe the uniqueness and strengths of our business model will play out through our ability to achieve revenue growth outpacing the overall founding market and strong operational leverage chiefly driven by gross margin flow through exceeding 50%. We believe that our differentiated approach What sets us up to potentially outgrow the industry and delivery near doubling of gross margins over the next two to three years truly sets Skywater apart as an investable option within the Founders space with particularly high earnings growth potential. Of course, expectations of strong demand and expanding opportunities for growth require ever-increasing efficiency gains, which we are driving aggressively through our automation and modernization efforts. This includes the installation of a variety of new software and metrology capabilities that we are bringing online to accelerate improvements in the productivity and yields of our 2 fabs. We are listening to support from 3rd party resources to help drive efficiency gains, which is a key investment we are making today with the expectation of significant long term gains in the future. Skywater has engaged outside consultants to help craft our operational execution to further optimize our task business model. By selectively applying industry best practices, we expect to build the operational foundation that will drive future revenue growth and margin expansion. The result of these and other operational excellence efforts gives us strong confidence in our ability to extract more margin from the business as we start to turn the corner to profitability. As Steve will also detail in his remarks, our adjusted EBITDA generation and cash flow profile means that we are generating positive free cash flow above the mid $60 million revenue level, excluding investments in working capital. And thus, our growth objectives do not require any significant new influx of capital. We intend to further strengthen the balance sheet through strong operational execution. Looking forward, Skywater continues to remain confident in our ability to secure CHPS funding to expand the capabilities at our existing sites in Minnesota and Florida while transforming the industry with our unique partnership with Purdue and the state of Indiana. We believe the momentum we build in 2023, including the expected efficiency gains we are now institutionalizing in our FABs, will position us for another strong year in 2024 as we continue to grow revenue and expand our gross margin profile. We anticipate that several ATS programs will transition to production in 2024, and we expect our active initiatives focusing on enhancing productivity and ongoing improvements in pricing will also drive the wafer services business next year. Furthermore, we will continue to emphasize our differentiated capabilities in the market and expect to secure new and improved long-term contracts to further strengthen our wafer services business. We anticipate gross margin acceleration to continue as a result of higher revenue volumes driving greater absorption of our fixed costs, positioning Skywater in the high 20s to low 30s gross margin level in 2024, and we expect to be nearing our target gross margin objective of 40% by 2025. In summary, we believe the distinction of our business model and a strong customer pipeline position Skywater for several years of above industry growth and strong operating leverage. This belief is independent of the macro weakness currently facing the semiconductor industry. We remain confident that the strategic investments being made towards the onshoring of critical semiconductor device manufacturing, in part due to the CHIPS Act, will ignite accelerated growth in our company as we aggressively drive towards our long-term revenue objective to be a billion-dollar pure-play semiconductor technology foundry within the decade. To be clear, we do not require CHIPS funding to achieve our long-term model, but we do intend to aggressively pursue it since we believe it will be an accelerant to our growth as the decade unfolds. I will now turn the call over to Steve.