SkyWater Technology, Inc.

Thank you for standing by. My name is Greg and I will be your conference operator today. At this time, I would like to welcome everyone to the Skywater Technology Q1 2024 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw your question, simply press star one again. Thank you. I would now like to turn the call over to Claire McAdams, Investor Relations for Skywater. Claire, please go ahead.

Thank you, Operator. Good afternoon, and welcome to Skywater's first quarter 2024 conference call. With me on the call today from Skywater are Thomas Sonderman, 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. On our IR website, we have posted an investor slide presentation to accompany today's call, as well as a financial supplement, which summarizes our quarterly and annual financial results for the last three years, including all non-GAAP adjustments and comparisons to our GAAP results, as well as the impact of tool sales on our gross margins. 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 8K today and our fiscal 2023 Form 10K. 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, our financial supplement, and in our Q1 earnings presentation, all three of which are posted on our investor relations website. And with that, I'll turn the call over to Tom.

Thank you, Claire, and good afternoon to everyone on the call. I am pleased to report another record quarter for Skywater with revenue of $80 million. ATS development revenue exceeded our expectations to reach a new record of $61 million, up 7% from Q4 and up 28% compared to Q1 of 2023. This growth was driven by continued strength in our aerospace and defense, quantum computing, and biomedical programs. Wafer services revenue was $10 million, a bit higher than expected, while tool revenue was lower than forecast, due to some transitory delays and equipment deliveries. Given the record results and revenue upside in ATS, the resulting mix of revenue was indicative of strong gross margin and adjusted EBITDA momentum. However, as Steve will detail in his prepared remarks, We recorded a multimillion-dollar charge to cost of revenue that reflects the anticipated additional costs required for us to complete certain development milestones for a significant A&D program, and this impacted our expected progress towards profitability in Q1. We believe our CapEx Lite and high operating leverage business model will lead to strongly profitable results in the years to come, and today I will focus my prepared remarks on the drivers for the anticipated strong customer demand and earnings leverage ahead. This quarter marks the three-year anniversary of our IPO. During that time, we have firmly established the key aspects of our unique value proposition within the global semiconductor industry. Through leveraging existing chip manufacturing infrastructure, and introducing new materials and processes, we are able to enhance the capabilities of traditional IC flows. While innovations in semiconductor advanced nodes are fundamentally enabled from shrinking geometries, In mainstream fabs such as ours, innovation comes from new ways of integrating new materials, new types of devices, and new additive process flows to provide new chip functionality and drive the performance envelope with respect to size, weight, power, and cost. And while these types of chips are often referred to as mature, they are absolutely essential. For example, high K materials at 90 nanometer can be used to create high density capacitors that enable our customers to design readout ICs or ROICs for state-of-the-art thermal imaging cameras. These sensors can be used in applications that range from defense systems to automotive driver assist. As another example, we incorporate a vast array of differentiated structures for CMOS and MEMS-like integrations for chemical and molecular sensing. which is required for the rapidly expanding medical diagnostic and sequencing markets. We are essentially creating new, fully integrated product categories by leveraging existing CMOS infrastructure and integrating new features, materials, and capabilities. 200 millimeter is exactly the right format to co-create these new categories alongside our customers. given the frequent iterations and cycles of learning required to develop new flows and new devices synergistically. These will be cost prohibitive at 300 millimeter. The resulting business from this ATS development work with our customers has far surpassed our legacy wafer services business in terms of revenue and has emerged to be the key growth driver for Skywater. And equally important, we expect this investment with our customers will resolve an entirely new class of products introduced to the market on technology developed at Skywater. Through the evolution of our ATS business model, we have had a front row seat to observe the diverse needs of our customers as they endeavor to bring disruptive ideas to life with new materials, devices, and integration schemes. This firsthand knowledge from supporting innovators across markets has led us to introduce advanced packaging as a new growth vector for Skywater. Offering advanced packaging solutions domestically enables us to enhance our DoD and commercial revenue growth opportunities. We are excited about the growth potential for our Florida operations as we have begun specifying and ordering tools that will enable our 2.5D and 3D packaging platforms. These tools are being funded by the $120 million award announced in January. Turning to the market environment, there are several key macro themes driving our business today. The first and most prominent driver currently is the increased investment in the semiconductor technology being made domestically in aerospace and defense. Upgrades and enhancements to critical defense infrastructure are ongoing and include nuclear modernization, space capabilities, missile defense, and unmanned systems, all of which are helping to drive increasing semiconductor content across all mission systems. Even more importantly for Skywater, however, is the growing realization of the fragility of the semiconductor supply chain and the critical need to onshore semiconductor infrastructure. And within this ecosystem, we play a critical, trusted role with the U.S. government. As defense program technology spending is deemed critical and the need for domestic supply chain undeniable, this growth factor is driving the majority of our current revenue growth, which also aligns with our expected A&D revenue mix exceeding 50% in 2024. The macro themes affecting our commercial businesses today reflect shifts in how we will compute, communicate, diagnose, and drive industry efficiencies into the future. These include the creation of device categories that operate by concepts beyond the conventional electronics realm, such as quantum computing and silicon photonics. Every day we are collaborating with our customers on numerous exciting new devices that will contribute to the highly connected AI-driven world emerging before us. We have begun an exciting period for Skywater as several long-term ATS customers begin their transition to wafer services. Last quarter, we talked about a biohealth program, and on today's call, I am pleased to highlight our most recent conversion. Following nearly two years of collaboration between Skywater and Lumotiv, we were excited to jointly announce last week the transition of their optical beam steering device to production. Lumotiv's Light Control Metasurface chips deliver solid-state optical beam steering into the market for the first time, ushering in a new era of programmable optics. The ability to shape and steer light with a single chip is already revolutionizing applications such as 3D sensing, with many more on the horizon. LM10, Lamoda's first LCM product offering, is now in production and shipping worldwide. In the coming weeks, we expect to announce the transition of another biomedical customer into a wafer services engagement. All of these transitions are key markers for the effectiveness of our unique technology-as-a-service approach to customer product realization. As anticipated, we are seeing a decline in wafer services revenue from legacy standard CMOS. Demand in those markets continues to be sluggish and has been compounded by a prolonged inventory correction. We have used this relaxation in demand for our traditional platforms to accelerate the development and integration of new technologies, resulting in continued growth in ATS development, which since our IPO has been the primary driver of our three-year annual revenue growth rate of 27%. With this as a backdrop to what is driving our top line, let's review the uniqueness of our business model and why we believe it positions us for gross margin expansion and significant earnings leverage as we turn the corner to profitability. First, our infrastructure. Several hundred million dollars of gross fixed assets invested in our Bloomington FAB have been largely depreciated. Total depreciation and amortization is expected to comprise about 5% of our revenues in the current quarter. More importantly, we believe depreciation will continue to be minimal for us because our customers are funding the majority of our current CapEx requirements. We expect 2024 to be a landmark year for customer funded CapEx investments in Skywater, and today we have the visibility for at least $70 million in expected tool revenue this year. We estimate that since 2020, we have been the beneficiary of at least $100 million in customer-funded CapEx between those incorporated in major contract awards and tool sales recognized over that period. In this next multi-year stage, we expect an additional $200 million of outsized investments through 2026, funding the majority of our capacity additions and incremental new capabilities. In total, this roughly $300 million of expected customer investment means that Skywater is the beneficiary of a greater amount of outside co-investment than any other participant we know of in the domestic semiconductor ecosystem relative to our size. Now turning to our outlook for Q2. We are forecasting another record level revenue quarter in the low to mid $80 million range. Within this forecast, ATS development revenue is expected to be in the high $50 million range, representing growth of approximately 10% to 15% compared to Q2 of last year. While we believe our DoD business overall will remain strong, some program funding was affected by the delays in approving the U.S. government 2024 fiscal budget, which we believe will result in a slightly lower quarterly run rate as we move beyond Q1's record revenue results. And wafer services, aligned with our earlier outlook for the year, is our expectation that quarterly revenue will decline to the $4 to $5 million range in Q2 and then stabilize at that level, reflecting the continued softness in the broader industrial market and our increased focus on ATS. With customer-funded CapEx continuing to ramp to record levels, tool revenue is expected to be at least $20 million in the second quarter. This landmark year for customer-funded CapEx is aimed at enabling new capabilities that we expect will allow us to execute on our robust future growth expectations for both ATS development and wafer services. Our revenue growth expectations for the full year are largely unchanged since our February earnings call. We continue to expect ATS development growth in the range of 10% to 20% over 2023, a significant increase in tool sales, and a meaningful decline in our legacy wafer services revenue. As we look beyond 2024, we believe that the distinction of our business model, the highly differentiated innovative technologies we are making available to the domestic IC market, and the strong customer pipeline we continue to build position Skywater for several years of above industry growth and strong operating leverage. I will now turn the call over to Steve.