Key Highlights of Earnings Call:

Operator

Introducing the latest insights from SkyWater Technology’s Q1 2024 financial results conference call, where the CEO and CFO shed light on the company’s exceptional performance and strategic outlook.

Strong Revenue Growth Amidst Challenges:

Claire McAdams — Investor Relations

Despite facing temporary setbacks in tool deliveries, SkyWater Technology reported a remarkable quarter with revenue soaring by $80 million. The surge in revenue was fueled by a stellar 28% rise in Advanced Technology Services (ATS) development revenue, driven by key programs in aerospace, defense, quantum computing, and biomedical sectors.

While wafer services revenue slightly exceeded expectations, lower-than-projected tool revenue, attributed to delivery delays, weighed on overall performance. The earnings call highlighted a significant charge to the cost of revenue, reflecting additional expenses linked to achieving specific development milestones for a critical A&D initiative. This adjustment impacted the anticipated path to profitability in Q1.

Promising Growth Trajectory and Customer Demand:

Tom Sonderman — President and Chief Executive Officer

Emphasizing the company’s distinguished market position and unique value proposition, Sonderman explained how SkyWater has revolutionized the semiconductor landscape over the last three years since going public. By capitalizing on existing infrastructure and introducing innovative materials and processes, SkyWater enhances traditional IC flows.

While cutting-edge semiconductor advancements typically stem from miniaturization, SkyWater’s innovation centers on novel materials, device types, and additive processes, elevating chip functionality and performance metrics. Despite being labeled as conventional, such chips play a pivotal role in various sectors. For instance, high-k materials at the 90-nanometer scale enable the creation of high-density capacitors, crucial for designing state-of-the-art thermal imaging systems for diverse applications spanning defense and automotive industries.

SkyWater Technology: Pioneering the Future of Semiconductor Integration

Throughout history, technological advancements have always been intrinsically linked to progress in various industries. For SkyWater Technology, the integration of CMOS and MEMS structures represents a pivotal milestone in its journey towards reshaping the landscape of medical diagnostic and sequencing markets. By leveraging existing CMOS infrastructure and integrating innovative features, materials, and capabilities, SkyWater is spearheading the creation of fully integrated product categories, a feat akin to sculpting a unique masterpiece in the realm of semiconductor technology.

Leading the Charge in Advanced Packaging Solutions

The transition towards advanced packaging solutions not only marks a strategic shift for SkyWater but also opens new avenues for revenue growth and market expansion. By enhancing its DoD and commercial revenue opportunities through domestic operations, SkyWater is aligning itself with the changing dynamics of the semiconductor industry, a transformation reminiscent of a chameleon adapting to its surroundings for survival.

Navigating the Currents of Change in Semiconductor Technology

The semiconductor industry is undergoing a metamorphosis driven by key macro themes that are reshaping the business landscape. From increased investments in aerospace and defense to the critical reassessment of the semiconductor supply chain’s vulnerability, SkyWater finds itself at the forefront of these transformative tides. As a trusted partner to the U.S. government, SkyWater’s pivotal role in enhancing domestic semiconductor infrastructure mirrors a strategic chess move in a high-stakes game of technological supremacy.

Embracing the Future Through Collaboration and Innovation

Collaboration and innovation lie at the heart of SkyWater’s ethos, evident in its ongoing partnerships with customers to bring disruptive ideas to fruition. Through the development of cutting-edge devices such as quantum computing and silicon photonics, SkyWater is paving the way for a future where conventional boundaries blur, and new horizons beckon. This evolution towards new device categories is akin to embarking on a journey to uncharted territories where each step holds the promise of a groundbreaking discovery.

Riding the Waves of Change: From Legacy Services to New Horizons

The transition from legacy wafer services to advanced technology solutions marks a pivotal moment in SkyWater’s trajectory. While traditional markets may experience sluggish demand and inventory corrections, SkyWater’s accelerated focus on developing and integrating new technologies has fueled growth in ATS development. This strategic shift underscores SkyWater’s adaptability and resilience in the face of evolving market dynamics, akin to a phoenix rising from the ashes of obsolescence.

Charting a Course for Future Growth and Innovation

As SkyWater sets its sights on gross margin expansion and profitability, its unique business model underscores a commitment to customer-centric innovation and sustainable growth. With significant customer-funded capex investments on the horizon, SkyWater is poised to usher in a new era of technological advancement and market leadership. This strategic foresight positions SkyWater as a key player in the semiconductor ecosystem, charting a course towards unprecedented growth and success.

SkyWater Poised for Industry Growth Despite Margin Challenges

Financial Results Showcase Resilience

Amidst a backdrop of shifting market conditions, SkyWater reported robust first quarter revenue of $79.6 million, marking a 20% increase from the same period in 2023. The company witnessed record Advanced Technology Solutions (ATS) development revenue of $61.2 million, surpassing expectations due to accelerated timelines and strategic initiatives prioritizing high-growth programs. Wafer services revenue saw a decline but exceeded forecasts at $10 million, whereas tool revenue at $8.5 million fell short due to delays in equipment deliveries.

Margin Challenges and Accrual Adjustments

SkyWater faced margin pressures, with a non-GAAP gross margin of 16.9% in Q1, lower than the anticipated low 19% range. An accrual charge of $8 million was recorded to account for additional development costs in a significant Aerospace and Defense (A&D) program. Despite this charge affecting gross margin expansion, a favorable business mix in the quarter showcased the company’s operational efficiency.

Operational Efficiencies and Future Outlook

Non-GAAP operating expenses of $13.6 million were below forecasts in Q1, primarily due to reduced variable compensation and timing shifts in certain costs. Looking ahead, SkyWater expects Q2 revenue in the low to mid $80 million range, driven by ATS development revenue, wafer services revenue, and tool sales. The company anticipates non-GAAP gross margin in the range of 16% to 19% for Q2, with operational expenses expected to remain stable throughout 2024.

Strategic Capex Management and Growth Forecast

SkyWater’s capital position remains robust, with $20 million in cash and $63 million available in credit. The company continues to prioritize customer-funded tool investments and expects total customer investments of at least $70 million in 2024. However, a shift in revenue mix is anticipated to impact gross margin expansion goals as non-tool revenue volumes face headwinds.

Revenue Projections and Operational Resilience

The company maintains a growth forecast of 10% to 20% in ATS development revenue for 2024, despite softening forecasts in wafer services. While depreciation levels are expected to decline, SkyWater’s visibility on customer co-investment is poised to support future capex needs. With a focus on operational efficiency and strategic investments, SkyWater remains optimistic about its long-term growth prospects in the semiconductor industry.

Unveiling the Complexities of SkyWater Technology’s Financial Landscape

Accounting for Government Contracts: An Intricate Dance of Numbers

A recent revelation by Steve Manko, the Chief Financial Officer at SkyWater Technology, shed light on the intricacies of accounting when dealing with government contracts. Amidst the fine print of regulatory mandates, the company was compelled to record an accrual for additional costs tied to a specific program. This practice, mandated by accounting principles, resulted in a distinctive shift in the balance sheet, encapsulating the essence of fiscal transparency.

Forecasting the Future: Tool Revenue Projections Unveiled

Tom Sonderman, the President and Chief Executive Officer at SkyWater Technology, unveiled a three-year pipeline forecast for tool revenue, shimmering with potential. Sonderman underscored the dynamic nature of tool arrivals, weaving a narrative where each quarter unfolds as a nuanced interplay of meticulously planned timelines.

Unraveling the Mysteries of Supply Chain Dynamics

Discussing the nuances of supply chain dynamics, Tom Sonderman, once again wearing his executive cape, deciphered the essence of pushouts impacting tool deliveries. These pushouts, intricately entwined with supply chain mechanisms, unravel a tale where customer commitments tiptoe on the edge between precision and fluctuation.

Strategic Insights into Gross Margins and Revenue Mix

Steve Manko, with poised sagacity, delved into the realm of gross margins and revenue mix, charting a trajectory laced with insights. As the landscape of tool revenue unfolds, Manko’s strategic foresight articulated a narrative where the economic pendulum swings, albeit with a touch of fluctuation.

Charting a Course Amidst Utilization Metrics and Macroeconomic Realities

Amidst the labyrinth of utilization metrics, Tom Sonderman masterfully navigated through the discussions encompassing front-end and back-end fabs, illuminating the strategic pursuits amidst a macroeconomic tapestry. The company’s focus on driving ATS programs shone through the veneer of utilization targets and industry realities.

Embracing Innovation and Customer Diversity

In the backdrop of customer diversity, Tom Sonderman outlined the distinct aura surrounding the Florida back-end fab, underscoring its status as an ATS centric facility. The convergence of multiple A&D and commercial customers within these walls epitomizes the essence of innovation interlaced with strategic partnerships.

With each quarter unfurling a new chapter in the saga of financial acumen, SkyWater Technology’s journey through the semiconductor landscape narrates a tale of resilience, adaptability, and strategic foresight.

SkyWater Technology: Navigating Future Growth Amidst Semiconductor Challenges

Seeding Future Technologies

As SkyWater Technology charts its course through the volatile seas of the semiconductor industry, the company’s focus remains steadfast on seeding its fabs with new technologies that promise a long and prosperous life cycle. In a strategic move, SkyWater has strategically positioned itself toward a future filled with promise and innovation.

Weathering Macro Challenges

Despite facing headwinds in the form of semiconductor weakness and declining legacy programs, SkyWater’s leadership team remains resolute in its commitment to embracing the turbulent macro environment. The company’s strategy involves positioning itself for future growth by nurturing robust wafer services businesses with promising margins.

Margins and Revenue Mix

When it comes to margins, SkyWater acknowledges the delicate balance between wafer services and ATS (Application-Specific Integrated Circuits) revenues. The company is navigating shifts in revenue mix with poise, evident in the strategic forecasting of revenue streams to maintain financial stability and growth. The complexities of margin management are met with calculated precision by the leadership, indicating a strategic approach to financial sustainability.

Paving the Path to Success

Looking ahead, SkyWater remains optimistic about its prospects, buoyed by the confidence of its entire team in achieving long-term growth and profitability. The road may be winding, but the company’s unwavering dedication to innovation and strategic planning sets a solid foundation for future success. As the semiconductor landscape continues to evolve, SkyWater stands as a beacon of resilience and adaptability in a constantly changing industry.