Q2 2021 Skywater Technology Inc Earnings Call
What are your fiscal year 2021earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to price a star 1 on your telephone please be advised that for these conference is being recorded.
In addition, if you require any further assistance. Please press star zero and thank you I would now like to hand, the conference over to your speaker today Ms. Heather Davis Ma'am. Please go ahead and good morning, and welcome to Sky water second quarter fiscal 2021 conference call with me on the <unk>.
Today from Sky water for Thomas on them.
Evidence and Chief Executive Officer, and Steve Manko, Chief Financial Officer.
To remind you that our call is being webcast live on Sky waters Investor Relations website.
Net.
IR Dot Fairwater technology Dot com the.
The webcast will be available for replay shortly after the call concludes.
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 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 8-K yesterday and a perfect stopped US filed April 22021, 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 and our earnings release, which is available on our Investor Relations website.
Unless noted all comparable reference today.
The prior year for second 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.
Today I'll briefly cover last quarter's financial results and then have a broader review of our exciting growth strategy and will also start providing a deeper dive into a specific area of our business dropped further and knowledge of sky waters disruptive capabilities. This quarter I'll focus on Chicago, Florida, and our new advanced packaging fab.
Steve will then go into further details on our financials.
And the second quarter net sales grew 34% to $41.2 million.
Compared to last year, driven by solid increases in both advanced technology services and wafer services.
Gross margin was 4.4% net loss attributable to shareholders was $7 million and adjusted EBITDA was negative $800000.
Scott Roeder made solid progress executing on multiple fronts during the quarter, but also experienced some revenue recognition delays.
This included U S government funding and tied to existing programs that we expect to occur, but the timing remains difficult to forecast.
We also experienced a delay and a recognition of the majority of the revenue for wafers produce and put and inventory for a temperature monitoring and wearable for early COVID-19 detection new to the market dynamics tied to the rapid introduction of new vaccines. These wafers are now being repurposed for and alternative health related wearable.
Application.
Lastly, and Etfs program that generated significant revenue for the company and 2020 and was forecasted for 2021 has been restructured with the customer we expect it to resume and 2022.
I am very pleased with sky water's year over year topline performance and remain confident and our long term revenue growth target of approximately 25% for 2021 and beyond.
Our vision and Sky water is to improve the world by Revolutionizing technology realization, because we're impatient waiting for the promise of tomorrow, and so we're focused on making it happen faster today.
Our industry transforming technology as a service our task business model allows us to co create next generation technologies with our customers accelerating their time to market with the confidence of automotive quality manufacturing and extensive IP protection as the market potential continues to expand for artificial intelligence.
Quantum computing power management, and various sensing technologies, we expect to see a corresponding growth and demand for our unique cash offering.
During the quarter, we began the transition of multiple ats customers to evaluate for manufacturing and key attributes of the Paas business model.
This achievement has literally been years, and and making because of the multiyear characteristics that microelectronics R&D and is a testament to the long term intimate relationships, we have established with our customers.
While we expect these transitions will drive significant long term shareholder value. They do create a J curve effect and the near term. We also continued to see strong pipeline growth and Etfs and wafer services as multiple companies engage with us on new programs Scopings and shuttle runs.
Scott Roeder continues to make substantial progress on <unk> 90, or radiation hard and technology to address the U S government needs for extreme environment, and microelectronics, which are necessary for satellite and mission critical defense systems, We recently announced the launch of our first multi project wafer shuttle using the ice 90 platform with.
Our existing aluminum interconnect technology, we anticipate future are aged 90, shuttles will leverage copper interconnects to deliver further enhancements and speed and performance for the mixed and room devices enabled by this leading edge Rad hard technology.
We also announced our strategic partnership with case to support the development of the design ecosystem necessary to enable market access to Ars 90 technology platform through this engagement, we will work together to achieve key design enablement and milestones that support the privatization and qualification of radiation hardened.
Applications.
We are very excited to be working with an industry leader like case as they bring their extensive experience and Rad hard ASIC product realization to sky waters are each 90 platform.
<unk> also continued to execute against our arch 90 technology qualification milestones as we prepare for Rad hard testing.
We expect the investments and our Rad hard program to be a long term growth driver for our sky water, but they are and near term drag on gross margins as we continue to develop and qualify this critically important technology platform for our nation.
And the second quarter, we continued to win new Ats business and the biomedical space customers are seeking to co develop and men's based micro from Tabetic proteins sequencing and genome technologies with Sky water.
This area of the business is anticipated to be a strong performer over the next several years as demand for rapid diagnostics and other disease screening technologies proliferate across the health care industry.
During the quarter Sky water aggressively ramped, our Minnesota fab to support the growing Iot and automotive segments of the business and in addition, we made significant progress transitioning and multiple ats programs and a wafer services, including our differentiated silicon based power management platform, which will begin to ramp and the second half.
For the year.
Sky water expanded its entry into the high growth advanced packaging space and February as the operators other center for Neo Bashan Kissimmee, Florida. This.
And this fab was built by Osceola County, and the University of Central Florida and 2018.
After the COVID-19 related business slowdown in 2020 and funding priority changes at UCF Osceola County search for a new operator, ultimately selecting sky water after a highly competitive bid process. This.
This created a great opportunity for our company to expand our reach across the semiconductor value chain by offering customers a comprehensive domestically sourced advanced packaging platform.
Today advanced packaging is done primarily overseas. Our fab is 1 of the few dedicated advanced packaging facilities and the United States and is anticipated to be part of our nation solution to create and secure domestic supply chain. We also plan to move existing advanced packaging programs from Minnesota to our Florida Fab.
I'm also excited to announce the 2 current customers are expanding their engagements with us with new programs that Scott water, Florida, including our long term technology partner Broccoli photonics.
Skywards capabilities will enable both 2.5 D and 3 D heterogeneous integration architectures, and enabling customer improvements and component density, which reduces die size, while improving product performance.
It is our intent to bring the most advanced capabilities and the industry to our Florida fab.
In addition, there is currently open clean room space, and Florida, allowing us to aggressively expand as we co create new advanced packaging solutions with our customers. We expect this offering to be a key differentiator for sky water.
And the second quarter of this year, we focused on restarting the center for <unk> and facility qualifying the existing tools and the fab and hiring key talent with proven advanced packaging expertise.
And operations director with deep foundry experience is now in place and we continue to build out the fab operations organization.
Our Florida team is now executing on the 3 existing programs with multiple Dod contractors buy.
By leveraging our existing business infrastructure, including sales marketing and finance, we have been able to efficiently expand further and to the advanced packaging space.
And the costs incurred and the first half for the year have put pressure on our gross margins as we started up and began to ramp our advanced packaging facility, but we expect these investments will translate into another high margin revenue stream for our company over the long term.
Scott has a long history of successfully executing public private partnerships, we remain highly confident about the long term potential for these types of engagements to further increase the production capabilities and microelectronics and our country. We applaud the Senate's passage of the U S innovation and competition Act.
Scott Roeder recently hosted Senator <unk> and representative Phillips at our Minnesota Fab to discuss solutions to resolve supply chain constraints and improve long term domestic semiconductor output.
In addition, we've spoken with multiple U S government officials about how best to increase the capabilities of the U S owned and operated boundaries that are focused on enabling the required innovation and production microelectronic technologies for the automotive industrial defense and medical device markets.
Much remains to be decided as to how and when the U S. Government will implement its plans to co invest with private sector companies to improve our nation's domestic R&D and manufacturing capabilities that we strongly believe that the passage of the U S. ICA is an important first step toward regaining U S leadership and microelectronics production and.
In addition to our interactions with Washington, and Sky water continues to engage with multiple state governments, including Minnesota, Florida, and Indiana to discuss co investment models and important components and secure the future of public private partnerships that are being discussed and our nation's capital.
And finally last week, we announced that our board of directors approved $56 million and strategic capital investments to expand capacity at our Minnesota fab and to accelerate our entry into the high growth 200 millimeter gallium nitride and market. It is our belief that the fastest way to address the current global chip shortage.
To rapidly increase the capacity at existing Fabs with qualified manufacturing processes.
This is especially true in the automotive sector, where new product qualifications can take multiple years, the majority of our $56 million on.
<unk> will be targeted towards the purchase of new equipment, allowing us to quickly repurpose existing clean room space for wafer level testing to expanded wafer production.
This investment and our ongoing efficiency improvements are expected to increase the overall output of our Minnesota fab by at least 40% further accelerating our revenue growth and gross margin expansion as we exit 2022.
A portion of the $56 million and strategic investment is also targeted towards expediting sky orders entry into the $200 million Gan market as the White House's 100 day supply chain review noted there is a significant need for a U S foundry to offer technology services for Gan Gan as a prime.
<unk> and emerging technology for electric vehicles, <unk> and consumer electronics among others.
Neat properties enable higher charging efficiencies smaller die sizes and lighter weights for many applications Youll development estimates for the Gan power device market alone is expected to grow at a compounded annual growth rate of 70% through 2026, reaching $1.1 billion.
I firmly believe skyway and the right foundry to offer domestically sourced and based technology development and scaled manufacturing leveraging our technology as a service model for.
Fast tracking our entry into began market is anticipated to further enhance our position and the aerospace and defense computation and industrial and automotive markets, creating another disruptive technology platform that skywriter can use to rapidly grow over the long term.
These strategic investments to swiftly increased the production output and our Minnesota Fab and hasten our entry and began market are expected to enable sky water to continue to deliver substantial topline growth and gross margin expansion well into the future.
It is important to note that our capital commitments are in addition to the previously announced $170 million of funding from the U S Department of defense to establish our Rad hard platform and $133 million of facilities and tools from Osceola County that we are leveraging to expand our advanced packaging offerings and summer.
We are winning new business aggressively ramping our Minnesota, and Florida, Fabs, securing key supplier arrangements with collaborative partners like radically photonics and building, our Rad hard and advanced packaging capabilities, while investing strategically to drive industry, leading long term profitable growth for our company I couldnt be more excited about Scott.
And as future as America's foundry.
I will now turn the call over to Steve for further information on our financial performance and our recently completed quarter Steve.
Thank you Tom and Scott.
<unk> accomplished much in the second quarter, including our initial public offering. This achievement is a great Testament to our team members customers and partners as we co create the next generation of technology through our technology as a service model, we continue to execute our strategy during the second quarter and grew our net sales.
Net sales for the second quarter were $41.2 million and increase of 34% versus second quarter of 2020 advanced technology service grew 35% to $26.9 million and wait for services increased 31% to $14.3 million.
<unk> growth was driven by continued program expansion with existing customers and new program additions ETF sales and the second quarter contains $2.3 million of customer funded tools compared to zero and the second quarter of last year.
For Q2, <unk> sales up $26.9 million compared to $38.1 million and Q1 this year.
Excluding $2.3 million and $15.4 million of customer from the tool revenue and the respective quarters, the ETS business delivered 8% sequential growth.
As anticipated wafer services increase from 2020 levels, driven primarily by strong demand from the Iot and automotive sectors.
Cost of sales were $39.4 million and increase of 56% year over year gross profit was $1.8 million decreasing from $5.5 million and Q2 last year.
Gross margin of 4.4% decline versus the prior year of 17, 8% net.
Non-GAAP gross profit was $3 million compared to $5.6 million and Q2 last year non-GAAP gross margin was 7.2% and 18, 1% respectively.
Both GAAP and non-GAAP gross profit and margin declined due to increased cost of goods.
Cost of sales increases were driven by labor increases as we ramp our Minnesota and Florida facilities, the labor market for skilled manufacturing remains tight as the country restarts the economy post pandemic and we've increased our average starting wage and our fabs to attract the best talent and the market.
Cost of sales also increased from additional wafer services output and investments we are making for the long term growth of the company to build out our Rad hard and advanced packaging capabilities. These investments are expected to be a drag on our margins in 2021.
And the second quarter depreciation related to Rad hard was $1.8 million and there was $1.6 million of startup and operating costs for Florida and cost of sales.
R&D and the second quarter was $3.3 million and increase of $2.5 million as we added executive leadership engineers and expanded design enablement and capabilities to accelerate and support for development of our platforms.
SG&A was $15.4 million compared to $6.9 million and the second quarter last year.
The increase was driven primarily by public company costs and equity based compensation.
Excluding non cash costs up for 5 million for equity based compensation and non recurring costs, which includes $1.5 million of corporate conversion and the IPO costs, approximately 400000 of management transition expenses and approximately 200000 of Scott, what our Florida startup.
Costs, SG&A was $8.8 million and the second quarter.
Adjusted EBITDA was a loss of 800000 declining from a positive $2.5 million last year, reflecting the decrease in gross profit flow through this quarter.
Cash used in operations and Q2 was $22.4 million, we spent $7.7 million and Capex this quarter on fab improvements aimed at increases and capacity and efficiency.
We ended the quarter with $64.6 million and cash and cash equivalents, which includes proceeds from our initial public offering in April 2021.
Total debt outstanding was $66.4 million as of July for 2021, and we had $28.9 million available on our $65 million revolver.
Total inventory at the end of Q2 was $29.2 million compared to $27.2 million at the end of fiscal year 2020.
As you are developing your sky water models. The following at some additional color for our expected operating costs.
Research and development expenses are anticipated in the $2.5 million to $3 million range per quarter.
SG&A expenses are expected and the $8 million to $9 million range per quarter, excluding equity based compensation and.
And we anticipate equity based compensation and the 13% to $14 million range for the full 2021 fiscal year.
I am pleased with our year to date top line growth and remain confident and our ability to deliver long term annual revenue growth of approximately 25%.
Given the nature of our business funding sources and current scale, we will have quarter to quarter fluctuations and net sales.
As Tom detailed sky water has many opportunities to deliver long term sustained growth and I remain confident for the company can execute on these opportunities.
With that I'll turn the call back to Heather and welcome your questions on Sky water.
Thank you, Steve Scala water will be presenting at the Jefferies semiconductor hardware and communications infrastructure summit on August 31st 2 from 'twenty 1.
And thats, the investor and growth on <unk>.
And on our website for other.
And our upcoming and partner for us on it on.
Operator, please open the line for questions.
As a reminder, if you'd like to ask a question. Thank you for Star then and then in Berlin on your telephone keypad and please note that limit your questions to 1 primary and 1 follow up if you have additional questions you may reenter the queue by again questions online on your telephone keypad.
Your first question comes from the line of Betsy <unk> with him and company. Your line is open.
Yes, Thank you and I appreciate it.
Additionally, insight on the on the Opex going forward.
Steve and Tom wondering if you think.
Give me a sense of the gross margin trajectory and.
And progress throughout the year, so the margins dropped to about 7.2% on a non-GAAP basis.
And you do as you mentioned and labor increases and your investments and Red Hot and.
And the AP and Florida wondering how to think about the margins on a go forward basis. When do we think those investments will start to kind of pay off and how do we think about our longer term margin target.
Yeah. Good morning, Rajeev. This is Steve and thank you for your question gross margin is a metric that we focus on and we have a long term plan to get to a gross margin of roughly 40% to 45% and Thats what were targeting what we will see first is revenue growth will lead the way and then gross margin expansion will follow as we look.
And out how we're going to build our gross margins from where they are today to our long term model. There are various phases of doing that I would say over the course of the next 12 to 24 months. The item that we focus on first are number 1 having scale increasing scale and keeping our fab highly utilized the second would be transition.
And to a higher Richard Lee for services mix from average sales prices and Youll see that with some of the Mems technology that we're looking to bring into production and the next 12 months to 24 months and then also grown our advanced technology services business through that we believe we can grow ETF not only with our current customers and programs, but also growing <unk>.
And through advanced packaging and Florida, those will be the near term elements that we're looking at and targeting to grow our gross margin and we hope that that would expand to a long term rate of $40 to 45%.
Okay, Thanks and tons.
And the 25% growth rate.
And you talked about in in 2021.
And beyond I'm wondering if you could give.
Give us a little more color on some of the growth drivers within that zone. For example, how do we think about existing customers ramping versus new customer additions.
How are we thinking about wait for versus Ats and growth.
And then as we look beyond 2021.
How are we thinking about the Florida facility as part of that overall growth rate and how much revenue and rebuilding and for for Florida and that part of the 25% or is that in addition to thank you.
Yes. Thanks, Good morning, Roger This is Tom.
Great question, I think the way too.
Lay it out as what I, just discussed and my opening remarks, there's really multiple drivers for growth and the company.
Pipeline, obviously, the immediate as the transition of Ats customers into wafer services that again will not only drive growth on the top line, but also and gross margins as we get a richer mix inside the bag.
We're also making great progress on our Rad hard technology of course, we're building capability today over the next couple of years. These capabilities will be turned into products that will be manufacturing again as a sole source provider and then we have our.
Expansion that we talked about we believe with both the expansion here in Minnesota, the 40% increase and capacity.
Coupled with our Florida fab that we can double our output collectively over.
And over the next 18 to 24 months. This of course will will drive again, both top and bottom line growth and then of course related to AP, specifically, we inherited the facility back in February we spent the last quarter getting the fab started up really preparing to run.
On the existing programs, which are now being executed and at the same time, we are beginning to expand our relationships as I mentioned with rapidly.
1 other customer, we're not mentioned and yet.
There's multiple others within our existing customer base that we're continuing to engage with in terms of how to leverage Florida and then of course, we have a strong pipeline for both Etfs.
Tied to AEP and other platforms that we have and then we're also getting a lot of design wins from not only.
The traditional kind of.
MPW driven download the PDK put your IP on on our platform and then launch those products into the market kind of the traditional foundry model that continues to go well, but we're also getting a lot of traction with our Google sponsored open source initiative, we have a.
<unk> going through the fab now that will be coming out later this quarter and then we already have the next shuttle prepared and this is driving an expansion and our reach to a whole new set of customers that we believe ought to be and long term driver for us.
Your next question comes from the line of Martha Sanchez from Jefferies. Your line is open.
Hi, great. Thanks for taking my question for.
First question on the I appreciate youre not going.
And then to give guidance for the next quarter, but.
I guess, Tom and you expressed confidence.
Confidence and the 25% growth for this year I think that that's going to assume like second half is above the first half. So should we think about this and have like a linear trajectory is that Ah ha.
Stick.
Kind of more backend loaded.
Any color that you can give us on.
The.
And the linearity of the of the growth that Youre that youre looking.
And looking at for this year, yes ill start and then sleep and add additional color.
And we've.
And projected with the 25% long term growth model.
Going to apply to this year as well I would say, it's linear but it's sn.
Essentially.
And I'm hearing some background noise.
The.
The basic way to think of it as I would just say.
Growth compared to last year, and then the ability to continue to execute on programs that are already.
Secured so think of it is.
<unk> already within Sky water that we're executing against.
Obviously continue to go after new business and we believe that Theres good opportunities. The market is obviously very robust.
But at this point in time as Steve alluded to we have a lumpy business we're going through.
And the transitions of Etfs for wafer services that creates a J curve effect that we're learning how to model. We believe that 25% is a consistent number.
<unk>.
Great and then.
A follow up if I may and I apologize for the background noise here.
You talked about qualifying making progress qualifying the Rad hard you've talked about.
Again, you talked about some new customers and Florida can you kind of give us a sense on when you think debt.
Revenues from those efforts start to.
And to hit your top line.
Yes, great question again, mark be the way to think of it is that and this is the unique part with our technology as a service model is that we will begin to.
Initiate ats from revenue and Florida. This year that is that is going on as we speak as we get into next year. Those programs will grow eventually they will move out of R&D into scaled manufacturing so think of as Florida as it relates to Florida, primarily Ats driven next year as we go.
Into 2023 total transition away for services. We also have a lot of clean room capacity that we expect to leverage jointly with our customers using our or fab light.
<unk> Lite model.
Through co investment.
And ability to get Rad hard online is making again really good traction we're qualifying the technology today. So everything we've done has basically been expanding the fab, bringing in tools getting them qualified standing up the process. We're now working with case and other company called trusted semi to create the design.
Ecosystem, we have our first shuttle going through the fab as we speak this has got multiple customers on it already through our early access program as those customers begin to value.
A valid ate their IP on our technology will begin starting next year to start getting into what I would call the design cycle as well as the qualification cycle. This is what we referred to as Rad hard testing and then as 22 unfolds and we get into 'twenty 3 you'll really begin to start seeing that.
<unk> revenue ramp up so from my perspective, all of these exciting new programs that we have been working on for for.
Multiple years are beginning to come to fruition and then I'll also mentioned the biomed space, we're seeing great traction with our Mems based technology.
<unk>.
For many different types of solutions and the biomedical market that we believe we can get some not only through ats, but into wafer services.
Within the next 12 months to 18 months. So we feel very confident about everything we put in place and of course, the backdrop of chips funding the commitment from our nation to really begin to invest and semiconductor technologies also gives us a lot of confidence, especially as we position ourselves as Americans foundry.
Your next question comes from the line of harsh Kumar of Piper Sandler Your line is open.
Yes, Hey, guys and a handful of question I want to flow back to I think the first question on the on the question that brought us on the 25% growth rate and I just want to make sure that.
That business, 25% organic growth rate assumes basically organic business and youre not assuming either any government subsidy or you don't need a whole lot of new orders and other what should I assume that this business that's in the bag that's already.
And then as that business hits, and you start to growth sort of meaningfully in the back half of this year.
How should we think about gross margin progression for this year.
Yes, so I'll start and then steeped and amplify on the gross margin, yes. So the way you outlined and as a good way to think about it we have.
Secured the business.
And the projections, the 25% that we're talking about and.
And of course, we're continuing to win new business.
The assumption of the 25% does not include anything tied to chip's funding.
Delay and government.
Funding is for all the existing programs. These are not at all tied to again assumptions based on new initiatives that are going through Congress and the idea of executing on.
On the business that we booked.
The focus for.
Sure.
The growth rate, we're talking about and of course, we believe there is.
Outside to that but again the timing for for when these deals occur there's there's.
A lumpiness to Ats in terms of how we monetize R&D, how the R&D programs get configured that make it a little difficult to kind of give the traditional quarter to quarter projections, but we believe the business is being stronger we will continue to be a major driver and are in.
History for the types of technologies, we're bringing to market and again, a very confident now with the 25% number we've talked about.
Steve and you said that gross margin.
Can amplify really quickly like we talked about previously the revenue will come first and then we will see if we can see gross margin expansion I outlined what our near term strategy is to expand those gross margins keep in mind.
Indicator will be the revenue growth that you would see while also realizing as we talked about that we still have a drag on gross margin as we're making investment in 2021, and the Rad hard technology and the advanced packaging platform that will be a drag on gross margin for 2021, and we start generating.
<unk> revenues from both of those businesses.
Understood and for my follow up Tom.
Maybe for multi part question, but I wanted to.
And some of the services and the Ats for our tech that pushed out into 2020.2.
And to understand your confidence level on.
On that business coming back maybe you could give us like to the extent that you can share some logistics around.
That process will work and when that business might head and maybe some clarity around us and 1 customer or is it multiple customers and get a technology that kind of on.
Power for you have got pushed out just any color and then for similar lane on.
The temperature sensing wafers.
Should I assume that the basic functions for remains the same for temperature sensing on that and personnel will be able to pick this up without meaningful modifications and just deploy it and some other application is that so the business hasn't really gone away like you are saying and it.
Relatively not any different for you to do this by guests pushing it out too for a different application later.
Yeah, Great question, and I'll kind of go and reverse so regarding the temperature sensor.
Basically what it is is a differential temperature monitoring.
Structure that we created and partnership with our <unk>.
Design.
Entities and.
For wearable device that is essentially being moved from early COVID-19 detection 2 themes.
Things like chemotherapy patients looking again to sensitive temperature variations that could be indicative of reactions when when cancer.
Cancer cases are basically being treated with those type of chemicals. So the idea on the wafers. They have been fabricated there and inventory and it'll be software and packaging design that will potentially change to accommodate.
You knew kind of trajectory for the end customers, but there's really nothing we have to do.
Too often we recognize the revenue we just needed to find a new target application again because of the rapid and it's good news for all of US the rapid introduction of the COVID-19 vaccine related to the.
Ats program that we referenced that was a single program. The customer was extremely pleased with our performance with meeting and exceeding expectations and milestones and but we wanted to do because again. This is our technology works as we began to look at the next phase of development. We felt it was important to us.
And to really go to more of a multi year trajectory versus an annual renewal for.
This type of program because of the type of.
Technology that we're developing the customer also wanted to reconfigure it along those lines and so where we are.
Confident that the program will start in 2022, and we're literally working through the details as we speak in terms of what it will look like again the timing is hard to project. So we're talking 2022 for the start day, but I certainly.
Confident and not only how the customer views, what we're doing but the criticality of the technology and data will continue to be.
And important program for scar water.
Your next question comes from the line of Krish from Cowen and company. Your line is open.
Yes, hi, Thanks for taking my question I feel of them first 1 Tom was PS.
Curious on the growth Margaret Kelly.
Kevin to book.
On the gross margin Q2, I understand the arguments you made about.
Increasing the loading and Minnesota and increased labor costs.
Seems like from other things like labor cost and fees are probably not transitory so I'm kind of curious.
Is the path for a 40 per booking gross margin really well.
But let's take and what kind of timeframe on if you're talking about and along the same thought and what are the gross margin for the for.
For the tool sales and then I have a follow up.
Yeah, Hi, this is Steve I'll take that question again, the timeline that we're looking at is about a 5 year horizon to get to our target of 40% to 45% keep in mind right a lot of the steps to get there would be increased scale and increase growth. We are investing for the future with more personnel and more costs coming in.
Through our organization just to build out that core foundation for the growth that we expect to be coming in 2022 and beyond and in addition to those technology investments that we continue to make and the Rad hard technology and the advanced packaging technology, So we're investing and building for the future.
Revenue will come first and we believe gross margin expansion will follow.
And just.
And part of it.
And Steve what is the.
And the true revenue and I have follow up.
But he said were awarded the tool revenues.
I think 1 other gross margin what tools.
Yes, there is margin on the tool revenue the revenue comes through Etfs and so the reason that we talk about that is there is a margin on that tool revenue. However, it is not at the similar margin that we see from the other services that we offer and Etfs. So while there is a margin on the tool sales.
At the equivalent level as other services that we offer and Etfs.
And we have a follow up question coming from the line of that video and we can kind of leg and your line is open.
And thanks for the follow up.
Just on the $56 million on strategic capital investment.
And capacity and Minnesota Fab.
What is the expected payback period, and that $56 million and other words, but what's the timeframe on when that capacity will kind of turn into production and into revenue.
Yeah, I'll start and Steve you can add additional color.
The expectation is that we're talking about is 40%.
Increased and capacity.
And it will be obviously ordering tools over.
The near term that's the first phase of this and then the timeline for when it ultimately turns into increased.
Wafer output.
As.
And going to be.
Obviously materialized I would say as we exit next year and go into 2023.
The other thing to point out is that $56 million isn't just bar.
And the.
Capacity increase and Minnesota portion of that is also tied to our Gan investments, which will again be another technology platform.
And we're obviously very focused on the power management space, we're bringing our silicon based power management platform with which has got some differentiated transistor architectures to the market and the second half and then our long term strategy has always been to moving the Gan space because we believe that is the future of power management.
And so again a portion of the $56 million will be tied to standing up that capability.
And any further comments.
Okay.
Good day.
Yes, it did.
Thank you and just 1 more if I can for point of clarification. So the tool revenue.
Looks like it's on track.
It generated about $17.8 million and revenue for Q1 and Q2 of this year last year. It was $8.4 million according to the.
A press release.
I'm wondering how you're thinking about the the total revenue for the rest of 2021.
And if there's any insight there.
And when we're thinking about that business.
Over and over the course of time and is this a business that you are opportunistically looking at.
To add and a service for large customers.
Or is this something that there is a concern and strategy.
Same yes, let's let's try to expand that part of the business to other customers, we have expertise and kind of for crewing tools and quantifying tools, let's expand that.
Service to other customers, although it might be lumpy, but this is something that we want to we want to offer I'm trying to get a sense financially quantitatively. The lumpiness of the total revenue and then kind of qualitatively how youre thinking about strategically.
Yeah sure I'll take that question and that's why we provided additional color for what the tool revenue was for each quarter going back for 2020, which was the first year, when we really sort of generating any sort of tool revenue. So you can see the lumpiness as we articulated we tried to stress debt, especially in the Q1 earnings call from 2021 given the.
Significant amount of the revenue that came through we also mentioned at that time, but through the first quarter and second quarter of 2021 that is when we anticipate the majority of the tool revenue for 2021 to come through.
From the aspect of the business really what we deal with its co investment and co development with our customers. That's what we stressed we see this as a co investment with our customers our customers come to Sky waters, especially on the Ats side, because they don't have a fab and we deal with that comes our expertise and having the relationships with.
The tool vendors, knowing how to procure that tooling install it qualify it and then get that up and running for R&D and then later into production. So we're always looking at opportunities to co invest with our customers and this is 1 that will remain it will be a lumpy part of the business, but we think it's a good indication of our customers being committed.
It to long term programs with Sky water.
And your next question comes from the line of Mark and Safra said Jefferies. Your line is open.
Hi, Thanks for taking my follow up so.
Another question on the $56 million.
On strategic investments so.
I just want to make sure I'm on unclear on that so is this is this going to show up and your Capex line.
For and what.
What are the cash flow implications of this so I guess my question is is this a co investor.
Are you co investing with.
Customers is this part of your Capex light.
And kind of.
Position or is this a 1 off strategic investment for you see an opportunity to to add capacity, so you're going to go for it and.
And youre bearing.
Cash flow implications of that and and if it's the latter can you help us understand how that ramps through the cash flow statement that $56 million and then when do you start depreciating that and when does that hit your your income statement. Thank you.
Yes, good question I'd be happy to clarify that so this would be and investment that sky water would be making this would not be.
Revenue like we talked about previously on the previous question I think it still does support our Capex light model. If you go back to the facilities and the tools that we obtained earlier this year from Sky water, Florida.
Hartmann to defense and divestments that we announced quite some time ago for the Rad hard technology as well as the tool revenue and investments being made by our customers I think there's still does support a capex light model. However, this will accelerate and build a good baseline for growth and the organization not only for wafer services, but.
Also for additional Etfs moves and Ats customers that we believe will move to wait for services with that investment that we will be making or plan to make we would really see and investment taking place over the course of for $2.6 quarters on a quarterly basis that will be dependent on tool availability.
And lead times, but it will be something that we will be looking to execute on and the near term.
It will be quarterly investments made over the next 4 to 6 quarters.
And when do you start depreciating.
Those assets you have to qualify before you depreciate or does that does that start depreciating and hitting your gross margin as soon as soon as it hits share.
Your PP&E share typically that's on a tool by tool basis and typically the depreciation starts work. The tool has been qualified and are.
Manufacturing facility.
So can you give us a sense for like roughly how long does it take to qualify tools and once it once it gets bolted down and the factory.
Yes ballpark estimate would be 6 to 9 months.
Great. Thank you.
Yes, a follow up question coming from the line of harsh Kumar of Piper Sandler Your line is open.
Yes, hey, guys kind of on that.
Curious if you could provide us some perspective on the.
And the government subsidy angle, yes come and seems to want to get money from semiconductor companies and I think you guys on a very good position and get it I'm curious when you have your conversations and what kind of commitments do you have to make and returns is it tight for a number of jobs set number of jobs and a state or 1.1 and.
Is involved and kinds of getting some of that money and how are you sort it but.
Yes, again, another great question, obviously sky water.
And is very involved with these conversations not only with the white house directly but with the department of Congress, obviously and department of Defense.
The department of Commerce will be the 1.
And kind of facilitating the deployment of those dollars.
<unk> approves the chips at so what we anticipate is there is there is going to be 2 angles for sky water 1 as it ties to not only the chip that but also the and this frontiers and.
There'll be R&D dollars flowing into various entities R&D facilities that are creating new technologies and a lot of the focus is and just replicating capabilities that our traditional kind of Moore's law.
Platforms, but really looking at differentiation, which was what sky water is all about new emerging technologies like carbon nanotubes superconducting et cetera. So we expect to be able to leverage R&D investment we become the corridor as they as technologies lead incubation and income.
And the technology validation demonstration and and ultimately commercialization.
The other piece will be adding capabilities. So 1 other thing that we're pushing is that to solve some of the immediate crisis.
And with demand and high chip demand base.
And basically adding equipment to existing facilities Thats 1 other things we're doing here in Minnesota automotive qualifications take multiple years.
For the.
The best way to really resolve some of this is by adding capacity where of course getting ahead of the game to enable that.
But we expect there will be continued joint investment opportunities with the state governments as well as with the federal government, which is why we're very focused on engaging as I mentioned in my remarks, with Minnesota, Florida, and Indiana, Indiana of courses, where Navy Crane is this is tied to our Rad hard program.
And we expect that combination of state and federal plus Sky water's commitment to as you alluded to create jobs and create capability and more important and create a corridor. So that the IP that is invested and by Americans can stay in the United States that is a unique capability that sky water brings we're a pure play <unk>.
Tract manufacturer foundry and we believe that we are and a very unique position and not only leverage the R&D dollars, but then ultimately the dollars associated with adding scale.
Thank you Don.
And your next question coming from the line of credit <unk> of Cowen and company. Your line is open.
Thanks for taking my follow up Tom just wanted to quickly touch sequentially, you said, the $66 million Capex NAV to the vast majority of existing silicon infrastructure, how much is going for Gan and what time frame are you talking about and it seems like that could translate into this book.
A few hundred vehicles for Gan has done the right way to think about it.
Yes, so I'll start and Steve you can add color.
We're not breaking out how much is going for the capacity expansion versus Gan, but.
<unk> Gan focus is really again too.
Physician sky water to be.
The right option for our 2.
200 millimeter, Dan here and the United States everything on Gander day that 6 inch.
And.
Certainly.
And within products that are tied to the power market, which is our initial focus, but we see great opportunities with Gan and <unk>.
RF and other applications sensors et cetera. So our goal is to accelerate the adoption of Gan technology, It's always been part of our strategy.
To get into the power management market, we believe differentiation will occur again as I alluded to with our silicon platform coming out later this year and then we're going to begin to do development on our Gan based technology.
Clearly the future of power management and in my opinion, and I believe that the Hunter IDEXX switching speed improvement 40% more.
Our efficient power consumption are the attributes that will really drive its adoption and again as I had mentioned.
And the White house, specifically called out the need for a 200 millimeter, Dan fab and the United States and we certainly expect.
To take advantage of that so we're accelerating our push and again and Thats why we are investing in it today.
Yes, I would just highlight on that as we look to make investments and our facility oftentimes, we look at where our bottlenecks occur and our typical process flows and a lot of our flows can be used for a lot. Other services that we offer both and wait for services and Etfs. So.
This investment we can break through some of the bottlenecks that we would forecast with the growth that we expect so it's Eric I sighted and to see this investment into our facility on top of that with again and investment and keep in mind with our business model that typically what's going to take place with again that revenue would come through from an ETF perspective first and then go into wait for services.
A later point in time, and so as we typically do with most of our technologies and platforms. We look at capabilities for us and Thats, what were investing for the <unk> capability and the near term.
And so on banks.
And we have reached the end of our Q&A session and I would like to turn it back to our CEO Tom from day Lang for any closing remarks.
I couldnt be more excited about sky water's future as we continue to win new business aggressively aggressively ramp our fabs secured key supply agreements and bring new capabilities like Rad hard and advanced packaging and the market I. Thank you for listening to our call today and look forward to talking to all of you again and the future.
Ladies and gentlemen, thank you for participating on today's conference you may now disconnect.
[music] net.
Yes.
Okay.