Q3 2021 Skywater Technology Inc Earnings Call
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Good morning, and thank you for standing by and welcome to the Sky water technology third quarter fiscal year 2021 earnings conference call.
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After the speaker's presentation, there will be a question and answer session.
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I'd now like to hand, the conference over to your speaker for today Ms. Heather Davis. Thank you. Please go ahead.
Good morning, and welcome to Sky Waters' third quarter fiscal 2021 conference call with me on the call today from Sky water are Thomas Fondren, President and Chief Executive Officer, and Steve <unk>, Chief Financial Officer, I'd like to remind you that our call is being webcast.
Five on Sky waters, Investor Relations website at IR Dot Sky water technology dotcom 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 in our earnings release filed on form 8-K yesterday, and our perspective filed April 22nd 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 comparable reference 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 out and will continue to emphasize the historic nature of the post Moore's law technology paradigm shifts that are occurring right now as well as the world Skywatchers playing to enable and drive this change.
We are working with our customers to co create solutions through a highly differentiated technology and service model in areas, such as Rad hard microelectronics Photonics, Nims superconducting imaging Microfluidics and advanced packaging.
The disruptive technologies that we enable support mega trends across the economy that are shaping our world like next generation communication networks advancing quantum computing autonomous vehicles electrification renewable energy rapid bio diagnostics genetic sequencing smart biomedical devices.
State of the Art Defense systems Interestingly in addition to technology and market driven paradigm shifts in 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 sky water plays an increasingly critical role in supporting the vision of reestablishing the U S. As a technology manufacturing leader.
I'm sure all of us to highlight our collective excitement about sky waters opportunity to address major needs in the industry for disruptive technologies are unique infrastructure. These technologies required to scale and to make Scott water 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 our expected long term growth and then spend some time unpacking some of the challenges we've seen 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.
<unk> 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.
Divers of gross margin of negative five 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 Rad hard empower management pipeline 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 <unk>.
Five 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 a 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 sky water 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 task.
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.
And the Paas model customers come to Sky water with an idea and we developed a 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 the product goes into production as well as the IP security benefits of performing <unk>.
<unk> and manufacturing onshore.
We have honed in exceptional co efficiency, 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 because one of our key differentiators and facilitates customer engagement throughout the development cycle, where we demonstrate and optimize their products, while refining our capabilities.
B attic relationship allows customers to create unique offerings and allowed skywriter 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. Our engineering teams is not economical and simply takes too long to capitalize on the market opportunity. This is ROE skywriters 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 our process development ultimately a successful Ats program will conclude with customers moving in.
For services, which is when they scale their product to volume production and do so with a process flow designed to run at Sky water.
And the Ats phase of our customer engagement, we focus on margin per activity targeting a high margin. These are all R&D programs centered around cycles, we're burning and validating technology as customers move into wafer services the margin per activity decreases as volume grows but also requires that.
Statutory 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 nonrecurring engineering, but also for tool acquisition. If there is a program that requires tooling, we do not possess our customers typically fund the acquisition of the tool, it's not sky waters practice.
As 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 developed with our customers with low capital intensity and strong.
On mutual benefit the positive momentum we've generated with the Paas model continues to grow and we believe strongly in our highly successful approach. This is evidenced by our eighth Ats wins during third quarter, bringing our total number of active customer engagements to 55, an increase from the 35.
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 began the transition of several customers into wafer services. These new programs deliver higher.
Margins than our legacy wafer services business.
The biomedical space as one of four important growth areas for Sky water mulch.
Multiple bio have programs are moving quickly at our company are highly collaborative engagement model is well aligned to needs in this space as conventional microelectronics and micro fabrication technologies are rapidly merging with screening and intervention technologies.
This ability to co create across fields, along with Sky waters. ISO 13, 485 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 about the pipeline for Ats projects and the biomedical space.
We achieved an important milestone with a radiation hard technology platform fabricating in Q3.
<unk> fully integrated test wafers with copper back into blind processing domestic production of Rad hard wafers is significant for the U S government in both space space and defense applications. This work is progressing and ongoing and we continue preparations to serve this critical high value market.
We're a Florida advanced packaging facility, we recently announced an agreement with Deca related to their second generation and serious fan out wafer level packaging technology.
We're working with Deca to become the first pure play foundry to offer this competitive AP technology solution in the United States.
The Gen. Two decade technology is state of the art and its ability to reduce die pitch and fan out wafer level packaging integration schemes.
We previously announced that to Scott Roeder, Minnesota customers have selected our Florida facility for their advanced packaging needs.
We continue to see increasing momentum and customer interest for our unique capabilities and I'm very excited about the future of our Florida facility.
Fourth growth platform prescribe water as high performance power management and connectivity, we have partnered with several customers in this category as we work to transition them from Ats any wafer services. One of these customers is working with us to commercialize a new innovative fin based MOSFET architecture that will provide substantial.
Benefits of high speed power switching applications.
This partner is currently working with their end customer and 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 is semiconductors cannot be overstated. The chipset received bipartisan support in the Senate and we remain confident that it will ultimately become law.
<unk> 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 malls tour, our facility and discuss several opportunities we see to quickly.
Kris the output and capabilities of our Minnesota Fab.
We believe Sky water 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 is ample opportunity for long term revenue growth prescribed water 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 ranger bowls 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.
<unk> as I've seen in my career as.
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.
Sky, rather 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.
Third quarter, both sky water and our customers experience increased challenges sourcing spare parts substrates in 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 multiyear 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 sometimes challenging to forecast the exact timing of these R&D related milestone achievements I will stress that this is a movement of revenue to the right and 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 fabs.
Output was constrained by the ongoing labor and supply chain challenges, even so wafer outs for the third quarter and our Minnesota Fab increased nearly 60% from the prior year, we were able to achieve this increase despite moving to new tools, improving infrastructure and Onboarding new hires these challenges.
A real but well understood in our organization, we are 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 and our recently completed quarter, Steve. Thank you Tom.
Of note, our business and make long term investments to deliver outsized growth of our financial results are anticipated to be choppy quarter to quarter total.
Total revenue for the third quarter of 2021 was $35 million, an increase of 6% compared to the third quarter of 2020.
Advanced technology services revenue declined 8% to $22 4 million and wafer services revenues increased 44% to $12 7 million.
Ats revenue was impacted by the customer program is being reconstructed and expected to recommence in 2022.
Contract contributed $4 3 million in third quarter of 2020 and $23 million in fiscal 2020.
Included in this program during the third quarter 2020 results, we would have shown etf's growth in the third quarter 2021.
We have a large multiyear ETS R&D program originally scheduled to be completed in the fourth quarter of 2021 that is pushing out into early 2022. This news revenue recognition from the third and fourth quarters of 2020 more in the early 2022.
Customer funded tool revenue, which is included in our Ats revenue in the third quarter of 2021 was $300 and roughly flat to the $400.
Third quarter last year.
Output for the quarter increased by nearly 60% compared to the prior third quarter and wafer services revenue increased 44% to $12 7 million.
Cost of revenue was $36 9 million, an increase of 43% year over year gross loss was $1 8 million decreasing from the gross profit of $7 3 million in the third quarter last year.
Gross margin of negative five 2% decline versus the prior year of 22, 1%.
Non-GAAP gross margin.
Was <unk> 5 million compared to gross profit of $7 4 million in the third quarter last year.
Non-GAAP gross margin was negative one, 4% and 22, 4% respectively.
Both GAAP and non-GAAP gross profit and margin declined due to increased cost of revenue.
Cost of revenue increases were driven by three primary factors volume labor and long term investments to.
The increased wafer surface output of approximately 60% in the quarter drove increased starting material cost and other variable costs.
At our minutes of this app, we've continue to hire technicians and maintenance engineers to support our expanding volume outlook heading into 2022.
We continue to make investments for our long term growth of the company by building out our Rad hard in advanced packaging capabilities. Both programs are expected to be long term growth drivers for our near term headwinds profitability in.
In the third quarter of 2021 depreciation related to the Rad hard program was $2 million.
And we incurred $2 9 million and cost of revenue for Florida.
Year to date, these investments and Rad hard in advanced packaging were $10 9 million combined of our cost of revenue.
R&D in the third quarter was $2 3 million compared to $1 1 million in third quarter 2020, as we added the executive leadership engineers to support our Ats growth and expanded design enablement capabilities to accelerate because of course, the development of our technology platforms.
We are enhancing process design kits to continue building out our technology platforms.
Our S 130, PDK in Q3.
We're also investing in R&D to bring power MOSFET to market, which is expected to occur in the fourth quarter of 2021.
SG&A was $9 6 million compared to $5 8 million in the third quarter last year.
Increase was driven primarily by public company costs and stock based compensation.
<unk> non cash cost of $2 1 million for stock based compensation SG&A was $7 5 million in the third quarter 2021.
This is lower than our previous expectation as we have not met our internal plan for the year and reversed most of the annual bonus accruals for 2021.
Adjusted EBITDA was a loss of $2 7 million declining from a positive $5 3 million last year, reflecting the decrease in gross profit flow through this quarter.
Cash used in operations during Q3 was $6 4 million.
<unk> 17 million in Capex this quarter on fab improvement came to increases in capacity and efficiency.
We ended the quarter with $8 4 million in cash and cash equivalents, we paid down $33 million on our revolver in the third quarter.
As a result of this pay down total debt outstanding was $35 6 million as of October three 2021, and we had $60 6 million available on our $65 million revolver.
Total inventory at the end of Q3 was $30 9 million compared to $27 2 million at the end of fiscal year 2020.
Temperature differential something wafers, we discussed in Q2 remaining in inventory at $13 4 million.
Update you or Scott water models, the followed with some additional color for our expected operating cost for the fourth quarter of 2021.
Research and development expenses are anticipated in the two to $2 $5 million range.
SG&A expenses are expected to be approximately $9 5 million, excluding stock based compensation and we anticipate annual stock based compensation to be approximately $13 million.
Tom highlighted the current headwinds resulted in a delay of approximately $15 million of revenue recognition from third quarter 'twenty, one in fourth quarter 21 into 2022 or.
Our business with new and existing customers is growing and both ETF and weaker services and we are continuing to transition ETS programs to wafer services.
Confidence in our long term topline growth model of 25%.
With that I'll turn the call back to Heather and welcome your questions on Sky water.
Thank you Steve Please visit the Investor Relations section of our website for upcoming Investor presentation. Operator, Please open the line for questions.
Ladies and gentlemen.
At this time, if you'd like to ask a question. Please press star and then.
Number one on your telephone keypad.
Okay.
The line of Mark <unk> with Jefferies.
Hi, guys. Thanks for taking my questions.
So the first one Steve if you could just if you could just played back.
The additions to your fixed cost structure and cards it looks like on a year over year basis, a similar revenue level has translated to gross margins going from.
High teens, 20% range too.
Flat so.
I got two it sounds like I've got $2 million of depreciation expenses added into Cogs and it sounds like there was some.
Labor costs that are going into Cogs.
The fixed cost if you could just.
If you could just break that down.
At a time.
And just help us understand.
First cost basis now in Cogs.
Sure happy to do so good morning, Mark it's very important to understand the cost structure of the business because what youll see in there we continue to remind of the investments we're making that are flowing through our cost of revenue right now for the long term growth of the company. So we really highlighted three things it was volume labor and long term investments are driving the increase.
We're seeing in cost of revenue so given that we had a 60% greater output comparing third quarter 2001, the third quarter of 2000, and obviously there'll be a higher cost of personnel starting materials and other variable costs that go with that higher output.
As I mentioned, we're adding fab technicians and equipment maintenance personnel as we get to our target utilization for 2021, and we want to be well prepared for the forecast we have for 2022 and the target utilization for 2022.
As I mentioned long term investments in the quarter, we had $4 9 million of costs flow through to the Rad hard technology as well as the advanced packaging platform.
Does add to our cost structure that wasn't there over the course of 2020 and on a year to date basis, we had $10 9 million of additional costs come through but I would call investments in Rad hard 90, and the advanced packaging platform for the long term growth of above our company through our cost structure did change primarily related to those investments, we're making for Rad hard.
In advanced packaging for the long term.
So on it so on a quarterly basis, we have $2 million higher depreciation expense right.
That's right.
And then can you give us a sense.
Appreciate that.
Hiring more fab tech.
Contacts and whatnot can you give us a sense.
I guess I'm, just trying to get to the variance.
The cost structure has increased $2 million depreciation theirs.
Labor that's gone up and then there's.
The Rad hard investments is this is this something that now is a.
<unk>.
Is it something are these costs that you use.
Capitalized now are amortizing it sounds that that Rad hard.
Element is that now a permanent part of the cost structure and we don't get to absorb those from Brandt <unk> start shipping from revenues. There is that does that kind of idea of what you're seeing.
Or is this like a one time.
On that.
Input to the Cogs.
Youre correct on the Rad hard this will be part of our cost structure going forward an important part of the cost of revenue that will be coming through and actually started coming through.
From a fully baked basis in the second quarter of this year. This will remain will be part of the investment we're making investment were recurring again Rad hard is very important for the long term growth of our company, but we won't really start generating any significant revenues from that Rad Rad hard platform until late 2023 at the earliest so significant.
Headwinds against us on our margin structure, but really good foundational investment for long term growth of the company.
Okay Fair enough and then.
The second question on the $15 million and three Q4 Q revenues got pushed into <unk> can you give us a sense.
Again, the variance here.
What what are part of that $15 million was from the supply chain or from the constraints or the delays in the government programs and.
And I just wanted to be clear. So is this is this revenue that you have high conviction hits in Q1, and so is that like a $15 million.
My conviction part of your <unk> revenues.
Thanks.
Sure. So on the government side that was a delay in about $3 $5 million of revenue the rest of that would be allocated over what we'd call supply chain constraints that would impact the efficiency of getting wafers out of the fab on a wafer services perspective, as well as the delays in some customer qualifications for wafer services and delays as we mentioned.
In our large Etfs program.
There is high conviction for that revenue, it's very defined on what those revenue opportunities are again, we are seeing those headwinds and some supply constraints remaining and that's why it was pushed out of Q3 and out of Q4 into 2022, we will see how we handle on what those headwinds continue to remain on the supply chain and some of the constraints. So.
We are currently dealing with but that revenue is very well defined and identified it's just a matter of executing on that given the challenges that we're facing at the macro level.
Okay.
Just wanted to make.
Make sure that I was clear on that so that's not $15 million that you expect to recognize in <unk>, but rather some time in 2022.
That's correct.
Thank you.
Your next question comes from the line of Christian <unk> with Cowen and co.
Hi, Thanks for taking my question I had a couple of them too Tom what Steve given the fact that you know.
On the cost structure has changed.
In the past you've said your long term growth.
Gross margin target of 40%. So I'm guessing is that a realistic expectation or is going to reset it to something lower given the fundamental structure of the business is changing.
Yes, I still think that the long term target that we've established we still have conviction and belief in that long term target. Obviously, we're seeing some near term near term headwinds.
Inefficiently, making the investments in the Rad hard into advanced packaging platforms as I talked about in the last quarter, obviously as the revenues grow that will help us to expand our gross margins, but we're seeing more of the opportunities for our long term growth materializing and Thats why we still have conviction in our long term growth model, but 25% top line revenue as well.
As we achieve that and realize the return on the investments the significant investments we've been making over the course of 2020. One we believe we can achieve those levels in the long term.
Yeah, and I'll just add that the defendant we're doing this year. That's very important is moving programs out of Etfs in the wafer services today, a lot of our wafer services volume as legacy technologies that we're running for Infineon for example, as those new technologies ramp which is underway.
More to come as certainly.
Major power management platform, that's coming in into the fab from a wafer services.
Perspective, youre going to see that gross margin improved on the wafer services side, while at the same time remaining strong.
Ats side, especially as we bring in all of these new customers. So over time, we absolutely believe that the not only long term revenue model is going to hold but also the improvements in gross margin we are starting up again.
New capability here in Minnesota, a new fab in Florida, and those are drags in the near term, but are all enabling capability to drive margin growth in the out years.
Got it and then finally, just wanted to dig a little deeper on your <unk>.
And long term revenue target can you just help us understand.
How much of the 25% that's coming from Ats, how much from visa service, how much from revenues and how much is really dependent on future government funding I'm just trying to figure out if you can help quantify that.
Looking good into four buckets.
Yes, so I think.
We will continue to be a strong driver as I noted.
<unk> continued to bring in a lot of new customers. The business today is two thirds Ats one third wafer services.
Think of Ats again is.
A high margin business, but it's up funding our pipeline for future wafer services business. So having a strong ats business today indicates long term wafer services growth in the long term of course, we had rad hard that platform will be coming to market as <unk>.
Alluded to we're going to complete process technology qualification early next quarter. We will then go into manufacturing qualification and product qualification with income.
<unk> customers and then system qualification leading into volume ramp in 23, all of that plus our broad platform. Another very important program were doing with the government. These are all long term growth drivers.
Advanced packaging many of the capabilities, we're putting it in Florida don't exist today in the United States. We partnered with Imac. We've now partnered with Deca, we have another partnership we're working on.
For <unk>. These are all foundational capabilities that we believe we're going to be long term growth drivers and I would not think of tool tools.
Come and go when we engage with the customer as I alluded to.
My remarks that sometimes with tour doesn't exist. So we get the customer to buy the tool, but that I would say is an infrequent mechanism, it's really going to be driving growth in Ags and then the transition of Ats into higher margin made for services and that's what's going to enable the model we're talking about.
Got it got it done I don't I just wanted a quick follow up.
I understand.
Your argument about the chip size and usefulness for that for you in U S manufacturing will kind of keep that the local.
Information is being floated around where you get a tax subsidy for the listing in the U S. We've kind of.
It's a good background.
But help us given the fact that you don't have any hypothesis.
A lot in taxes, so just trying to figure it out.
<unk>.
Government funding.
The benefit to you.
If it comes in a different form as a tax subsidy with us.
<unk> investment.
Yes, a great question and again a lot of the mechanics of what the chip to act will actually look like are yet to be defined there is there is a <unk> which is the broader.
Component tied to innovation investment in addition to manufacturing investments. So that's important to understand as well sky water will make a lot of money off the mere fact that there's going to be more innovation more investment going into R&D, which plays very well into our Ats model, but we're also working with three state governments.
Private partnerships.
The chips funding more work will be the governmental supply investment for new manufacturing capacity that will be complemented by state governments and then industry will also be expected to invest the goal is to not only innovate in the United States, but at scale.
That scale will occur in the out years, it's not going to have an immediate impact so as I alluded to we're talking with the state of Minnesota.
Both the executive branch as well as <unk>.
The Senators and representatives from the U S government in terms of how we can accelerate adding capacity into our Minnesota fab. So that you can resolve some of these near term supply constraints. So I believe that we have a great long term strategy tied to chips tied to you sika.
That said the delays that we're talking about are programs that are already rewarded have nothing to do with whether or not that will ultimately passes I think we have a great relationship with U S. Government, we're doing things critical to national security and getting these programs reconfigured around.
New contracts longer timelines more tiered pricing are all things that are going to benefit us got water in the long term, even though they've created some near term headwinds in terms of them being.
<unk> funded for our company.
Got it thanks Tom.
Your next question comes from the line of harsh Kumar with Piper Sandler.
Yeah, Hey, guys maybe.
Maybe I missed it but did you guys give any idea of what revenue you are expecting in the December quarter.
No we didn't give any <unk>.
Items on that we did talk about the $15 million that was pushed out from the second half of 2021 into 2022.
So that was the information we gave on some revenue expectations from the forecast we have going forward.
Okay and can I add.
<unk>.
The same topic, then should we expect in the absence of $15 million on any other kind of saying should we expect kind of flattish trends for the December quarter on the top line or is there any reason for me to believe that they've been more for services or Ats contracts have not come to fruition and generating revenues.
Yes, you can compare the fourth quarter of this year the fourth quarter of last year for comparison purposes, but remember in the fourth quarter of 2020, we have.
An extra week in the year that was coming through which is about $2 $5 million of revenue that came through in the fourth quarter of last year, given that extra week, which is not repeating again in the fourth quarter of 2021 this year.
Okay great.
It might again be down that is the way to look at it because I think you guys if im not mistaken $39 million, Okay got it okay.
Fair enough.
Fair enough and then maybe Steve you could talk about the $15 million.
What is your visibility like I think Mack Australia about this distribution revenue.
Could you maybe talk a little bit timing and the certainty and the visibility into this will it be spread out kind of uniformly into next year.
It's going to come out as one big chunk at some point in time and do you have visibility into that timing.
Yes, so we definitely have visibility into the tangible nature of what that revenue is.
Again, what we don't have the visibility into is the timing of when that comes through given what we were facing right now we still see some of those constraints coming through in the fourth quarter and can we know that which is why that revenue was pushed out into 2022, so depending on how we navigate some of the macro impact that we're seeing as well as some of the ramping and efficiency.
We are seeing in the fab that will clearly impact the timing of when that revenue actually has materialized over the course of 2022.
Got it and then I had one on cash as well you guys paid down.
Quite a bit of cash.
Quite a bit of debt.
Leaving a cash balance of $8 million. So the question is how much do you guys need to have on the books to tangibly like run out of that funded the operation and do you think it might be stretching again, what was the rationale again for paying down that debt.
As a young growing company that might need cash.
Sure. So you saw that we paid around $30 million down on that revolver. That's what we did in the third quarter again, we can at any point in time, we can draw that amount back over the course that we need that funding. So that's perfectly acceptable at the end of the quarter, we had access to over $60 million on that $55 million revolver to draw upon.
We're making significant investments over the course of 2020 and 2021, we talked about $17 million of payments, we made for for capital expansion that we made in the quarter. We also had some nonrecurring expenses of about $10 million that we've funded and paid this year, which are one time events that we don't expect to continue over the course of <unk>.
'twenty two.
On another note we talk about some of the royalties that were paying on our Ats revenues those cash outflows, where approximately $9 million on a year to date basis, we're excited about that rate decreasing and dropping by 50% in 2022 and going forward. So we're getting a lot of investments in items behind us over the course of 2021 that won't be.
Repeatable over the course of 2022 on cash outflows going forward, we do expect to make draws on our line over the course of the next four quarters, but that amount that youll see drawn on that line each of those four quarters should decrease as we go or grow our revenue and start to.
Recognize some of the return on the investments that we've made over the course of 2000 22021.
Understood guys. Thank you.
Your last question comes from the line of Ritchie Gill with Needham <unk> company.
Yes, thanks for taking my questions I appreciate it.
Just a follow up.
On the $50 million.
Revenue.
Can you just clarify.
Multiple programs in Ats.
And with the <unk>.
Revenue.
Is being pushed into 2022.
Trying to understand the piece parts of that you mentioned that there was a government deal of $3 $5 million.
And then isolated event.
And then separately there are other ats programs.
And that are being pushed out because of supply constraint issues your inability to.
Qualify.
<unk>.
And could you parse that out.
Because it kind of speaks to the idea and whether that $50 million could be recoverable in 'twenty two how much of it is.
So to speak in the bag as you mentioned, Tom you kind of just moving the revenue to the right of the model.
How much of that is still dependent on qualifying customers getting access to wafers versus government funding being.
Being delayed and then there's just.
And a lot of confusion there in terms of how that $50 million be parsed out. So please specify that in detail. Thank you.
Yes, I can give you some additional color on it Tom is Judy can tack on it the yen.
So if we go to the wafer services first again, that's where we're seeing some of the constraints on really getting the efficiencies out of the fab. The orders for those wafers are there there are concrete it's a matter of us getting those wafers out we're hitting some of those constraints on having our tools up and running when the spare parts to come in the available availability of those spare parts as well as the <unk>.
Equipment maintenance personnel hiring training those personnel and also executing on our third party suppliers that provide maintenance services again with everything taking place in the market. Our third party providers are also constrained and not as timely as what they would have been given the constraints that they are currently facing as well so those orders on the wafer services side are there.
It's a matter of getting efficient get on your fab up and running to the capacity and efficiency that we believe it can and getting those wafers out the door.
On the second side moving over onto the Ats side Ats is really it's not a matter of if that revenue come that's more of a matter of when so some of the milestones that we were working on we've already identified would not be achieved in the fourth quarter of 2021 and those are pushing out into 2022, so as we achieve those milestones depth when that revenue.
<unk> will be recognized and that was one item that we saw on the milestone push and then we have another item that is a customer qualification given the constraints that they're facing as well, but delayed that by approximately a quarter as well and so those are the items that pushed out the amount of the $15 million. In addition to the $3 5 million alluded to related to the government.
Funding.
Just to add the.
Power management platform, that's going to be coming to market.
Later this quarter going into next year.
Not only requires the wafer fabrication, but also the.
The assembly test and system level qualification from the end customers.
And that process is also feeling the effects of some of the supply chain constraints that are being talked about the ability obviously for us to ramp that program and get it moved into wafer services and volume.
Dictated by getting those final qualifications completed so we remain very confident that it will be a highly differentiated platform create a lot of disruption and frankly, we think it will allow us to reset some of the some of the <unk>.
Conditions in the market as it relates to foundry delivered power management devices, and we're really excited about that program.
And the volume as we enter next year, but the original plan was frankly to have it go into volume in Q4 and because of some of these constraints. We just have not been able to get that done.
Okay. Thank you.
So just to clarify again, so there's proof of $3 $5 million government deal.
That is the push because of lack of.
Delays in funding from the government related to that program. That's a separate item and then there was a power management platform.
What's your kind of Ats I guess.
It's supposed to hit into Q4, but it's going into <unk>.
Next year, given the same kind of.
Issues about constraints and those kind of orders on wafer services.
That you are trying to get it out of the fab, but because of the constraints in the third party ramp.
It's all kind of.
All combining to having this revenue to be pushed out.
So.
That's a fair statement then.
Sure.
I wanted to just touch base, a little bit on the previous questions related to the cost structure.
Thank you for the insight.
The details related to the investment for Rad hard in the advanced packaging.
$4 9 million this quarter year to date is $11 million and $10 9 million.
How do we and you said thats really not been ever.
Not really recoup those costs until late 2023 at the earliest.
We're increasingly significant margin headwinds.
Related to that so how do I think about then.
The margins on a go forward basis.
Are there going to be more investments and ran hard and AEP events that thinking going into next year kind of layering on top of the existing investments.
Because it doesn't appear based on what you are saying is that.
The cost structure is going to remain fairly high.
For some time to come I, just want to clarify that I appreciate that thank you.
Yeah happy to clarify that.
Those will be headwinds that what you said was accurate that those are going to be recurring headwinds in items running through cost of revenues over the course of 2022 and 2023 as far as the additional investments go we have about 29% or $30 million in.
Capital investment that Hasnt been placed in service yet once that $29 million is placed in service typically depreciate over a seven year life. So once that 29 million is placed in service that will obviously have an impact on our depreciation which will run through cost of revenue as well in the near term, we will continue to make investments in <unk>.
<unk> packaging in Florida, as we continue to build that out but both of those programs, whether it's rad hard or advanced packaging.
Getting the fab up and running getting the tools qualified and building out those technology platforms over the next 12 months to 24 months to really allow us to have a foundation for growth going forward and we don't expect that growth in that returned to really start to materialize until late 2023.
Got it and just last question Tom.
You mentioned that.
There is a 24% to 48 months.
Timeframe to move the designs that are in kind of the Ats funnel ultimately into volume production, so moving them to ultimately to the wafer services part of the business.
Racking up more Ats win.
Which is good and could you just remind us.
As you look forward.
You saw that revenue accelerates as kind of a product insurance through the funnel.
Can you remind us how that process works again.
And the reason is that there could be a.
Mismatch of timing of revenue relative to kind of the growth.
How much of that growth that you are baking in for 25% how much of that is thinking in X percentage of customers moving into volume production just wanted to get a sense.
How that process works.
I'll outline it and Steve you can add any color. So the way we tend to look at it as there's new Ats and Theres mature Ats and then Theres new wafer services in mature wafer services, we have been bringing in a lot of new Ats customers 25 over the last 12 months those typically.
Start out at a relatively small run rate and then as the programs pick up momentum the resources get fully deployed the R&D cycle learning begins to accelerate you'll see them move into mature.
And again, depending upon the complexity of the program that can be a two year window or it can be a four year window.
As programs begin to.
Yet towards the end of the development cycle in years, two to four there'll be preparing for our new wafer services or the transition out of development into volume manufacturing your experience of J curve effect is the R&D slows down and the volume begins to pick up but over time, where youre going.
C as the customer base grows and we fill out that entire funnel each and individual program will have less significant of an impact on our overall model.
And we certainly expect that the biomed programs that we're doing they tend to be more on the two year timeframe to get to wafer services, whereas complicated programs like Rad hard for example take.
Taking a longer time, but the whole idea is to have customers constantly moving out of Ats and new wafer services, while back filling the funnel and again the unique thing about sky water has all these technologies that we're developing are being done on our task platform, which is.
US becoming the single source provider on new technologies, new platforms, new products that are going to market all leveraging the unique case.
But because we have so our customers are partnering with us to fund our development pipeline to bring new competitive products to market versus traditional products that are really the ones you hear about being consumed today.
So it's really a new a new paradigm for the market technology at the surface.
The service at the same time as the industry is going through a major new paradigm as we bring back semiconductor manufacturing to the U S.
It's creating a lot of demand for resources a lot of demand for equipment, it's only going to get more intense with the chips fell passes but it's all good for our country, because we're creating new capabilities that aren't being made anywhere else in the world and Scott what is right at the center of that.
And that's what gives us confidence in our long term model still seeing customers moving from Etfs into wafer services and being backfill by new Ats programs, which is exactly how the model as opposed to work, but I want to be clear those new programs typically do start out slow and they're not significantly material in first year contribution.
There are new R&D programs and stuff it really hasn't been done before so it's more a year by year as we go and as we're more successful we typically see the spend really started increasing in year two or three so 24 to 30 months into an R&D program, but as we're going into the mature Ats stage as Tom mentioned, that's what giving us better visibility into our long term.
As we've seen these contracts look to be more long term contracts as we talked about last quarter and up giving us better visibility into our Ats revenue and what we needed to to achieve that revenue as well. So good contributions coming through balancing that pipeline, but it usually takes 24 to 36 months for those new Ats.
Graham to really materialize and generate significant revenue.
Thank you.
Yeah.
You do have a follow up question from the line of Christian <unk> with Cowen and company.
Yes, hi, thanks for taking the follow up to almost <unk> I just wanted to check on one thing.
Youre reluctant to give near term guidance is driven by the fact that it's.
It's very hard to forecast the Ats business I'm, just kind of curious.
Is that still the case and B if that is the case, how should we think about just the vapor services heading into December and also entered into the March quarter, given the fact that with PCM revenue overflow from the $15 million in March but at the same time, there will be seasonality going into okay.
So overtime, we will see that we're getting better visibility as I mentioned, not only will the ats type of a contract extending and being longer which will give us better visibility. We'll also have more confidence in the services. We're delivering again with R&D that we're currently doing a lot of it is new R&D that hasnt been done before but as we further build.
And take these individual program and turned them into platform technology development that will give us a good baseline to build off on and there won't be as much learning going through and the new R&D programs that will give us better visibility into the Ats programs, but as you can see that over the past couple of quarters. There is some lumpiness that comes through with these contract.
Especially on the timing of the achievement of those milestones again, you've seen the output increasing on the wafer surface side, we've talked about that in the increases year over year. There is still more revenue on the table high demand for our wafer services and we expect to continue to be more optimized and more efficient in driving more wafers out the door and get better.
At each quarter going forward.
But those are being fulfilled as bill into Q4 Oclock.
There is significant demand for our wafer services and we're becoming more efficient with the way that we drive that wafer services revenue.
Got it thanks, Steve.
And there are no further questions at this time I would like to turn the call back over to Tom Sunderman for closing remarks.
Thank you.
As I shared at the beginning of our call Skywriters Paas model is perfectly aligned to accelerate the realization of disruptive ideas into the market at a time that demand for beyond Moore's law technologies is growing to satisfy mega trends across industries.
Additionally, a great opportunities in front of our nation to act in pursuit of semiconductor sovereignty and to ensure the next generation of technologies are produced domestically.
<unk> sky waters to differentiate disrupt and dominate the markets we choose to participate in these factors drive our collective enthusiasm for the future of our company and U S based high Tech manufacturing.
<unk> for your interest in Sky water.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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