Q4 2023 SkyWater Technology Inc Earnings Call

Good afternoon, My name is Andrea and I will be your conference operator today.

Operator: Good afternoon, my name is Audra, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Skywater Technology fourth quarter 2023 financial results conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise.

At this time I would like to welcome everyone to the Sky water technology fourth quarter 2023 financial results Conference call Today's conference is being recorded.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.

Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. At this time, I'd like to turn the conference over to Claire McAdams, Investor Relations for Skywater Technology. Please go ahead.

If you would like to withdraw your question Press Star one again.

At this time I'd like to turn the conference over to Claire Mcadams Investor Relations for Sky Water Technology. Please go ahead.

Claire E. McAdams: Thank you, Operator. Good afternoon, and welcome to Skywater's fourth quarter and full year 2023 conference call. With me on the call today from Skywater are Thomas Ponderman, Chief Executive Officer, and Steve Manco, Chief Financial Officer. I'd like to remind you that our call is being webcast live on Skywater's Investor Relations website at ir.skywatertechnology.com. The webcast will be available for replay shortly after the call conclude

Thank you operator.

Afternoon, and welcome to <unk> fourth quarter and full year 2023.

Carl.

With me on the call today are Robert our Congress Harlan.

Thank you Rocco.

Steve Mollenkopf, Chief Financial Officer.

I'd like to remind you that our call is being webcast live.

He was investor relations website at IR high water technology Broadcom.

The webcast will be available for replay shortly after the call concludes.

Claire E. McAdams: On our IR website, we have also posted an investor slide presentation as well as a financial supplement to accompany today's call. During the call, any statements made about future financial results and business are forwarded as a statement. 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 8K today and our fiscal 2022 10K. All forward-looking statements are made as of today, and we assume no obligation to update any such statement. During this call, we will discuss non-GAAP financial measures. You can find the reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release, our financial supplement, and in our Q4 earnings presentation, all three of which are posted on our IR website. With that, I'll turn the call over to Tom.

On our IR website, we also have posted an investor slide presentation, rather than a financial question.

To accompany todays call.

During the call any statements made about future financial results that are.

Our 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 today and our fiscal 2022.

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.

Finally, a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release.

With supplements.

And in our Q4 earnings presentation, all three of which are posted on our IR website.

With that I'll turn the call over to Tom Thank.

Tom: Thank you, Claire, and good afternoon to everyone on the call. Today we are pleased to report strong fourth quarter financial results. Revenues grew to a record $79 million, up 11% from Q3, and exceeded our expectations due to continued sequential growth in our ATS development business, which was up 6% from Q3. As expected, tool revenues totaled nearly $10 million for the quarter.

Thank you Claire and good afternoon to everyone on the call.

We are pleased to report strong fourth quarter financial results revs.

Revenues grew to a record $79 million up 11% from Q3 and exceeded our expectations due to continued sequential growth in our Etfs development business, which was up 6% from Q3.

As expected tool revenues totaled nearly $10 million for the quarter as we discussed on our last call. We are entering a new multiyear stage increased levels of customer funded capex in support of our growing Ats business.

Tom: As discussed on our last call, we are entering a new multi-year stage of increased levels of customer-funded CapEx in support of our growing ATS business. The CapEx investments being made by our customers are targeted at building our platform development capability and putting the necessary capacity in place for volume production. Consistent with our expectations going into the quarter, wafer services revenues were $12 million, down 17% from Q3, driven by the continued softening in in-market demand, chiefly from the broader industrial sector.

Our capex investments being made by our customers are targeted at building our platform development capability and putting the necessary capacity in place for volume production.

Consistent with our expectations going into the quarter wafer services revenues were $12 million down 17% from Q3, driven by the continued softening in end market demand chiefly from the broader industrial sector.

Tom: In spite of this in-market softness, the continued strong customer demand for ATS development business has driven six straight quarters of sequential growth and record revenue performance. For fiscal year 2023, we exceeded our long-term targets, with total revenues growing 35% from fiscal 2022. The strength of ATS within a backdrop of an overall weak-end market was reflected by the changing mix of revenues in 2023 with an 80-20 mix of total ATS revenues to wafer services compared to about two-thirds, one-third in 2022. As we have demonstrated, ATS is the major growth driver for Skywater's business for 2023 and, we believe, for the next several years as we continue to develop new advanced technologies for the aerospace We believe the strong demand for ATS business demonstrates that our customers' innovation investments remain strong and that our unique business model offers a compelling value proposition for the accelerated development of new technology platforms and products. The largest contributors to our total ATS revenue growth this year of over 60% have been multiple strategic aerospace and defense programs. These include our RADHeart 90 nanometer platform, as well as multiple additional A&D programs that have also been moving forward aggressively over the past year.

In spite of this end market softness that continued strong customer demand for Ats development business has driven six straight quarters of sequential growth and record revenue performance.

For fiscal year 2023, we exceeded our long term targets with total revenues growing 35% from fiscal 2022.

The strength of Etfs within a backdrop of an overall weak end market was reflected by the changing mix of revenues in 2023 with an 80 20 mix of total Acs revenues to wafer services compared to about two thirds one third in 2022.

As we have demonstrated Ats is the major growth driver for Sky waters business booked for 2023, and we believe for the next several years as we continue to develop new advanced technologies for the aerospace defense and commercial markets.

We believe the strong demand for Etfs business demonstrates that our customers innovation investments remains strong and that our unique business model offers a compelling value proposition for the accelerated development of new technology platforms and products.

The largest contributors to our total Acs revenue growth this year of over 60% have been multiple strategic aerospace and defense programs. These include our Rad hard 90 nanometer platform as well as multiple additional A&D programs that have also been moving forward aggressively over the past year.

Tom: We believe this signifies the Department of Defense's increased commitment and investment in Skywater to be the major trusted U.S. foundry providing a growing portfolio of technologies that are critical to national security. These are the same programs that are driving the majority of the anticipated growth in customer-funded CapEx. Altogether, our aerospace and defense programs in 2023 grew to comprise over half of our revenue, compared to about 40% of our revenues in 2022. Our continued progress in developing our A&E technologies and platforms is also accelerating our engagement with new commercial customers and partners. We expect to be able to leverage the A&E investments happening today at Skywater to support numerous commercial use cases that require reliable CMOS performance in applications like advanced computing and medical diagnosis, which are our next two fastest-growing end markets. Our focus on advanced medical diagnostics and sequencing applications has expanded significantly since our IPO. These applications require the precise processing of fluids, such as blood, and leverage the electrical properties of semiconductors to enable groundbreaking advances in the sampling of biological materials.

We believe this signifies the department of Defense's increased commitment and investment in sky water to be the major trusted U S foundry, providing a growing portfolio of technologies that are critical to national security.

These are the same programs that are driving the majority of the anticipated growth and customer funded capex altogether, our aerospace and defense programs in 2023 grew to comprise over half of our revenues.

<unk> to about 40% of our revenues in 2022.

Our continued progress ramping our A&D technologies and platforms is also accelerating our engagement with new commercial customers and partners.

We expect to be able to leverage the A&D investments happening today at sky water to support numerous commercial use cases that require reliable Cmos performance and applications like advanced computing and medical diagnostics, which are next two fastest growing end markets.

Our focus on advanced medical diagnostics and sequencing applications has expanded significantly since our IPO. These applications require the precise processing of fluids, such as blood and leverage the electrical properties of semiconductors to enable groundbreaking advances and the sampling of biological materials.

Tom: These unique semiconductor devices require sophisticated process development and adherence with strict quality standards, which is what Skywater offers through our ATS business. This investment in biohealth is paying off, as we are forecasting multiple medical technology companies to transition from ATS to waiver services in 2024. Our recent announcement with Nautilus Biotechnology is just one example. We anticipate strong growth in the biohealth category in the coming years, and we look forward to sharing news of additional customer transitions to wafer services expected this year. Progress also continues on our enhanced CMOS platforms, including qualification efforts for our low noise performance 90 nanometer CMOS technology, which supports numerous sensor applications, such as thermal imaging.

These unique semiconductor devices requires sophisticated process development and adherence with strict quality standards, which is wet sky water offers through our Ats business.

This investment in <unk> is paying off as we are forecasting multiple medical technology companies to transition from Etfs to wafer services in 2024, our recent announcements, but not always biotechnology is just one example.

We anticipate strong growth in the Bayou health category in the coming years, and we look forward to sharing news of additional customer transitions to wafer services expected this year.

Progress also continues on our enhanced Cmos platforms, including qualification efforts for our low noise performance 90 nanometer Cmos technology, which supports numerous sensor applications such as thermal imaging. We are currently engaged with several of the customers as we work towards a baseline platform qualification and PDK relief.

Tom: We are currently engaged with several lead customers as we work towards a baseline platform qualification and PDK release plan for the second half of the year. In the RADHeart category, we are currently adding incremental engineering resources to enhance our RH90 platform design enablement efforts in parallel with our ongoing work on our RH90 qualifications. Customer engagement remains strong across both of these new, uniquely differentiated CMOS platforms. Now, I'd like to provide an update on several recent developments that are allowing Skywater to build a strong foundation for revenue growth and margin expansion for the years to come. First, in Florida, I recently announced an award from the Department of Defense that includes up to 190 million dollars of funding over the next five years in order to advance our capabilities and capacity for what we believe will be the most comprehensive advanced packaging facility in the United States. Advanced packaging represents a new growth factor for Skywater. Today, devices incorporating advanced packaging technologies are largely produced in Asia, with a heavy concentration in Taiwan. In most cases, these technologies and processes are also tied directly to specific foundries as part of a closed ecosystem.

Our plan for the second half of the year.

In the Rad hard category, we are currently adding incremental engineering resources to enhance our aged 90 platform design enablement efforts in parallel with our ongoing work with our it's 90 qualification.

Customer engagement remains strong across both of these new uniquely differentiated Cmos platforms.

Now I'd like to provide an update on several recent developments that are allowing sky water to build a strong foundation for revenue growth and margin expansion for the years to come.

First in Florida, Our recently announced award from the Department of Defense includes up to $190 million of funding over the next five years in order to advance our capabilities and capacity for what we believe will be the most comprehensive advanced packaging facility in the United States.

Advanced packaging represents a new growth vector for sky water today devices, incorporating the advanced packaging technologies are largely produced in Asia with a heavy concentration in Taiwan in most cases. These technologies and processes are also tied directly to specific foundries as part of a closed ecosystem that.

Tom: The desire to onshore advanced packaging production is a priority shared by both defense and large commercial companies. As evidence of this, AMD, a leader in deploying advanced packaging solutions to deliver leading-edge compute solutions, recently applauded our efforts in Florida and the recent DoD award, which is focused on exactly that, bringing world-class advanced packaging technology development and production support to the United States. Another important announcement since last quarter relates to the submission of our full CHIPS application for Minnesota. Our application is focused on modernizing our Bloomington facility, adding the necessary tools, equipment, and infrastructure that will further expand our development capabilities and production capacity over the next five years. We have a multi-faceted approach to obtaining outside investment in support of future growth, and any CHIPS funding would be incremental to the significant level of customer-funded investments received to date.

Xyrem to onshore advanced vaccine production is a priority share by both defense and large commercial companies.

As evidence of this AMD a leader in deploying advanced packaging solutions to deliver leading edge compute solutions recently applauded our efforts in Florida and the recent Doj Award, which is focused on exactly that bringing world class advanced packaging technology development and production support to the United States.

Another important announcements since last quarter relates to the submission of our <unk> chips application for Minnesota. Our application is focused on modernizing our bloomington facility, adding the necessary tools equipment and infrastructure that will further expand our development capabilities and production capacity over the next five years.

Ours.

We have a multifaceted approach to obtaining outside investment and support our future growth and any chips funding would be incremental to the significant level of customer funded investments received to date altogether. These outside funding opportunities enable us to accelerate our revenue growth, while minimizing internal capital requirements.

Tom: Altogether, these outside funding opportunities enable us to accelerate our revenue growth while minimizing internal capital requirements. Finally, a major strategic initiative over the past year has been our decision to invest in the transformation of our operations in partnership with outside experts. These investments have been focused on improving the operational efficiencies needed in order to achieve even higher outputs from our Bloomington fab, enhance the monetization of our unique value proposition, and optimize the utilization of our workforce. This approach is already starting to pay dividends.

Finally, a major strategic initiative over the past year has been our decision to invest in the transformation of our operations in partnership with outside experts. These investments have been focused on improving the operational efficiencies needed in order to achieve even higher outputs from our Bloomington fab enhance the monetization.

Our unique value proposition and optimize the utilization of our workforce.

This approach is already starting to pay dividends in the second half of 2023, we significantly increased wafer velocity achieved record levels of ETS activities and realize more linear wafer services production.

Tom: In the second half of 2023, we significantly increased wafer velocity, achieved record levels of ATS activities, and realized more linear wafer services production. Our transformation effort culminated in a number of important developments as we closed 2023. First, during the fourth quarter, we completed a restructuring of the organization that included the reduction of approximately 10% of Skywater's workforce across all levels of the company to better align the company's resources with our long-term growth strategy.

Our transformation efforts culminated in a number of important developments as we closed 2023.

First during the fourth quarter, we completed a restructuring of the organization that included the reduction of approximately 10% of sky warrants workforce across all levels of the company to better align the company's resources with our long term growth strategy, we believe that our newly highly integrated approach to R&D and manufacturing will manifest in <unk>.

Tom: We believe that our newly highly integrated approach to R&D and manufacturing will manifest in greater efficiencies and operating leverage as we continue to scale our business. 2024 hiring is specifically aimed at aligning select skill expertise around the needs of our emerging technology platform. Second, by optimizing the company's existing resources and leveraging the capabilities of our new executive talent, we were able to conclude the outside investment phase of the transformation process by year end. And going forward, we are not planning on any additional transformation-related consulting fees in 2024.

Greater efficiencies and operating leverage as we continue to scale our business two.

<unk> 2020 for hiring is specifically aimed at aligning select skill expertise around the needs of our emerging technology platforms.

By optimizing the company's existing resources and leveraging the capabilities of our new executive talent, we were able to conclude the outside investment phase of the transformation process by year end and going forward. We are not planning on any additional transformation related consulting fees in 2024.

A third outcome of our process was the decision to focus the majority of the company's resources on accelerating the growth of our Ats business, allowing us to continue to build a strong pipeline that we expect will drive us towards a higher gross margin wafer services business for the long run.

Tom: A third outcome of our process was the decision to focus the majority of the company's resources on accelerating the growth of our ATS business, allowing us to continue to build a strong pipeline that we expect will drive us toward a higher gross margin wafer services business for the long run. And lastly, we believe that the transformational process we have executed over the past year is enabling us to quickly turn the corner to profitability. And with our current visibility, we believe we will achieve this key milestone in the second half of 2024.

And lastly, we believe that the transformational process, we have executed over the past year is enabling us to quickly turn the corner to profitability and with our current visibility. We believe we will achieve this key milestone in the second half of 2024.

Tom: Now turning to our outlook for Q1 and the year ahead. We entered 2024 with strong momentum in our ATS business, which we expect to continue. With our current visibility, we expect Q1 revenues in the $80 million range.

Now turning to our outlook for Q1 in the year ahead.

We entered 2024 with strong momentum in our Ats business, which we expect to continue.

With our current visibility, we expect Q1 revenues and the $80 million range. This reflects a similar level of Etfs development revenues as Q4, which would represent nearly a 20% growth over Q1 of 2023. We also expect a high level of customer funded capex as we enter 2024 and estimate tool.

Tom: This reflects a similar level of ATS development revenues as Q4, which would represent nearly 20% growth over Q1 of 2023. We also expect a high level of customer-funded CapEx as we enter 2024, and we estimate tool sales will increase to approximately $14 million in the first quarter. We expect that offsetting the sequential growth will be a further decline in wafer services revenues, which we expect will be down about 25% from Q4. As we look ahead to our full year outlook for 2024, we expect the uniqueness of our ATS business model and strong customer-funded CapEx will enable Skywater to achieve another revenue growth year. First, we expect our ATS development revenues to show solid growth in the range of 10 to 20 percent after outperforming our growth objectives with greater than 50 percent growth in 2023.

Sales will increase to approximately $14 million in the first quarter.

We expect that offsetting the sequential growth will be a further decline in wafer services revenues, which we expect will be down about 25% from Q4.

As we look ahead to our full year outlook for 2024, we expect the uniqueness of our Ats business model and strong customer funded capex will enable sky water to achieve another revenue growth year.

First we expect our Ats development revenues to show solid growth in the range of 10% to 20%.

After outperforming our growth objectives with greater than 50% growth in 2023.

Tom: We also expect a record year of customer capex investments, and we believe tool revenues will grow to at least $60 million. Furthermore, this level of customer-funded CapEx is expected to continue over the next few years, with the investments planned by our customers in 2025 and 2026 expected to match or even exceed the strong levels forecasted for 2024. As previously stated, given the broad-based weakness in the industrial market and expectations for a prolonged inventory correction, customer demand for the broader industrial end market is expected to remain soft throughout 2024.

Also expect a record year of customer Capex investments and we believe tool revenues will grow to at least $60 million.

Furthermore, this level of customer funded Capex is expected to continue over the next few years with the investments planned by our customers in 2025, and 2026 expected to match or even exceed the strong levels forecasted for 2024.

As previously stated given the broad based weakness in the industrial market and expectations for a prolonged inventory correction customer demand with the broader industrial end market is expected to remain soft throughout 2024.

Tom: As a result, we are accelerating the pace at which we are phasing out our less profitable legacy programs as we redirect wafer services resources to ATS development. We expect that this will result in an increased mix of our ATS business in 2024, in advance of more material transitions of ATS development into wafer services in the future, which we again expect to be far more profitable than our legacy business. All together, we anticipate that our wafer services revenues will be down by at least 50 percent in 2024 compared to 2023 levels. 2024 is all about the continued acceleration of our business transformation as we aggressively prepare to launch our new secure CMOS platforms, expand our ATS development business, convert existing ATS customers to wafer services, and build out the development and production capabilities of our two fabs in Minnesota and Florida through our demonstrated public-private partnership model.

As a result, we are accelerating the pace at which we are phasing out our less profitable legacy programs as we redirect wafer services resources to Etfs development.

We expect that this will result in an increased mix of our Ats business in 2024 and advance a more material transitions of Ats development into wafer services in the future, which we again expect to be far more profitable than our legacy business altogether, we anticipate that our wafer services revenues will be down by at least 50.

<unk> in 2024 compared to 2023 levels.

<unk> thousand 24 is all about the continued acceleration of our business transformation as we aggressively prepare to launch our new secure Cmos platforms expand our Ats development business convert existing Ats customers wafer services and build out the development and production capabilities of our two fabs in Minnesota in Florida.

Through our demonstrated public private partnership model.

Tom: Before turning the call over to Steve, I'd like to close by highlighting that since our IPO nearly three years ago, the Skywater team has outperformed our long-term annual revenue targets with a three-year CAGR exceeding 25%. We believe that the distinction of our business model, the highly differentiated innovative technologies we are making available to the domestic IC market, and the strong customer pipeline we continue to build position Skywater for several years of above-industry growth and strong operating leverage. I will now turn the call over to you. Thank you, Tom.

Before turning the call over to Steve I'd like to close by highlighting that since our IPO nearly three years ago. This guy water team has outperformed our long term annual revenue targets with a three year CAGR exceeding 25%.

We believe that the distinction of our business model the highly differentiated innovative technologies, we are making available to the domestic IC market and a strong customer pipeline. We continue to build physician sky water for several years of above industry growth and strong operating leverage I will now turn the call over to Steve.

Thank you Tom before I begin my review of our fourth quarter results I will direct you to the financial supplement available on our IR website, which summarizes our quarterly financial results for the last three years, starting in Q3, we changed our policy regarding a couple of our non-GAAP financial metrics and to help us supplement on our IR website is where you can find.

Steve: Before I begin my review of our fourth-quarter results, I will direct you to the financial supplement available on our IR website, which summarizes our quarterly financial results for the last three years. Starting in Q3, we changed our policy regarding a couple of our non-GAAP financial metrics, and the helpful supplement on our IR website is where you can find all comparable non-GAAP adjustments, as well as the impact of tool sales on our gross margin. Now turning to our Q4 results, fourth quarter revenues reached another record for us, exceeding our expectations to total $79.2 million, which was up 11% from Q3 and up 22% from the fourth quarter of 2022. Record ATS revenue of $67.1 million was up 17% from Q3 and up 40% year over year.

All comparable non-GAAP adjustments as well as the impact of tool sales on our gross margins now.

Now turning to our Q4 results fourth quarter revenues reached another record for us exceeding our expectations to totaled $79 2 million.

Which was up 11% from Q3 and up 22% from the fourth quarter of 2022.

Record Ats revenue of $67 1 million was up 17% from Q3 and up 40% year over year.

Steve: ATS revenue included $9.9 million in tool sales compared to $3.2 million in Q3, an anomalous amount in Q4 of 2022. The growth in ATS exceeded our earlier expectations due to another quarter of sequential growth in ATS development revenues. Offsetting this growth was the decline in wait-for-services revenue, which, as expected, was down 17% sequentially as a result of the softening demand environment in the broader industrial market.

Yes revenue included $9 $9 million of tool sales compared to $3 2 million in Q3, and a novel amount in Q4 of 2022.

The growth in Ats exceeded our earlier expectations due to another quarter of sequential growth in ETF development revenues offsetting this growth was the decline in wafer services revenue, which as expected was down 17% sequentially as a result of the softening demand environment in the broader industrial markets.

Steve: Our non-GAAP gross margin for the quarter was 17.4%, a bit better than expected, primarily due to more favorable ATS development revenue compared to the forecast. The nearly $10 million of tool sales in the quarter impacted non-GAAP gross margin by 130 basis points. As a reminder, tool sales represent CapEx that is funded by our customers. These enable us to increase our capacity and capabilities without requiring us to use our own capital.

Our non-GAAP gross margin for the quarter was 17, 4% a bit better than expected primarily due to more favorable ATF development revenue compared to the forecast.

Nearly $10 million of tool sales in the quarter impacted non-GAAP gross margin by 130 basis points.

As a reminder, tool sales represent capex that is funded by our customers. These enable us to increase our capacity and capabilities without requiring us to use our own capital.

Steve: Additionally, since this CapEx is funded by our customers, there is no expansion of our fixed asset base and, therefore, no ongoing depreciation for us to carry. And while tool sales will often reduce our overall gross margin, they typically have no negative impact on gross profit dollars. Non-GAAP operating expenses declined to just $10.5 million, which was well below our guidance of $13 to $14 million, primarily as a result of the recovery of approximately $4 million of prior bad debt expense. Turning to our business transformation process, we completed the outside investment phase of our process with $5.3 million of management consulting fees in the quarter.

Additionally, since this capex is funded by our customers. There is no expansion of our fixed asset base and therefore, no ongoing depreciation for us to carry and while tool sales will often reduce our overall gross margin. They typically have no negative impact on gross profit dollars.

non-GAAP operating expenses declined to just $10 5 million, which was well below our guidance of $13 million to $14 million, primarily as a result of the recovery of approximately $4 million of prior bad debt expense.

Turning to our business transformation process, we completed the outside investment phase of our process with $5 $3 million of management consulting fees in the quarter. We also completed a workforce reduction of approximately 10% of our head count, which going forward is going to support our gross margin expansion strategies through decreased manufacturing cost and.

Steve: We also completed a workforce reduction of approximately 10% of our headcount, which, going forward, is going to support our gross margin expansion strategies through decreased manufacturing costs and also better align the company's resources with our long-term growth strategy. Non-GAAP operating income was $3.3 million, and adjusted EBITDA was $10.6 million, both exceeding expectations due to the favorable gross margin performance and expense recovery mentioned earlier. Interest expense was $2.9 million, and with a tax benefit of $0.5 million, the GAAP net loss was $0.22 per share, and the non-GAAP net loss was $0.02 per share.

Also better align the company's resources with our long term growth strategy non.

non-GAAP operating income was $3 3 million and adjusted EBITDA was $10 6 million, both exceeding expectations due to the favorable gross margin performance and expense recovery mentioned earlier.

Interest expense was $2 $9 million and with a tax benefit of $5 million. The GAAP net loss was <unk> 22 per share and a non-GAAP net loss was <unk> <unk> per share.

Steve: Turning to the balance sheet, we continue to improve upon our capital position in fiscal 2023. We consistently generated positive cash flows from the P&L prior to working capital changes and reduced our total indebtedness by $30 million compared to year-end 2022. Total proceeds from our ATM added $20 million of equity funding for the full year, with all transactions taking place during the first seven months of the year. We minimized short-term borrowing as interest rates increased, and our total cash at year-end was $18 million, with $78 million available on a revolving line of credit.

Turning to the balance sheet, we continue to improve upon our capital position in fiscal 2023, we consistently generated positive cash flows from the P&L prior to working capital changes and reduced our total indebtedness by $30 million compared to year end 2022.

Total proceeds from our ATM at a $20 million of equity funding for the full year with all transactions taking place during the first seven months of the year.

We minimize short term borrowing as interest rates increase and our total cash at year end was $18 million was $78 million available on our revolving line of credit.

Steve: Turning to our outlook for Q1 and our expectations for various financial metrics as we enter 2024. As Tom mentioned, with our current visibility, we expect Q1 revenue levels in the $80 million range. This reflects our assumption of a similar level of ATS development revenues, $14 million of tool sales, and that wafer services will decline to less than $10 million. Given the expected revenue profile, we expect non-GAAP gross margin EQ1 in the low 19% range. This reflects the greater contribution of tool sales, which we expect will impact gross margin by 200 to 300 basis points. We expect non-GAAP operating expenses of approximately $14 to $15 million for the first quarter, and beyond Q1, we expect quarterly non-GAAP operating expenses will continue to remain in this range through fiscal 2024.

Turning to our outlook for Q1, and our expectations for various financial metrics as we enter 2024.

As Tom mentioned with our current visibility, we expect Q1 revenue levels in the $80 million range. This reflects our assumption of a similar level of ATF development revenues $14 million of tool sales and that wafer services will decline to less than $10 million.

Given the expected revenue profile, we expect non-GAAP gross margin in Q1, and the low 19% range.

This reflects the greater contribution of tool sales, which we expect will impact gross margin by 200 to 300 basis points, we expect non-GAAP operating expenses of approximately $14 million to $15 million for the first quarter and beyond Q1, we expect quarterly non-GAAP operating expenses will continue to remain in this range.

Fiscal 2024.

Steve: For the full year, we are forecasting another year of revenue growth. We expect customer fund and tool investments of at least $60 million and solid growth in ATS development revenue in the range of 10% to 20%. We expect the resulting strong year-over-year growth for our overall ATS business in 2024 will be partially offset by a reduced level of wait for services business, which we expect will be down by at least 50% and potentially as much as 60%. The significant changes in revenue mix for 2024 will impact our gross margin expansion objectives, including tools, but the trajectory is expected to continue to improve. The chief tailwinds for gross margin improvement include the expected continued strong flow through of over 50% for our ATS development business and the decrease in quarterly depreciation expense as the purchase accounting portion phases out toward the end of Q1.

For the full year, we are forecasting another year of revenue growth, we expect customer funding tool investments of at least $60 million and solid growth in ETF development revenue in the range of 10% to 20%.

We expect the resulting strong year over year growth for our overall Ats business in 2024 will be partially offset by a reduced level of wafer services business, which we expect will be down by at least 50% potentially as much as 60%.

The significant changes in revenue mix for 2024 will impact our gross margin expansion objectives, including tools, but the trajectory is expected to continue to improve the <unk> tailwind for gross margin improvement include the expected continued strong flow through of over 50% for ATF development business and the decrease in.

Quarterly depreciation expense as the purchase accounting portion phases out towards the end of Q1, taking.

Steve: Taking these into account, our expectation is that gross margin for the full year 2024 will increase slightly year-over-year. The higher tool mix is expected to have an estimated impact in the range of 300 to 400 basis points on full-year gross margin. There is no doubt that our model is unique and that customer-funded CapEx brings some complexities to modeling our forward-looking financial performance. However, it's important to come away from today's call with an understanding that there is absolutely nothing negative about our customers funding a significant portion of our CapEx needs. First, tools fail to have either a neutral or positive impact on gross profits.

Taking these into account our expectation is that gross margin for the full year 2024 will increase slightly year over year. The higher tool mix is expected to have an estimated impact in the range of 300 to 400 basis points on full year gross margin.

There is no doubt that our model is unique and that customer funded capex, bringing some complexities to modeling our forward looking financial performance. However, it's important to come away from today's call with an understanding that there is absolutely nothing negative about our customers funding a significant portion of our capex needs first tool sales to have either a new.

<unk> our positive impact on gross profit. We also expect our quarterly depreciation will remain at these relatively low levels as we reach new levels of revenue growth at scale over the next few years with over 80% of our planned capital expenditures in 2024 expected to be funded by our customers our foreseeable capital needs.

Operator: We also expect our quarterly depreciation will remain at these relatively low levels as we reach new levels of revenue growth and scale over the next few years. Furthermore, with over 80% of our planned capital expenditures in 2024 expected to be funded by our customers, our foreseeable capital needs are extremely low. And compared to typical foundry models with depreciation totaling at least 15 to 20% of revenues, for us, we expect depreciation will shrink to less than 5% of our revenues as we move beyond Q1, which is one of the reasons we believe we can be so confident in our long-term margin target of 40%. We also expect to turn the corner to positive non-gap EPS in the second half of 2024 and look forward to discussing our With that, I'll turn the call over to Q&A. Operator, please open the line for questions. Thank you. At this time, I would like to remind everyone that in order to ask a question, press star, then number one on your telephone keypad. We'll go first to Quinn Bolton at Needham and Company.

Our extremely low and compare to typical foundry models with depreciation totaling at least 15% to 20% of revenues for us we expect depreciation will shrink to less than 5% of our revenues as we move beyond Q1, which is one of the reasons. We believe we can be so confident in our long term margin target of 40%.

We also expect to turn the corner to positive non-GAAP EPS in the second half of 2024 and look forward to discussing our success on this key milestone in future calls with that I'll turn the call over to Q&A operator, Please open the line for questions.

Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

We'll go first to Quinn Bolton Needham <unk> company.

Hey, guys. Thanks for taking my questions.

Quinn Bolton: Hey guys, thanks for taking my question. I guess to start, just for the gross margin outlook, obviously lots of puts and takes. I understand the tool revenue is a bit of a headwind, and the $60 million of tool revenue, I understand sort of the drag there, but you talked about wafer services being down pretty significantly, and I know that's been sort of a fad filler. And so can you just kind of talk through the ramp that you see into the second half of the year, what kind of level of gross margin would you expect you need to get to hit that profitability target that you mentioned in the second half of the year? Thank you, and then I've got a couple of following questions as well, for more information visit www.skywatertech.com on the revenue side.

Sir just on the gross margin outlook, obviously lots of puts and takes.

I understand the tool revenue.

It's a bit of a headwind in the $60 million of coal revenue.

Understand sort of what the drag there, but you just talked about wafer services being down pretty significantly and I know that's been sort of a fab tailoring. So.

Can you just kind of talk through that.

Ramp that you've seen in the second half the year, what kind of level of gross margin.

You need to get to to hit that profitability target.

Mentioned in the second half of the year. Thank you and then I've got a couple of follow on questions as well.

Listen to on the revenue side.

Go ahead and start with the revenue.

Yes, so so wafer wafer services revenue obviously.

Tom: Go ahead and start with the revenue on Wafer Services. Yeah, so Wafer Services revenue obviously is feeling the effects of the overall industry softening. We, of course, have been in a transition mode over the last several years as we continue to bring in more of our ATS development programs, preparing them to go to volume production. So, as I mentioned in my prepared remarks, we are leaning hard into those transitions.

Feeling the effects of the overall industry softening we of course have been in a transition mode over the last several years as we continue to bring in more of our Ats development programs preparing them to go into volume production. So as I mentioned in my prepared remarks, we are leaning hard.

<unk> into those transitions, we're doing this to prepare to not only ramped those into volume as this year unfolds, but more importantly, as we prepare for next year and beyond and of course, we're taking into account the fact that lower utilization of our wafer services business.

Tom: We're doing this to prepare to not only ramp those up to volume as this year unfolds, but more importantly, as we prepare for next year and beyond. And of course, we're taking into account the fact that lower utilization of our Wafer Services business does have an impact on gross margins, but that is somewhat being offset by the fact that we are bringing in new tools that, while not like a typical ATS development margin, do have an overall positive impact. So we believe that the work we're doing this year to position the business for continued ATS growth makes long-term sense, and we're doing that in a mode where we're still seeing gross margin performance at a level that is consistent with our previous discussions. Steve, anything to add? Yeah, and I'll just highlight two things.

Does have an impact on gross margins, but that is somewhat being offset by the fact that we are bringing in.

New tools that.

Thanks.

Not like a typical Ats development margin does have a an overall positive impact. So we believe that the work we're doing this year to position the business for continued Ats grows makes long term sense in and we're doing that.

Mode, where we're still seeing gross margins performance at a level that is consistent with our previous discussions Steve anything that yeah, and I'll just highlight two things so ill address the tool revenue one first and again I think you referred to it as a headwind we still look at it like we said in opening remarks as a tailwind for the long term.

Steve: I'll address the tool revenue one first, and again, I think you referred to it as a headwind. We still look at it, like we said in the opening remarks, as a tailwind for the long term of our business. Seeing this level of tool investment coming in was much more than we probably could have ever imagined in the near term, and seeing the significant investments coming through to continue building out not only technology programs but technology platforms, in my opinion, is a significant sign of growth for the company in the future and not being funded by our customers. So to your point, on a margin perspective, it will have a headwind, if you will. But it does make a small contribution to profit. And even with the gross margin being impacted by the tool revenues over the course of next year, even a margin in the mid to low 20s could be something that could generate some positive non-GAAP EPS for us over the course of 2024. And so we really think that's something that we could achieve over the course of 2024.

Our business are seeing this level of tool investment coming in was much more than we probably could have ever imagined in the near term and seeing significant investments coming through to continue building out the only technology programs, but technology platforms. At my opinions is significant sign of growth for the company in the future and not being funded by our customers.

So to your point on a margin perspective, it will have a headwind if you will but it does have some small contribution to profit.

And even with the gross margin being impacted by the tool revenues over the course of next year, even a margin in there.

The mid to low twenty's could be something that could generate some positive non-GAAP EPS for us over the course of 2024, and so we really think thats something that we could obtain over the course of 2024.

And Steve It sounds like.

Quinn Bolton: Steve, it sounds like, you know, the margin for the year is a little higher than I think you said, the 22% for full year 23. It sounds like we probably are in that, you know, 23 to 25% kind of rate in the second half of the year if you're starting the year at 19. That's just the way the math works.

Morgan here was a little higher than I think you said that 22% for full year 'twenty three it sounds like you probably are in that.

22% to 25% kind of rate in the second half of the year for starting the year at 19.

The way the math works it sounds like that that's kind of the range and that can be thinking about.

Steve: It sounds like that's kind of the rate you should be thinking about. Yeah, I don't think it has to be quite that high, again, depending on the timing of when these tools come through. Again, we see significant opportunity for the tool investments. We communicated that we expect not only a record year but something around the $60 million level for the tools.

Yes, I don't think it has to be quite that high again, depending on the timing of when these tools come through again, we see significant opportunity for the tool investments, we communicated that we expect not only a record year, but something around the $60 million level on the tools now again, given the significant contribution or the <unk>.

Steve: Now again, given the significant contribution, or the significant amount, I should say, of the tool revenue coming in, even a little bit of contribution margin coming from the tools can have an impact positively on the gross profit performance and the bottom line as well. So, I'm still saying within the low 20s on our margin, with the tools coming in. It should be something that could get us to the break even point, or slightly positive on the non-GAAP EPS. And just one thing to add is that we are positioned well, you know, if the market were to turn, of course, we could begin to take advantage of that as well. Go ahead. Yeah, sorry, last one for you, Tom.

Second amount I should say of the tool revenue coming in even a little bit of contribution margin coming from the tools can have an impact positively on the gross profit performance in the bottom line as well so I'll still staying within the low twenty's on our margin with the tools coming in should be something that could get us to breakeven point or slightly positive on a non-GAAP.

Yes.

And just one thing to add is as we are.

Positioned well if the <unk>.

Market were to turn of course, we could begin to.

Take advantage of that as well.

Go ahead Glen.

Yes, yes, sorry last one for you Tom just on that then went to services, obviously I understand that.

Tom: Just on that, the wafer services. Obviously, I understand the headwinds in the industrial side of the business were a legacy. You talked about the bio bulk business starting to transition to wafer services this year. When would you think that wafer services revenue bottoms? Is it kind of the bottom middle of the year, and it starts to recover sequentially into the back half of the year? Is it just kind of just trending at a pretty flattish level through the year? What's the shape you guys are expecting for wafer service? Yeah, so we're expecting in the first half of this year, maybe going into Q3, that we would see a bottom, and then we would start to see recovery post that point. And again, the rate at which programs that have transitioned to wafer services, the rate at which they ramp up is highly dependent on

The headwinds in the industrial side of the business with our legacy will talk about the Bible.

Paul.

Business started transition delinquent servicing mix in Europe.

Would you think that the servicing revenue bottoms as it kind of bottomed at all near it starts to recover.

Sequentially into the back half of the year.

I knew you had a pretty flattish level.

Thank you guys are expecting on on wafer carrier.

Yes, so we're expecting in the.

First half of this year, maybe going into Q3 that we would see a bottom and then we would start to see recovery post that point.

And again the rate at which programs that have transitioned to wafer services the rate at which they ramp is highly dependent on the customer and their ability to get their products to market. Our goal is to prepare them to to ramp.

We're very excited about the number of new programs coming through the pipeline and the.

The pace that they will grow will depend on the customer there is a J curve effect that will come into play, but we believe the breadth and depth of programs. We have now will allow us to make that transition effectively.

Got it thank you.

Okay.

We will move next to harsh Kumar at Piper Sandler.

Hey, guys I had a couple of questions as well I guess that was more curious about the spud in the Ats business was there anything that happened in the end market or maybe your own focus as a company.

Prompted this kind of growth and then my second one is kind of tied to it. So I'll just ask it anyways historically the model has been that Ats drives Baker revenues.

But the revenues are coming down is that mostly the industrial sort of.

Call. It a flushing out this year or is there something else going on maybe a shift in strategy perhaps.

Yes, so to answer the first question, it's all about transformation, we clearly are.

Doing everything we can to maximize our ability to move our etfs programs as quickly as possible through the development cycle, while at the same time delivering consistent wafer services output.

That's what we really have been doing.

Our ability to not only execute the transition while delivering solid financial performance is a good testament to the team.

And.

The kind of positioning legacy products in.

Phasing those out as we move towards these new programs is kind of always been the plan for sky water. When we spun out of Cypress, we have never put a lot of energy into our legacy mature technologies as they're there to fill the fab to allow the new business.

To be developed and put in a position to grow in the long term and that's exactly what we've been doing and really as.

As we said 23 was was driving that transformation, we've executed it and now we're leaning into it hard and really taking advantage of maybe call. It a weaker broad market to move some of these ats programs at a faster pace and specifically the <unk> programs, which as we've been talking all year.

Already moving at a very fast pace using that.

Good response.

Okay.

Chris.

Our.

Sorry, My second one was regarding the.

The wafer services Flushing out I guess.

Thats, just basically certainly it sounds like its industrial correct, yes.

Yes.

<unk>.

A lot of the industrial products are legacy products I think there was a lot of inventory building in the industrial space and.

As our primary customer Infineon has made very public there are digesting that inventory and obviously.

For those type of products, we feel the effect of that as well and that's really what we see happening.

This year unfolds and in parallel we're going to continue to drive these etfs transitions and get these new tools installed, which ultimately just drive fast here.

Ats transitions as well.

Got it fair enough guys. Thank you.

And we will move next to Robert Mertens at TD Cowen.

Hi, This is Rob Mertens on for Chris Thanks for taking my questions.

The first one you had mentioned that the Aero and defense customers, who are a big part of calendar year 'twenty three revenues what would you expect the mix to sort of look like throughout this year and will this material materially shift in.

Calendar year, 'twenty, five as wafer services start to recover.

<unk>.

Yes, I mean, I think as I put in my remarks, A&D is going to continue to to grow it was over 50% in 'twenty three we expect that to increase further.

And 24 again, there is theres a lot of focus on moving those programs very quickly. So we're taking advantage of that and given the weakness in the.

Broader wafer services market as we just discussed and the pace of transition for some of our commercial programs. We expect as A&D to continue to be a strong contributor.

Through this year and into next year as well.

Great. Thanks.

And then just a quick follow up I want to make sure I heard correctly that the consulting fees, where they $3 $5 million in the December quarter, and then just based on the March guide of $14 million to $15 million Opex. What are you sort of thinking the consulting fees would look like there and then in out quarters.

Yes.

Transformation costs is what we referred to and you can see those broken out in the non-GAAP tables.

Supplements to the earnings release were $5 $3 million for the quarter.

Again.

Around 11 $3 million for the year and as Tom mentioned, there is not an expectation of those recurring again in the year 2024.

Yes.

Okay got it that's helpful.

Okay.

Sure.

Next we'll go to Richard Shannon at Craig Hallum.

Hi, guys. Thanks for taking my questions as well.

First question for Steve.

Trying to absorb all the.

Numbers here in terms of the guide for the year and as just wanted to.

Try to ask a question I have here is really thinking about the exit rate of gross margin.

Exiting this year, both with and without tool sales I tried to run all your numbers through here.

I Wonder if you could just give us your thoughts here, starting with a $19 five or 19.

<unk> <unk> or 19% number here in the first quarter, obviously got a lot of depreciation kicking off after that I mean is this something where we get into the upper half of the 20th exiting this year or how should we think about that yes.

Yes, good question and again, it's going to depend on the level of the tool revenue is coming through.

<unk> been expecting and communicating that in 2020 for the depreciation is falling off and coming down and we're seeing that take place and we will see that play out starting really in the second quarter of this year. So that was a big tailwind that we've been looking forward to for quite some time, it's really going to like I said, though impact be impacted by the tool revenues I think as we've talked about a few <unk>.

<unk> ago, we still look at our base cost of doing business at around $45 million and excluding tool revenue. We still believe over the course of 2024, we will continue to have better than a 50% contribution to the gross profit line coming through for incremental dollars on the revenue side above 45, now that's excluding the tool revenue.

Again, thats going to be a bit of a drag on the gross margin number but when you pull out the tools and talked about the growth that we expect over the course of this year, we start to expect a better than 50% contribution margin for incremental revenue.

Sure.

Okay, I will try to run through that run that through my model and try to nail that down a little bit better here, maybe a follow on question on tool sales here.

I guess a couple of questions here really.

Thank Tom I heard your prepared remarks here about a $60 million number this year and then.

Some more thoughts on years past this where you're seeing the tool sales do you expect to be at or even higher levels in 'twenty five 'twenty six.

Yes.

As I said.

<unk> seen similar levels for the next several years. So this year and next year.

And even through 2006 so.

Okay.

For model, Okay, and then kind of think of it.

Yes, just.

Just want to make sure I get the magnitude and then a related follow up question is even more important one here thinking about the contributors to this to what degree is this.

Government versus commercial customers, obviously, you announced the big.

Government contract earlier this year, that's obviously contributing to this visibility not only pass this year, but to what degree are we seeing contributions from commercial customers as molecule sale.

Yes, I would say the majority are within the A&D space.

Majority of these two investments there are some commercial customers, but the majority is definitely.

And that is I would say.

Consistent with the kind of the A&D model they are investing deferred capabilities in place and we plan on leveraging those where we can into the commercial sector, but.

There is the majority investor right now and as we mentioned these when you see tool investments of this size, which is again much larger than what we've had in the past it's really not for one off individual programs, although that can still be the case and is still part of our business model.

By one toolbox here or there for development purposes, when you see tool revenues and contribution of this size, it's really to build out our platform and that will be a platform that could be offered in many customers down the road. So again, that's when you see significant investments of this size coming in.

A good indication of growth in future years with a number of customers coming to development then manufacturer off that platform.

Okay. Thanks for the details guys I will jump out of line.

Thanks Richard.

And there are no further questions at this time, Mr. Sonderman I'll turn the call back over to you for closing remarks.

Thank you operator, I want to close todays call by conveying the strong confidence all of us at Sky water haven't and our ability to execute successfully towards our long term growth and profitability objectives. Our amazing employees have now delivered a three year annual revenue growth rate of <unk>.

Exceeding our long term targets, we intend to continue to build your confidence in our ability to execute on our future growth and profitability objectives.

We look forward to talking to you again on our Q1 call in May.

And with that I will conclude today's earnings call. Thank you.

Yes.

And again this concludes today's conference call. Thank you for your participation you may now disconnect.

One call in May.