Q1 2024 SkyWater Technology Inc Earnings Call

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Thank you for standing by my name is Greg and I will be your conference operator today at this time I would like to welcome everyone to the Sky water technology Q1, 'twenty 'twenty, four and financial results conference call at.

Operator: Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to the Skywater Technology Q1 2024 Financial Results Conference Call.

Operator: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw your question, simply press star one again. Thank you. I would now like to turn the call over to Claire McAdams, Investor Relations, for Skywater.

Greg: All lines have been placed on mute to prevent any background noise.

Claire E. McAdams: After the Speakers' remarks, there will be a question and answer session.

Operator: If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad and if you'd like to withdraw your question simply press Star one again. Thank you.

Claire E. McAdams: I would now like to turn the call over to Claire Mcadams Investor Relations for Sky water Claire. Please go ahead.

Claire E. McAdams: Thank you operator, good afternoon, and welcome to Sky Water's first quarter 2024 conference call.

Claire E. McAdams: Thank you, operator. Good afternoon, and welcome to Skywater's first quarter 2024 conference call. With me on the call today from Skywater are Thomas Sonderman, Chief Executive Officer, and Steve Manko, Chief Financial Officer. I'd like to remind you that our call is being webcast live on Skywater's Investor Relations website at ir.skywatertechnology.com. The webcast will be available for replay shortly after the call concludes.

Claire E. McAdams: With me on the call today from Sky water are Thomas Anderman, Chief Executive Officer, and Steve <unk>, Chief Financial Officer.

Claire E. McAdams: I'd like to remind you that our call is being webcast live on Sky Water's Investor Relations website at IR Dot Sky water technology Dot com.

Claire E. McAdams: <unk> cast will be available for replay shortly after the call concludes.

Claire E. McAdams: On our investor relations website, we have posted an investor slide presentation to accompany today's call, as well as a financial supplement, which summarizes our quarterly and annual financial results for the last three years, including all non-GAAP adjustments and comparisons to our GAAP results, as well as the impact of tool sales on our gross margin. 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.

Claire E. McAdams: On our IR website, we have posted an investor slide presentation to accompany today's call as well as the financial supplement, which summarizes our quarterly and annual financial results for the last three years, including all non-GAAP adjustments and comparisons to our GAAP results as well as the impact of tool sales on our <unk>.

Claire E. McAdams: Gross margins.

Claire E. McAdams: During the call any statements made about our future financial results and business are forward looking statements.

Claire E. McAdams: These forward looking statements are subject to risks and uncertainties that could cause our actual results to differ materially.

Claire E. McAdams: 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 2023 Form 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 a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release, our financial supplement, and in our Q1 earnings presentation, all three of which are posted on our Investor Relations website. And with that, I'll turn the call over to Tom.

Claire E. McAdams: 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 2023 Form 10-K.

Tom: All forward looking statements are made as of today and we assume no obligation to update any such statements.

Tom: During this call we will discuss non-GAAP financial measures you can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release, our financial supplement and in our Q1 earnings presentation. All three of which are posted on our Investor Relations website.

Claire E. McAdams: And with that I'll turn the call over to Tom.

Thomas J. Sonderman: Thank you, Claire, and good afternoon to everyone on the call. I am pleased to report another record quarter for Skywater with revenue of $80 million. ATS development revenue exceeded our expectations to reach a new record of $61 million, up 7% from Q4 and up 28% compared to Q1 of 2023. This growth was driven by continued strength in our aerospace and defense, quantum computing, and biomedical programs. Wafer services revenue was $10 million, a bit higher than expected, while tool revenue was lower than forecast due to some transitory delays and equipment delivery.

Tom: Thank you Claire and good afternoon, everyone on the call.

Thomas J. Sonderman: I'm pleased to report another record quarter for Sky water with revenue up $80 million.

Thomas J. Sonderman: ACS development revenue exceeded our expectations to reach a new record of $61 million up 7% from Q4 and up 28% compared to Q1 of 2023.

Thomas J. Sonderman: This growth was driven by continued strength in our aerospace and defense quantum computing and biomedical programs.

Thomas J. Sonderman: <unk> services revenue was $10 million a bit higher than expected while tool revenue was lower than forecast due to this.

Thomas J. Sonderman: Some transitory delays in equipment deliveries.

Thomas J. Sonderman: Given the record results in revenue upside in Acs, the resulting mix of revenue was indicative of strong gross margin and adjusted EBITDA momentum.

Thomas J. Sonderman: Given the record results and revenue upside in ATS, the resulting mix of revenue was indicative of strong gross margin and adjusted EBITDA momentum. However, as Steve will detail in his prepared remarks, we recorded a multimillion-dollar charge to cost of revenue that reflects the anticipated additional costs required for us to complete certain development milestones for a significant A&E program, and this impacted our expected progress towards profitability in Q1. We believe our CapEx Lite and High Operating Leverage business model will lead to strongly profitable results in the years to come, and today I will focus my prepared remarks on the drivers for the anticipated strong customer demand and earnings leverage ahead. This quarter marks the three-year anniversary of our IPO.

Thomas J. Sonderman: However, as Steve will detail in his prepared remarks, we recorded a multimillion dollars charged to cost of revenue that reflects the anticipated additional costs required for us to complete certain development milestones for a significant A&D program and this impacted our expected progress towards profitability.

Speaker Change: Thank you Juan.

Thomas J. Sonderman: We believe our Capex light and high operating leverage business model will lead to strongly profitable results in the years to come and today I will focus my prepared remarks on the drivers for the anticipated strong customer demand and earnings leverage ahead.

Thomas J. Sonderman: This quarter marks the three year anniversary of our IPO.

Thomas J. Sonderman: During that time, we have firmly established the key aspects of our unique value proposition within the global semiconductor industry. Through leveraging existing chip manufacturing infrastructure and introducing new materials and processes, we are able to enhance the capabilities of traditional IC flows. While innovations in semiconductor advanced nodes are fundamentally enabled by shrinking geometries, in mainstream fabs, such as ours, innovation comes from new ways of integrating new materials, new types of devices, and new additive process flows to provide new chip functionality and drive the performance envelope with respect to size, weight, power, and cost.

Thomas J. Sonderman: During that time, we have firmly established the key aspects of our unique value proposition within the global semiconductor industry.

Thomas J. Sonderman: Through leveraging existing chip manufacturing infrastructure, and introducing new materials and processes, we are able to enhance the capabilities of traditional IC flows.

Thomas J. Sonderman: While innovations in semiconductor advanced nodes are fundamentally enabled from shrinking geometries in mainstream fabs such as ours innovation comes from new ways of integrating new materials, new types of devices and new additive process flows to provide new chip functionality and dry.

Thomas J. Sonderman: The performance envelope with respect to size weight power and cost.

Thomas J. Sonderman: And while these types of chips are often referred to as mature, they are absolutely essential. For example, high-k materials at 90 nanometers can be used to create high-density capacitors that enable our customers to design readout ICs, or ROICs, for state-of-the-art thermal imaging cameras. These sensors can be used in applications that range from defense systems to automotive driver assistance.

Thomas J. Sonderman: And while these types of chips are often referred to as mature. They are absolutely essential for example high K materials at 90 nanometer can be used to create high density capacitors that enable our customers to design readout Ics, our ROE ex for state of the art thermal imaging cameras.

Thomas J. Sonderman: These sensors can be used in applications that range from defense systems to automotive driver assist.

Thomas J. Sonderman: As another example, we incorporate a vast array of differentiated structures for Cmos Mems like integrations.

Thomas J. Sonderman: As another example, we incorporate a vast array of differentiated structures for CMOS and MEMS-like integrations for chemical and molecular sensing, which is required for the rapidly expanding medical diagnostic and sequencing market. We are essentially creating new, fully integrated product categories by leveraging existing CMOS infrastructure and integrating new features, materials, and capabilities. 200mm is exactly the right format to co-create these new categories alongside our customers, given the frequent iterations and cycles of learning required to develop new flows and new devices synergistically, which would be cost prohibitive at 300 millimeters.

Thomas J. Sonderman: Chemical and molecular sensing, which is required for the rapidly expanding medical diagnostic and sequencing markets.

Thomas J. Sonderman: We are essentially creating new fully integrated product categories by leveraging existing Cmos infrastructure and integrating new features materials and capabilities 200 millimeter is exactly the right format to co create these new categories alongside our customers give us the frequent iterations in cycles.

Thomas J. Sonderman: Learning required to develop new flows and new devices Synergistically.

Thomas J. Sonderman: These will be cost prohibitive at 300 millimeter.

Thomas J. Sonderman: The resulting business from this Acs development work with our customers has far surpassed our legacy wafer services business in terms of revenue.

Thomas J. Sonderman: The resulting business from this ATS development work with our customers has far surpassed our legacy wafer services business in terms of revenue and has emerged to be the key growth driver for Skywater. And, equally important, we expect this investment with our customers will result in an entirely new class of products introduced to the market on technology developed at Skywater. Through the evolution of our ATS business model, we have had a front row seat to observe the diverse needs of our customers as they endeavor to bring disruptive ideas to life with new materials, devices, and integration schemes. This first-hand knowledge from supporting innovators across markets has led us to introduce advanced packaging as a new growth factor for Skywater.

Thomas J. Sonderman: And has emerged to be the key growth driver for sky water and.

Thomas J. Sonderman: And equally important we expect this investment with our customers will result in an entirely new class of products introduced to the market on technology developed at Sky water.

Thomas J. Sonderman: Through the evolution of our Ats business model, we have had a front row seat to observe the diverse needs of our customers as they endeavor to bring disruptive idea to life with new materials devices and integration schemes. This firsthand knowledge from supporting innovators across markets has led us to introduce advanced.

Thomas J. Sonderman: Packaging is a new growth vector for sky water.

Thomas J. Sonderman: Offering advanced packaging solutions domestically enables us to enhance our DoD and commercial revenue growth opportunities. We are excited about the growth potential for our Florida operations as we have begun specifying and ordering tools that will enable our 2.5D and 3D packaging platforms. These tools are being funded by the $120 million award announced in January.

Thomas J. Sonderman: Offering advanced packaging solutions domestically enables us to enhance our Dod and commercial revenue growth opportunities. We are excited about the growth potential for our Florida operations as we have begun specifying and ordering tools that will enable our two five D and three D packaging platforms.

Thomas J. Sonderman: These tools are being funded by the $120 million Award announced in January.

Thomas J. Sonderman: Turning to the market environment, there are several key macro themes driving our business today. The first and most prominent driver currently is the increased investment in semiconductor technology being made domestically in aerospace and defense. Upgrades and enhancements to critical defense infrastructure are ongoing and include nuclear modernization, space capabilities, missile defense, and unmanned systems, all of which are helping to drive increasing semiconductor content across all mission systems. Even more importantly for Skywater, however, is the growing realization of the fragility of the semiconductor supply chain and the critical need to onshore semiconductor infrastructure. And within this ecosystem, we play a critical, trusted role with the U.S. government.

Thomas J. Sonderman: Turning to the market environment there.

Thomas J. Sonderman: There are several key macro themes driving our business today.

Thomas J. Sonderman: First and most prominent driver currently is the increased investment in the semiconductor technology being made domestically and aerospace and defense.

Thomas J. Sonderman: Upgrades and enhancements to critical defense infrastructure are ongoing and include nuclear modernization space capabilities missile defense and unmanned systems, all of which are helping to drive increasing semiconductor content across all emission systems.

Thomas J. Sonderman: Even more importantly for Sky water. However is the growing realization of the fragility of the semiconductor supply chain and the critical need to onshore semiconductor infrastructure.

Thomas J. Sonderman: And within this ecosystem, we play a critical trusted role with the U S government.

Thomas J. Sonderman: As defense program technology spending as being critical and the need for domestic supply chain undeniable. This growth vector is driving the majority of our current revenue growth, which also aligns with our expected A&D revenue mix exceeding 50% in 2024.

Thomas J. Sonderman: As defense program technology spending is critical and the need for a domestic supply chain undeniable, this growth vector is driving the majority of our current revenue growth, which also aligns with our expected A&E revenue mix exceeding 50% in 2024. The macro themes affecting our commercial businesses today reflect shifts in how we will compute, communicate, diagnose, and drive industry efficiencies into the future. These include the creation of device categories that operate on concepts beyond the conventional electronics realm, such as quantum computing and silicon photonics.

Thomas J. Sonderman: The macro themes affecting our commercial businesses today reflect shifts in how we will compute communicate diagnose and drive industry efficiencies into the future.

Thomas J. Sonderman: These include the creation of device categories that operate by concepts beyond the conventional electronics wrong, such as quantum computing and silicon photonics.

Thomas J. Sonderman: Every day, we are collaborating with our customers on numerous exciting new devices that will contribute to the highly connected AI-driven world emerging before us. We have begun an exciting period for Skywater as several long-term ATS customers begin their transition to wafer service. Last quarter, we talked about our biohealth program, and on today's call, I am pleased to highlight our most recent conversion. Following nearly two years of collaboration between Skywater and Lumotive, we were excited to jointly announce last week the transition of their optical beam steering device to production. The MODIS Light Control Metasurface chips deliver solid-state optical beam steering to the market for the first time, ushering in a new era of programmable optics.

Thomas J. Sonderman: Everyday we are collaborating with our customers on numerous exciting new devices that will contribute to the highly connected AI driven world emerging before us.

Thomas J. Sonderman: We have begun an exciting period for <unk> as several long term Acs customers began their transition to wafer services last quarter, we talked about a bio health program and on today's call I am pleased to highlight our most recent conversion.

Thomas J. Sonderman: Following nearly two years of collaboration between Sky water and new motive. We were excited to jointly announced last week the transition of their optical beam steering device to production but.

Thomas J. Sonderman: Motives light control <unk> chips deliver solid state optical beam steering into the market for the first time ushering in a new era of programmable optics.

Thomas J. Sonderman: The ability to shape and steer light with a single chip is already revolutionizing applications such as 3D sensing, with many more on the horizon. LM10, LaMotive's first LTM product offering, is now in production and shipping worldwide. In the coming weeks, we expect to announce the transition of another biomedical customer into a wafer services engagement. All of these transitions are key markers for the effectiveness of our unique technology-as-a-service approach to customer product realization. As anticipated, we are seeing a decline in wafer services revenue from legacy standard CMOS. Demand in those markets continues to be sluggish and has been compounded by a prolonged inventory correction.

Thomas J. Sonderman: The ability to shape and steer light with a single chip has already revolutionized and applications such as <unk> with many more on the horizon.

Thomas J. Sonderman: <unk> motives first LCM product offering is now in production and shipping worldwide.

Thomas J. Sonderman: In the coming weeks, we expect to announce the transition of another biomedical customer into a wafer services engagement. All of these transitions are key markets for the effectiveness of our unique technology as a service approach to customer product realization.

Thomas J. Sonderman: As anticipated we are seeing a decline in wafer services revenue from legacy standard Cmos.

Thomas J. Sonderman: Demand in those markets continues to be sluggish and has been compounded by a prolonged inventory correction.

Thomas J. Sonderman: We have used this relaxation and demand for our traditional platforms to accelerate the development and integration of new technologies, resulting in continued growth in Acs development with sensor IPO has been the primary driver of our three year annual revenue growth rate of 27%.

Thomas J. Sonderman: We have used this relaxation in demand for our traditional platforms to accelerate the development and integration of new technologies, resulting in continued growth in ATS development, which since our IPO has been the primary driver of our three-year annual revenue growth rate of 27%. With this as a backdrop to what is driving our top line, let's review the uniqueness of our business model and why we believe it positions us for gross margin expansion and significant earnings leverage as we turn the corner to profitability. First, our infrastructure.

Thomas J. Sonderman: With this as a backdrop to what is driving our top line, let's review the uniqueness of our business model and why we believe it positions us for gross margin expansion and significant earnings leverage as we turned the corner to profitability.

Thomas J. Sonderman: First our infrastructure several $100 million of gross fixed assets invested in our Bloomington fab have been largely depreciated.

Thomas J. Sonderman: Several hundred million dollars of gross fixed assets invested in our Bloomington fab have been largely depreciated. Total depreciation and amortization is expected to comprise about 5% of our revenues in the current quarter. More importantly, we believe depreciation will continue to be minimal for us because our customers are funding the majority of our current CapEx requirements. We expect 2024 to be a landmark year for customer-funded CapEx investments in Skywater, and today we have the visibility for at least $70 million in expected tool revenue this year.

Thomas J. Sonderman: Depreciation and amortization is expected to comprise about 5% of our revenues in the current quarter. More importantly, we believe depreciation will continue to be minimal for us because our customers are funding the majority of our current capex requirements.

Thomas J. Sonderman: We expect 2020 for it to be a landmark year for customer funded capex investments ensky water and today, we have the visibility for at least $70 million in expected tool revenue this year.

Thomas J. Sonderman: We estimate that since 2020, we have been the beneficiary of at least $100 million in customer-funded CapEx between those incorporated in major contract awards and tool sales recognized over that period. In this next multi-year stage, we expect an additional $200 million of outside investments through 2026, funding the majority of our capacity additions and incremental new capabilities. In total, this is roughly $300 million of expected customer investment means that Skywater is the beneficiary of a greater amount of outside co-investment than any other participant we know of in the domestic semiconductor ecosystem relative to our size. Now turning to our outlet for Q2.

Thomas J. Sonderman: We estimate that since 2020, we have been the beneficiary of at least $100 million in customer funded capex between those incorporated and major contract awards and tool sales recognized over that period.

Thomas J. Sonderman: And this next multiyear stage, we expect an additional $200 million of outsized investments through 2026 funding the majority of our capacity additions and incremental new capabilities. In total this roughly $300 million of expected customer investment means that sky water is the bench.

Thomas J. Sonderman: Fishery of a greater amount of outside co investment than any other participant we know of in the domestic semiconductor ecosystem relative to our size.

Thomas J. Sonderman: Now turning to our outlook for Q2.

Thomas J. Sonderman: We are forecasting another record-level revenue quarter in the low-to-mid $80 million range. Within this forecast, ATS development revenue is expected to be in the high $50 million range, representing growth of approximately 10% to 15% compared to Q2 of last year. While we believe our DoD business overall will remain strong, some program funding was affected by the delays in approving the U.S. government's 2024 fiscal budget, which we believe will result in a slightly lower quarterly run rate as we move beyond Q1's record revenue results.

Thomas J. Sonderman: We are forecasting another record level revenue quarter in the low to mid $80 million range.

Thomas J. Sonderman: Within this forecast Acs development revenue is expected to be in the high $50 million range, representing growth of approximately 10% to 15% compared to Q2 of last year.

Thomas J. Sonderman: While we believe our Dod business overall will remain strong some program funding was affected by the delays and improving in the U S. Government 2020 for fiscal budget, which we believe will result in a slightly lower quarterly run rate as we move beyond Q1 record revenue results.

Thomas J. Sonderman: And Wafer Services, aligned with our early outlook for the year, is our expectation that quarterly revenue will decline to the $4-5 million range in Q2 and then stabilize at that level, reflecting the continued softness in the broader industrial market and our increased focus on ATS. With customer-funded CapEx continuing to ramp to record levels, tool revenue is expected to be at least $20 million in the second quarter. This landmark year for customer-funded CapEx is aimed at enabling new capabilities that we expect will allow us to execute on our robust future growth expectations for both ATS development and wafer services.

Thomas J. Sonderman: And wafer services aligned with our earlier outlook for the year is our expectation that quarterly revenue will decline to the 4% to $5 million range in Q2, and then stabilize at that level, reflecting the continued softness in the broader industrial market and our increased focus on Acs with customer funded capex.

Thomas J. Sonderman: <unk> to ramp to record levels tool revenue is expected to be at least $20 million in the second quarter.

Thomas J. Sonderman: This landmark year for customer funded Capex is aimed at enabling new capabilities that we expect will allow us to execute on our robust future growth expectations for both Acs development and wafer services.

Thomas J. Sonderman: Our revenue growth expectations for the full year are largely unchanged since our February earnings call. We continue to expect ATS development growth in the range of 10-20% over 2023, a significant increase in tool sales, and a meaningful decline in our legacy wafer services revenue. As we look beyond 2024, we believe that the distinction of our business model, the highly differentiated innovative technologies we are making available to the domestic IC market, and the strong customer pipeline we continue to build position Skywater for several years of above-industry growth and strong operating leverage. I will now turn the call over to... Thank you.

Thomas J. Sonderman: Our revenue growth expectations for the full year are largely unchanged since our February earnings call. We continue to expect Ats development growth in the range of 10% to 20% over 2023, a significant increase in tool sales and a meaningful decline in our legacy wafer services revenue.

Thomas J. Sonderman: As we look beyond 2024, we believe that the distinction of our business model. The highly differentiated innovative technologies, we are making available to the domestic IC market and a strong customer pipeline. We continue to build physician sky water for several years of above industry growth and strong operating leverage.

Thomas J. Sonderman: I will now turn the call over to Steve.

Speaker Change: Thank you Tom first quarter revenue reached another record for us at $79 $6 million.

Steve Manko: Thank you, Tom. First quarter revenue reached another record for us at $79.6 million, up 1% from Q4 and up 20% from the first quarter of 2023. Record ATS development revenue of $61.2 million exceeded our forecast for the quarter as a result of accelerated development timelines, as well as our internal initiatives to prioritize high-growth ATS programs. We had forecast ATS development revenue to be similar to Q4, but with strong demand and operational execution, actual results demonstrated sequential growth of 7% and year-over-year growth of 28%.

Steve Manko: Up 1% from Q4 and up 20% from the first quarter of 2023.

Steve Manko: Record ETF development revenue of $61 2 million exceeded our.

Steve Manko: Our forecast for the quarter as a result of accelerated development timelines as well as our internal initiatives to prioritize high growth Ats programs.

Steve Manko: Had forecast ETF development to be similar to Q4, but with strong demand and operational execution actual results demonstrated sequential growth of 7% and year over year growth of 28%.

Steve Manko: As expected, wafer services revenue declined meaningfully from our prior run rates but still came a bit higher than forecast at $10 million. Tool revenue was $8.5 million, lower than expected due to certain delays in equipment deliveries.

Steve Manko: As expected wafer services revenue declined meaningfully from our prior run rates, but still came a bit higher than forecast at $10 million tool.

Steve Manko: <unk> revenue was $8 $5 million lower than expected due to certain delays in equipment deliveries.

Steve Manko: Our non-GAAP gross margin for the quarter was 16.9% compared to a forecast in the low 19% range due to an additional accrual recorded in cost of revenue. We recorded a roughly $8 million charge in Q1 to reflect the anticipated additional costs for us to complete certain development milestones for a significant A&E program. Absent this accrual for expected future development costs, our gross margin for Q1 would have surpassed our prior expectations, chiefly as a result of the more favorable mix of business in the quarter.

Steve Manko: Our non-GAAP gross margin for the quarter was 16, 9% compared to our forecast in the low 19% range due to an additional accrual recorded in cost of revenue.

Steve Manko: We recorded a roughly $8 million charge in Q1 to reflect the anticipated additional cost for us to complete certain development milestones for our significant A&D program.

Steve Manko: <unk> said this accrual for expected future development costs, our gross margin for Q1 would have surpassed our prior expectations chiefly as a result of a more favorable mix of business in the quarter.

Steve Manko: Tool revenue in the quarter impacted non-GAAP gross margin by 170 basis points. As a reminder, you can find the impact of tool revenue on gross margin each quarter in the financial supplement posted to our IR website. Non-GAAP operating expenses were $13.6 million, which was below the forecast, primarily due to lower variable compensation, along with a shift in timing of certain other SG&A costs of subsequent quarters. We've reduced the variable comp accrual during Q1 to reflect the softer market conditions primarily affecting our wafer services business, which we now are forecasting to decline by 60% in 2024.

Steve Manko: Total revenue in the quarter impacted non-GAAP gross margin by 170 basis points. As a reminder, you can find the impact of tool revenue on gross margin each quarter in the financial supplement posted to our IR website.

Steve Manko: non-GAAP operating expenses were $13 $6 million, which was below the forecast primarily due to lower variable compensation, along with a shift in timing of certain other SG&A costs in subsequent quarters.

Steve Manko: We've reduced the variable comp accrual during Q1 to reflect the softer market conditions, primarily affecting our wafer services business, which we now are forecasting to declined by 60% in 2024.

Steve Manko: Also of note, we added approximately $1.6 million of engineering costs to R&D expense due to our expectations that the record level of R&D activities in Q1 will continue. Non-GAAP operating income was approximately break-even, and adjusted EBITDA was $4.9 million, both of which would have been at record levels without the added accrual charge to cost of revenue. Interest expense was $2.4 million, and with nominal tax expense, the GAAP net loss was $0.12 per share, and the non-GAAP net loss was $0.08 per share. Now, turning to the balance.

Steve Manko: Also of note, we added approximately $1 6 million of.

Steve Manko: Engineering cost to R&D expense due to our expectation that the record level of R&D activities in Q1 that will continue.

Steve Manko: non-GAAP operating income was approximately breakeven and adjusted EBITDA was $4 9 million both of which would have been at record levels without the added accrual charged to cost of revenue.

Steve Manko: Interest expense was $2 $4 million and with nominal tax expense. The GAAP net loss was <unk> <unk> per share and the non-GAAP net loss was eight per share.

Steve Manko: Now turning to the balance sheet.

Steve Manko: Our capital position remains strong with $20 million of cash at quarter end and $63 million available on a revolving credit line. For the past five straight quarters, we have consistently generated positive cash flows from the P&L prior to working capital changes. In the current interest rate environment, we have minimized short-term borrowing intra-quarter, which has been enabled in part through over $20 million of advanced customer deposits. With record levels of customer CapEx co-investment expected to fund the majority of our CapEx needs, our CapEx for the quarter was $2 million, and over the past 12 months, our CapEx spend has been roughly equal to 3% of revenue.

Steve Manko: Our capital position remains strong with $20 million of cash at quarter end and $63 million available on our revolving credit lines over the past five straight quarters. We have consistently generated positive cash flows from the P&L prior to working capital changes in the current interest rate environment, we have minimize short term borrowing.

Steve Manko: Quarter, which hasnt been enabled in part through over $20 million of advanced customer deposits for tool purchases.

Steve Manko: With record levels of customer Capex co investment expected to fund the majority of our Capex needs. Our capex for the quarter was $2 million and over the past 12 months, our capex spend has been roughly equal to 3% of revenues.

Speaker Change: Turning to our outlook for Q2, and our expectations for various financial metrics as we move through 2024.

Steve Manko: Turning to our outlook for Q2 and our expectations for various financial metrics as we move through 2024. As Tom mentioned, with our current visibility, we expect Q2 revenue levels in the low to mid $80 million range. This reflects our forecast for ACF development revenue in the high $50 million range, $4 to $5 million of wafer services revenue, and at least $20 million of tool sales. Given the expected revenue profile, we expect non-GAAP gross margin in Q2 in the range of 16 to 19 percent. This gross margin range reflects the greater mix of tool sales expected in the quarter, which we expect will impact gross margin by 300 to 500 basis points.

Steve Manko: As Tom mentioned with our current visibility, we expect Q2 revenue levels in the low to mid $80 million range.

Steve Manko: This reflects our forecast for Acs development revenue in the high $50 million range $4 million to $5 million of wafer services revenue and at least $20 million of tool sales.

Steve Manko: The expected revenue profile, we expect non-GAAP gross margin in Q2 in the range of 16% to 19%.

Steve Manko: This gross margin range reflects the greater mix of tool sales expected in the quarter, which we expect will impact gross margin by 300 to 500 basis points. We also expect that the sequential decline in non tool revenue volumes will be a headwind to Q2 gross margins.

Steve Manko: We also expect that the sequential decline in non-tool revenue volumes will be a headwind to Q2 gross margin. We expect non-GAAP operating expenses of approximately $16 to $16.5 million for the second quarter and to remain in this range through fiscal 2024. For modeling purposes, we estimate that R&D will now comprise about $4 million of that run rate on a quarterly basis. For the full year, our growth forecast is largely unchanged since last quarter.

Steve Manko: We expect a non-GAAP operating expenses of approximately 16% to $16 5 million.

Steve Manko: For the second quarter and to remain in this range through fiscal 2024 for modeling purposes, we estimate that R&D will now comprise about $4 million of that run rate on a quarterly basis.

Steve Manko: For the full year, our growth forecast is largely unchanged since last quarter. We continue to forecast Etfs development revenue growth in 2024 in the range of 10% to 20%.

Steve Manko: We continue to forecast ETS development revenue growth in 2024 in the range of 10 to 20 percent. Since last quarter, we've seen some incremental softening in our wafer services forecast and expect this business to be down by approximately 60% from 2023. We do expect this softening will be more than made up for with total customer funded tool investments totaling at least $70 million in 2024. However, the expected revenue mix in 2024 will be less favorable compared to prior forecasts, which will impact our gross margin expansion objectives throughout the year.

Steve Manko: Since last quarter, we've seen some incremental softening in our wafer services forecast and expect this business will be down by approximately 60% from 2023.

Steve Manko: We do expect this softening we'll be more than made up for with total customer funded tool investments totaling at least $70 million in 2024.

Steve Manko: The expected revenue mix in 2024 will be less favorable compared to prior forecast, which will impact our gross margin expansion objectives throughout the year.

Steve Manko: The lower run rate of non-tool revenue volumes will likely be a headwind until we replace the revenue volume coming from legacy devices. At the same time, our depreciation declined to $5.1 million in Q1 and will further decline to an estimated $4.2 million in Q2, as expected, which is a tailwind to gross margin flow-through with depreciation expected to comprise around 5% of our revenue. Importantly, we expect these low levels of depreciation will continue for the foreseeable future, given our visibility for similar levels of customer co-investment funding 80% or more of our planned CapEx needs for the next couple of years.

Steve Manko: The lower run rate of non tool revenue volumes will likely be a headwind until we replace the revenue volume coming from legacy devices.

Steve Manko: At the same time, our depreciation declined to $5 1 million in Q1 and will further decline to an estimated $4 2 million in Q2 as expected, which is a tailwind to gross margin flow through with depreciation expected to comprise around 5% of our revenues.

Steve Manko: Importantly, we expect these low levels of depreciation will continue for the foreseeable future given our visibility for similar levels of customer co investment funding, 80% or more of our planned capex needs for the next couple of years.

Steve Manko: Finally, here are a few more of our assumptions for 2024. While overall debt levels will fluctuate through the year, depending on draws from our revolver, our Q1 interest expense is a good indicator of what to assume for quarterly interest expense for the remainder of the year. Any tax benefit or expense for 2024 will likely be negligible, and for modeling purposes, we would assume zero tax impact this year. Our income from variable interest entities below the line is not something that we can predict with accuracy, but $1 million is a historical average that we expect will be appropriate to use for your models looking forward. With that, I'll turn the call over to Q&A. Operator, please open the line for questions.

Steve Manko: Finally here are a few more of our assumptions for 2024.

Steve Manko: While overall debt levels will fluctuate through the year, depending on draws from our revolver. Our Q1 interest expense is a good indicator of what to assume for quarterly interest expense for the remainder of the year any.

Steve Manko: Any tax benefit or expense for 2024 will likely be nominal and for modeling purposes, we would assume zero tax impact this year.

Steve Manko: Our income from variable interest entities below the line is not something that we can predict with accuracy, but $1 million as a historical average that we expect will be appropriate to use for your models looking forward.

Speaker Change: With that I'll turn the call over to Q&A operator, Please open the line for questions.

Steve Manko: Okay.

Steve Manko: Sure.

Speaker Change: Okay, Great and just as a reminder, I would like to remind everyone in order to ask a question press star one on your telephone keypad once again star one on your telephone keypad.

Operator: Okay, great. And just as a reminder, I would like to remind everyone that in order to ask a question, press star one on your telephone keypad. Once again, press star one on your telephone, and we will pause just a moment to compile the Q&A route. Okay, looks like our first question comes from the line of Quinn Bolton with Needham & Company. Quinn, please go ahead.

Operator: And we will pause just a moment to compile the Q&A roster.

Operator: Okay.

Operator: Okay. It looks like our first question comes from the line of Quinn Bolton with Needham <unk> Company. Please go ahead.

Operator: Hey, guys, Nick Doyle on for Quinn Bolton, Thanks for taking my questions.

Nicolas Emilio Doyle: Hey guys, Nick Doyle. I'm for Quinn Bolton.

Nicolas Emilio Doyle: Thanks for taking my questions. First, can you just expand on the $8 million A&D accrual? Are there additional accruals needed for the project? Do other, you know, additional RADHARD projects you're looking at come with similar structures? I mean, it just seems like this is the main driver for the margin, unless you have a bunch of tailwinds, like you talked about in your comments.

Nick Doyle: First can you just expand on the $8 million.

Nicolas Emilio Doyle: A&D accrual are there additional accruals needed for the project.

Nicolas Emilio Doyle: Do other additional Rad hard projects Youre looking at come with similar structures I mean, it just seems like this is the main driver for the margin unless you had a bunch of tailwind like you talked about in your comments.

Thomas J. Sonderman: Yeah, I'll start, and Steve can elaborate on how we accounted for the essentially additional engineering work that's going to be required to get one of our strategic A&D programs to the level of performance that's required by our customers. As is typical when you're doing R&D and creating products in parallel, it's an iterative process, and as the technology matured, we got to the point where we decided it was going to take a little bit more engineering effort to get the program completed, and that resulted in the additional charge. Steve, you can elaborate on how we accounted for that. Sure. Under the accounting rules, when...

Speaker Change: Yes, I'll start and Steve can elaborate on how we accounted for the essentially additional engineering work, that's going to be required to get one of our strategic A&D programs to the level of performance that's required by our customers.

Steve Manko: As typical when youre doing R&D and creating products in parallel, but it's an iterative process and as.

Thomas J. Sonderman: The technology matured and we got to the point, where we decided it was going to take a little bit more engineering effort to get the program completed in that resolves resulted in the additional charge. Steve you can elaborate on how we accounted for that sure under the accounting rules when youre dealing with the contract with the government certainly those rules require.

Steve Manko: Sure. Under the accounting rules, when you're dealing with a contract with the government, certain of those rules require us to record an accrual in the period we identify additional costs needed for that program. This is one such case where that accounting principle had to be applied to this contract. So that is our best estimate as of right now of what the additional costs needed for the program are. So that accrual was put on our balance sheet, and that expense was recognized completely in this quarter. So, essentially, what happens is, as opposed to recognizing that expense, let's say, over the next three to four quarters in the P&L, it all comes through under government accounting in the quarter when it's recognized.

Steve Manko: For us to record an accrual in the period, we identify additional cost needed for that program. This is one such case, where that accounting principle. It had to be applied to this contract. So that was our best estimate as of right now what the additional cost needed for the program are so that accrual was put on our balance sheet and that expense was.

Steve Manko: <unk> completely in this quarter. So essentially what happens is as opposed to recognizing that expense, let's say over the next three to four quarters in the P&L. It all comes through under a government accounting in the quarter and when it is recognized.

Speaker Change: Okay. It makes sense that kind of got pulled in.

Nicolas Emilio Doyle: Okay, it makes sense. I kind of got pulled in.

Speaker Change: Second question, just the shape of the tool revenue over the next couple of years and you mentioned this three year pipeline at $200 million would be higher than our estimates.

Nicolas Emilio Doyle: Second question, just the shape of tool revenue over the next couple of years. You mentioned this three-year pipeline of $200 million. Would it be higher than our estimates? I mean, you gave some commentary around that $70 million for this year, so just how you're thinking about that tool revenue coming in? Would it make sense for $25 million to be lower, and then we step back up to $26 million? Any thoughts on timing, maybe risk of a further pushout? Thanks.

Nicolas Emilio Doyle: You gave some commentary around that $70 million for this year. So just how you're thinking about that the tool revenue coming in when it makes sense for 25 to be lower and then we step up step back up in 2006 any thoughts on timing maybe risk of a further push outs.

Speaker Change: Thanks, Paul.

Nicolas Emilio Doyle: Yeah. So I mean, I think we gave kind of a.

Steve Manko: Yeah, so, I think we gave kind of a broad view of what we think it'll be over the next three years. You can do the math; 70 would be about close to the average over that three-year period. I think that's a good way to model it. Each quarter, the tools are arriving per plan; sometimes they're coming sooner, sometimes later than planned. And so, for modeling purposes, we think 70 is probably a good rate for the next three years.

Steve Manko: A broad view of what we think that will be over the next three years you can do the math 70.

Steve Manko: Above.

Steve Manko: Close to the average over that three year period, I think thats, a good way to model it.

Steve Manko: Each quarter tools are arriving.

Steve Manko: Plan, sometimes say something sooner sometimes later than planned.

Steve Manko: So we think for modeling purposes. The 70 is probably a good rate over the next three years.

Steve Manko: Okay.

Steve Manko: It's nice to ask a follow-up question there about the push out. I mean, what's driving that push out? Is that a demand issue or really just a supply chain, you know, things taking longer than expected?

Steve Manko: Just a follow up there to the push out I mean, what's driving that push out is that is that a demand issue or really just the supply chain.

Steve Manko: It's taking longer than expected supply chain, it's literally.

Steve Manko: Yeah, supply chain, it's literally, you know... We get commitments from customers on when tools will arrive, and sometimes they meet those commitments, sometimes they slip a little bit. And that's literally what happened this past quarter. And that's why we provide the guidance that we do. I mean, if you look at it, we really had one slight pushout in this quarter.

Steve Manko: We get commitments from customers on when tools will arrive in.

Steve Manko: Sometimes they meet those commitments, sometimes they slipped a little bit and that's literally what happened this past quarter and Thats why we provided the guidance that we do I mean, if you look at it really we had one slight push out in this quarter. However at the same time, we were also saying with the clarity we have we expect more tools to come in over the course of 2024 I think Thats why we gave the overall pipeline of what we think.

Steve Manko: However, at the same time, we were also saying with the clarity we have, we expect more tools to come in over the course of 2024. I think that's why we gave the overall pipeline of what we think the tool revenue is for the next three years. There can be slight timing delays, but we don't see anything systemically wrong in the supply chain at this point in time. But tool deliveries can come right at quarter end and by a week or so could have an impact on the quarter.

Steve Manko: The tool revenue is for the next three years.

Steve Manko: There can be slight timing delays, we don't see anything systemically in the supply chain at this point in time, but two deliveries can come right right at quarter end and slipped by a week or so could have an impact on the quarter and Thats why we give a general guide and what the pipeline really looks like so again, we had one tool slightly miss coming into this quarter, but we also have visibility that more tools.

Steve Manko: And that's why we give a general guide to what the pipeline really looks like. So, again, we had one tool slightly missed coming into this quarter, but we also have visibility that more tools are likely to come in in 2024 than what we otherwise said in the last quarter earnings call.

Steve Manko: Collectively come in in 2024 than what we otherwise had in the last quarter earnings call.

Speaker Change: Thank you.

Speaker Change: Alright, Thank you Colin.

Operator: All right. Thank you, caller. And our next question comes from the line of Krish Sankar with TD Cowen. Krish, please go ahead.

Steve Manko: And our next question comes from the line of Krish Shankar with TD Cowen Christian. Please go ahead.

Krish Sankar: Yeah, thanks for taking my question. I had a few of them.

Krish Sankar: Yes. Thanks for taking my question I had a few of them Steve I'm just kind of curious you know clearly the revenue is improving nicely, but the gross margin is lagging I understand the one time costs.

Krish Sankar: Steve, I'm just kind of curious, you know, clearly the revenue is improving nicely, but the gross margin is lagging. I understand the one-time cost. I'm kind of curious how to think about overall gross margins for this year relative to last year. And if I remember right, you have spoken about in the past a long-term gross margin target of 40% existing in 2025. Is that still realistic? And I had a few

Krish Sankar: I'm curious how do you think about overall gross margin for this year relative to last year and <unk> spoken about in the past our long term gross margin target of 40% exiting 2025 is that realistic and then had a few other questions.

Steve Manko: Yeah, sure. So, on the gross margin standpoint, I mean, really, it was the $8 million, but you're also getting a little bit more tool costs flowing through as well. So, that was really the impact of where we were for the first quarter. Otherwise, it was pretty much in line with where we thought our costs would be and really would see that incremental growth taking place. Now, going forward, you know, we gave a range of what we thought the gross margins would be for second quarter, which is approximately 16 to 19 percent, and given what we talked about on the revenue side, but we'll still have good top-line revenue growth over the course of 2024, but what we're seeing right now, that revenue mix changes, and our expectation is that revenue mix for the rest of the year would be very similar to what we talked about and have expectations for the second quarter of this year.

Steve Manko: Yes, sure. So on the gross margin standpoint, I mean really it was the $8 million, but youre also getting a little bit more tool costs flowing through as well as obviously the impact of where we were for the first quarter otherwise it was pretty much in line with where we thought our cost would be and what it really would see that incremental growth taking place now going forward.

Steve Manko: We gave a range of where we thought that the gross margins would be for second quarter, which is approximately 16% to 19% and given what we talked about on the revenue side, but we'll still have good topline revenue growth over the course of 2024 with what we're seeing right now that revenue mix changes and our expectation is that revenue mix for the rest of the.

Steve Manko: A year would be very similar to what we've talked about and have expectations for the second quarter of this year.

Steve Manko: So soon is it fair to assume gross margin will be down versus last year.

Krish Sankar: So, sir, is it fair to assume growth margins this year will be down versus last year because of the true revenue?

Speaker Change: To revenue.

Steve Manko: Yeah, so if you look at the margin, the margin likely would be slightly down. Again, though, what you have to look at is the impact basis points of what we said, three to five hundred basis points of impact of tools coming in. So, if you're looking at a margin, it's a more important way to look at what the gross profit line is for the company because the margin will be impacted significantly by the amount of tool revenue coming in this year.

Speaker Change: Yes. So if you look at the margin the margin likely would be slightly down again, what you have to look at is the impact basis points of what we said three to 500 basis point impact of tools coming in so we're looking at our margin. It's more importantly to look at what the gross profit line is for the company.

Steve Manko: Because you are at the margin will be impacted significantly by the amount of tool revenue coming in this year.

Steve Manko: And clearly, the lower runway of wafer services with our legacy Infineon platform is going to contribute to gross margin dilution as well.

Steve Manko: And clearly the lower run rate of wafer services with our legacy Infineon.

Steve Manko: Platform is going to contribute to gross margin dilution as well.

Speaker Change: Got it and then two other quick questions. One is can you just tell us what your utilization rate is in your minutes it upfront in broadband Orlando Bakken pipe.

Krish Sankar: Got it. And then there are two other quick questions. One is, can you just tell us what your utilization rate is in your Minnesota front-end fab and the Orlando back-end fab?

Steve Manko: Yeah, so, again, we don't quote utilizations at Skywater, but, you know, we have talked about in the past our target utilization. We tend to want to run at a target utilization to drive our ATS business. We're running at the minimum levels of utilization for wafer services. You know, that's obviously tied to the macro environment we're in, and as we've talked before, we're using this as an opportunity to accelerate our ATS programs, and that is really the focus of the company right now, as we kind of deal with the macro reality that the whole semiconductor sector is working its way through.

Speaker Change: Yes, so again, we don't we don't.

Steve Manko: Utilizations at Sky water.

Steve Manko: We have talked about in the past our target utilization, we tend to win and run it added target utilization to drive our Ats business, we're running at.

Steve Manko: At the minimum levels of utilization for wafer services.

Steve Manko: That's obviously tied to the macro environment, we're in and as we've talked before we're using this as an opportunity to accelerate our etfs programs.

Steve Manko: That is really is the focus of the company right now as we kind of deal with the macro realities that the whole semiconductor sector.

Steve Manko: Is working its way through.

Speaker Change: Got it and then one final question.

Krish Sankar: Got it. And then one final question, Thomas. Steve, how much of your front end customers are using the Florida back end fab?

Krish Sankar: Thomas.

Speaker Change: What's your feel of London customers are using the Florida Bakken Bob.

Steve Manko: Yes, so and you asked about utilization in Florida that fab is still an ats centric fab. There is no volume products down there. So there is really no utilization to quote but as far as.

Thomas J. Sonderman: Yeah, so, and you asked about utilization in Florida. That fab is still an ATS, you know, center fab. There are no volume products down there, so there is really no utilization to quote, but as far as customers using the facility, we have multiple A&D customers as well as commercial customers that are doing development in the fab. And, as we announced in January, we were awarded a 120 million dollar program through the DOD to stand up a fan-out wafer packaging technology that was kicked off again in January, and that program will ramp throughout the year.

Thomas J. Sonderman: Customers using the facility, we have multiple A&D customers as well as commercial customers that are doing development in the fab and as we announced in January we were awarded a $120 million.

Thomas J. Sonderman: Program through the Dod needs to stand up a fan out wafer packaging technology.

Thomas J. Sonderman: That was kicked off again in January and that program will ramp throughout the year.

Thomas J. Sonderman: You know, we were excited to have A&D applaud our efforts in moving that type of capability back here to the U.S., so we expect to see a lot more coming from Florida as this year unfolds because of the technology that we're putting into the fab, but nothing from a buying perspective at this point.

Thomas J. Sonderman: We were excited to have AMD applaud our efforts in moving that type of capability back here to the U S. So we expect to see a lot more coming from Florida as this year unfolds because of the technology that we're putting in the fab, but nothing from a volume perspective at this point.

Krish Sankar: Got it, got it. Thanks, Tom. Thanks, Steve.

Speaker Change: Got it got it thanks, Tom Thanks, Steve.

Operator: Thanks Chris. Thanks Chris. And a reminder, if you'd like to ask a question again, press star number and the number one on your telephone keypad. Once again, star one. And our next question comes from Robert Iguano with Piper. Robert, please go ahead.

Speaker Change: Thanks, Chris and thanks, Chris.

Robert Iguano: And a reminder, if you'd like to ask a question again press star number and the number one on your telephone keypad once again star one.

Robert Iguano: And our next question comes from Robert <unk> with Piper Sandler.

Robert Iguano: Robert Please go ahead.

Robert F. Aguanno: Hi, guys.

Robert Iguano: Hi guys. Just a quick strategic one first. Can you maybe walk us through your longer-term outlook for wafer services? Obviously, with the business taking a hit, and I understand the macro side of things, and I'm not asking for numbers, but maybe just kind of the long-term strategy and how you're thinking about kind of the relative scale of the business and any sort of qualitative things that might impact the business going forward, you know, maybe in a positive way. Yeah,

Robert Iguano: Quick strategic one first can you maybe walk through your longer term outlook for wafer services business.

Robert Iguano: Business, taking a hit and I understand the macro side of things and I'm not asking for numbers, but maybe just kind of the long term strategy and how youre thinking about.

Robert Iguano: Kind of the relative scale of the business and any sort of qualitative things that might impact the business going forward maybe.

Robert Iguano: Maybe in a positive way.

Thomas J. Sonderman: Yeah, good question, and we've talked in the past about the J-curve effect as we have customers convert from ATS to wafer services. So this year, we're excited to announce Nautilus Bio last quarter and Lumotive this quarter.

Speaker Change: Yes, good question and we've talked in the past about the J curve effect as we have customers convert from Ats to wafer services. So this year, we're excited to announce.

Thomas J. Sonderman: <unk> bio last quarter most of this quarter, we expect another announcement coming soon about these conversions, but they are not going to immediately replace our legacy volumes that we obviously get from Infineon and a few other customers. Our plan all along has been to you.

Thomas J. Sonderman: We expect another announcement coming soon about these conversions, but they are not going to be able to replace our legacy volumes that we obviously get from Infineon and a few other customers. You know, our plan all along has been to use our ATS business to seed our fab here in Minnesota with new technologies on new platforms and new products that will have a long, long life cycle ahead of them, and that is working as planned.

Thomas J. Sonderman: Use our Ats business to seed our fab here in Minnesota with new technologies on new platforms, and new products that we will have a long long lifecycle ahead of them and that is working per plan. Obviously, along the way we are dealing with a macro environment, where there is semiconductor weakness.

Thomas J. Sonderman: Obviously, along the way, we're dealing with a macro environment where there is, you know, semiconductor weakness, certainly as it relates to some of the legacy programs. And so while we are, you know, hopeful that, at some point, business will come back in some form, our focus is really on seeding our fabs with these future technologies. The rate at which they'll come back is somewhat out of our control.

Thomas J. Sonderman: Certainly as it relates to some of the legacy programs and so while we are.

Thomas J. Sonderman: Hopeful that at some point that.

Thomas J. Sonderman: Business will come back in some form our focus is really on <unk>.

Thomas J. Sonderman: Our fabs with these future technologies the rate at which they'll come back again is somewhat out of our control and it's up to our customers to get the products in the market get the traction our goal is to make sure that we can scale when they are ready to scale and that is definitely what we're doing obviously in the space. We have programs also moving.

Thomas J. Sonderman: It's up to our customers to get the products in the market and get traction, but our goal is to make sure that we can scale when they're ready to scale. And that is definitely what we're doing. Obviously, in the A&D space, we also have programs moving, you know, through the funnel, preparing to go into production. Those will be very viable products, not necessarily high volume. But we see as you get through 24 into 25, and certainly in the second half of the decade, you're going to start seeing a much more robust wafer services business with much better margins. And that will really carry the business forward as we, you know, continue to grow and scale Skywire.

Thomas J. Sonderman: Through the funnel preparing to go into production.

Thomas J. Sonderman: It will be very valuable products, not necessarily high volume, but we see as you get.

Thomas J. Sonderman: 324 into 'twenty, five and certainly in the second half of the decade, Youre going to start seeing a much more robust wafer services business with much better margins and that will really carry the business forward.

Thomas J. Sonderman: We continue to grow and scale skywalk.

Speaker Change: Great color there thanks, guys and just one on margins just to kind of expand on an earlier question is there a way maybe to quantify.

Robert Iguano: Great color there. Thanks, guys. And just one on margins, just to kind of expand on an earlier question. Is there a way maybe to quantify, you know, the mixed shift around the waiver services versus ATS and tool revenue, basically just asking for something to maybe put some more context around maybe the decline that you guys are seeing year over year?

Robert Iguano: The mix shift around the wafer services versus Ats and tool.

Robert Iguano: Revenue base, basically just asking for something too.

Robert Iguano: Maybe put some more context around maybe the decline that you guys are seeing year over year.

Robert Iguano: Yes.

Speaker Change: Yes, I believe we forecasted out what we expect our revenue to be so I think that was in the prepared remarks on the upper fifties for.

Steve Manko: Yeah, I believe we forecasted out what we expected the revenue to be. I think that was in the prepared remarks on the upper 50s for ACS revenue for the second quarter, approximately $20 million for the tool revenue, and a range of, I believe it was 4 to 5, for wafer services. So you can see that there's a significant change in the mix of the revenue compared to Q1.

Steve Manko: Acs revenue for the second quarter.

Steve Manko: Approximately $20 million for the tool revenue in a range of I believe it was four to five four to five for wafer services. So you can see that there is a significant change in the mix of the revenue compared with Q1.

Steve Manko: And then any color around margins there.

Robert Iguano: and Will. Any color around the margins there?

Will: So tool margins are relatively I'd say similar to wafer services margins.

Steve Manko: So tool margins are relatively, I'd say, similar to wafer services margins. Yeah, we basically say that the...

Steve Manko: Yeah, you can see that we basically say that the margins are somewhere between 5% to 10% on the tool, depending on the tool that's being sold. But tools are of all different revenue sizes, so really the margin would be, if you look back at our supplemental information, you can see where we break out tool revenue and tool cost over the past couple of years. So you can see the whole goal of what we do on the tool side is not necessarily to generate gross profit, even though we do get a slight gross profit, but it's really to limit our depreciation expense and the need to raise capital for those tools.

Steve Manko: Yes.

Steve Manko: C.

Steve Manko: We basically say that the margins are somewhere between 5% to 10% on the tool depending on the tool that's being sold but tools are all different revenue sizes. So really the margin would be if you look back at our supplemental information and see where we breakout tool revenue in tool cost over the past couple of years, you can see the whole goal of what.

Steve Manko: We do on the tool side is not necessarily to generate gross profit, even though we do get a slight gross profit, but this was the limit limit our depreciation expense and a need to raise capital for those tools.

Speaker Change: Thank you.

Steve Manko: Okay.

Speaker Change: Alright, Thanks Robert.

Steve Manko: And with that I will now turn the call back over Q Thomas <unk> for closing remarks Thomas.

Operator: And with that, I will now turn the call back over to Thomas Sonderman for his closing remarks.

Thomas J. Sonderman: Thank you, Operator. I want to close by reinforcing the confidence that all of us at Skywater have in our ability to achieve long-term growth and profitability. We will keep working to build your confidence in us. We will be attending the Craig Holloman Kahn Conferences this month, and you can contact Claire for further follow-up. We look forward to speaking with you again in August during our Q2 webcast. With that, I will conclude today's call.

Thomas J. Sonderman: Thank you operator.

Thomas J. Sonderman: I want to close by reinforcing the confidence that all of us at Sky water have and our ability to achieve long term growth and profitability.

Thomas J. Sonderman: We will keep working to build your confidence in us.

Thomas J. Sonderman: We will be attending the Craig Hallum and Cowen conferences. This month and you can contact Claire for further follow up we look forward to speaking with you again in August during our Q2 webcast with that I will conclude today's call.

Speaker Change: And ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.

Operator: And ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

Thomas J. Sonderman: speaking with you again in August during our Q2 webcast. With that, I will conclude today's call.

Operator: With you again in August during our Q2 webcast with that I will conclude today's call.