Q3 2024 SkyWater Technology Inc Earnings Call
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Krista: Ladies and gentlemen, thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to SkyWater Technology 3rd Quarter 2024 Financial Results Conference Call.
Krista: All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session.
Krista: If you would like to ask a question during this time, simply press star, followed by the number 1 on your telephone keypad. And if you would like to withdraw that question, again press star 1. I would now like to turn the conference over to Claire McAdams, Investor Relations for Skywater. Claire, you may begin.
Claire McAdams: Thank you, operator. Good afternoon and welcome to Skywaters third quarter 2024 conference call.
Claire McAdams: 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
Claire McAdams: The webcast will be available for replay shortly after the call concludes.
Claire McAdams: On our IR website, we have posted a slide presentation to accompany today's call, as well as a financial supplement summarizing our quarterly and annual financial results for the last three years.
Claire McAdams: including all non-GAAP adjustments and comparisons to our GAAP results, as well as the impact of tool sales on our gross margins.
Claire McAdams: During the call, any statements made about our future financial results and business are forward booking statements.
Claire McAdams: These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially.
Claire 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.
Claire McAdams: All forward-looking statements are made as of today, and we assume no obligation to update any such statements.
Claire McAdams: 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 Q3 earnings presentation, all three of which are posted on our Investor Relations website.
Claire McAdams: Also on our Investor Relations website events page, you will see that we plan to participate in two investor events between now and our next earnings call, the New York Summit on December 17th and the Needham Growth Conference on January 15th.
With that, I'll turn the call over to Tom.
Tom: Thank you, Claire, and good afternoon to everyone on the call.
Tom: I'm pleased to announce another record quarter for Skywater, with $94 million in revenue, driven by unprecedented levels of customer co-investment and $0.08 positive non-GAAP EPS.
Combined ATS and wafer services revenue totals $63 million.
Tom: Tools revenue, which represents customer-funded CapEx investments, increased to an all-time record $31 million, driving our ninth consecutive quarter of sequential growth and record revenue.
Tom: ATS development revenue of $56 million demonstrated year-over-year growth of 5% but declined 9% from our record Q2.
Tom: ATS activity was a bit softer than we expected, largely due to funding constraints at some of our A&D customers as we neared the end of the government's fiscal year.
Tom: Our ability to quickly balance ATS activity requirements with wafer services demand allowed us to move more production wafers through the FAB, which resulted in wafer services revenue exceeding our expectations at nearly $7 million.
Tom: We delivered 22% gross margin for the quarter, well above expectations.
Tom: This was driven by our continued focus on operational efficiencies and improved execution on a significant A&E program.
Tom: which enabled us to deliver key milestones with lower-than-expected costs and recover the majority of the $8 million cost accrual recorded in Q1. Steve will provide greater detail on our strong gross margin performance during his remarks.
Tom: In all, Q3 was an important quarter of execution on key programs, resulting in significant gross margin and earnings upside in spite of the temporary softening in ATS revenue.
Speaker Change: Now, I will highlight several positive developments in our business and provide our current outlook within the overall customer demand environment.
Speaker Change: First, consistent with our expectations throughout the year, we expect to deliver double-digit revenue growth in our ATS business this year.
Speaker Change: We expect to return to sequential growth in ATS revenue in the fourth quarter, after the temporary decline in Q3, which we expect will result in a record ATS year for us in 2024.
Speaker Change: This anticipated robust growth year for ATS underscores the strategic importance of multiple aerospace and defense programs underway at Skywater, as well as several emerging growth technologies being developed for our commercial customers.
Speaker Change: At the midpoint of Q4 expectations, our 3-year CAGR for ATS revenue exceeds 35%.
Speaker Change: At the same time, we are demonstrating steady improvements in our operational execution, which is an important outcome from the business transformation process we undertook last year.
Speaker Change: We believe the added revenue tailwind of record-level CapEx co-investment is yet another proof point of our customers' confidence in SkyWater as a trusted domestic source of critical semiconductor technology.
Speaker Change: Next, we're pleased to announce a multi-year supply agreement with NanoDx, a pioneer of in vitro diagnostics and biosensor applications.
Speaker Change: They are currently completing the development of a revolutionary biosensor that is the foundation of their rapid point-of-care diagnostic platform.
Speaker Change: NanoDx is initially focused on traumatic brain injury applications with a clear path to various other disease states including stroke and infectious disease.
Speaker Change: This agreement marks an important step forward reflecting our progress and readiness to support NanoDX on their path towards commercialization.
Speaker Change: We continue to believe that these types of customer partnerships build a strong foundation for the future growth of our commercial wafer services business, where in addition to advanced biomedical, we see strong potential for our advanced compute and thermal imaging platforms.
[inaudible]
Speaker Change: Next, expanding our leadership in critical semiconductor technologies is our growing role within the Microelectronics Commons Initiative, an important element of the CHIPS Act.
Speaker Change: Established under the National Defense Authorization Act, the Microelectronics RME Commons initiative is designed to accelerate U.S. innovation in microelectronics and strengthen national security.
Speaker Change: Skywater has been selected as a key performer for multiple Emmy Commons projects.
Speaker Change: spearheaded by the Southwest Advanced Packaging Hub and the Northwest AI Hardware Hub.
Speaker Change: These projects, and the initial round of funded programs, aim to advance scalable, low-power microtechnology solutions that support AI hardware development and other high-impact national security applications.
Speaker Change: Another highlight since last quarter is the appointment of Basil Haddad as Senior Vice President and General Manager of Advanced Packaging. Basil is charged with building and scaling SkyWater's advanced packaging business, serving both the defense and commercial market sectors.
Speaker Change: His commercial sector experience will be pivotal in cultivating key new customers and partnerships to build a strong, scalable manufacturing presence in the United States.
Speaker Change: His proven track record at Intel, where he effectively managed large-scale business lines and engineering projects, highlights his ability to rapidly translate strategies into operational success.
Speaker Change: During the quarter, we continue to place new tooling purchase orders funded by the $120 million award announced earlier this year.
Speaker Change: As Moore's Law is slowing down, 2.5D and 3D advanced packaging becomes the next frontier of semiconductor technology innovation. The unprecedented demand for computation in the AI era makes heterogeneous integration a pivotal capability fueling the next phase of semiconductor growth.
Speaker Change: We believe SkyWater is uniquely positioned to be a leading domestic supplier of advanced packaging solutions, serving both defense and commercial customers.
Speaker Change: Now turning to our outlook for the fourth quarter. With our current visibility, we expect total revenue of 72 to $76 million, of which approximately $11 million is expected to be tools revenue.
Speaker Change: Therefore, we expect combined ATS and Waiver Services revenue to be $63 million plus or minus $2 million.
Speaker Change: Within this range, we expect sequential growth for ATS with revenue in the range of $58 to $61 million and wafer services revenue in the range of $3 to $4 million.
Speaker Change: Looking ahead to 2025, we are encouraged by a robust pipeline of secure A&E demand, growing momentum across multiple commercial programs, and the initial ramp of our advanced packaging business.
Speaker Change: Growth in our ATS segment is expected to be driven by strong, continued momentum across various A&E programs and new, well-funded commercial initiatives.
Speaker Change: We expect these advancements to be bolstered by substantial new tooling capabilities funded by our customers during this unprecedented period of co-investment.
Speaker Change: Additionally, we plan to accelerate our advanced packaging ATS development as we ramp our new FANOP platform. We expect revenue from our Florida FAB in 2025 will be a mix of ATS and tools.
Speaker Change: In our wafer services segment, we anticipate increasing demand from commercial programs that have and will transition from ATS to production.
Speaker Change: Together, we believe these factors position us well for continued expansion of our combined ATS and wafer services business in 2025.
Speaker Change: Finally, for tools, we continue to expect approximately $200 million of total customer co-investment between 2024 and 2026.
Speaker Change: Our tool delivery schedule indicates a current estimate of $40-$50 million for 2025 as we continue to ramp our advanced vaccine business in Florida and incorporate new tooling in Minnesota.
Speaker Change: We expect that these capabilities will greatly enhance the solutions we can provide to our customers, driving growth long into the future.
Speaker Change: All together, our outlook for 2025 supports continued top-line growth and gross margin expansion as we progress through the year.
I will now turn the call over to Steve.
Thank you, Tom.
Steve Manko: Third quarter revenue reached another record for us at $93.8 million. Within this new record, ATS revenue was lower than forecast at $56.4 million, given the government fiscal year budget constraints Tom discussed earlier, while wait for services was higher than forecast at $6.7 million.
Steve Manko: Combined ATS and wafer services revenue was $63.1 million in the quarter, and tools revenue reached an all-time record at $30.7 million. As a reminder, the additional metrics discussed today are non-GAAP measures.
Steve Manko: On our August call, we guided Q3 gross margin in the mid-to-high teens, or approximately 17% at the midpoint.
Steve Manko: We also guided an expected 7 percentage points of negative gross margin impact from tools revenue for the quarter, equating to an effective 24 percent margin at the midpoint expected for our combined ATFs and wafer services business in Q3.
Steve Manko: Our reported Q3 gross margin was 22.3%. The record level of tools revenue impacted gross margin by about 10.5 percentage points, equating to an effective 32.8% gross margin for our combined ATS and wafer services business.
Steve Manko: The most significant driver of the gross margin upside was the reversal of the majority of the $8 million cost accrual recorded in Q1. We made strong progress delivering on key program milestones and recovered $5.6 million of the accrual during Q3.
Steve Manko: This had a 9 percentage point positive impact on gross margin for the quarter.
Steve Manko: So, with a reported gross margin of 22.3%, the 10.5 percentage point negative impact of tools
Steve Manko: and the nine percentage point positive impact of the reversal, Q3's gross profit equated to 23.8% gross margin performance for our combined ATS and waiver services business.
Steve Manko: The continued strength and gross margin was driven primarily by improved operational efficiencies and continued progress in our ongoing cost reduction strategies.
Steve Manko: Operating expenses were $14.1 million, aligned with our expectations for the quarter. Given the $5.6 million accrual recovery, operating income was well ahead of forecast at $6.8 million. Adjusted EBITDA was $11 million, and we achieved non-GAAP net income of $0.08 per share.
Turning to the balance sheet.
Steve Manko: The balance of total cash at quarter end at $20.7 million has remained relatively consistent since year-end 2023.
Steve Manko: During the quarter, we reduced our overall indebtedness by approximately $6 million, with $60.8 million in total debt outstanding at quarter end. We currently have $76 million available on our revolver.
Steve Manko: Turning to our outlook for Q4 and our expectations for various financial metrics as we move through 2024 and into 2025.
Speaker Change: As Tom mentioned, with our current visibility, we expect Q4 total revenue of $72 to $76 million.
Speaker Change: This reflects our expectations of $58 to $61 million of ATS revenue, $3 to $4 million of wafer services revenue, and $11 million of tools revenue.
Speaker Change: We expect wafer services revenue this year will end up slightly favorable to the 60-65% year-on-year decline forecasted a quarter ago.
We currently expect 2024 tools revenue of approximately $76 million.
Speaker Change: In total, expectations for revenue growth in 2024 are in the range of 18 to 20 percent.
Speaker Change: Turning to Q4 Gross Margin Guidance. At the midpoint, we expect similar gross margin performance on a similar quarter of combined ATS and wafer services business levels.
Speaker Change: With Q4 gross margin expected to be in the range of 19% to 23% in an anticipated tool impact of 300 basis points, at the midpoint, our Q4 guidance represents 24% gross margin performance for the combined ATS and wafer services business.
Speaker Change: We expect operating expenses in the range of $14.5 to $15 million, interest expense in the range of $2.5 to $2.9 million, and nominal tax expense for the fourth quarter.
Speaker Change: Assuming that income from non-controlling interest remains approximately $1 million, the resulting non-GAAP EPS range for Q4 is a loss of $0.04 to a loss of $0.10 per share.
Speaker Change: Finally, here are a few more of our assumptions for our quarterly results as we move into 2025.
Speaker Change: Tools revenue is currently expected to be in the range of $40 to $50 million in 2025. And with our current visibility, we expect the majority of tools revenue to be recognized in the second half of the year.
Speaker Change: Our OPEX run rate has been running at the lower end of expectations as a result of good execution on our cost control initiatives, as well as deferment of certain spending to future quarters. As a result, the run rate is likely to be somewhat higher as we move into next year.
[inaudible] I'm sorry. I'm sorry. I'm sorry.
Speaker Change: While overall debt levels will fluctuate through the year depending on draws from a revolver, we believe $2.5 to $2.9 million in quarterly interest expense.
is a good assumption for the foreseeable future.
Speaker Change: as we continue to benefit from over $20 million of advanced customer deposits for tool purchases.
Speaker Change: For 2025, for modeling purposes, you should assume nominal to no tax expense or benefit.
Speaker Change: Our income from variable interest entities below the line is not something we can predict with accuracy, but $1 million is a historic 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.
Thank you.
Speaker Change: We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.
Speaker Change: And if you'd like to withdraw your question, again, press star 1.
Speaker Change: We ask that you limit yourself to one question and one follow-up. Your first question comes from the line of Krish Sankar with TD Cowen. Please go ahead.
Speaker Change: Hi, thanks for taking my question. I have two of them. First one, Steve, I just want to make sure that I got your guidance right. On the gross margin side, you said it's 19 to 23 percent. Is it mainly because backing of the tool revenue, the revenue is effectively flattish sequentially, X tools?
Steve Manko: Yeah, that's right. Probably a flat quarter-to-quarter on the ATS and Waiver Services revenue and therefore a very similar margin for ATS and Waiver Services business in Q4. So 19 to 23 percent was the range provided.
Steve Manko: Got it. And then I had a question on this one in 2025.
Speaker Change: A two-part question, one is how should we think about March quarter? Are we going to see seasonality for ATS and wafer services, so revenue should be down?
Speaker Change: and therefore gross margin should be down and what do you think about ATF and AFS services for calendar 25 as a whole? You know, would you expect it to grow or is it still dependent on semi-market recovery?
Speaker Change: Yeah, so, the way we're looking at, you know, wafer services...
Speaker Change: is, you know, we see overall growth next year in 25.
Speaker Change: again with a higher concentration of our ATS to Wafer Services conversions.
Speaker Change: being the primary driver. And then, of course, ATS, we still expect to see growth in ATS next year. The real seasonality we typically see is in Q3 as we end the fiscal year given the current concentration in A&E, but overall we expect to see combined core growth or ATS plus wafer services.
going up next year.
Thank you very much.
Okay, thanks
Speaker Change: Your next question comes from the line of Quinn Bolton with Needham. Please go ahead.
[inaudible]
Speaker Change: Hey, guys. Nick Doyle. I'm for Quinn. Thanks for taking our questions. The tool revenue guide for 4Q is, I think, coming in a little softer than expected. And then 25, I think, coming in a little softer as well. So it seems like a little bit of a pause here the next couple quarters. Anything specific you can talk to on that line? Thanks.
Speaker Change: Yeah, I mean, typically, you know, we project when we think tools are going to arrive, the timing of some of those tools, again, is highly dependent on our tool supplier. So that's part of what you're seeing. And then again, as we get into 2025, we're projecting based on current delivery schedules, what we anticipate, you know, coming into our fabs.
Speaker Change: What we're confirming is the $200 million over the 24 to 26 period, and the specific cadence will be highly dependent on when our customers engage with us to place the orders and then, of course, when we actually get the tools delivered.
Speaker Change: And with what we're seeing for the fourth quarter, we said up to $80 million for 2024. With what we just guided for the fourth quarter, we would just be under that at around $76 million, so still in line with what we thought for 2024.
Speaker Change: I think the other important thing to think about is looking at the overall $200 million. We're still confirming our expectations.
for co-investments in that range over a three-year period.
Speaker Change: We did bring down our expectations for 2025, and I think also the important thing to know is we're really seeing maybe only one to two million dollars of tool revenue in the first quarter, and probably a similar amount in the second quarter. And a lot of the tool revenue will come from the tools going into our Florida facility in 2025, where the majority was coming into Minnesota in 2024. So given the timing of that project, we're seeing it back end loaded in the second half of 2025, and that's when the majority of the 40 to 50 million dollars of tool revenue is expected to be recognized.
Speaker Change: Understood. Very clear. Thank you. And then I think last quarter you indicated maybe four customers have.
Speaker Change: transition to wafer services in 2024, and then you kind of mentioned some of the strength you're seeing you're expecting in 2025 should be, you know, further transition. So have any more transition this quarter and visibility on that for 2025, you know, the number of customers transitioning. Thanks.
Speaker Change: Yeah, well, as I mentioned in my prepared remarks, NanoDX, we just concluded a long-term supply agreement with them. The timing for when they'll actually move to production, like our other customers, is highly dependent on their qualification schedules, which are somewhat out of our control.
Speaker Change: but we continue to be very confident in our conversions and that's why overall we're looking at wafer services growth next year.
Speaker Change: even in the soft, you know, macro environment we're dealing with as it relates to, you know, our traditional legacy business, which was really our main driver of Wafer Services, you know, as we entered this year.
Thank you.
Speaker Change: Your next question comes from the line of Richard Shannon with Craig Hallam Capital. Please go ahead.
Richard Shannon: Well, hi guys, thanks for taking my question as well. Maybe a question on the accrual reversal, the accrual you took in the first quarter. You said you reversed a good chunk of here. I guess how do we think about the potential for a full reversal and what does that mean about the program involved here? Does that mean we're back to where we were before or how should we interpret what this means for that program?
Steve Manko: Yeah, so good evening Richard. This is Steve. I'll start with it on the accounting side and I'll give it over to Tom to talk about the program. Yeah, but just to make sure we're clear, it was an eight million dollar accrual that was recorded in the first quarter and we released the remaining 5.6 million of that in the third quarter. So essentially if you look at that on a year-to-date basis for 2024, it's almost like it never happened. So the full accrual now has been recognized and reversed through the P&L. So from an accounting perspective it's all behind us.
Speaker Change: Do you want to go talk about the program? Yeah, Richard, how are you doing? Good to hear you. Good to hear you on the other side. Thank you.
Speaker Change: The way to think of this program, again, it's a technology development program.
Speaker Change: And when we, you know, were exiting Q1, we were, you know, working through some technical issues that we have resolved. Really excellent progress by the team to get the platform stabilized so that we can launch it in the second half of next year. Our PDK will be released in the early part of next year, and while production is still several years away, again, this is our, you know, rat-hard program that has a significant qualification beyond just the chip manufacturing. We expect this program to continue to, you know, move forward at a pace that is consistent with our customers' expectations.
Speaker Change: and we really feel good about where we are, you know, given some of the challenges we were facing earlier this year.
Speaker Change: Okay, appreciate that update, and Steve, thanks for a reminder about the prior accrual reversal. I guess I forgot about that one.
Speaker Change: My second question is really kind of looking at your aerospace and defense customers and you talk about budgets that were a little soft ending the September quarter, the fiscal year for the government.
Speaker Change: Maybe if you want to discuss both what you're seeing here as an impact in the current fourth quarter, but obviously as we have a new administration coming in in the following quarter here, what do you get a sense either way about what this might mean for the programs you're involved with?
Speaker Change: Yeah, so we feel very strong about all of our programs. I think, you know, as we enter the new fiscal year which began in Q4, of course
Speaker Change: funding and the commitment to the programs is as strong as it's ever been, and a lot of that has to do with the progress we've been making as the technology development matures. But the real question related to the administration and all that, you know, that obviously has to work its way through, you know.
Speaker Change: through the process, but we're as confident again as we've ever been in our ability to not only execute on these programs, but where they are in their development cycle and the ability again for us to make them successful is really all about execution and that's what we're focused on.
Speaker Change: Okay, fair enough. I appreciate the detail guys. That's all for me.
Thank you. Thank you.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from a line of Robert Agano with Piper Sandler. Please go ahead.
Thank you.
Robert Agano: Yes, thanks guys. This is Robert on for harsh. Appreciate you guys taking the time and the question.
Just one here from me on gross margin.
Speaker Change: The gross margin trajectory had been growing steadily through the year, and it seems like you guys are guiding it down here for Q4.
Can you give it...
Speaker Change: Some of the drivers, I guess, looking forward for 2025, since you mentioned in your presentation, increasing revenues and operating leverage kind of impacting here, the number for 2025. So what is wondering the puts and takes there?
[inaudible] I'm sorry. I'm sorry. I'm sorry.
Speaker Change: Yeah, first off, let me address the fourth quarter. Gross margin isn't expected to go down in the fourth quarter. It's expected to be very similar to what it was in the third quarter, especially when you're looking at it from the tool impact on a basis point perspective. So ATS and waiver services revenue levels are expected to be the same in the fourth quarter as they were in the third, and also the gross margin driven from ATS and waiver services business is likely to be the same in the fourth quarter as well.
Speaker Change: or so million dollars of tools in 2024 compared to 40 to 50 in 2025.
So your margin...
Speaker Change: on a basis point impact will be less in 2025 given the lower amount of expected tool revenue.
Speaker Change: But the ATS and wafer services business is expected to grow, as Tom mentioned, and with that, we still believe that we're going to get better than a 55% flow-through at these revenue levels on a margin, and with that, the gross profit should increase in 2025 as well.
Fair enough, that's all for me. Thanks guys.
Speaker Change: And we have no further questions in our queue at this time. I will now turn the call back over to Thomas Sondersen, CEO, for closing comments.
Thomas Sondersen: Thank you, Operator. I want to close today's call by conveying the strong confidence all of us at Skywater have in our ability to execute successfully towards our long-term growth opportunities and profitability objectives, and we intend to continue to build your confidence in our ability to execute.
Thomas Sondersen: Please reach out to Claire directly to arrange a follow-up, and we hope to see many of you at the New York Summit in December or the Needham Growth Conference in January. We look forward to providing an update on our 2024 results in February. And with that, I'll conclude today's earnings call.
Speaker Change: Ladies and gentlemen, this does conclude the call. Thank you for your participation and you may now disconnect.