Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the SkyWater Technology First Quarter 2022 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. [Operator Instructions]. Thank you. Claire McAdams, Investor Relations with SkyWater. You may begin.

Good afternoon, and welcome to SkyWater's first quarter fiscal 2022 conference call. With me on the call today from SkyWater are Thomas Sonderman, President and 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. During the call, any statements made about our future financial results and business are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially. For a discussion of these risks and uncertainties, please refer to our filings with the Securities and Exchange Commission, including our earnings release filed on Form 8-K today and our fiscal 2021 10-K filed on March 10. All forward-looking statements are made as of today, and we assume no obligation to update any such statements. During the call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release, which is available on our Investor Relations website. Unless otherwise noted, all comparables referenced today are versus the prior year, or the first quarter of fiscal 2021. With that, I'll turn the call over to Tom.

Thank you, Claire, and good afternoon to everyone on the call. Today we are pleased to report total Q1 sales of $48 million. While GAAP reported revenues were essentially flat year-over-year. Total revenues excluding tool sales were up 44%. This reflects Advanced Technology Program sales or ATS growth of 13% and 150% growth in wafer services. This was higher than forecasted for Q1 due to the completion of our new contract with Infineon, which is our largest historical customer and the associated impact on our GAAP results. For the 8-K filed at the end of the quarter, the revised contract terms reflect a significant price increase, as well as a change in revenue recognition, but wafer revenues being recognized over time instead of when shipped. This resulted in immediate revenue recognition of all work-in-process wafer inventory within the quarter, and all at the higher price level. The result was Q1 revenue upside of approximately $8 million, which was more than offset by higher costs attributed to the WIP inventory, resulting in a slightly negative reported gross margin for the quarter. With improving pricing and volume momentum, our non-GAAP gross margin was positive, and would have been even higher without this impact. While the accounting impact resulted in significant upside in our Q1 revenues, our prior growth forecasts for the full year had already reflected our expectations for better pricing and the recognition of all WIP revenue in Q1 is effectively a pull-in of expected finish wafer sales from the next couple of quarters. Importantly, the new contract recognizes the value Skywalker is bringing to the market, and is a key element of our strategy to drive permanent pricing expansion. It also means that our overall business is being valued at a higher level than it was previously. Our legacy technology…

Thank you, Tom. Total revenue for the first quarter of 2022 was $48.1 million, which was essentially flat year-over-year and up 25% sequentially from the fourth quarter. Advanced Technology Services revenue was $26.6 million and Wafer Services revenue was $21.5 million. There are a couple of important adjustments to make when comparing our revenue performance. prior periods. First, ATS revenue in the first quarter of 2022 included just $1 million of tool revenue, compared to an unusually high $15.4 million of tool revenue in the first quarter of 2021. Second, Wafer Services revenue in the first quarter of 2020 to include the pull-in of $8.2 million of revenue related to the new Frame Agreement with Infineon. This pull-in revenue is due to an accounting adjustment in the first quarter related to the now non-cancelable nature of purchase orders from this customer. Effective April 1st of this year, SkyWater recognizes revenue over time, as the wafers are being fabricated. Prior to April 1, SkyWater was recognizing Wafer Services revenue for this customer at a point in time, such as when the wafers were shipped. Given the April 1 effective date, which was before our fiscal quarter end of April 3, this necessitated a one time accounting adjustment to recognize overtime revenue for the Infineon related work-in-process or WIP inventory. Excluding the WIP revenue adjustment, which was an acceleration of revenue from future quarters, gain at higher prices, Wafer Services revenue would have been $13.2 million, up 33% year-over-year on a comparable basis. Excluding tool revenues, ATS revenue of $25.6 million was up 13% year-over-year. Increase revenue in both ATS and Wafer Services continues to track well against our revenue growth targets for 2022, as we continue to ramp production and with new customers and programs. GAAP cost of revenue was $49.1…

Thank you, Steve. Our upcoming investor activities include the Oppenheimer Virtual Emerging Growth Conference on May 10, the Cowen Technology Conference in New York on June 2, and the CEO Summit in San Francisco on July 13. Please visit the investor relations section of our website for other upcoming presentation. Operator, please open the line for questions.

Thank you. [Operator Instructions] Our first question is from Raji Gill with Needham & Company. Your line is open.

Yes. Thank you and congrats on the progress on the gross margins turning positive on a non-GAAP basis. That's really good to see. And as well as the good progress on the design programs. So just a follow-up on the wafer revenue and the $8.2 million revenue that was pulled in from the new agreement with Infineon. So it seems like this is a combination of a new accounting revenue recognition policy to recognize the revenue over time in the current quarter as well as the higher ASPs related to the contract. So, when we look at then the wafer revenue going forward, how do we think about that type of revenue on a kind of on a quarterly basis? If we take out the a million, the wafer revenue was about $13 million. So we'd be expecting kind of sequential growth off that base of revenue. Just want to get some clarity there? Thank you.

Hey, good afternoon. Steve Manko here. And great question on that. Really want to make sure everyone understands what happened there. Your understanding of the information is actually correct. What happened was of the combination of the timing of when the quarter ended, this contract went into place, and we kind of got the benefit of having some wafer shipping, and also recognizing the upfront revenue for the wafers that were in process. So, if you're looking at the second quarter, I think you're looking at it in the appropriate fashion, looking at our Q1 wafer services revenue, backing out to $8.2 million, which was the one time pull-in and basing growth for second quarter and beyond off of that baseline of about $13.2 or $13.3 million. Obviously, going forward off of that amount, we would expect some increases from improved efficiency, as well as the enhanced price that was built into the contract as well.

Got it. That's helpful. And then, in terms of the gross margins, kind of inflecting positive on a non-GAAP basis, when you exclude the tool revenue, and then the DSO et cetera. You mentioned that at mid 40s, you'll be able to have a positive gross margin. As we kind of go throughout the year, what do you think is going to be the biggest driver to kind of gross profit fall-through? Is it going to be continue -- continuation and just more wafer volume, better mix? So just you could walk me through some of the best drivers of gross profit fall-through as we progress, hopefully off this base of gross profit?

Yes. I think one thing to keep in mind is that we add a higher mix of wafer services this quarter, because of the new pricing, as well as the adjustment. As we get into the out quarter starting in Q2, you're going to see more of the traditional mix of two-third, one-third, two-thirds being ATS. And obviously, that'll drive higher gross margins. And then the other efficiencies that we'll get once we break through at the mid 40s. And again, more flow through of the revenue dollars to the bottom line.

Thank you.

Our next question is from Mark Lipacis with Jefferies. Your line is open.

Hi. Thanks for taking my question. A follow-up on the revenue recognition for wafer services. So, Steve, are all the Wafer Services revenues now put into this bucket of non-cancelable and therefore recognizable as you generate the WIP? Or is that -- this is just portions of that business that fall into that bucket?

Great question. It would only be a portion of our Wafer Services revenue. Really what we could look at as, if you look at the balance sheet, given the fact that we really have inventory still reflect on the balance sheet, that's an indication that we are still recognizing revenue for the non Infineon-related wafers at a point in time. So, it's really just related to this specific contract for these wafers with Infineon. Something we've been working for not only to get some market pricing on that product, but also gives us better visibility. Obviously, negotiating for non-cancelable features for those POS coming in, is really a good step forward on our direction for the near term growth of the company.

And it is for all products that we make.

I'm sorry, Tom. Could you say that again?

Yes. It is for all the Infineon products that we make.

Got you. Okay. So I mean, it seems to me that, any product that comes out of ATS that would migrate to wafer services, that would be -- those would be like highly customized, wafers that might also be considered not fungible or not cancelable? So, I'm wondering if that is -- this is a feature that you have with Infineon, that you started with Infineon that you expect to kind of put to the rest of your programs that run through wafer services?

Yes. Absolutely correct, Mark. So remember, going back to our take-or-pay with Cypress, we were basically getting paid when the wafer shift. And then, we had a period of around 18 months between when the take-or-pay ended and this new contract, which remained in that fashion. The model for SkyWater going forward is clearly the Pay-As-You-Go approach, which is applied to not only wafer services, but also a lot of our new contracts for ATS.

Got you. Okay. That's helpful. And Steve, another one on the accounting mechanic. So the wafer services were up $7 million, the deferred revenues were up $2.5 million. So, is that to make accounting mechanics? Does that imply that you actually shipped $4.5 million of that WIP that you recognize those revenues? Or is there a different way to think about the accounting mechanics around that -- those wafers?

Yes. That's right. So really the WIP that the $8.2, really what that means is at that point in time, when we closed our books on April 3, none of that $8.2 was shipped at that point in time. That would just be WIP. It is in various stages of process in the fab. The way I think about it is now it gives us some flexibility that I can take one wafer and move that one step, where I can also take five wafers, and sorry, one wafer move at five steps or five wafers and move it one step, I kind of get the same revenue recognition. So it gives me better visibility and better flexibility on how I optimize the mix of my fab and prioritize my time in the fab on moving ATS and wafer services programs throughout.

Okay. Got you. All right. And then, Tom, last question for you. So you expressed optimism about the RadHard ramp this year. And then also, you mentioned power products and heterogeneous products. So is the RadHard ramp this year? Is that going to be production as the kind of solutions that you're delivering to your customers that are going into their production systems? Or is this like a testing phase still? And when would you expect to see power products and heterogeneous products hit your top line? And that's it. Thank you.

Great. Great question mark. So on RadHard, what we are doing is we've completed the development phase, and are going into privatization and qualification. So we expect revenue to ramp. These won't be product wafers driving revenue, but program revenues as we move through the qualification sequence that our customers will be putting the devices through as they go through their own qualifications into the final systems. So, we're moving to what's considered the next phase in these government funded programs. It's a very important phase, because the next round of investment is setting the stage for actual products that are being put in systems, which will be occurring as we exit the 2023 timeframe and go into 2024. And again, there are some programs that are replacement parts, they have a longer qualification cycle. We do have some designs that we're anticipating to go into this platform that would actually be qualified earlier. So the whole point of the next phase is to prepare for our product, shipment of wafers. And it's an important, again milestone because the government is further investing in the program to prepare for production. As far as power, we continue to see great traction with this platform, the AND platform. In the market, we have samples going out to the OEMs. They're beginning to go through their own qualification processes. We do have a lead customer that's driving that. And we anticipate to start ramping that in the second half of this year. And then, in heterogeneous integration, a lot of that is still in the ATS side of the equation. We're making good progress on all three fronts. The Ibis program is again a DOD funded initiative. And that is moving ahead of schedule. the DECA program is for wafer fan-out, packaging, there will be doing test chips that will go out to customers in the second half of this year. And then, as mentioned, we're also working with Rockley on their platform, which includes not only the wafer fabrication we're doing up here, but also some additional processing down in Florida. That's the one that has the quickest potential to go to a wafer services revenue as we prepare to ramp that program based on their schedules. And then finally, the wafer bonding technology. That's definitely still in the development phase. But we do have a lead target customer that we'll be talking more about, as the year unfolds that will drive that program again through ATS. And then. as we get into the early part of next year, we'll start seeing wafer services revenue for that as well.

Very helpful. Thank you.

[Operator Instructions] Our next question is from Krish Sankar with Cowen. Your line is open.

Hi. Thanks for taking the question. And congrats on the latency above the gross margin for change. I just had a couple of questions. Just to clarify, Tom, you mentioned, you expect potential revenue growth as the quarters progress this year. Was this off the baseline of $48 million in March? Or was it off of $40 million batching of $8.2 million from Infineon program?

Yes. It's definitely the latter. So, what we continue to do is drive growth in our ATS business. And of course, we did full in, because we had to recognize all the WIP. There was a pull-in if some of the revenue that would have materialized in Q2, Q3. That's why we're targeting somewhere in the mid 40s is what we're anticipating. So when you pull that out, there will be sequential growth, but it won't be off the $48 million base.

Got it. And then, the 25% growth this year. Does that still include the $15 million for shout from last year to the government funding?

Yes. So next, I want to make sure to hear that again. Say that last part again?

The 25% revenue growth this year, does that include the %15 million that was pushed out from last year due to government funding?

Yes, it does.

Okay, cool. All right. And then one other question I just wanted to check in is that, on the Florida fab, it like, you said it's progressing, and then you're working on heterogeneous Integration and everything. I'm just kind of curious, like, and you spoke about the depreciation on the Florida fab, which was actually lower in last quarter compared to the prior quarter? How should we think about it as you start ramping on the wafer to wafer bonding and textile related activities? Is that differentiation, increasing, or the CapEx related to is going to increasing for the Florida fab?

Yes. So we talked about that, the depreciation again, really relates to the RadHard fab that we have up here in SkyWater, Minnesota. So both elements are investments. The RadHard is an investment. Heterogeneous Integration in Florida as an investment both going through my cost of revenue. The difference being the RadHard is depreciation, where the heterogeneous integration costs are more sort of operating costs flowing through. So that's not depreciations want to remind you that. But really those are at baseline levels in Florida for heterogeneous integration. As we continue to ramp that I would expect those costs to increase as there's more programs moving into Florida, more revenue visibility. And like we said, those programs, whether it's in Minnesota or Florida, the ATS programs start off small and ramp over time. So as they ramp they would need more headcount focusing on them and growing as well. So as the revenues grow with heterogeneous integration, I would expect those expenses and cost of revenue to grow as well.

Got it. Super helpful. And then, just one last question, Steve. Can you just reminds us again, on that FY 2022 was been guided for R&D, SG&A and Stock comp, I didn't get it completely?

Yes. Let me go back to that. Copy the script in front of me. The stock comp for the year was $9.9 million. R&D…

For FY 2022?

For FY 2022 for the year.

And R&D was 2.1 to 2.4 per quarter or?

2.1 to 2.4 per quarter. I got to make sure, I'm backing out the stock-based compensation from the SG&A. One second. SG&A was 10.0 to 10.4 for the quarter.

And that's like the way to model it over the next few quarters?

Yes. That would be my expectation.

Got it. Thank you very much. Really appreciate.

No problem.

The next question is from Richard Shannon with Craig-Hallum. Your line is open.

Well, thanks, guys. Thanks for taking my questions. Glad to be here on the call and congratulations at a good quarter. Couple questions here. I think I'll start off with the new frame agreement with Infineon. If you will characterize the level of appreciation in the ASPs. And kind of characterize in terms of margins here fully baked using appreciation you have in place. Is it something that's now close to 0%. gross margins are still a little bit negative here? And anyway, you characterize, that would be great?

And when we look at it from an overall perspective, we focus on activities and margin per activity. So, we really don't look at it from one individual component, again, with what we're doing and opening up our fab for the ATS Services. There's ATS programs going through that don't allow us to run a full fab, just focusing on high volume manufacturing. So really, what we do is we focus on how can we get each activity to be the most profitable activity in the fab. That's why as I mentioned earlier, having us be able to recognize revenue on that activity takes the burden off of making sure we get the wafer all the way through to production in that quarter to recognize the revenue. We can really just focus on maximizing now the revenue per activity and the margin per activity. With that now, and the cost that we saw come through pulling in, 10.8 of costs on 8.2 of revenue, because of that, that would have a fully baked cost with all of our depreciation, as it currently stands flowing through, and a lot of the depreciation that goes back to the acquisition back in 2017, that will start to come off towards the end of 2013, and into the first quarter of 2014 -- Sorry, 2024. So opportunities to expand our margins at that point in time. So with that pricing, and with that cost, it does have our depreciation fully baked into that, as you mentioned.

And I'll just add. We certainly went after more aggressive pricing on those legacy platforms, and we achieve that. But our business is really to drive not only our ATS programs in a wafer services, but creating a much richer mix within wafer services, because all those ATS programs were the single source provider, they're all on new platforms that are just becoming products in the market. And over time, we expect the concentration of the legacy platforms to decrease.

Perfect. Thanks for that perspective. Question here on the growth for this year. And I just want to make sure that I caught your comments accurately. And I think Tom in your remarks about kind of a baseline, the mid 40s. And then, are you characterizing the rest of the year as sequential growth for every quarter past that or could there be some variability in that?

Yes. As I put in my remarks, I think we'll see sequential growth. We are expecting things to continue to move up into the right as the year unfolds. There, of course, is a lumpiness to our business and we are dependent on certain government contracts coming in. So that contingency hasn't been removed with our statements, but there clearly is a lot of positive feelings within the company and with our customer base that the programs we're working on they're moving in the right direction. And we feel confident that the 25% targeted growth rate is achievable this year, as we've said at the beginning of the year, and continue to say, and this strong movement towards that in the first quarter increases our confidence.

Okay, perfect. Thanks for that confirmation. Maybe last question for me. On the pipeline here, I guess it's probably more related to the ATS here, but maybe you could just characterize kind of the early stage part of that pipeline, where are you getting attraction here? Can you characterize both by the technologies that you have, in addition to the applications your customers are looking for?

Yes. Great question, Richard. The bio-health sector and the unique capabilities we have, because we have both MEMS platforms and CMOS, which allow you to kind of integrate those together in almost a Lego black fashion, has given us a lot of traction in that space. Those programs tend to move quickly through the development cycle. So we're seeing, I would say a faster pace on that side of the equation. And then, of course, you have power, RadHard with very extensive qualification cycles that we're learning about as we get further into this space. And so, those tend to take longer. The whole perspective around extreme environment electronics, as it gets into the commercial space is also something that is relatively new to us. But the pipeline conversion typically from a initial contact with the customer to, we begin working for them between three to six months. And then, as Steve has alluded to before, there's a slow ramp, the ATS programs start out with slow cycles to learning and then as the program progresses, it picks up speed. But we have a very strong pipeline. We believe as we continue to grow our backlog, that confidence is part of where I get really excited about our statement, alluding to the 25% growth, because the pipeline strong. We're building that a good backlog. We have a secure partner for the higher volume portion of our business, that gives us better predictability. And we think all that really bodes well for SkyWater's future.

Okay. Perfect. Thanks for all the details, guys. I'll jump on the line.

Thanks, Richard.

We have no further questions. At this time. I'll turn the call over to Mr. Sonderman for any closing remarks.

Thank you. As I look at where we are today, compared to our company's inception, it is my strong conviction that with the technology achievements we're making on a routine basis, the customer wins we continue to capture that SkyWater has never been better positioned to achieve our financial objectives and play our role and the ongoing resurgence in domestic semiconductor manufacturing. Thank you again for your time.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect