Ladies and gentlemen good afternoon. My name is Addie and I will be your conference operator today. At this time, I would like to welcome everyone to the SkyWater Technology Second Quarter 2022 Financial Results Conference Call. Today’s conference is been recorded and 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. [Operator Instructions] Thank you. And I will now turn the conference over to Claire McAdams, Investor Relations for SkyWater. Ms. McAdams, you may begin conference.

Good afternoon, and welcome to SkyWater’s second 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 would 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. On our IR website, we also have posted an investor slide presentation to accompany today’s call. 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 10th. All Forward-Looking Statements are made as of today, and we assume no obligation to update any such statements. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release as well as in our Q2 earnings presentation both of which are available on our Investor Relations website. With that, I will turn the call over to Tom.

Thank you, Claire, and good afternoon to everyone on the call. Today we are pleased to report Q2 revenue if over $47 million. With total revenue up 50% year-over-year, wafer services revenue increased 23% reflecting these significantly improved long-term pricing agreement secured at the end of Q1 ATS revenue grew 11%. However, net up tool sales, ATS revenues actually grew 20%, reflecting the momentum we are gaining with several key customers. With our quarterly revenue run rate now firmly established above the mid $40 million level, our gross margin performance in Q2 demonstrates that we have now suppressed that breakeven threshold and that incremental revenue growth will bring significant flow through to margins and profitability as we forecast sequential revenue growth in the forthcoming quarters. As promised last quarter, we have raised the revenue baseline from which to grow. After adjusting for the pooling of revenue in Q1 as a result of the new pricing agreement with our largest customer, we are now delivering on consequential improvements in revenue both for the recently completed Q2 as well as expected growth through the forthcoming quarters. In fact, we are seeing sequential quarterly growth with nearly every key ATS customer as we progress through the year. As a result, we are well on-track to achieve revenue growth in 2022 approaching our long-term annual growth target of 25%. We are pleased with the progress made in Q2, so sequential improvement and a revenue pipeline, increased fab efficiency and output significant improvements to gross margin and EBITDA improving once again, closing in on breakeven at a negative $1.6 million for the quarter. The big news of the last quarter however, has been the multitude of important announcements that together provide a strong foundation for consistent revenue growth and firmly established SkyWater as a critical…

Thank you, Tom. Total revenue for the second quarter of 2022 was $47.4 million, which was slightly down from Q1 and up 15% from the second quarter of last year. Advanced technology services revenue was $29.8 million and wafer services revenue was $17.6 million. There are a couple of important adjustments to make when comparing our revenue performance to prior periods. First, I will remind you that wafer services revenue in the first quarter of 2022 included an accounting adjustment of $8.2 million for work in process inventory being recognized as revenue pursuant to the new frame agreement with Infineon. This new ingredient included increased pricing, as well as other improved contract terms that make all purchase orders non-cancelable, and which enables SkyWater to recognize revenue as the wafers move through the manufacturing process. Altogether, the more favorable contract terms are resulting in both higher levels of revenue, as well as greater predictability of revenue from this historical customer. So while the accounting adjustment in Q1 effectively pulled in $8 million of whip revenue, or wafer services revenue in Q2 is a real time reflection of current pricing and efficiency as these wafers moved through the fab. The comparable level of wafer services revenue was therefore 32% higher than Q1 and 23% higher than Q2 last year. Moving now to ATS revenues, the nearly $30 million recognized in the quarter represents an 11% increase year-over-year and a 12% increase over Q1 2022. After excluding tool revenues for each period, ATS growth in Q2 was 20% year-over-year and 15% quarter-over-quarter, and effectively backfield all of the decline in wafer services revenue, which was expected due to the Q1 accounting adjustment. Year-to-date, increased revenue levels in both ATS and wafer services is tracking well toward our revenue growth targets for 2022. As…

Thank you Steve. Our upcoming investor activities include the Needham, Virtual, Semiconductor and Semi Cap conference on August 24th, and the Jefferies semiconductor conference in Chicago on August 30th, and 31st. Please visit the Investor Relations section of our website for other upcoming presentations. Operator, please open the line for questions.

Thank you. [Operator Instructions] And we will take our first question from Raji Gill with Needham & Company. Your line is open.

Great, thanks and congratulations on all the momentum and being a real component of the success. That is great to hear. So just a question, Steve, on the gross margins. You talked about now that the revenue is over the breakeven point, you will start to see some operating leverage. And then you mentioned that the gross profit falls through, I guess under normal life circumstances would be about 50% incremental gross profit fall through. As I just wanted to get some clarity on kind of the near term kind of given margin still being kind of in the single digit margin range. You talk a lot about some of the - at least elaborate further on what are some of the near-term headwinds? And as you go into 2023, as you mentioned that you will be above kind of hopefully above 10% gross margin. Do you think those near-term headwinds are going to abate on the cost side and then you will start to see the higher volume plus the higher utilization start to kick in, and you start to really see the margin leverage in 2023. Just trying to get some clarity on gross margin.

Yes. Good afternoon, and thanks for the question. We are pleased with where we are on achieving, you know, the revenue levels and in the mid to high-40s. We talked about that on our previous call saying once we obtained that you would start to see some positive, gross margin for the company. We also believe that we have some good flow through that could come in the future as we continue to grow revenue, it is important to see not only is it the incremental revenue growth, but also the mix of revenue that comes through. We are getting back to our more normal model where ATS revenue was 63% of our overall revenue for the quarter. That is going to be a driver of any gross margin flow through that comes with that though on staying within the single digits for the rest of 2022. Given the impact that are still coming through from the inflationary cost, the inflationary costs are probably about 6% to 8% of our overall revenue. So we are being impacted by those and planning on those staying with us for the course of 2022. And we are still continuing make those investments for the long-term in the company, we talked about every quarter the importance of the Rad-Hard technology, and heterogeneous integration and afforded that we are doing both of those doing about continued investment, each quarter, the depreciation from the Rad-Hard, and the cost of revenue from Florida, $4 million to $5 million a quarter. So with those headwinds that we expect to remain with us, that is why we are staying good gross margin flow through will be on the horizon, but we will keep investing and dealing with the inflationary cost over the course of 2022.

Appreciate that, and Tom on the CHIPS Act, and congratulations on your role in pushing that, specifically for the Indiana fab update, can you give us some sense of what the total CapEx of the project could be. How much it will be split across the federal government, the state government, you guys, customer prepayments, if at all, and how to think about the potential revenue, how many wafers should come out of that? Any kind of quantifiable, or at least some sense of how big the opportunity to be?

Yes, so all very good questions, I think, very premature in terms of the clarity that we can really give, what we have said is that it is a $1.8 billion project, obviously, that will be composed of building the facility and then putting the necessary equipment in the fab. The model in terms of the federal investment, the state investment and industry investment still to be determined by the Department of Commerce, we are obviously all anxious to see what those rules become. But our goal right now is to work with the state of Indiana and Purdue, to bring our approach to our customer base, I can say the enthusiasm for what we are bringing in how we are doing it, the fact that we are stationed at Purdue, their commitment to developing semiconductor curriculum, semiconductor engineers that feed right into our ecosystem, I think has a lot of excitement. And as this year on folds, I think we will be able to provide more clarity in terms of exactly how the project will unfold. But the key of course, was getting the bill passed, I think, SkyWater for our company our size, we were able to really differentiate the approach we are taking. And as I said in my remarks, we are going to not only go after the dollars tied to building new facilities, but the dollars tied to innovation, the $12 billion for R&D related innovation, the $20 billion a year over 10-years that will be tied to investment not through the university system, as we build our National Semiconductor technology roadmap these are all areas that SkyWater will participate in. And again, I think there will be revenue tied to what we execute here in Minnesota and Florida, because we are going to go after funding for these facilities as well. I see that being more near-term. And again, as I said, the second half of the decade, I think you will start seeing incremental revenue come from that Purdue project.

And just last question from me, and I will step back in the queue. So the significant progress on the RH90 program, you talked about Phase 1 27 million has been funded. And then you mentioned kind of Phase 2 productization qualification and that should start to hit the model and help you hit the 25% target throughout the year. Can you maybe elaborate on the timing of that and the components of that Phase 2? How should we think about the breakdown of Phase 2, as we kind of look into Q3 and Q4? Thank you.

Again, the option E component was to really build out the design ecosystem. We have already announced the partnership with Google to bring the RH90 platform to the commercial market. So that will be incremental, we will start seeing that revenue flow, beginning this quarter, there will be other announcements that will be tied to the remainder of that 28 million - 27 million, that are forthcoming. But again, that is, essentially building out the design capabilities that will leverage the technology, the privatization and qualification or Phase 2, we expect to also be awarded this quarter that will be tied to investment for scale and capability, yield, capabilities, et cetera. So that we can prepare to bring, to actual products S24 and 24 unfold where the idea that you actually get into system designs as you exit 24 going into 25. So it is the next phase of this program, P&Q means you are preparing to go into privatization. And the qualification, of course, is dependent on what application if it is a new product that will move faster than a replacement product, but all of it is, is really geared for the next two years. It’ll drive incremental ATS revenue for us as we invest further with the government to stand up the capability. And then as we said, you will start seeing actual product related revenues as you get under the latter part of 2024 and beyond. And once you get designed in your design in for a good five to 10-year period for all these programs.

We will take our next question from Harsh Kumar with Piper Sandler. Your line is open.

HI everyone this is [Matt Ferrell] (Ph) on for Harsh. My first question is on the long-term growth rate of 25% and the recent momentum behind with the CHIPS Act and the new fab in Indiana. Does the further clarity on the CHIP stack provide an upward bias on the growth rate in the future? And I guess how should we be thinking about the chips Act and the new Indiana fabs impact on the 25% long-term growth.

Yes. So none of the 25% commitments that we have talked about has anything to do with CHIPS. So as of today, they are completely independent, I would see chips as being a creative to what we have been anticipating with, you know, our overall plan is obviously reduces the risk and the out years because you have got a lot of new investment that is going to come in to Sky water for capability and capacity Purdue being one example. And again, ATS revenues are a key driver of sky water and a lot of the dollars tied to chips are for innovation. That innovation not only originates in the U.S., but it has to stay in the U.S., the IP has to stay in the U.S. The end products need to be manufactured in the U.S. all that plays directly to the sky water model. But in no way should you think that our commitment about 25% ever had anything to do with CHIPS. We were pushing heavily to get CHIPS past but I see that just being you know, an overall risk reduction in terms of our ability to you know, continue to drive that level of growth is this decade unfolds.

Great, and maybe one more on - I know it has only been a short period of time but has customer conversation really changed in a meaningful way again, now that we have some more visibility on the recent passage of the CHIPS Act? And can you kind of help us understand what it does on your end in any way when you go out to talk to customers, whether it is about assurance or supplier or the ability to work in a more meaningful way? Thank you.

Yes. So I would say absolutely, conversations have changed, since literally, not just it got signed last week, but leading through the passage and Congress. And the reason, again, is because it became real. And what I would say is, you are seeing companies begin to look at how can we take advantage of this, and I’m talking about customers in that particular regard. And if you look at our DOD partnership, the DOD said, we want to stand up a new technology, we are going to partner with SkyWater, we are going to invest in capability. When that capability comes online, we are going to apply that to our core suppliers, our prime suppliers, they are going to get their solutions fabricated at SkyWater and we are going to understand completely how that supply chain works from design all the way through final product. That exact model is what we are promoting with other customers and other verticals and I can say the enthusiasm is as high as I have ever seen it. I don’t think any major entity wants to be left without control their supply chain and all of them are looking at new opportunities, new ways to achieve that whether it is automotive, bio, you just go down the line, everyone is looking for a new formula. And our partnership approach, our collaborative approach is highly attractive. And we are seeing a lot of interest. And our goal, of course, is to get those customers formed into what we call a customer network. They will provide the industry source of funding to complement what Purdue and the state of Indiana invest along with the federal government for in the Purdue example.

Awesome. Thank you so much.

Thanks.

And we will take our next question from Krish Sankar with Cowen and Company. Your line is open.

Hi thanks for taking my question and congrats on the good results. First question for Tom. Of the 25% revenue growth this year, how should we think about ATS and wafer service? And also can you give us some color on how much of the growth is driven by volume versus pricing? And then I have a follow-up?

Yes, great questions, and good to hear from you. The way to think of it is it is really, higher ASPs, higher productivity, having more programs flow through our funnel as we announced a lot of new customers last year, a lot of those customers continue to progress through the funnel. We see the ATS two waiver services mixed in around the two-thirds, one-third, that is the model that we are kind of trying to adhere to on a quarter-by-quarter basis. I think this second half of the year, we now have the RH90 expansion that we talked about that you are going to start seeing incremental capability, incremental growth on. And then of course, we have Florida where we have six different active customer programs each at different stages. The Florida facility continues to ramp we are looking at, expanding our shift coverage and all those elements together is what is allowing us to stick with the two-thirds, one-third but also adhere to the 25% growth. And the fact that we have such a strong pipeline of ATS capabilities customers, coupled with a strong desire of all those customers to move as quickly as possible. As I said in my remarks, when you are in a kind of a down cycle, potentially in the industry, that is when people really accelerate R&D investment in our, in our industry and we are seeing that exact phenomena. There is a lot of customers who keep saying, “How can we move faster? The fact that we are getting better productivity out of the FAB, we are at our target headcount?” These are all things that are allowing us to incrementally drive towards that 25% level on an ongoing basis.

Got it. Thanks for that. Another quick question for Steve, I understand. It is still too early to figure out the funding dynamics for the Indiana fab. How should we think about CapEx in the next couple of years?

Yes. CapEx or SkyWater for the next couple of years will be like we have talked about previously, I don’t think that ships announcement will change what we are trying to do in our investments for Minnesota and Florida. So anything that we would do from CHIPS funding, and the potential fat that we announced in Indiana, would just be incremental. And on top of that, we are still looking at our core business and our core business we want to invest in Florida, and Minnesota with the opportunities that are at hand. So again, this doesn’t change our plans for investing in our core business, this would just be incremental investment on top of that, that we would partnership with the various states, federal governments and commercial partners as well to fund.

What is really think about, I have to personally give see what CapEx is these next couple of years business?

The CapEx for the core business would remain the same that we talked about probably between the $10 million to $20 million range on an annual basis in addition to customer funded CapEx on top of that.

Got it. Thanks a lot Tom, thanks Steve and congrats on the good results.

Thank you.

Thank you.

And we will take our next question from Natalia Winkler with Jefferies. Your line is open.

Hi, Tim, Steve, thank you for taking my question and congrats on strong results. So the first one I had was about your ability to pass on the inflationary cost. And, Steve, I think you mentioned 60%, sort of as a headwind. Would mind kind of explaining, diving deep a little bit into that and just kind of walking us through your ability to pass those costs, I appreciate some of that contract has been increased - you know, the terms of the contracts have been improved for you guys. But outside of that contract with a main customer, how does it look for the rest of the customers?

Sure. So the buildup was consistent with what we talked about starting in the fourth quarter, we were relatively lightly impacted by the inflationary costs until we saw that coming through in the fourth quarter, as we talked about those continued in Q1 and we expect those remain for the remainder of 2022. Really, those costs relate to labor and inflation, attracting the right talent at all levels in all departments of the organization, no matter whether you are in finance or working in the manufacturing process, labor rates are going up. So that is one component of it. We are also seeing like we talked about previously, the freight and shipping costs have gone up significantly, as well as the chemicals and gases that are used to supply our ongoing manufacturing process. With all the demand that is out there for tooling and all the growth that is taking place, we are also seeing our suppliers that come in and our equipment manufacturers sending in their technicians. They are having the same struggles as we are finding the right talent and paying higher prices to keep them as well. So we are seeing higher costs in our equipment maintenance component as well. So those are the key costs that have increased over the past couple of quarters, we would expect to be with us. We will do our best to pass those on to the customers as appropriate. We want to be fairly compensated for the services that we provide. Our services are in high demand and as we deliver those services, routinely, and on time to our customers, we feel that we should be adequately compensated for those. So it is more so on a customer by customer basis, that we have those discussions with our customers.

And we have increased prices, not just for our largest customer in wafer services, but also with many of our ATS customers as well. So it has been kind of a universal strategy, as contracts come up for renewal, that we are implementing these price increases.

Understood, that is very helpful. And then the second follow-up I had was just around the Ugandan silicon program. Do you guys have any update for us on this and then just to confirm that new facility with Purdue, would that also have that platform enabled or is that going to be kind of mostly driving in your existing clubs?

Yes, great question. So we do continue to have multiple engagements with customers on - again on silicon, nothing that we can report publicly. As far as the Purdue fab, that would certainly be a option would be to stand up a 200 millimeter, again, lie within that facility. There is many different scenarios we are looking at with the Purdue facility as well as what we are doing here in Minnesota and in Florida. And now that again, CHIPS has been passed, we can put together an integrated capacity and capability expansion plan, understand how the relative you know, you know, grants, et cetera, you know, property tax or tax offsets, et cetera, these are all things that we can begin to put into the formula for how we build out our capabilities over time. And the other thing that again, makes us very unique is that we are able to go after these innovation dollars, and the innovation dollars have constraints on them in terms of where those technologies can ultimately end up and again, the key is protecting IP and having a source to fabricate those in the U.S. And that is really going to be part of our strategy. What we put in Purdue what we put in any expansion will be tied to what our customers need to ensure that their innovation ideas can get to market as rapidly as possible.

Understood. Thank you.

[Operator Instructions] And there are no further questions at this time. Ladies and gentlemen, this concludes today’s conference call and we thank you for your participation. You may now disconnect.