Please standby, we’re about to begin. Good afternoon, ladies and gentlemen. Welcome to the SkyWater Technology Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode and please be advised that this call is being recorded. After the speakers' prepared remarks, there will be a question-and-answer session. [Operator Instructions] And at this time, I'll turn things over to Ms. Claire McAdams, Head of Investor Relations. Ms. McAdams, please go ahead.

Thank you, Operator. Good afternoon and welcome to SkyWater's fourth 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. On our IR website, we have also 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 our fiscal 202110-K filed on March 10 of last year and subsequent 10-Q filings. 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 Q4 earnings presentation both of which are available on our Investor Relations website. With that, I'll turn the call over to Tom.

Thank you, Claire and good afternoon to everyone on the call. We are pleased to report a strong finish to 2022 with new records achieved in quarterly revenues, gross profit and EBITDA. Q4 revenues exceeded our expectations and were a record $65.1 million, growing 24% higher than our previous record set in Q3. This revenue upside helped drive fiscal 2022 growth above our long-term target of 25% to $213 million for the year. The record revenue level, along with strong gross margin performance in the second half helped drive the significant improvement in our 2022 financial metrics which included record EBITDA for Q4 and overall positive EBITDA generation for the full year. Unique to the fourth quarter was a onetime revenue recognition event that was noncash and which increased total ATS revenues by $4.7 million. This occurs when the revenues for a particular program are fixed and the expected timing or duration of the program is pulled in. For example, we witnessed the opposite effect in 2021 when certain programs were delayed or elongated and with total program revenues fixed, this reduced the amount of revenue we could recognize each quarter. In the fourth quarter of 2022, a successful multiyear government program came to completion earlier than originally scheduled and this required all the remaining revenue for the program to be recognized in the fourth quarter and without any associated costs. Absent this impact, our revenues for the quarter were still a bit stronger than forecast but the upside driven by increased productivity gains and our ability to increase the number of ATS activities in the fab. Unlike the $4.7 million revenue recognition event, we expect the higher levels of revenues resulting from productivity gains to continue in the forthcoming quarters and therefore, we are pleased to report today that…

Thank you, Tom. Total revenue for the fourth quarter of 2022 was $65.1 million which was 24% higher than Q3 and up 69% from the fourth quarter of last year. Wafer Services revenues were consistent with the prior 2 quarters at $17.2 million which represented 21% growth year-over-year. Included in Q4 ATS revenues of $47.9 million was a $4.7 million nonrecurring and noncash revenue event that Tom described earlier. Given that the total project revenues were fixed and the program concluded earlier than originally expected, we recognized all deferred revenue remaining for the program in Q4 and there was no cost of revenue associated. As a result, we exited 2022 with a new quarterly baseline revenue level of approximately $60 million which was still modestly stronger than what we were expecting this time last quarter. The stronger revenue performance in ATS can be primarily attributed to productivity gains which allowed us to execute on large ATS programs, such as Phase 2 of the RH90 program, leading us to exit 2022 with a higher baseline of revenues and gross profit from which to grow. Importantly, these productivity gains enabled us to generate incremental and more profitable customer program revenue which resulted in more favorable mix and significant flow-through to gross profit. GAAP gross profit increased significantly in Q4 to $16.6 million or 25.4% of revenues. On a non-GAAP basis which adjusts for impact of episodic tool sales, equity-based compensation and Florida start-up costs, gross margin was 26.2%. And as Tom mentioned earlier, the revenue recognition event that was $4.7 million of 100% profit benefited gross margin by approximately 600 basis points. We expect that our new baseline as we enter 2023 is now at the $60 million revenue level and roughly high-teens gross margins. The higher baseline for revenues and gross…

Thank you, Steve. Our upcoming investor activities include the Susquehanna Technology Conference being held virtually on March 3. Please visit the Investor Relations section of our website for other upcoming presentations. And as always, please feel free to reach out to me directly to arrange a call or meeting. Operator, please open the line for questions.

[Operator Instructions] We'll take our first question this afternoon from Krish Sankar at Cowen & Company.

Tom and Steve, congrats on really good results. I have 2 questions. First one, on the roughly 25% or so growth this year you expect in revenue. How to think about Wafer Service and ATS? And how do you think about volume versus pricing?

Yes. So Wafer Services and ATS, I would look at as having a fairly similar mix to what we exited Q4. We will obviously continue to grow both of these but ATS will grow at a faster pace than Wafer Services but we expect both those businesses to grow throughout 2023.

Got it. Very helpful. And then as a follow-up, in the past, you mentioned with one of your largest historical customers which I believe, Infineon, had some salable pricing terms. Is this because you're expanding your relationship with them? Or is this for the existing projects? And also to their exposure, are you more exposed to the industrial automotive side?

Yes. Good question. So yes, the strategic relationship with Infineon obviously, is an integral part of not only better pricing but also a stronger commitment from them to put more product in our fab here in Minnesota. I also think that the overall trajectory given their concentration in automotive and the industrial space is very much aligned to SkyWater. We are not very much exposed to the consumer sector. And because of a lot of the type of work we do, it's very much aligned with the needs of Infineon. And so we expect that relationship to be foundational. But that said, we do have 50 active ATS programs that are also underway. And all those eventually, some percentage, I should say, will move into volume manufacturing and that will, over time, decrease the concentration and dependence on Infineon.

Got it. Thanks a lot, Tom. And nice to see the really good execution. Thank you.

We go next now to Raji Gill at Needham & Company.

Yes. And I echo the congratulations on really solid results and gross margin improvement across all the metrics. That's good to see. Just, Steve, a question on the margins, if I can. So the 26% gross margin in Q4. If you back out the 600 basis point impact from that revenue recognition program related to that ATS, it's about 20% gross margin. You're kind of guiding to 15% to 20% on a quarterly basis in 2023. So just can you maybe walk me through again that kind of mid-teens gross margin when you kind of have 20% in Q4 on an apple-to-apple basis, I would expect that the margins might tend to be higher as you know, a $60 million kind of run rate on a go-forward basis?

Yes, good question. I think that we want to put that range out there for a couple of reasons. First off, like I talked about, we want to make sure that we have the opportunity to invest ahead of when revenue may be coming. So we talk a lot about what we're doing with advanced packaging and heterogeneous integration in Florida. Getting that fab up and running and started. So I want to make sure that we're not being held to a 20% margin expectation when we need to start investing ahead of -- revenue can come for a project that could go into Florida or really just growing our business here even in Minnesota going into 2024 as well. Additionally, we expect to have some potential for customer tool revenue coming through in 2023. Probably not like what we saw in 2021 but likely more than what we saw in 2022. So again, that can be good revenue that comes through but doesn't have the typical flow-through like we see from our other ATS revenues that flow through as well. So with that, I think your math is right. So you're at the right starting point and it is a valid question of why we're not expecting 20% and growing from there. I think that's obtainable in 2023 but we also want the flexibility for the additional investing we'll do ahead as well as some pass-through revenue that comes through that doesn't carry the same margin as our core revenue as well.

Yes. I appreciate the transparency. Just on the question of the tool revenue potential. So the 15% to 20% gross margin range -- you talked about it contemplates some sort of tool revenue less than 2021 but more than 2022. So just to put a bracket on it, 2021 was $19 million of tool revenue. I believe 2022 was $1.5 million. That's a huge range. When do we think we'll get a sense of what the tool revenue will be. So we're -- can you model that in terms of the timing?

Yes. I think that's a great question because just like we show in the tables that go along with our earnings release, we want to be transparent about not only the revenue that comes in from tools but also what the cost of that tool revenue is. So we still had very minimal tool revenue coming in, in the first quarter. I think what we'll talk about is very likely in the second quarter, we'll have better transparency on what the range of revenue and costs will be from tools as well as some pass-through revenue coming through. I think it's fair to say that it will be announced a very large range but somewhere between the range of what we saw in 2021 and 2022. And very likely we can give additional color to that in our next quarter earnings call.

Great. Appreciate that. So Tom, you very clearly outlined some of the growth drivers in this year, mostly the strategic government programs and then 2024 more of the commercial programs. When we're thinking about the 2024 kind of outlook, can you talk about some of the types of commercial programs that you're looking at. What about in terms of the customer base? How much are you going to be increasing your -- and diversifying your customer base on the commercial side? Any potential end markets that are new that would be hitting the model in 2024 on the commercial side?

Yes. Good question again and excited to talk about a lot of the development we've been doing and how it ultimately manifests itself in new products. One of the ones we talked about a lot last year was biomedical. We have multiple programs that are moving through our pipeline that we expect to go into production later this year and into next year. Obviously, Photonics is an area of strength for us. We have multiple engagements in that space. These are targeted towards a data center as well as other applications. Applications in both the automotive and industrial space. Of course, another area is just we'll call it, the ASIC-based arena of IoT given our CMOS foundation with 130-nanometer and 90-nanometer on our technology that we received from Cypress. There's a lot of different applications that are being configured. But for the most part, they will be going into the traditional verticals we've talked about, again, with a limited exposure to the commercial space.

Got it. Great. And just last question for me. In terms of the pricing versus volume question that Krish mentioned, can you talk about your ability to kind of raise pricing on the commercial contracts, maybe excluding Infineon? Are we still kind of in a favorable position with respect to capacity and the demand for those type of process nodes being imbalanced? Any thoughts in terms of the pricing over this year and over the course of maybe next year.

Yes. Again, I think one of the unique things about SkyWater is that we are creating technologies here at SkyWater with our customers that will be single sourced. The technologies are being cocreated with our customers. And so by definition, we're going to get much more attractive pricing as they go to market. Part of the other thing that's going on is we're getting better pricing for our ATS programs as we've demonstrated our technical capabilities, our ability to execute, customers are willing to pay more to have access to our unique capabilities. And so we think not only as we enter an engagement that we have strength in our negotiation. But as we position the products as they ramp to volume, we obviously take advantage of the fact that these are going to be new technologies on products that haven't been in the market before. And we're the single source provider. So by definition, again, we get to control the pricing. The nice thing about being the manufacturer is that you have a lot of influence over ultimately how the products get to market and the pricing profile that takes them to market. And as we have grown and matured as a company, we've been able to get a lot more proactive in terms of how we create those arrangements.

Thank you and congratulations, again.

Thank you. We go next now to Natalia Winkler at Jefferies.

Congratulations on the strong results. One of the things I wanted to confirm was I think back in '21, you guys had this kind of longer-term CapEx program that was around $56 million, I believe. Can you help us figure out where you guys are with that program? And I appreciate it's probably running over multiple years but just kind of how is that helping support your expansion and your growth [ph]?

Yes. That's a continuing process and investment like we talked about previously. That was a combination of supporting our move into offering GaN technology just as well as further building out our capacity in SkyWater, Minnesota. So as you mentioned, we're moving along the way. A lot of the investment that you saw coming through our balance sheet this year and cash flow statement on the investments we made from the CapEx side do go against that investment that we committed to back in 2021. So still will be a multiyear phase going through and that will continue over the course of 2023 and in fact, even into 2024.

Understood. That's very helpful. And I guess, Steve, the other question is really also about this idea of your model being kind of CapEx light, right? And Tom has mentioned this goal of reaching $1 billion by kind of 2030. So I'm curious to kind of think like what's the right way for us to think about the capacity expansion, if any, you guys would kind of need to see in your model to really ramp up revenues to 2025 and really beyond that?

Yes. So I'll talk about 2025, first because we'll focus on that in the near term. Really, our model with what we're currently doing with our CapEx plan that we have in place which you alluded to a portion of it as well as the investments that we're getting from our customers. I think that will allow us to grow to those 2025 levels that we've been talking about. Clearly, from there to go to what Tom alluded to by the end of the decade, would take additional investment coming through. And that's where we talk about some of the larger investments, partnering with various states on growing capacity would likely be needed to grow to those levels by the end of the decade. But focusing on what we can control, focusing on the near term over the next couple of years, we think our current model lends very well with what we've already invested in. But we haven't received a complete return on to really grow to our 2025 levels that we continue to communicate.

And just to add, the CapEx-light model essentially means the capital is still required but we partner with our customers to enable that investment to come into our facilities. So part of the way we will achieve that longer-term second half decade growth is through continued exploitation, frankly, of the model that we've created. We will be leveraging our customers' investments and our technical and manufacturing capabilities to bring that combination together to get our customer products to market.

That's very helpful. And Steve, I just wanted to clarify one little thing from the prepared remarks. I think you mentioned that you have the start-up costs, right, like still in the model at the moment which are around $7 million to $9 million is up per quarter related to the ramp of Florida and the RadHard. Did I catch that right? And I think in the past, you also provided sort of a split between the different lines? Is there a way for us to kind of think about that number going forward?

Yes. The $7.9 million would not be related to the start-up costs. I don't know exactly which one you're referring to. I know that we talked about there are about $8 million to $9 million of quarterly costs that are flowing through that will either fall off or be absorbed within the next couple of years. But I did prepare in my comments, an expectation for some of the quarterly ranges on the various components of our operating expenses but it wasn't in relation to the $7.9 million. So that may be something that we can listen to the replay or cover at a different time.

Understood. Thank you very much and congrats, again.

We go next now to Harsh Kumar at Piper Stanley.

My congratulations as well. Excellent quarter and guide. So Tom, I wanted to understand where the majority of the upside might have come from. Even if I take out the $4.7 million that you got, that's nonrecurring onetime revenues, was it, I guess, more coloring -- was it more business as an existing customer? Or was it 1 or 2 customers stepping up? Or just any kind of color you can provide would be helpful.

Yes. Overall, I think it was the RadHard program clearly was a big driver. We announced that program, the Phase 2 award and the team just stepped up and was able to execute at a very high level to hit the milestones that were needed to trigger the revenue back into the company. And so I think that was certainly a big component and driver in the second half of last year. And then also just our overall execution in the fab. I've said before that we're running a very complicated model, doing volume manufacturing for a company like Infineon while running 50 development programs. And the team has really stepped up and done a great job of integrating and institutionalizing a lot of the behaviors that we want to be able to grow and scale the model that we've created. And I think we're seeing the efficiencies, the productivity, a lot of those capabilities, the investments that we have talked about in the automation side are beginning to pay dividends. And no one's ever really done this type of high-level R&D and a volume manufacturing facility before. And I think we're all very excited about the potential we're seeing from this model as we continue to grow and scale it.

Fair enough. And then a very similar question for the $60 million base that you cited as a starting base going forward. And I think, Steve, you even went on the record in the guidance that it will start in the low 60s and kind of finish in the high 60s as the year goes on. Is that also being helped by the RadHard program? Or is that just kind of productivity and customers having confidence in stepping up and giving you more business. So I was just curious and -- and then also, is that in backlog at this point in time? Or is that being driven by sort of conversations you're having?

No, I mean, I think, again, RadHard will continue to play an important role this year and into '24, as we prepare to start actually making products in 2025. The other is just the continued ramp of other programs that we've talked before as programs go through various phases, various gates. The spending tends to increase and a lot of the programs we were talking back in 2021 now have gotten larger and continue to grow. And I think both of those components, plus just the productivity improvements I just discussed, give us confidence that where we exited Q4, we think will really become a baseline as we grow throughout this year. The other thing is that we do have a lot of, I'll just call it, maturing of the business and how we not only predict revenue but how we bring customers into the business, as I discussed earlier and then how we work with them to take advantage of the semi industry is in a correction right now. And there's a lot of customers that are really excited about getting their products to market for the next upturn. And so that is really taking advantage of our model in a unique way and it allows us to show what our capabilities are in a unique way. And I think that combination is what gives us confidence in 2023 that we can continue to grow at the 25% level or close to it.

That's great, guys. Thank you so much. Congratulations again.

We'll take our next question now from Richard Shannon of Craig Hallum.

I'll echo my congratulations on some nice numbers end of the year here. Let's see here. Tom used the language here on some of your growth expectations for this year talking about funded programs. And I think it's fair to understand that with the U.S. government type programs and customers here. But what about the commercial programs? To what degree do you have confidence if the ones that you're expecting to grow nicely here are actually funded and they won't be pulled in any way? Just help us kind of put this together and give us a little more confidence on that, please.

Yes. So I'll start and Steve can give any additional color. Obviously, one of the things that we have learned over our life as a company is not only who we want to engage with to take advantage of our model but how do we make sure that they are able to deliver on the financial side as we deliver on the technology enablement side. And I think we feel very strongly and as I put in my prepared remarks that the engagements we have, the R&D investments our customers are making into our company are very much in a high confidence level not only because of the companies involved but also the maturity of the technologies and the commitment of the investors in those technologies to get those products to market. So we do a lot more vetting when we bring a customer into the business. We obviously have a couple of scars where we didn't do that as well as we should have in our earlier days. And so I think we feel like as we enter this year and go into next year and really bring some of these technologies to fruition that the partners that we're choosing are maybe in a better place than some of the ones that we've had before. Steve, anything to add?

That's good. Thanks, Tom.

Excellent. My next question is some language used to being and I think maybe the last call and maybe in 2 calls here about stabilization of fab operations and productivity. In the context of one of the other questions in your prepared comments here about gross margins, where you just finished at 20%, excluding the big contract revenue recognition and you're expecting 15% to 20% seems like that's implicitly stating you're not expecting any more improvement or stabilization in productivity. To what degree does that -- that you're not expecting more versus that could happen and you potentially see upside throughout this year?

Yes. I mean, clearly, we're going to continue to drive productivity improvement throughout the year. I think, if anything, it's what Steve said earlier, is that we also expect some tool revenue to come into the mix this year. We have some subcontractors that are tied to the R&D program for RadHard that will come into play where the margins aren't the same level as ATS, so our traditional ATS. So, I think -- and frankly, we're in a very -- we'll call it cautionary environment at a macro level in terms of what's the overall economy going to do here in the U.S. And so I think all that is why we're cautiously optimistic about our ability to continue to grow and scale the business but recognizing that there are going to be some different factors that hit the revenue line and their margin profile will be somewhat different than what we had this year. Steve, anything to add? Does that answer your question, Richard?

Yes, sorry, I was waiting for Steve to respond. If he did, I didn't hear anything. My last question...

He just nodded his head.

Yes.

He just nodded, all right. Last question, I'll jump out of line here. Just any info you can give us on the 10% customers and they will see the 10-K but I wonder if you can give it to us for the fourth quarter or for the year, please, Steve?

Sorry. Can you repeat what was the question, 10% of what?

10% customers.

What were the 10% customers either for the quarter or for the year?

Yes. We'll just wait for the 10-K and we'll list those out like we do consistently. Those will be in their customers I believe for the fourth quarter.

And ladies and gentlemen, that will conclude our question-and-answer session today. We'd like to thank you all so much for joining the SkyWater Technology Fourth Quarter and Financial Results call. Again, thank you so much for joining us and we wish you all a great evening. Goodbye.