Good afternoon. My names is Rodger, and I will be your conference operator today. At this time, I would like to welcome everyone to the SkyWater Technology Q2 2024 Financial Results Conference Call. Today's conference is being recorded. 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] At this time, I would now like to turn the call over to Claire McAdams, Investor Relations. Please go ahead.

Good afternoon, and welcome to SkyWater's second quarter 2024 conference call. With me on the call today from SkyWater are Thomas Sonderman, Chief Executive Officer; and Steve Manko, Chief Financial Officer. I'd like to remind you that, our call is being webcast live on SkyWater's Investor Relations website at ir.skywatertechnology.com. The webcast will be available for replay shortly after the call concludes. 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, including all non-GAAP adjustments and comparisons to our GAAP results as well as the impact of tool sales on our gross margins. 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 2023 Form 10-K. 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, our financial supplement and in our Q2 earnings presentation, all three of which are posted on our Investor Relations website. And with that, I'll turn the call over to Tom.

Thank you, Claire, and good afternoon to everyone on the call. I'm pleased to report strong financial results for SkyWater's second quarter with a record $93 million in revenue and our achievement of non-GAAP positive EPS for the first time. ATS development revenue of nearly $62 million exceeded our expectations to reach a new record, up 1% from Q1 and up 18% compared to Q2 of last year. This growth was driven primarily by continued strength in our aerospace and defense business, which exceeded forecast due to pull-ins of demand on multiple programs, which we delivered through improved fab cycle times and agile engineering execution. Wafer Services revenue was just under $6 million, slightly better-than-expected, but still well below prior run rates due to continued weakness in the broader industrial segment. Tool revenues exceeded our forecast at $26 million with enhanced equipment lead times enabling faster deliveries within the quarter. Customer funded tool installations demonstrate our customers' commitment to bring additional capabilities and capacity into our fabs to support their most critical programs. We believe, we are in the early stages of an anticipated multiyear period of elevated customer co-investment. These investments are adding critical new capabilities in our fabs and will enable substantial additional scale to our business, while maintaining our streamlined cost structure given minimal SkyWater funded CapEx needs. With the record results and the revenue upside in ATS, we achieved non-GAAP EPS positive results for the first time this quarter. With strong gross margin flow through and ongoing efficiency gains, we have now demonstrated the expected business level necessary to support profitable results in the future. We believe our CapEx light and high operating leverage business model will lead to significant expansion of our gross margin profile, allowing strong profitable results in the years to come. Today,…

Thank you, Tom. Second quarter revenue reached another record for us at $93.3 million with upside reported in all three revenue components. Total revenue was up 17% from Q1 and up 34% from the second quarter of 2023. Record ATS development revenue of $61.7 million exceeded our forecast for the quarter, as a result of strong demand and accelerations on our strategic aerospace and defense programs. While we had expected a modestly-lower ATS run rate entering Q2, actual ATS revenues increased slightly from the first quarter. As expected, Wafer Services revenue declined meaningfully from our prior run rate, but still came in a bit higher than forecast at $5.8 million. Tools revenue was $25.9 million compared to our outlook for at least $20 million with the accelerated delivery of tools near quarter end. Our non-GAAP gross margin for the quarter was 18.9% at the upper end of our guidance range due primarily to stronger ATS and Wafer Services revenue compared to our forecast. Tools revenue in the quarter impacted non-GAAP gross margin by 570 basis points. As a reminder, you can find the impact of Tools revenue on our gross margin each quarter in the financial supplement posted to our IR website. Non-GAAP operating expenses were $13.5 million which was well below the forecast primarily due to lower variable compensation and a shift in timing of certain other costs to subsequent quarters. With the upside in gross margin and lower OpEx, non-GAAP operating income was well ahead of forecast at $4.1 million. Adjusted EBITDA was $8.1 million and we achieved non-GAAP net income of $0.02 per share. Turning to the balance sheet. The balance of total cash at quarter end at $18.4 million has remained relatively consistent since year end 2023. We generally manage our cash needs through inter quarter…

[Operator Instructions] And our first question goes to Harsh Kumar at Piper Sandler.

Congratulations, on very, very strong execution. Tom, I have one for you. I guess the question was, what kind of programs are you seeing in ATS? You talked about aerospace and defense being the dominant sort of force in the results this quarter. And you talked about this continuing on to the rest of the year. So I was curious, if there's a specific area of aerospace and defense, where people are coming to you more than other areas or is it pretty broad based?

Clearly, we've talked before about thermal imaging. I think that's a strong growth area for us. There is a variety of special programs will be referred to as specialized ASICs that drive a lot of our engagement with the aerospace and defense business. And then of course, we talked before about the Rad-Hard program, which while it gets a lot of attention today is a relatively small component of our overall A&D business. So I'd bucket it in those three broad categories.

And then for my follow-up, Tom, you're equipping the Florida fabs, sounds like you're, I think you're getting closer to commercialization at some point in time in the near-term. But could you maybe help us to think about what this sort of facility for advanced packaging can do for you and what the contribution could be when it's all put together and sort of humming and running?

Yes. Over the last several years, we've been of course facilitating the clean room, getting the fab essentially ready to run the development programs that we currently have up here in Minnesota. The difference of course being the focus on advanced packaging in Florida. We've put in an interposer program that was the first program that came via IMEC. We put in a hybrid bonding capability that has been slowly ramping up, but the one that's the most exciting and the one that is really just beginning to move forward is the fan-out wafer level packaging capability that we announced back in January. That's the $120 million investment that will allow us again via the DoD's investment to stand up a Gen 2 version of Deca technology, our adaptive patterning based technology and we expect the Florida operation to be sufficient for prototyping early stage production, but anything beyond that would obviously require an investment in a larger type facility. So think of it as an ATS like capability that will begin to really add to the top-line, as we get into next year, as we're standing up the technology. Then as you get into the out years, you would again begin to see that transition to wafer services, But it will be primarily ATS development related revenue in Florida as that program matures.

We'll move next to Krish Sankar at TD Cowen.

This is Steven calling on behalf of Krish. Tom, maybe a first question for you in terms of your demand from Wafer Services customers. I know, you just mentioned in your prepared remarks that demand should be relatively soft for the near-term. I was just kind of wondering in terms of conversations with customers, especially your large looking, one, what kind of, demand signals are they giving you in terms of two or three quarters out if there's any of those conversations happening? Is the relative work down of inventory that some of your customers have been talking about, is that more favorable for you? Or is that other areas of the business that doesn't touch upon the WS business?

Yes. Clearly, when it comes to Infineon, who is our largest legacy Wafer Services customer, they continue to have weakness. I think they announced their earnings a day or so ago. The industrial segment that we primarily service continues to be weak. We think it will be weak for the rest of this year. That's what we're modeling. And then as we get into 2025, we do see and are expecting like many to see a modest recovery in the legacy business, but it's really going to be our focus to continue to accelerate the thermal imaging capabilities, continue to transition in our ATS to Wafer Services customers, which as we've been discussing is really focused around the biomedical space. And then of course continue to make progress on things like thermal imaging, like I mentioned, which we believe will start moving into production as we move into next year. So we're hopeful like many that eventually the legacy businesses will start coming back, but we are definitely pivoting towards the future, which is really taking the technologies we've been developing with our customers over the last several years and helping get those ramped into production because that's really what's going to drive the profitability side of the Wafer Services business just like we have today in ATS.

For my second question, I had one for Steve, regarding the I guess the longer term CapEx needs for the Florida packaging facility relative to that $120 million to be spent between now and 2026. Just to clarify, is that $120 million, is that part of the original $190 million of funding that that was announced with that fan-out wafer level packaging, or is this on top of that $190 million? And secondly, for the $80 million of fuel revenue that you guys are expecting this year, does that include any of that CapEx related to Florida?

I'll start with the last question first. So part of that $80 million has a very small amount of the tool revenue going into Florida for 2024. So that would be item number one. Item number two going specifically to Florida then what we talked about with $120 million going into Florida for the fan-out wafer packaging as Tom mentioned, that would take place over a couple of years, really starting in 2025 and then flow into 2026. That amount like you said though, what has been awarded is $120 million there's potential upside to that program to go to something like $190 million and maybe something above that. We've seen that happen with other programs before where they start getting more and more money, as we are successful with various stages of the program. But just to keep everything straight, what we're talking about by putting out the fan-out wafer packaging in Florida that is part of the $120 million program we announced last year.

We'll move next to Shadi Mitwalli at Needham and Company.

This is Shadi Mittwalli on for Quinn Bolton. I have a question on the MEBL system SkyWater received. Can you expand on what this means for SkyWater in the near- and long-term? And can you talk about the customer interest you have received with that capability?

This is obviously a new system that SkyWater is very excited to now have in our fab. E-Beam traditionally has been a technology that is used for, we'll call it, more exotic type processing. It's slow. It doesn't have high productivity and again is geared towards a certain type of application. Those type of applications actually align very well with what SkyWater does, which leverages a lot of customization and focus on optimizing -- co-optimization of the process and the product. So the multi-beam capability because it's 10x to even 100x faster than traditional e-beam allows more customers that want to take advantage of a direct ride capability, which essentially doesn't require masks and some of the other collateral that you get with an optical solution, just opens up many more opportunities for us. Again, as I mentioned in my remarks for MEMS, curvilinear designs, things that are really aligned with the type of work that we do at SkyWater. So the fact that, it provides a new kind of conduit of customers but also allows us to go below 50 nanometers at 200 millimeter makes it very unique and puts SkyWater into position, as the most advanced 200 millimeter fab from a geometric perspective in the world. And we believe that will drive a lot of innovation not only within our existing customer base, but as investments start flowing through chips-related funding. We just think it's going to be a great opportunity for us to really exploit our leading-edge 200 millimeter capability.

And then my follow-up is on QuantumPsi transitioning into Wafer Services. How long have you guys been working with them before the transition? And can you give any color on the timing and capacity ramp?

Yes. So, So typically these biomedical solutions are about two years of ATS engagement and that's true in the case of QuantumPsi. As we get to the point of freezing the process, we then go through a qualification period. We provide the initial samples and then they complete the rest of their qualifications. That can take upwards a year depending upon the level of approvals that are needed. We would start seeing ramps of many of these biomedical programs, as we get into the later part of next year going into 2026, I would anticipate. Of course along the way, there will be more samples that will be needed but this is what we talk about the J-curve effect. As you come out of ATS development, there is definitely going to be a low before the Wafer Services revenue kind of picks up from where we left off in the ATS revenue, and think of that as about a 9 month to 18 month timeframe. Again, we're kind of just moving through the process. So we're getting data on this as you guys are getting data on it, but that's the way I would generally think of it.

We'll move next to Richard Shannon at Craig Hallum.

I may follow-up on the last one here and maybe ask the question a bit more broadly about all of your ATS customers that have or at least you talked about transitioning or transitioned to ATS here. Tom, I wonder if you can kind of paint us a picture about when do we see revenue profile from these new customers that becomes noticeable, maybe even becomes bigger than the kind of the legacy wafer services revenue stream that you have right now.

I think it's kind of again, like we talked in our remarks, we believe, we're going to start seeing growth again in Wafer Services next year. Some of that growth will come from these ATS Wafer Services transitions. We clearly are being conservative in terms of how we think these programs will ramp because they're very much out of our control. Once we get the solutions provided to our customers, they have to build the rest of the systems and get the quals done. So whether it's in the biomedical space or in the case of Lumotive, in the ADAS space, we believe it's going to be a series of quarters. But, as you get into the -- again the later part of '25 moving into '26, I think you'll start seeing an acceleration and the pace of their ramp. And then the other thing you can expect is that, we'll continue to have customers transitioning. So much like in the early days of ATS, where we didn't have a broad portfolio of customers, when one would slow down tended to be more noticeable. We expect as you get in the out years and we get multiple programs in Wafer Services, they'll all be ramping at paces. But overall, you're going to see growth in Wafer Services that is no longer dependent on our legacy business. And that's really the exciting opportunity that we think we have before us, because the slowdown has allowed us to accelerate the focus on ATS, which is driving these programs faster and faster through the conversion and that just gets them out in the market quicker so that we can capture the upside when it materializes.

And my follow-up is probably mostly for Steve. Steve obviously hit a nice, level of profitability here in the quarter, which is obviously great to see and didn't have enough time to really run your forward numbers through my model in great detail here. But it sounds like, we could see close to profitable, if not profitable quarter over the next couple of few or so. Maybe, I just want to comment generally on what you see profitability versus slight losses in the near future here kind of big picture?

I mean that's, something that we've been waiting for quite some time. We were clearly excited to announce that we get non-GAAP EPS positive for the quarter for the first time. I think what this shows is a second level of financial modeling. We talked about the leverage of our model from a profitability perspective. In the second quarter of 2022, I believe, we talked about generating 50% or greater flow through on gross profit, once we exceeded $45 million of the fixed cost. Now we've already demonstrated for the past couple of quarters, you're seeing a new revenue profile. And remember that, the real margin right now is coming from ATS and Wafer Services. When you see something in the upper 60s to 70 for ATS and Wafer Services revenue coming through that's really looking like our next breakeven on the profitability standpoint. There could be some puts and takes each quarter depending on exactly what that revenue profile looks like and maybe even more importantly what the cost side of the house looks like. But I think we're demonstrating pretty consistently that in the upper 60s, we can really get very close to non-GAAP EPS and non-GAAP profitability. I think that's something that we can look forward to going forward at those revenue levels.

[Operator Instructions] We'll go next to Ezra Weener at Jefferies.

A quick question, you guys talked about QuantumPsi and moving that from ATS into Wafer Services. Obviously, that's a great step trying to -- as you try to do that with more of the ATS business. Can you just talk about that pipeline going forward and opportunities you see there?

Yes. We have, I think announced now four different customers that have done a conversion this year. There's more slated, as we get into the later part of this year, another one or two and then as we get into next year, again, we're not going to get into this many per year kind of cadence, but we have others that we expect to begin the transition. And as I was just alluding to, over time what you'll see is just more and more of those customers converting. They'll each be ramping at their own rates but the ability to replace the legacy volume with new highly-profitable technologies that we help create with our customers that are just beginning to enter the market, we think is a huge opportunity for us. And what you're seeing is profitability at the very lowest levels of wafer services revenue, as those Wafer Services revenue begin to move back up into the right. We're absorbing the fixed cost of the business as Steve was just alluding to. We're seeing now where the true breakout point is, and we believe we're very well-positioned to capture that upside with a very efficient business model we put in place.

And again, I think you're seeing a new phase of our business that we've been talking about for quite some time materializing before us, where it's maybe only one or two per quarter that we're talking about. We're not guaranteed with timing to have one every quarter, but there's been a consistency that you've seen this year with more and more customers routinely moving from ATS to Wafer Services. That's an exciting time for our business that we've been waiting for. With that we expect more and more customers to do so. Then we'll have better information on really what the pipeline looks like and when we can expect revenue from those new wafer services customers.

And I'll just add we're always adding to our ATS pipeline as well, whether it's advanced compute, more biomedical things in the AI, IoT space. We have lots of exciting customers that are just coming on board and others that continue to move through the pipeline. And that is the real story of SkyWater, as we took a legacy fab through our ATS model, we brought in a lot of new exciting customers and opportunities, and as those move into volume production, we'll essentially have replaced legacy volume with new SkyWater created technology that literally is just beginning to enter the market in a very CapEx light model.

That concludes our Q&A session. I will now turn the conference back over to Thomas Sonderman for closing remarks.

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. It is our intent to continue to build your confidence and our capability to execute. We anticipate that additional opportunities to meet with investors during the third quarter will include the virtual Needham Semiconductor Conference and the Jefferies Semiconductor Summit in Chicago later this month, as well as the Piper Sandler Growth Frontiers Conference in early September. And please feel free to reach out to Claire directly to follow-up with us. We look forward to talking with you again on our Q3 call in November. With that, I'll conclude today's earnings call. Thank you.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.