SkyWater Technology, Inc. (NASDAQ:SKYT) Q3 2023 Earnings Call Transcript

SkyWater Technology, Inc. (NASDAQ:SKYT) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good afternoon. My name is Adra, and I will be your conference operator today. At this time, I would like to welcome everyone to the SkyWater Technology Third Quarter 2023 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’d like to turn the conference over to Claire McAdams, Investor Relations for SkyWater. Please go ahead.

Claire McAdams: Thank you, operator. Good afternoon and welcome to SkyWater’s third quarter fiscal 2023 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 also posted an investor slide presentation, as well as a new financial supplement 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 2022 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 Q3 earnings presentation, all three of which are posted on our Investor Relations website. And with that, I’ll turn the call over to Tom.

Thomas Sonderman: Thank you, Claire, and good afternoon, to everyone on the call. Today, we are pleased to report strong third quarter financial results as SkyWater set another record for quarterly revenues at nearly $72 million. Q3 revenues exceeded our expectations going into the quarter and marked an unprecedented fifth straight quarter of sequential growth. Revenues were 3% higher than the previous record set in Q2 and grew 37% from Q3 of last year. We believe the sequential growth in our ATS business demonstrates that our customers’ innovation investments remain strong despite the incremental softening, and end-market demand since our last call. Not surprisingly, the strong growth achieved in our ATS business this year has been partially offset by a lower level of wafer services revenue, which has seen a greater impact from the overall macroeconomic weakness and slowing consumer demand environment.

For SkyWater, 2023 has continued to see a robust R&D environment in the base of the current inventory, correction facing the broader semiconductor industry and most recently, the automotive and industrial markets. We expect this will result in a significant increase in ATS revenue mix this year from the two-thirds one-thirds split seen in 2022 to an expected 80/20 split for fiscal 2023. Year-to-date, total revenues of $208 million are 40% year-over-year, clearly exceeding our expectations entering 2023, while the outperformance we have achieved this year has been primarily driven by the increased demand and improved operational execution, we’re also entering a new stage of expected amplified tool revenues within the ATS business. Not only is this a trend we expect to continue, but anticipate a significant increase in tool investments over the next several quarters.

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Q&A Session

We believe this is a strong indicator of our customers’ desire to make increased investments in SkyWater to enable the production ramp of multiple products and platforms being developed here at our fab in Bloomington, as well as in Florida. The largest contributor to our ATS growth this year of over 50% as been multiple strategic aerospace and defense programs. These have been ramping in scale and scope throughout 2023 and include important progress with phase 2 of our RadHard 90 nanometer platform. Other A&D programs are also moving forward aggressively, which we believe signifies the department of defense’s increased trust and commitment to SkyWater to provide critical national security technologies. The government’s increased commitment to SkyWater is enabling us to achieve several important milestones this year.

We are on track to exceed our long-term revenue growth target of 25% annually in a year that is otherwise down for the semiconductor industry and where the overall foundry market is seeing about a 10% decline from 2022. Our continued progress towards a maturation of our A&D technologies is accelerating our engagement with new customers and partners. It is Skywar’s intent to develop some of the most advanced RadHard and imaging platforms in existence. Both platforms serve a similar customer ecosystem by leveraging our unique technology enablement and product realization model within this community, we continuing to see design capture momentum as these technologies are ready for our production ramp in 2025. We expect to be able to leverage the A&D investments happening today at SkyWater to support numerous commercial use cases that require reliable CMOS performance in non-traditional applications, like extreme environment computation heads-based, AI and focal plane array thermal imaging.

These capabilities are needed in a range of use cases including low earth orbit satellites, industrial MCUs, IoT devices and autonomous systems. The ability to execute well on multiple government programs is a key attribute of our chips application framework as we pursue funding to expand our two existing fabs and establish a greenfield facility in partnership with Purdue. While this funding is not essential to our long-term growth plans, we do expect it to be an accelerant to our advancement in the second half of this decade. Beyond strategic A&D, there are several important commercial programs underway with our bio health and advanced computing customers, each of which are generating multimillion dollar revenues for us this year. In bio health, we are seeing continued strength in the areas of rapid diagnostics, genetic sequencing and health wearable devices, all high potential products that are demonstrating a strong demand or innovation services.

And SkyWater’s is differentiated leadership capabilities in superconducting and photonics offer an important value proposition for customers pursuing innovations in the rapidly accelerated artificial intelligence and quantum computing industries. While the very nature of our businesses at technology foundries to work with emerging companies and entirely new product categories fewer than half of these engagements are with early-stage or startup companies. As our Technology- as- a-Service business model has matured and developed over the last few years, we have become increasingly selective with our customer engagements. As a result our commercial business pipeline has never been stronger. All these programs are pursuing emerging and large market opportunities, which while relatively small today have a path towards high volume production within the next couple of years.

Fundamental to SkyWater’s ability to continue to ramp and scale our business are the transformative investments we are making today in our fab and enterprise operations. These investments are focused on rapidly improving the operational efficiencies needed to achieve even higher outputs from our Bloomington fab and handsome monetization of our unique value proposition and optimize the utilization of our workforce. This approach is already starting to pay dividends. And in Q3 we increased wafer velocity achieve record levels of ATS activities and realized more linear wafer services production. These continuous improvements are enabling us to realize a higher concentration of ATS activities, improving the service level we provide to our customers.

We expect the transformation to be completed by mid-2024, as these proprietary business processes and systems are integrated across the company. Turning to our recent announcement regarding Cadence Design Systems. The world’s leading systems design company is now offering a Sky130 PDK to their user base, encouraging and facilitating design work and subsequent tape outs on one of SkyWater’s key CMOS technology platforms. Cadence’s incorporation of the. Sky130 PDK is an important validation of the key role we are playing in the future of opensource design. By leveraging Cadence’s substantial global user base, SkyWater reach continues to expand to new customers’ markets and applications. This is a significant milestone for us and the opensource community, as we continue to enable this capability for the global semiconductor ecosystem.

Now, turning to our outlook for Q4 and the year ahead. We expect to achieve a similar level of core ATS activities in Q4 after well exceeding our forecasts in Q3. At the same time, we anticipate a further increase in our Q4 tool revenue. We expect that offsetting this ATS growth will be another sequential decline in wafer for services revenue, which is materializing due to the inventory corrections taking place in the automotive and industrial sectors. All together we expect cube or revenue in the mid $70 million range. As we look ahead to 2024, SkyWater’s core ATS activities are anticipated to show solid growth after the 50% growth forecasted for 2023. We believe our continued momentum in ATS, coupled with a strong year of customer tool investment will result in continued outperformance in SkyWater’s revenue growth in 2024, compared to the overall industry wven with the expected decline in wafer services.