SkyWater Technology, Inc. (NASDAQ:SKYT) Q4 2023 Earnings Call Transcript

SkyWater Technology, Inc. (NASDAQ:SKYT) Q4 2023 Earnings Call Transcript February 27, 2024

SkyWater Technology, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Audrey, and I will be your conference operator today. At this time, I’d like to welcome everyone to the SkyWater Technology Fourth 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 Technology. Please go ahead.

Claire McAdams: Thank you, operator. Good afternoon, and welcome to SkyWater’s fourth quarter and full year 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 also have posted an investor slide presentation as well as a financial supplement to accompany today’s call. During the call, any statements made about 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 supplements and in our Q4 earnings presentation, all three of which are posted on our IR website. 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 fourth quarter financial results. Revenues grew to a record $79 million, up 11% from Q3 and exceeded our expectations due to continued sequential growth in our ATS development business, which was up 6% from Q3. As expected, tool revenues totaled nearly $10 million for the quarter. As we discussed on our last call, we are entering a new multiyear stage of increased levels of customer-funded CapEx in support of our growing ATS business. The CapEx investments being made by our customers are targeted at building our platform development capability and putting the necessary capacity in place for volume production.

Consistent with our expectations going into the quarter, Wafer Services revenues were $12 million, down 17% from Q3, driven by the continued softening in end market demand, chiefly from the broader industrial sector. In spite of this end market softness, the continued strong customer demand for ATS development business has driven six straight quarters of sequential growth and record revenue performance. For fiscal year 2023, we exceeded our long-term targets with total revenues growing 35% from fiscal 2022. The strength of ATS within a backdrop of an overall weak end market was reflected by the changing mix of revenues in 2023 with an 80-20 mix of total ATS revenues to Wafer Services compared to about two-thirds, one-third in 2022. As we have demonstrated, ATS is the major growth driver for SkyWater’s business both for 2023 and we believe for the next several years as we continue to develop new advanced technologies for the aerospace, defense and commercial markets.

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Q&A Session

We believe the strong demand for our ATS business demonstrates that our customers’ innovation investments remain strong and that our unique business model offers a compelling value proposition for the accelerated development of new technology platforms and products. The largest contributors to our total ATS revenue growth this year of over 60% have been multiple strategic aerospace and defense programs. These include our RadHard 90-nanometer platform as well as multiple additional A&D programs that have also been moving forward aggressively over the past year. We believe this signifies the Department of Defense’s increased commitment and investment in SkyWater to be the major trusted U.S. foundry providing a growing portfolio of technologies that are critical to national security.

These are the same programs that are driving the majority of the anticipated growth in customer-funded CapEx. Altogether, our aerospace and defense programs in 2023 grew to comprise over half of our revenues compared to about 40% of our revenues in 2022. Our continued progress ramping our A&D technologies and platforms is also accelerating our engagement with new commercial customers and partners. 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 applications like advanced computing and medical diagnostics, which are our next two fastest-growing end markets. Our focus on advanced medical diagnostics and sequencing applications has expanded significantly since our IPO.

These applications require the precise processing of fluids such as blood and leverage the electrical properties of semiconductors to enable groundbreaking advances and the sampling of biological materials. These unique semiconductor devices require sophisticated process development and adherence with strict quality standards, which is what SkyWater offers through our ATS business. This investment in bio health is paying off as we are forecasting multiple medical technology companies to transition from ATS to Wafer Services in 2024. Our recent announcement with Nautilus Biotechnology is just one example. We anticipate strong growth in the bio health category in the coming years, and we look forward to sharing news of additional customer transitions to wafer services expected this year.

Progress also continues on our enhanced CMOS platforms, including qualification efforts for our low noise performance 90-nanometer CMOS technology, which supports numerous sensor applications such as thermal imaging. We are currently engaged with several lead customers as we work towards a baseline platform qualification and PDK release planned for the second half of the year. In the RadHard category, we are currently adding incremental engineering resources to enhance our RH-90 platform design enablement efforts in parallel with our ongoing work with our RH-90 qualification. Customer engagement remains strong across both of these new uniquely differentiated CMOS platforms. Now I’d like to provide an update on several recent developments that are allowing SkyWater to build a strong foundation for revenue growth and margin expansion for the years to come.

First, in Florida, our recently announced award from the Department of Defense includes up to $190 million of funding over the next five years in order to advance our capabilities and capacity for what we believe will be the most comprehensive advanced packaging facility in the United States. Advanced packaging represents a new growth vector for SkyWater. Today, devices incorporating advanced packaging technologies are largely produced in Asia with a heavy concentration in Taiwan. In most cases, these technologies and processes are also tied directly to specific foundries as part of a closed ecosystem. The desire to onshore advanced packaging production is a priority shared by both defense and large commercial companies. As evidence of this, AMD, a leader in deploying advanced packaging solutions to deliver leading edge compute solutions, recently applauded our efforts in Florida and the recent DoD award, which is focused on exactly that, bringing world-class advanced packaging technology development and production support to the United States.

Another important announcement since last quarter relates to the submission of our full CHIPS application for Minnesota. Our application is focused on modernizing our Bloomington facility, adding the necessary tools, equipment and infrastructure that will further expand our development capabilities and production capacity over the next five years. We have a multifaceted approach to obtaining outside investment in support of future growth, and any CHIPS funding would be incremental to the significant level of customer-funded investments received to date. Altogether, these outside funding opportunities enable us to accelerate our revenue growth while minimizing internal capital requirements. Finally, a major strategic initiative over the past year has been our decision to invest in the transformation of our operations in partnership with outside experts.

These investments have been focused on improving the operational efficiencies needed in order to achieve even higher outputs from our Bloomington fab, enhance the monetization of our unique value proposition and optimize the utilization of our workforce. This approach is already starting to pay dividends. In the second half of 2023, we significantly increased wafer velocity, achieved record levels of ATS activities and realized more linear Wafer Services production. Our transformation effort culminated in a number of important developments as we close 2023. First, during the fourth quarter, we completed a restructuring of the organization that included the reduction of approximately 10% of SkyWater’s workforce across all levels of the company to better align the company’s resources with our long-term growth strategy.

We believe that our newly highly integrated approach to R&D and manufacturing will manifest in greater efficiencies and operating leverage as we continue to scale our business. 2024 hiring is specifically aimed at aligning select skill expertise around the needs of our emerging technology platforms. Second, by optimizing the company’s existing resources and leveraging the capabilities of our new executive talent, we were able to conclude the outside investment phase of the transformation process by year-end. And going forward, we are not planning on any additional transformation-related consulting fees in 2024. A third outcome of our process was the decision to focus the majority of the company’s resources on accelerating the growth of our ATS business, allowing us to continue to build a strong pipeline that we expect will drive us towards a higher gross margin Wafer Services business for the long run.