Good afternoon. My name 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. 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 bringing 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, I will highlight several positive developments in our business and provide our current outlook within the overall customer demand environment. First, our strong results for the second quarter and continued confidence in the growth expected in our ATS business for fiscal 2024 underscore the strategic importance of multiple aerospace and defense programs underway at SkyWater. Altogether, our expectation is that the majority of our growth this year will be driven by several strategic A&D programs, witnessing consistently strong demand coupled with steady improvements in our capabilities and operational execution. For Q2 specifically, we witnessed some pull-ins of demand from the second half, which we expect will result in a slightly front-half loaded year for our ATS business in 2024. Overall, we believe these programs are secure and well-funded. The added revenue tailwind of record levels of tool sales is yet another proof point of our customers' confidence in SkyWater as a trusted domestic source of critical semiconductor technology. Next, we are pleased to announce another successful customer transition from ATS to Wafer Services, this time for biomedical pioneer QuantumPsi. We have remained committed to our focus on next generation medical technologies, particularly for the novel categories of instruments and devices that leverage our unique service model that enables highly differentiated and customized technologies. Our recent collaboration with QuantumPsi will support a key facet of their state-of-the-art proteome sequencing technology to enable enhanced analysis of proteins, anticipated to propel a variety of life sciences applications, including drug discovery. We continue to believe that these types of customer partnerships build a strong foundation for the future growth of our commercial businesses, where in addition to advanced biomedical, we see strong potential for our advanced compute and thermal imaging platforms. Another exciting development is the recent installation of multi-beam's high productivity direct write patterning system into our Minnesota fab. The first of its kind multi-column e-beam lithography or MEBL system enables the most advanced 200 millimeter patterning solution capable of sub-50 nanometer geometries currently available from early concept prototyping through production ramp. We consider this new direct write lithography capability, which is orders of magnitude faster and more productive than conventional e-beam solutions as a key development towards supporting strong customer demand for our technology-as-a-service, our TaaS business model. MEBL accommodates high topography and curvilinear designs to enable 3D devices such as MEMS and photonics and can also enable secure chip identification for anti-counterfeit applications as one example. MEBL can also enable advanced packaging for very large and custom interposers. We are very excited to add this capability in order to speed the concept to production journey in secure defense, biomedical, thermal imaging and the high reliability and advanced compute markets. Another highlight since last quarter is the first tool delivery of our new fan out wafer level packaging platform in Florida. With the arrival of tools accelerating as we move through the next several quarters, we anticipate ATS development on this exciting new technology to ramp up throughout 2025. We have already begun engaging a broad set of customers across both defense and commercial applications, including Tier 1 semiconductor companies. We believe there is a clear market demand for domestic advanced packaging services that can support wafers from any foundry. We have secured $120 million in outside funding to complete the tooling facilitation of our Florida operation. This first new tool delivery for our 300 millimeter capable fan-out packaging line is an exciting milestone for our emerging advanced packaging business. Now turning to our outlook. Our full year revenue expectations for ATS and Wafer Services in 2024 are largely unchanged since our last earnings call. We continue to expect ATS development growth in the range of 10% to 20% over 2023 and a meaningful decline in our legacy Wafer Services revenue. Today, we are once again increasing our forecast for customer-funded CapEx investments, which for SkyWater are recorded as tools revenue. We now expect approximately $80 million of customer-funded CapEx investments in 2024. With strong operational performance as we install and ramp up these new systems, we are executing well in our expected path to install over $200 million of new customer-funded tooling spanning 2024 through 2026. For Q3 specifically, we are forecasting total revenues to be slightly higher than Q2. Within this forecast, ATS development revenue is expected to be $16 million plus or minus 3% and wafer services revenue in the $4 million to $5 million range. With our current visibility, we believe wafer services is likely to remain quite soft for at least another quarter or two, reflecting the continued weakness in the broader industrial market. That being said, we are optimistic for a return to growth for Wafer Services in 2025, driven by services in 2025, driven by the thermal imaging and medical diagnostics segments. With customer-funded CapEx continuing to ramp to record levels, tool revenue in Q3 is expected to be approximately $30 million. Finally, we are driving for incremental growth in each of our businesses, as we move into 2025, and we look forward to continuing to build your confidence in our ability to execute on our growth and profitability objectives.

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 draws on a revolver, which also helps to minimize our overall borrowing costs. Q2 was a strong quarter of free cash flow generation with $9.3 million in cash flow from operations and $1.1 million of CapEx. Positive cash flow from operations consisted of approximately $5.8 million generated from the P&L and $3.5 million benefit from capital changes. During the quarter, we have reduced our overall indebtedness by $5.6 million with $66.3 million in total debt outstanding at quarter end. We currently have $74 million available on our revolver. Turning to our outlook for Q3 and our expectations for various financial metrics, as we move through 2024 and into 2025. As Tom mentioned, with our current visibility, we expect Q3 total revenues in the mid $90 million range. This reflects our forecast for ATS development revenue of $60 million plus or minus 3%, $4 million to $5 million for Wafer Services revenue and approximately $30 million of tool sales. Given this expected revenue profile, we expect Q3 non-GAAP gross margin in the mid to high teens. Our gross margin expectations reflect the increased mix of tool sales expected in the quarter, which we expect will impact gross margin by approximately 7 percentage points or 700 basis points. We expect non-GAAP operating expenses of approximately $14 million for the third quarter and to remain in this range through the end of fiscal 2024. For the full year, our revenue outlook is largely unchanged since last quarter. We continue to forecast ATS development revenue growth in 2024 in the range of 10% to 20%, while the prolonged industry softness affecting our Wafer Services business is expected to result in a revenue decline of 60% to 65% for the full year. Today, we have increased the expected level of Tools revenue for the year to approximately $80 million. Finally, here are a few more of our assumptions for our quarterly results. Our OpEx run rate is lower than previously forecasted for 2024, as a result of good execution on our cost control initiatives as well as deferment of certain spending to future quarters. As a result, the run rate is likely to be somewhat higher, as we move into next year. While overall debt levels will fluctuate through the year depending on draws from our revolver, we believe $2.5 million to $2.9 million in quarterly interest expense is a good assumption for the foreseeable future, as we continue to benefit from over $20 million of advanced customer deposits for tool purchases. For the remainder of 2024 for modeling purposes, you should assume nominal to no tax expense or benefit. Our income from variable interest entities below the line is not something we could predict with accuracy, but $1 million is a historical average that we expect will be appropriate to use for your models looking forward.

Congratulations on 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 we refer 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.

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.

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 types 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 write 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 for customers but also allows us to go below 50 nanometers at 200 millimeter makes it very unique and puts SkyWater in 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. Yes. 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 of 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.

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 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.

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 fixed costs. 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.

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.