SkyWater Technology Q3 2024 Earnings Report

Thank you, operator. Good afternoon, and welcome to SkyWater's Q3 2024 Conference Call. With me on the call today from SkyWater are Thomas Sonderman, Chief Executive Officer and Steve Mannco, 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 3 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 ks today and our fiscal 2023 Form 10 ks.

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. Also on our Investor Relations website events page, you will see that we plan to participate in 2 investor events between now and our next earnings call, the New York Summit on December 17th and the Needham Growth Conference on January 15th. With that, I'll turn the call over to Tom.

Thank you, Tom. 3rd quarter revenue reached another record for us at $93,800,000 Within this new record ATS revenue was lower than forecast at $56,400,000 given the government fiscal year budget constraints Tom discussed earlier, while wafer services was higher than forecast at $6,700,000 Combined ATS and wafer services revenue was $63,100,000 in the quarter and tools revenue reached an all time record at $30,700,000 As a reminder, the additional metrics discussed today are non GAAP measures. Our gross margin performance for the quarter exceeded our expectations entering into the quarter. On our August call, we guided Q3 gross margin in the mid to high teens or approximately 17% at the midpoint. We also guided an expected 7 percentage points of negative gross margin impact from tools revenue for the quarter equating to an effective 24% margin at the midpoint expected for our combined ATS and Wafer Services business in Q3.

Our reported Q3 gross margin was 22.3%. The record level of tools revenue impacted gross margin by about 10.5 percentage points equating to an effective 32.8 percent gross margin for our combined ATS and Wafer Services business. The most significant driver of the gross margin upside was the reversal of the majority of the $8,000,000 cost accrual recorded in Q1. We made strong progress delivering on key program milestones and recovered $5,600,000 of the accrual during Q3. This had a 9 percentage point positive impact on gross margin for the quarter.

So with a reported gross margin of 22.3 percent, the 10.5 percentage point negative impact of tools and the 9 percentage point positive impact of the reversal, Q3's gross profit equated to 23.8 percent gross margin performance for our combined ATS and waiver services business. The continued strength in gross margin was driven primarily by improved operational efficiencies and continued progress in our ongoing cost reduction strategies. Operating expenses were $14,100,000 aligned with our expectations for the quarter. Given the $5,600,000 accrual recovery, operating income was well ahead of forecast at $6,800,000 Adjusted EBITDA was $11,000,000 and we achieved non GAAP net income of $0.08 per share. Turning to the balance sheet.

The balance of total cash at quarter end at $20,700,000 has remained relatively consistent since year end 2023. We generally manage our cash needs through intra quarter draws on our revolver, which also helps in minimizing our overall borrowing costs. Our interest expense was lower than forecast in Q3 as a result of our ability to minimize our revolver balance for much of the quarter. We were free cash flow positive once again in Q3 with $14,300,000 of cash flow from operations. Positive cash flow from operations consisted of approximately $9,000,000 generated from the P and L and a $5,000,000 benefit from working capital changes.

During the quarter, we reduced our overall indebtedness by approximately $6,000,000 with $60,800,000 in total debt outstanding at quarter end. We currently have $76,000,000 available on our revolver. Turning to our outlook for Q4 and our expectations for various financial metrics as we move through 2024 and into 2025. As Tom mentioned, with our current visibility, we expect Q4 total revenue of $72,000,000 to $76,000,000 This reflects our expectations of $58,000,000 to $61,000,000 of ATS revenue, dollars 3,000,000 to $4,000,000 of wafer services revenue and $11,000,000 of tools revenue. Our Q4 revenue guidance demonstrates solid execution toward our growth objectives entering 2024.

Despite budget constraints affecting ATS in Q3, we continue to expect a solid growth year within the 10% to 20% range. And with our current visibility today, our expectations are in the range of 12% to 14% growth over 2023. We expect wafer services revenue this year will end up slightly favorable to the 60% to 65% year on year decline forecasted a quarter ago. We currently expect 2024 tools revenue of approximately $76,000,000 In total, expectations for revenue growth in 2024 are in the range of 18% to 20%. Turning to Q4 gross margin guidance.

At the midpoint, we expect similar gross margin performance on a similar quarter of combined ATS and Wafer Services business levels. With Q4 gross margin expected to be in the range of 19% to 23% and an anticipated tool impact of 300 basis points, at the midpoint our Q4 guidance represents 24% gross margin performance for the combined ATS and Wafer Services business. We expect operating expenses in the range of $14,500,000 to $15,000,000 interest expense in the range of $2,500,000 to $2,900,000 and nominal tax expense for the Q4. Assuming that income from non controlling interest remains approximately $1,000,000 the resulting non GAAP EPS range for Q4 is a loss of $0.04 to a loss of $0.10 per share. Finally, here are a few more of our assumptions for our quarterly results as we move into 2025.

Tools revenue is currently expected to be in the range of $40,000,000 to $50,000,000 in 2025 and with our current visibility we expect the majority of tools revenue to be recognized in the second half of the year. Our OpEx run rate has been running at the lower end of expectations 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 $2,500,000 to $2,900,000 in quarterly interest expense is a good assumption for the foreseeable future as we continue to benefit from over $20,000,000 of advanced customer deposits for tool purchases. For 2025 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 can predict with accuracy, but $1,000,000 is a historic average that we expect will be appropriate to use for your models looking forward. With that, I'll turn the call over to Q and A. Operator, please open the line for questions.

Hi. Thanks for taking my question. I have 2 of them. First one, Steve, I just want to make sure that I got your guidance right. On the gross margin side, you said it's 19% to 23%.

Is it mainly because backing of the tool revenue, the revenue is effectively flattish sequentially ex tools?

Got it. And then another question on just on 2025, a 2 part question. One is how should we think about March quarter? Are we going to see seasonality for ATS and MAFR services? So revenue should be down and therefore gross margin should be down.

And what do you think about ATS and MAFR services for calendar Teleflex as a whole? Would you expect it to grow or is it still dependent on semi market recovery?

answer that

Well, hi guys. Thanks for taking my question as well. Maybe a question on the accrual reversal, the accrual you took in the Q1. You said you reversed a good chunk of here. I guess how do we think about the potential for a full reversal?

And what does that mean about the program involved here? Does this mean we're back to where we were before? Or how should we interpret what this means for that program?

are you doing? Good to hear you on the other side.

The way to think of this program, again, it's a technology development program. And when we were exiting Q1, we were working through some technical issues that we have resolved, really excellent progress by the team to get the platform stabilized so that we can launch it in the second half of next year. Our PDK will be released in the early part of next year. And while production is still several years away again, this is our RadHard program that has a significant qualification beyond just the chip manufacturing. We expect this program to continue to move forward at a pace that is consistent with our customers' expectations and we really feel good about where we are given some of the challenges we were facing earlier this year.

Yes. So we feel very strong about all of our programs. I think as we enter the new fiscal year, which began in Q4, of course, the funding and the commitment to the programs is as strong as it's ever been. And a lot of that has to do with the progress we've been making as the technology development matures. But the real question related to the administration and all that, that obviously has to work its way through the process.

But we're as confident again as we've ever been and our ability to not only execute on these programs, but where they are in their development cycle and the ability again for us to make them successful is really all about execution and that's what we're focused on.