SKYT earnings call analysis

NASDAQ:SKYT Q4 2025 Earnings Call Transcript Generated on 6/6/2026 Aaron | Conference Operator: Good morning. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Skywater Technology fourth quarter 2024 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. And if you would like to ask a question during that time, simply press star, followed by the number one on your telephone keypad. If at any point you would like to withdraw your question, you can just press star followed by the number one again. And we do ask that you please limit yourself to an initial question and then a follow-up question when you are given the opportunity to speak. Thank you. With that, I'm pleased to turn the call over to Claire McAdams, Investor Relations for Skywater. Claire McAdams | Investor Relations, Skywater: Thank you, Operator. Good morning and welcome to Skywater's fourth 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 the events page of our IR website, we have posted a slide presentation that directly accompanies today's call. Also posted is our financial supplement, which summarizes 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 8K today and our Fiscal 2023 Form 10K. 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. Also on our IR website events page, you'll see that we plan to participate in the inaugural B. Reilly Quantum Computing Day, a virtual investor event taking place on March 7th. Please feel free to contact me directly for any investor follow-up requests. And with that, I'll turn the call over to Tom. Thomas Sonderman | Chief Executive Officer: Thank you, Claire, and good morning to everyone on the call. Turn to slide three. Along with our earnings release this morning, we announced our planned acquisition of Infineon's FAB25 in Austin. I'm incredibly excited to share that Skywater is expanding its domestic manufacturing capabilities through the acquisition of this high-volume 200-millimeter FAB, an essential part of our long-term strategy to become the leading pure-play domestic foundry service provider for foundational semiconductors by the end of the decade. Fab 25 has long been one of the largest 200-millimeter U.S. manufacturing sites, providing over 30,000 wafer starts per month of domestic supply of foundational semiconductor devices. This marks a significant milestone in our company's journey, one that will shape our future in a powerful way. Before I walk through the Fab 25 acquisition, I'll first provide a recap of our Q4 and fiscal 2024 results as well as our outlook for the year ahead. Turn to slide four. I'm pleased to announce strong financial results for the fourth quarter, which exceeded our expectations for gross margin and profitability. Total revenue topped $75 million toward the upper end of guidance. With tools revenue of $12 million, our combined ATS and wafer services business generated $64 million of revenue, which was modestly stronger than expected. The upside reported today in earnings, both for Q4 and the full year, was largely driven by several gross margin tailwinds occurring late in the year. Reported gross margin of nearly 27% in Q4 exceeded the high end of our guidance range, driving 4 cents positive EPS for the quarter and contributing to full year positive earnings of 6 cents per share for fiscal 2024. Turn to slide 5. Full-year revenues totaled a record $342 million, up 19% from fiscal 2023. Consistent with our expectations throughout the year, our ATS business delivered strong 13% revenue growth compared to 2023, while our waiver services business declined significantly due to prolonged weakness in the automotive and industrial segments. The most significant in-market strength in 2024 was in the aerospace and defense sector, where we have established an essential trusted position to provide critical semiconductor capabilities domestically. During the year, we witnessed the expansion of multiple critical programs, which altogether drove the majority of our ATS revenue growth for the year. Our second largest end market in 2024 was Advanced Compute, where we are engaged with multiple well-funded customers, driving advancements in next-generation computing. Over 90% of our advanced computing revenues in 2024 were related to quantum computing technologies, with customers like Psi Quantum and D-Wave, among others. With the decline in wafer services, revenue from the automotive market was down for the year, while biohealth grew. In 2024, we saw an unprecedented level of customer-funded CapEx investments, resulting in a record $77 million in tools revenue recognized for the year. Turn to slide six. This level of CapEx co-investment is highly beneficial for our business. It not only reflects our customers' long-term commitment and partnership, but also significantly reduces our own capital funding requirements. This allows us to strategically align and expand our capabilities and capacity to support the programs, platforms, and products that we expect will drive future growth. Since last quarter, we also announced our preliminary CHIPS award for the modernization of our Minnesota FAB in conjunction with matching funding from the state of Minnesota. As we've consistently communicated since the CHIPS Act was announced, we see this funding as an accelerant of our growth plans, enabling us to pull in our planned investments and accelerate the revenue growth we can achieve here in Minnesota. We previously communicated a total of $320 million of outside co-investment planned for the period spanning 2020 to 2026, And this recent development now brings that total to over $350 million, which we believe is a greater amount of outside funding for a semiconductor business relative to our size witnessed in our industry today. I'll now review some of the other recent positive developments in our business and share our outlook for the year. Turn to slide seven. First, I'm very pleased to introduce the production launch of ThermaView Solutions, Skywater's first category-specific brand dedicated to readout IC and microblometer solutions for thermal imaging applications. We announced the launch in January with support from Raytheon Vision Systems, a key customer engaged with us to develop next-generation thermal imaging technologies. With the increasing demand for advanced infrared sensing, ThermaView positions Skywater as a key supplier in a rapidly growing $9 billion market. spanning defense, industrial, and medical applications. Our engagement with top-tier defense customers reinforces Skywater's role in delivering trusted U.S.-based semiconductor solutions for mission-critical applications. This initiative also strengthens our strategic focus on growth markets while driving opportunity for the long-term revenue expansion of our wafer services business. In 2024, we announced multiple conversions from ATS to wafer services. We expect 2025 will mark a significant milestone as wafer service revenue returns to growth, driven primarily by new products, including both additional ATS conversions and the ThermaView production platform. In 2024, wafer services revenue was composed roughly of 90% legacy products and 10% new products. In 2025, new products are expected to account for approximately 60% of wafer services revenue, with legacy products making up the remaining 40%. We anticipate that new products will continue to be the primary driver of wafer services growth moving forward here in Minnesota, and we expect this trend to accelerate over time. Turn to slide eight. Additionally, our advanced packaging business is expected to become another growth vector for Skywater in 2025. We expect revenue to grow throughout the year with a significant increase in the second half of 2025. As a reminder, we are executing a $120 million contract to develop a fan-out wafer-level packaging platform at our Florida facility. This funding is allocated to tool purchases, process development, and integration. We anticipate tool deliveries and installations will begin around mid-year, driving an initial ramp in tools revenues. As these tools are qualified and released to production, we expect ATS revenue to begin ramping in late 2025 and continue climbing through 2026. Turn to slide nine. Before discussing today's VAT 25 announcement, I will share our outlook for Skywater's standalone business for the year, independent of the addition of VAT 25, which we anticipate closing around mid-year. We are driving for a growth year for our combined ATS and wafer services business in 2025. With our current visibility, our revenue forecast for the year reflects modest year-over-year growth in both ATS and wafer services. We expect ATS growth this year will be supported by revenues from advanced packaging, strategic A&D programs, and quantum computing, while wafer services growth is anticipated to come from new ATS conversions as well as our ThermoView production platforms. With ongoing continuing resolutions, extended budget negotiations, and the expected timing of program allocations, we are taking a conservative view for the year. Our expectation today is for combined ATS and waiver services revenue growth of approximately 5% in 2025, plus or minus 2%, compared to $266 million of revenue in 2024. Our latest estimate for 2025 tools revenue currently indicates approximately $30 million this year, mostly centered around Florida and weighted to the second half of the year. We expect the most important aspect of our financial performance for the year ahead will be the expansion of our gross margin profile, as Steve will describe in a few moments. For Q1 specifically, with the U.S. federal government budget operating under a continuing resolution, we are likewise taking a conservative view to ATS revenues in the first quarter in advance of an expected rebound in Q2. With new products beginning to ramp, we forecast wafer services to improve to nearly $6 million in the first quarter. The expected ATS rebound in Q2 indicates at least 15% sequential growth from Q1, followed by a significantly stronger second half of 2025. We expect continued sequential growth in Q3 and Q4, and importantly, our advanced packaging business will begin to contribute to ATS growth late in the year, all of which supports our objective to return to profitable results in the second half and to report slightly EPS-positive results for the full year. Now turning to today's exciting news regarding our planned acquisition of Infineon SPAB 25 in Austin. Turn to slide 11. Since the formation of Skywater, we have successfully transformed foundational semiconductor IDM assets into a high-value foundry infrastructure, enabling custom technology development and high-margin wafer services. This acquisition represents a transformational milestone in that strategy. Turn to slide 12. FAB25 is a highly capable 200-millimeter FAB expected to contribute approximately $300 million of annual wafer services revenue to our revenue profile. Our revenue is secured by a four-year strategic supply agreement with Infineon. We believe our acquisition structure is capital efficient, consisting of an $80 million purchase price plus the assumption of working capital. Of the $80 million, we intend to pay a total of $55 million in cash at closing, funded by new senior secure debt financing, with the remaining $25 million deferred to year four. We expect this transaction to generate immediate incremental free cash flow and a strong adjusted EBITDA, further reinforcing Skywater's path to long-term profitability. Turn to slide 13. This combination is expected to strengthen our financial foundation, providing a meaningful and stable incremental free cash flow by expanding our technology portfolio with 65-man-meter production, high-volume copper interconnect, and process capabilities to support high-voltage products. Turn to slide 14. We will more than double our workforce in the U.S. with fabs located in three strategic manufacturing centers, Minnesota, Florida, and Texas. Strategically, this acquisition is expected to balance Skywater's revenue mix, moving towards a more evenly balanced ATS and wafer services business, while expanding our total addressable market by more than $3 billion. Turn to slide 15. The demand for U.S.-based 200-millimeter manufacturing remains strong, supported by industrial, automotive, and defense customers seeking secure domestic supply chains. There's no question that we are in the midst of a major reshoring effort for U.S. semiconductor production, providing additional tailwinds for this transformative business combination. Turn to slide 16. As we transition FAB25 from an IBM to a customer-driven foundry model, we will work closely with Infineon to ensure a seamless handoff while leveraging the FAB's highly skilled workforce to expand Skywater's service offerings. We expect this model will allow us to introduce new platforms that align with long-term industry trends while scaling both 200-millimeter and advanced packaging to capitalize on the next industry upcycle. Importantly, this business combination is expected to make Skywater one of the largest domestic providers of 200-millimeter wafer-founded capacity for foundational devices. Turn to slide 17. By transitioning FAB25 to a high-value foundry services model, optimizing capacity utilization, and integrating our technology-as-a-service approach, we expect to drive continued profitability improvements over time. In addition to a multitude of strategic benefits, we believe this acquisition solidly positions Skywater on a long-term path to exceeding 30% gross margin performance as a leading domestic foundry for foundational 200-millimeter devices. Furthermore, we feel Skywater is uniquely positioned to lead this IBM to Foundry transition in the U.S. for other foundational semiconductor fabs. At this time, we anticipate 90 to 120 days until closing. We are planning a capital market stay for our analysts and investors subsequent to closing in order to provide more detail regarding the financial benefits of the acquisition, as well as our longer-term strategic vision for Fab 25. In the coming months and quarters, we will continue to provide more details on our integration roadmap and customer expansion plans. I will now turn the call over to Steve. Steve Manko | Chief Financial Officer: Thank you, Tom. I'll first review our resulting guidance before discussing the financial highlights of the FAB25 acquisition. Turn to slide 20. Fourth quarter total revenue of $75.5 million came in at the upper end of our guidance range. Combined ATS and wafer services revenue was $63.8 million, above the midpoint of expectations and up slightly from Q3. Tools revenue was $11.7 million. Turn to slide 21. For the full year, 13% revenue growth in another record year for our ATS business was primarily driven by strong A&D demand and our growing business serving multiple quantum computing customers. The decline in wafer services revenue was primarily due to continued weakness in the broader automotive and industrial markets, while record tools revenue marks an unprecedented period of customer-funded CapEx co-investment. Slide 22. Our Q4 gross margin exceeded our expectations at 26.6%. Our Q4 gross margin guidance of 21% at the midpoint equated to an effective 24% margin expected for our combined ATS and wafer services business in Q4, and we did quite a bit better than that. First, tools added more gross profit than usual and impacted gross margin by only 170 basis points in the quarter. The effective 28.3% gross margin for our combined ATS and wafer services business in Q4 was therefore about four percentage points higher than expectations, primarily due to roughly $2 million of cocktail wins, which we'll not repeat, as well as additional cost savings and cost referrals into 2025. Turn to slide 23. Turning to the full year summary, our 2024 gross margin was 21% compared to 22% in 2023. The record level of tools revenue in 2024 negatively impacted gross margin by 480 basis points compared to only 50 basis points in 2023. Therefore, the gross margin performance for a combined ACS and Wafer Services business increased over 300 basis points from 22.5% in 2023 to 25.8% in 2024. Turn to slide 24. Turning to adjusted EBITDA, the gross margin tailwinds that were unique in Q4 similarly resulted in adjusted EBITDA performance exceeding expectations at over $10 million in Q4. Q4 operating expenses were aligned with forecasts at $14.8 million. Also note that interest expense was lower than expected for Q4 as customer cash advances for tool purchases helped reduce in-record or borrowing levels on a revolver. Slide 25. Adjusted EBITDA for the whole year was $34.3 million, or 10% of total revenue. We closely managed operating expenses in 2024, which for the year were $56 million, up just 2% from 2023. Turn to slide 26. Turning to the longer-term trend for net income, T4 EPS was positive at $0.04 per share, exceeding our guidance range primarily due to the gross profit upside as well as a lower-than-expected interest expense. We were also slightly profitable for the full year with $0.06 positive EPS. Turn to slide 27. Now turning to the balance sheet, we ended 2024 with total cash of $19 million, up slightly from a year ago. 2024 was our second year of strong positive cash flow from operations at over $15 million in 2024, compared to $10 million in 2023. The P&L generated approximately $25 million of positive cash flow, roughly equal to adjusted EBITDA, less interest expense. And our net working capital investment was about $10 million. Our total debt balance was $67 million at year end, a net increase of approximately $5 million over the year. With the total sources of cash generated from operation and net draws on our revolver, we used $18 million for CapEx investments. We successfully amended our loan agreement in November, increasing the line to $130 million with an additional $30 million accordion feature and extending the term to year-end 2028. Our lenders have been strong financing partners for Skywater. and they are also working to commit the anticipated new $150 million credit facility that will fund the upfront cash payment to acquire FAB25, any ongoing working capital and maintenance cap-back needs related to FAB25, as well as the transaction fees and expenses. I'll turn to slide 28. Turning to our outlook. Based on full-year revenue expectations Tom discussed earlier, reflecting modest growth in combined ACS and wafer services revenue, and approximately $30 million in tools revenue, we expect significant expansion of our gross margin profile in 2025. As discussed earlier, our combined ATS and wafer services business generated nearly 26% gross profit margin in 2024. Our current forecast reflects gross margins on the core ATS and wafer services business expanding into the 30s in the second half in order to result in high 20s gross margin for the full year. Again, this is the expected range for combined ACS and wafer services portion of our revenues. We expect little to no gross profit on tools revenue in 2025, which, as Tom mentioned, is also highly second-half weighted. We expect close to a 300 basis point negative impact of tools revenue on our gross margin for the full year. Therefore, our expectation for reported non-GAAP gross margin for the full year is in the mid-20s, or the 23% to 27% range. This is our forecast for non-GAAP gross margin for the full fiscal year of 2025 before any contribution from Fab 25. We expect the expansion of our gross margin profile as we move through 2025 will result in profitable results in the second half and for the full year, slightly positive non-GAAP EPS and strong adjusted EBITDA of at least 10% of total revenue. These expectations assume an increase in total non-GAAP operating expenses for the year, in the range of 10 to 15%. We expect a similar level of combined interest tax and VIE for 2025 as reported for 2024. Turning to Q1 guidance. Given the dynamics Tom discussed earlier, we are taking a conservative view to the quarter with an expected range of $59 to $63 million in total revenue, consisting of nearly $6 million in wafer services revenue, about $1 million in tool revenue, and a range of $52 to $56 million in ATS revenues in advance of a rebound in Q2. Given these assumptions, our gross margin guidance for Q1 is in a range of 19 to 23%, with a negligible impact from tools. We expect Q1 operating expenses of approximately $15.7 million, plus or minus $200,000, $2 to $2.5 million in interest expense, and $1 million in income from variable interest entities, or an expected EPS loss for the quarter in the range of $0.10 to $0.16 per share. Based on our outlook for the full year, we expect a strong rebound in financial results for Q2 and continued sequential improvement in both Q3 and Q4. Now turn to slide 29. Now turning to the financial implications of the BAP25 acquisitions. We've outlined here in our preliminary expectations for the full year, and next to that, the expected annual contribution from FAB25. As a reminder, the transaction includes a four-year supply agreement, and therefore, the annual contribution is expected to remain fairly similar to what we've outlined here throughout the duration of the four-year supply agreement. The near-term implications are strongly positive for our revenue, adjusted EBITDA, and free cash flow generation. The supply agreement is expected to generate approximately $40 million annually of cash gross profit dollars. We expect this amount will be more than sufficient to cover the additional op-ex and interest expense associated with the acquisition, as well as annual maintenance cap-ex for the FAB. This means that we expect the combination to be immediately accreted to adjusted EBITDA and to generate positive cash flow from operations and free cash flow from the outset. However, purchase accounting rules dictate that we must record depreciation expense for the fair market value of the FABs. Given our estimate of a fair market value of over $300 million, this equates to approximately $24 million annually in purchase accounting depreciation, which will continue to impact our reported financials much in the same way as our own purchase accounting depreciation did before it rolled off in Q1 2024. Turn to slide 30. As Tom mentioned, leveraging everything we've built as a technology foundry and now having the ability to significantly ramp and scale is essential to our long-term growth strategy. As you look at the implied diversification of our revenue mix through this combination, you will see both a more balanced mix of ATS and waiver services revenue going forward, as well as a much more balanced end market mix as we integrate FAB25 into our financial results. And with that, I'll turn the call over to Q&A. Operator, please open the line for questions. Aaron | Conference Operator: Thank you. Ladies and gentlemen, once again, if you would like to ask a question for today, remember to hit star followed by the number one on your telephone keypad. And if you wish to withdraw your question, it's simply to hit that star followed by the number one again. Our first question is from the line of Chris Sankar with TD Cohen. Your line is live. Chris Sankar | Analyst, TD Cohen: Yeah, hi, thanks for the good question. I feel the first one, Steve, just wanted to clarify something. You said that the FAP 25 would be $40 million in gross profit dollars from the vapor supply agreement. Is this fair to assume all of FAP 25 output is going to be through the vapor supply agreement? Because based on slide 29, it looks like gross margin percentage is going to come to mid-teens from the standalone sky water, which is in the mid-20s. Thomas Sonderman | Chief Executive Officer: Yeah, the initial supply agreement, of course, is to provide Infineon with the products that they're getting today. The goal, of course, is to diversify that over time as we bring in new ATS business, other transfers tied to repositioning business through dual sourcing strategies here in the U.S., and, of course, bringing new customers and new designs in based on the unique technologies we're going to offer. But the agreement is to provide Infineon with the output they're getting today, which is running essentially at what they would define as full capacity for the upcoming multi-year terms of the agreement. Chris Sankar | Analyst, TD Cohen: Gotcha. So is it fair to assume for the combined company or the fab, post-acquisition, the customer revenue profile, Infineon will become your largest customer again? Thomas Sonderman | Chief Executive Officer: Yeah, absolutely. And, you know, Infineon has been a strategic partner with RFAB in Minnesota, and now they will become a much bigger strategic partner. And our ability to quickly, you know, rebalance our ATS to wafer services business with a secure supply agreement over time allows us to not only drive diversification, but capture what we believe is a very strong tailwind to reposition our foundational devices here in the U.S. Chris Sankar | Analyst, TD Cohen: Got you. And then two other quick questions. For Fab25, where is the backend being done? Is it done with the OSAS, or do you think that's an opportunity for your Florida fab? Thomas Sonderman | Chief Executive Officer: Yeah, today Infineon uses the traditional OSAS and maybe internal capabilities to do backend assembly tests. Of course, by bringing up capabilities that we have in Florida, I wouldn't say a direct connect because of the products they make here aren't really using advanced packaging. But over time, and as AP and heterogeneous integration grow, chiplet technology evolves, there's certainly opportunities for us to fabricate ASICs that could go into AP, you know, fan-out-based solutions here in this fab in Texas. Chris Sankar | Analyst, TD Cohen: Gotcha. And then a quick housekeeping for Steve. You mentioned advanced computers are number two in markets. with over 90% earned by quantum, how much is quantum in either Q4 of all of calendar 24 as opposed to your revenues? Steve Manko | Chief Financial Officer: Yeah, it would fit that mix. So it was about 10% there. So we give the pie charts that you see in that slide presentation that give a pretty good indication of where we are. You know, that business has been strong for us in growing. We can only talk about the two customers that we have listed there. But, again, there's been a lot of development work in that space, and because of the customization that we offer, that's why Skywater is a good place to develop your quantum computing technology. Chris Sankar | Analyst, TD Cohen: Got it. Thanks, Tom. Thank you. Congrats on the acquisition. Aaron | Conference Operator: Yeah, thank you. Thanks for your questions. Ladies and gentlemen, once again, if you would like to ask a question for today, remember it is star followed by the number one in your telephone keypad. Our next question is from the line of Harsh Kumar with Piper Sandler. Your line is live. Thank you. Harsh Kumar | Analyst, Piper Sandler: Yeah. Hey, guys. Congratulations from my end as well on FAP25. Tom, I had a quick question. You gave us a little few specs about FAP25, 65 nanometer, 200 millimeter vapors. Could you tell us about What kind of products you could run for other people? Is it mostly industrial automotive or are there other applications that could be had for you from FAB25 down the line? Thomas Sonderman | Chief Executive Officer: Yeah, great question. And, you know, you just reiterated our strategy. You know, if you look at the FAB, it has today a 130 nanometer mixed signal HX technology with copper interconnect. what we call internally S8. We have a similar technology in Minnesota with aluminum back end. That technology is very much suited for ASIC designs, various types of applications that have been really manufactured in this facility and the one in Minnesota for many years. What we're going to be able to do is take the capabilities we created with our design enablement foundation and apply that to not only ASICs, but with the BCD capabilities the FAB has, also move into PMICs and other microcontroller opportunities will be out there. The FAB today makes NOR flash, so we have those capabilities. But what's really exciting is the 65 nanometer dimension that we can now bring to the 200 millimeter foundry space. Today, most 65 nanometers, if not all, certainly in the foundry space, is done on 300 millimeter. And we believe there's a real market at 65. Steve Manko | Chief Financial Officer: There's a little bit more detail on the technologies and end-user applications on slide 13. I know the information was coming out pretty fast and quick today. But if you want to refer to slide 13, there's more detail there on the technologies. And also, I want to make sure we highlight, we think through this acquisition. our SAM actually expands by $3 billion. So pretty exciting for the long-term growth of the company. Harsh Kumar | Analyst, Piper Sandler: No, absolutely. Thanks for that, Steve. And then quick follow-up there. You're ready for services, look like it's bottoming, and then you'll get this big boost from FAT25 as you go back to Infineon. If I had to put you in a spot and say, like, let's say that a year from now, what would be the mix between ATS and And waiver services, do you anticipate, Tom or Steve, that it will be 50-50? Or do you think maybe just give us some color on how you see this transitioning? Thomas Sonderman | Chief Executive Officer: Yes. So, again, great question. The growth that we anticipate in Minnesota, again, we think Q4 was the bottom. We'll see growth off of that, which we, you know, communicated in our prepared remarks. you're going to continue to see that occur to what we believe similar levels from a total revenue perspective compared to last year where we ended up. But the mix, again, is going to be much more towards new platforms, new customers with higher ASPs. So that number will be growing. And, of course, we'll be taking on the volume down here, which will obviously generate fairly predictable revenue, the $300 million a year revenue. that assumes just the Infineon revenue. As we integrate other capabilities over time, we expect that to also start expanding. But right now, just think of it as $300 million coming out of this FAB and then growth similar to last year. And then the growth we projected for overall wafer services and ATS without FAB 25, basically 5% plus or minus 2%. Steve Manko | Chief Financial Officer: I just want to summarize that. We will be more wafer services loaded, would be my expectation. We showed that in the slide presentation. Again, given the amount that's coming through with VAB 25, I don't want to lose focus on what was planned for 2025. 2025 was a critical year in Skywater, Minnesota as well with a lot of new technologies being qualified and moving into wafer services like we talked about. So it's a very transitional and transformative year for the Minnesota FAB as well with the new technologies moving into wafer services. So you won't see the biggest splash in numbers like we are with the wafer services in FAB 25, but you will see a better mix with wafer services in Minnesota would be our expectation for 2025. Harsh Kumar | Analyst, Piper Sandler: That's fair, guys. Thank you and congratulations again. Looks like a great deal for you guys. Thank you. Thank you. Aaron | Conference Operator: Thanks for your questions. Our next question is from the line of Quinn Bolton with Needham. Your line is live. on behalf of Quinn Bolton\ Hey, guys. This is Nick on for Quinn. Congrats on the scale expansion. What kind of details can you give us on the supply agreement? Are there take-or-pay contracts built in, and how fungible is that capacity? If their demand is weaker than expected, are you able to start filling the FAB with potential ATS or wafer services at any point in those four years? Thanks. Thomas Sonderman | Chief Executive Officer: Yeah, again, great question. I appreciate that, you know, diving into the really important aspects of why this is a, you know, very important transaction for Skywater. The whole idea of doing this is to have not only a secure supply agreement, but parameters, as you said, like take or pay. Our goal is to run the FAB, you know, at full utilization, far and finian, through the multi-year period. Of course, as we drive efficiencies, there are going to be opportunities for us to leverage additional capacity within the FAB. We believe that is doable, and we plan to do that. But in terms of the ability, if Infineon, for some reason, was not wanting to run at the current levels they're running at, there would certainly be opportunity to backfill that. But we don't anticipate that happening. We expect to do what we're doing today, execute extremely well, far Infineon, while adapting businesses. And then as the the multi-year agreement begins to expand or expire, we'll certainly be bringing other customers to backfill and eventually we'll move to market pricing for not only Infineon when the agreement expires, but also for all those new customers. And that's where we really see the ASP expansion that we believe we can deliver because of the unique differentiated technologies as well as the fact that we'll have significant scale for domestic sourcing of foundational semiconductors. on behalf of Quinn Bolton\ Thanks. And you had the really strong combined ATS and wait for services gross margin this quarter. And you talked about some cost savings, some were one time and it sounded like some were going into 2025. did the combined upside of gross margin at 28% come from the wafer services piece, and can that momentum continue in 2025? Steve Manko | Chief Financial Officer: Yeah, good question. So it was a combination of really the ATS mixed of the business as well as some of the cost deferrals and reductions that we talked about. So there will be a little bit of it that repeats. But again, with the guidance that we provided, we don't expect it to be at those same levels in the fourth quarter. And it really was not in the fourth quarter driven by the waiver services business. Unidentified Speaker | Unidentified: Understood. Thanks. Aaron | Conference Operator: Thanks for your questions. Our next question is from the line of Richard Shannon with Craig Hallam. Your line is live. Richard Shannon | Analyst, Craig Hallam: Well, hi, Tom, Steve. Thanks for taking my questions as well. I guess my first question is one of your prepared remarks about judging down your yearly outlook here based on, you know, Department of Defense program and budget cycles here. I guess I'd love to get a sense of two things. First of all, to what degree or any way you can characterize how much you've judged the year down And then maybe is there any inside baseball understanding, you know, the conservatism here? We obviously see some headlines. I think there's some questions about what the Trump administration is doing with the defense budget this year. Maybe you can kind of peel the layer back a little bit, please. Thomas Sonderman | Chief Executive Officer: Yeah. Hi, Richard. And I, again, think that we're all seeing, you know, the dynamics that are playing out as we move in with the new administration. You know, the first thing I'll say is the programs that we are involved with are not only critical to national security, but we believe that they are funded and will continue as we expect. There are just dynamics related to a change in administration and the timing of when we can actually move beyond continuing resolutions and get to actual budgets. Right now, everything's kind of frozen up. And so we just decided, given these dynamics and some lessons from the past that we were going to take a conservative approach as we looked into the year. Of course, as the year unfolds, we're seeing, you know, more and more momentum built, you know, building back into our ATS business. So it's really just, you know, making sure that we understand the dynamics we control, the things we don't control, and we're taking a conservative approach with the, you know, 5% overall growth for the ATS and waiver services business that we have, you know, currently in the business. Richard Shannon | Analyst, Craig Hallam: Okay, fair enough for that. Second question is related to the Infineon FAB purchase here and following up on one of the prior questions here. I think you said that you're running this FAB with full utilization now, but you're expecting to get some efficiencies. I guess maybe if you can describe what those inefficiencies were in the past, how are you going to prove them, and how much and how fast will this provide some excess capacity that you could run new revenues from? Thomas Sonderman | Chief Executive Officer: Yeah, again, there's many vectors. And as we get further down the road, I think we can provide those, you know, as we mentioned in our capital markets day. But the whole idea, of course, is we have built a very strong ATS business in Minnesota. We have an AP business that's emerging. And now we have the capability to bring scale, not only for existing ATS customers, future ATS customers, but customers that want to leverage the very unique capabilities we have in this fab. So, as we convert from an IDM to a foundry, and this is something I've been through multiple times in FABs, you get efficiencies because you bring in a multi-customer environment, and we believe having ATS as a starting point allows us to start engaging with customers really almost immediately as they begin to consider how they can leverage these assets that we've now expanded through FAB25 in a way that gives them differentiation. And the fact that there are a lot of companies out there wanting to re-look at U.S.-based supply chains and us having a foundry offering as opposed to today where FAT25 only serves Infineon, we believe is a great opportunity for us. So it's really just building off the model we've created. We now have a scale. We have the ability to drive efficiency synergies and bring leading-edge foundry capacity to the U.S., for CMOS, you know, related devices. Unidentified Speaker | Unidentified: Okay. Fair enough. Thank you, Tom. Aaron | Conference Operator: Thank you for your question. Ladies and gentlemen, last call. If you would like to ask a question today, remember it is star followed by the number one on your touchtone keypad. We'll give you just a couple seconds here if there is and are any further questions. And it looks like that is going to be it for today. So, ladies and gentlemen, that will conclude our Q&A session for today. And I would like to turn it back over to Mr. Sonderman for closing comments. Thomas Sonderman | Chief Executive Officer: Thank you, Operator. As we wrap up today's call, I want to express our unwavering confidence at Skywater and our ability to achieve long-term growth and profitability. We are committed to earning your trust through our executions. We look forward to sharing more updates during our Q1 earnings call in early May. Thank you, and this concludes today's call. jsPDF 3.0.3 D:20260606090432-00'00'

NASDAQ:SKYT Q3 2025 Earnings Call Transcript Generated on 6/6/2026 Operator | Conference Operator: Speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. We ask that the callers limit themselves to one question and one follow-up only. Thank you. I would now like to turn the conference over to Claire McAdams, Head of Investor Relations. You may begin. Claire McAdams | Head of Investor Relations: Thank you, Operator. Good afternoon, and welcome to Skywater's third quarter 2025 conference call. With me on the call today from Skywater are Thomas Sonderman, Chief Executive Officer, and Steve Manco, 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 the events page of our IR website, we have posted a slide presentation that accompanies today's call. Also posted is our financial supplement, which summarizes 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 discussion of these risks and uncertainties, please refer to our filings with the Securities and Exchange Commission, including our earnings release files on Form 8K today and our fiscal 2024 Form 10K. 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 the 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. Our upcoming investor conferences include the New York CEO Summit on December 16th and the Medium Growth Conference in January. We are also pleased to announce that Skywater will hold its first Investor and Analyst Day on March 24th in New York City at NASDAQ's market site. Please feel free to contact me directly for any investor follow-up requests. And with that, I'll turn over the call to Tom. Thomas Sonderman | Chief Executive Officer: Thank you, Claire, and good afternoon to everyone on the call. We are pleased to report today third quarter results which exceeded our expectations across all metrics. Record Q3 revenues of nearly $151 million came in more than $9 million above the high end of the range provided last quarter. The majority of the upside was related to purchase accounting for Fab 25's revenue in Texas and ATS revenues for the quarter coming in above the high end of our expectations at over $54 million. The stronger performance for ATS reflects the timing of program execution within the quarter as we recorded approximately $4 million of A&D business we had previously expected to recognize in the fourth quarter. We also reported our strongest ever quarter for quantum computing related revenue, positioning Skywater to exceed 30% revenue growth with our quantum customers in fiscal 2025. With quantum momentum continuing to build since last quarter, today we are very pleased to announce that we have signed four new quantum customer engagements since Q2, which I'll discuss in a moment. Rounding out our recap of Q3, our stronger than expected profitability at both the gross and operating levels reflect the fact that the majority of revenue upside in the quarter flowed directly to gross profit. which likewise led to significant outperformance in Q3's adjusted EBITDA and net earnings relative to our earlier expectations. This outperformance has established a high bar for Skywater as we exit 2025 and begin to articulate our expectations for the coming year. So I'll take a few moments now to discuss our visibility and growth objectives in each of our businesses as we look ahead towards the next several quarters. First, I'll discuss the environment for our ATS business, starting with aerospace and defense. You may recall that in August, we took a conservative view regarding the timing of releases for various DoD program funding. Our ATS business is largely driven by several strategic multi-year development programs with government. and they have invested hundreds of millions of dollars in Skywater's capabilities and capacity in support of securing trusted domestic foundry supply for critical new semiconductor platforms that are fully aligned with each of our nation's most critical aerospace and defense initiatives. Given the roughly $4 million pull-in of ATS revenue in Q3, in addition to the continued stagnation of progress exacerbated by the shutdown of the U.S. government, we now expect Q4 ATS revenues of approximately $50 million. On the whole, our previous outlook of around $105 million of ATS revenues for the second half of fiscal 25 is largely unchanged since our last earnings call. Turning now to our progress in the quantum computing market, which continues to be one of the most exciting and fastest growing parts of our business. Quantum computing is a strategically important end market for Skywater, and our investments are enabling us to play a central role as this industry transitions from research to scalable manufacturing. Over the past quarter, we've witnessed a significant increase in both activity and investment across the quantum ecosystem. Several well-known players have announced large funding rounds, underscoring growing global confidence in the commercial potential of quantum computing. These investments, now tallied in the multi-billion dollar range, validate this expanding opportunity and reinforce the essential role that trusted U.S.-based semiconductor manufacturing partners like Skywater Play in bringing quantum technologies to market. Within our own portfolio, today we are at liberty to name two of our four new quantum customers, Silicon Quantum Computing, our SQC, and QuantCore. SQC is the pioneer of a unique silicon-based spin-qubit approach using atomic-level precision to place individual phosphorus atoms in isotopically pure silicon. Their platform is highly compatible with existing CMOS processes, which makes Skywater's U.S. manufacturing capability a natural fit for scaling their technologies. Our new engagement with SQC launched in Q3 and is expected to contribute strong quantum-related revenue growth for our skywater in the coming year. QAMCOR, by contrast, has a differing approach in that they are developing a superconducting quantum processor built for massive integration, targeting one million qubits and a single cryogenic system. Their approach focuses on architectural scalability and advanced interconnect design, two areas where Skywater's digital logic expertise adds significant value. QAMCOR is also one of several quantum companies completing successful funding rounds this year. These programs are great examples of how our technology as a service model enables very different quantum architectures to develop and iterate quickly from early prototyping through production scale readiness. They also demonstrate the non-recurring engineering revenue we are capitalizing on today during process development, while also positioning us for future wafer production as these customers commercialize their technologies. In addition to SQC and QAMCOR, two additional well-funded quantum customers kicked off new ATS programs with Skywater this past quarter, bringing our total number of active commercial quantum customers to seven. Collectively, these programs span multiple modalities from spin-based and superconducting to photonic and other architectures, a testament to both the breadth of our support for multiple architectures and the adaptability of our engineering team and unique business model. We believe the future of quantum computing will not be defined by a single winning technology. Just as classical computing evolved into a diverse landscape of CPUs, GPUs, FPGAs, and custom accelerators optimized for different workloads, we expect Quantum to follow a similar path, where different modalities specialize around unique application requirements. We believe our diversified customer base across multiple architectures positions Skywater to succeed no matter which technology leads in commercial adoption. As mentioned earlier, our successes year-to-date position Skywater to exceed 30% growth in quantum-related ATS revenues far fiscal 2025, and with our current visibility, we expect quantum revenues could grow at a similar level in 2026, driven by new customer onboarding and program growth. While quantum today is a modest component of our overall revenue, it is our fastest-growing category and a key contributor to our longer-term financial targets. We expect this segment will be a highlight of our upcoming analyst day in early 2026, at which time we expect to discuss our long-range expectations for each of our primary served markets. With our trusted U.S. manufacturing platform, flexible process technologies, and deep collaborative partnerships, Skywater is increasingly being recognized as the quantum foundry and a cornerstone of U.S. innovation infrastructure. turning to our first full quarter of our newly acquired Fab 25 operations in Texas. Since first announcing this acquisition in February, we have been consistent in our expectations of strong revenue and adjusted EBITDA contributions from Texas, roughly doubling the scale of our overall business and providing strong free cash flow from the outset. Our Texas operations contributed nearly $87 million of wafer services revenue for the third quarter, well ahead of expectations, primarily due to a higher level of work and process wafers during the immediate post-acquisition phase and various purchase accounting determinations. While we expect wafer services volumes in Texas will normalize as we move into 2026, on the whole, today we are pleased to share that the expected ongoing financial contribution from FAB25 is more favorable than we originally forecast. As a reminder, FAB25 brings a number of significant benefits to Skywater, not just financially, but strategically. Skywater is now the largest exclusively U.S.-based pure play foundry service provider in the nation. While we initiated this acquisition well before the launch of increasingly proactive tariff strategies, The continued evolution of U.S. policy regarding the critical importance of domestic semiconductor production have only amplified the strategic benefits of the acquisition. The addition of Fab 25 has significantly strengthened Skywater's competitive position. Our Texas operations expanders scale, diversify our customer and technology mix, and add advanced manufacturing capabilities that complement our Minnesota and Florida facilities. Fab 25 enhances our ability to meet growing customer demand for secure U.S.-based semiconductor production while improving overall efficiency and capacity utilization. We believe these advantages position Skywater to capture new opportunities in key markets, including automotive and industrial, and to drive continued growth through our technology-as-a-service model. Before discussing our outlook, I will turn briefly to our Florida operations. It was early 2024 when we announced a major $120 million program award to expand our advanced packaging platform in Florida. Since last year's announcement, the vast majority of the program focus has been dedicated to bringing in the new tooling and capabilities to complete the facilitation of our wafer-level fan-off platform in Florida. With tool installs ramping in Q4, we expect our Florida operations will contribute a greater level of ATS revenues over the next couple of quarters as we prepare for initial customer prototypes. With the majority of tool installations expected to be completed by the end of the first quarter, our current ramp plans anticipate running customer prototypes through the Florida FAB by the second half of next year. There is growing demand within the defense and industrial base for system integration to improve size, weight, and power efficiency. As advanced wafer manufacturing ramps onshore, advanced packaging capabilities are required to support these products. The global advanced packaging market, estimated by your research to reach nearly $80 billion by 2030, supports a broad range of applications, including high-performance systems and automotive, IoT, 5G, AI, and edge computing. Furthermore, quantum computing is driving the need for more complete solutions to increase qubit density and enable capabilities such as integrated photonics. As we look across our business, it's important to pause and reflect on the broader mission driving everything we do. For decades, the U.S. has allowed much of its semiconductor manufacturing capability to move offshore. Today, most of the world's microelectronics are produced in Asia. Approximately half of the foundational node devices used in our defense systems are built in China or Taiwan. and that dependence reaches deep into our power grid, healthcare, and transportation networks. We are now working to claw this back because semiconductors have become the steel of the modern age. If you can't make your own chips, you're dependent on others for the technologies that power your economy, your security, and your future. Skywater was built to change that as a catalyst to restore domestic capability to secure trusted production and to rebuild the innovation engine that defines America's strength. We believe advanced packaging gives us an opportunity not just to rebuild but to leap ahead, to define the next chapter of leadership as the industry moves towards new system architectures and heterogeneous integration. Our Florida operations, together with our foundries in Minnesota and Texas, are creating complete onshore solutions that combine flexibility, speed, and trust, precisely what our customers need to design, prototype, and scale the technologies that will shape the future. And while we rebuild strength in today's technologies, we are also standing at the threshold of what comes next, quantum, a new computing paradigm with the power to transform science, industry, and defense in ways we can't yet fully imagine. It's essential that the United States lead in this field, and that leadership begins by ensuring quantum hardware is built here at home. Our customers across defense, industrial, and emerging technology markets are leading that charge. They turn to Skywater because they need a partner who can innovate with them, move quickly, and manufacture securely on U.S. soil. And that's what it means to be America's Foundry, a homegrown company free of foreign control, working shoulder to shoulder with our customers to rebuild what was created here decades ago, and to ensure that America remains the place where the world's most important technologies are born, built, and launched. Which brings us to our outlook. First, specific to Q4, Given the government budget dynamics discussed earlier, we expect the decline in A&D-related ATS revenues to more than offset the strength in quantum and advanced packaging, resulting in a modest sequential decline in ATS revenues expected for the fourth quarter. Our second half ATS revenue forecast remains largely unchanged since last quarter. Q4 wafer services revenue is expected to continue at roughly the same level as Q3, reflecting the continued elevated WIP in Texas and expected sequential growth in Minnesota. We also expect tools revenue to increase to the $17 to $18 million range for an expectation of total Q4 revenues to reach a new record between $155 and $165 million. With the gross profit and adjusted EBITDA contributions from our Texas operations now expected to exceed prior estimates, we also expect to deliver upside to our prior profitability expectations for the fourth quarter, which Steve will detail in a few moments. Importantly, our continued momentum in quantum computing with four new customer engagements initiated since the second quarter, along with the initial ramp of ATS revenues in Florida, and a more favorable financial contribution from Texas enables us today to express strong confidence that our initial baseline expectations of at least $600 million of revenue and at least $60 million of adjusted EBITDA in 2026 will prove to be conservative. We look forward to providing official 2026 guidance when we report our Q4 and fiscal year 2025 results in February. With that, I'll turn it over to Steve for his prepared remarks. Steve Manco | Chief Financial Officer: Thank you, Tom. Record third quarter revenue of $150.7 million exceeded the midpoint of our guidance range by $15 million. Within our ATS business, the timing of program execution within the quarter resulted in a revenue pull-in from Q4 of approximately $4 million in A&D revenues. Texas wafer services revenue of nearly $87 million was $9 million above the midpoint of our expectations entering the quarter. As a reminder, various purchased accounting items were still in process at the time of our Q2 earnings call, and our Q3 results reflect an off-market component of the supply agreement that is approximately $5 million higher than initially forecast. The remaining $4 million of revenue upside from Texas reflects additional revenue generated from work completed in third quarter on the higher level of work and process wafers during the immediate post-acquisition phase, which we expect to normalize as we move into 2026. Nearly all of the revenue upside recorded for Q3 flow directly to gross profit without offsetting costs, evident in our reported Q3 gross margin of 24.6%. Of the $20 million of gross profit upside recorded in the quarter, We currently estimate approximately $8 million of this benefit to continue into the fourth quarter, after which we expect Texas WIPP levels to normalize, resulting in a net ongoing gross profit upside from Texas of approximately $5 million per quarter compared to our earlier estimates. A portion of the now more favorable gross margin profile for Texas is due to a reallocation from cost of revenue to operating expense of approximately $2 million. The remaining gross profit upside we consider unique to Q3, or roughly $12 million, reflects the pure profit revenue upside recognized in the quarter and approximately $5 million of non-recurring cost savings. These include favorability and warranty expense, where we reversed accruals due to a higher yield quality, a reduction in our FTI accrual, and lower than expected tariff exposure. Altogether, both the recurring and one-time benefits to gross margin benefited our adjusted EBITDA for the quarter, which at $25.8 million, well exceeded the expected range of $10 to $12 million for Q3. Turning to operating expenses, total operating expenses of $23.5 million exceeded the midpoint of our expectations by $4.5 million, reflecting the $2 million reclass from cost of revenue to SG&A, as well as a higher level of incremental ongoing overhead costs related to roughly doubling the scale of our business. These expenses included higher costs for insurance, audit, HR, and intercompany expenses incurred since acquiring Fab 25. Our expectation today is that our quarterly OpEx run rate will continue at around the same level as we move into 2026. Given the more attractive gross margin profile now expected for Texas, The net impact on our expected operating income and adjusted EBITDA generation from Texas is modestly more positive than we expected a quarter ago. Moving to tax. During the third quarter, it was determined that the financial impacts related to our acquisition of Fab 25 will enable us to use our deferred tax assets. As a result, our total GAAP tax benefit of $31.8 million in Q3 includes a $27.5 million non-cash tax benefit reflecting the reversal of our deferred tax asset valuation allowance. The net difference of $4.3 million represents the deferred tax assets actually recognized in the quarter equivalent to $0.09 per share. The resulting earnings per share for the quarter was $0.24. Now turning to the balance sheet. Total debt outstanding at the end of the third quarter was $184 million. an increase of $118 million from Q2, reflecting the borrowing from our new debt facility to fund the Fab 25 purchase price, plus working capital, as well as all transaction and closing costs. The total addition to PP&E for the quarter was $356 million, reflecting the fair market value assessment for Fab 25. Negative cash outflow from operations primarily reflects the significant increase in accounts receivable during the quarter, and we expect the combined business to be regularly cash flow positive outside of significant working capital changes. Capital expenditures were less than $2 million in Q3, and we ended the quarter with $31 million in cash. Turning to our guidance for Q4, beginning with our Texas operations. Given the higher level of WIPP inventory moving through the FAB during the post-acquisition time period, we currently expect Texas revenues will continue and an elevated run rate of approximately $84 to $88 million for the fourth quarter, before normalizing in the low $80 million range as we move into next year. Also reflected in our Q4 guidance range of $155 to $165 million of total revenues are ATS revenues of $48 to $52 million, Minnesota wafer services revenues of $6 to $7 million, and tools revenue of $17 to $18 million. These ranges are aligned with our earlier expectations for second half ATF's revenues nearing $105 million in a sequentially stronger Q4 for our wafer services business in Minnesota. The change in total tool revenue for the full year, now estimated at $23 to $24 million, reflects our expectation that one tool will push to 2026. We now expect stronger overall gross margin performance for the fourth quarter compared to our previous expectations as a result of a more favorable gross margin profile for our Texas operations. We expect consolidated Q4 gross margin in the range of 17 to 20%, reflecting an estimated 200 basis point negative impact from tools in the quarter. We expect operating expenses to continue in the range of $23 to $24 million, net interest expense of approximately $5.5 million, a tax provision of approximately $500,000, and $1 million of VIE. The resulting EPS guidance range for the fourth quarter is a loss of $0.08 per share to net income of $0.04 per share. Within these ranges, our expectations for adjusted EBITDA in the fourth quarter is in the range of $16 million to $22 million. I'll add an additional note here regarding a potential tools charge in Q4 that is not reflected in our guidance. Our current estimate of the actual total cost of procuring and installing all of the tooling in Florida currently exceeds the original program award estimate by approximately $5 million as a result of inflation-related cost charges. If we are unsuccessful in securing additional funding to cover these additional costs, we may record a net loss on tools for the fourth quarter. As we look toward the coming year, we are increasingly confident that the initial baseline expectations for our revenue, gross margin, and adjusted EBITDA performance over the coming year will prove to be conservative. We expect to provide 2026 guidance on our Q4 call in February. In the meantime, on today's call, we have updated certain ongoing changes, namely a roughly 200 basis point improvement in gross margin generation or mid to upper teens from mid-teens previously, as well as higher OpEx quarterly run rate, now expected to be in the $23 to $24 million range. And with that, I'll turn the call over to Q&A. Operator, please open the line for questions. Operator | Conference Operator: At this time, I would like to remind everyone, if you would like to ask a question, please press star 1 on your telephone keypad. Your first question comes from the line of Brian Shin with Stiefel. You may go ahead. Brian Shin | Analyst, Stiefel: Hi there. Good afternoon, and thanks for letting us ask a couple questions, and congratulations on the good results here. Maybe to start with, the fourth quarter non-GAAP gross margin of 17% to 20%, understanding that there's like a 200 basis point impact from the tools revenue in the quarter, Is that comparable? That's comparable to the prior 12% to 15%, right? And can you kind of flesh out what X tool revenue, what the kind of normalized gross margin kind of would be into kind of Q1? This is the same kind of concept revenue into Q1. And can you also further explain, I think I heard something about Some revenue was recognized at 100% gross profit during 3Q. If you could just kind of unpack some of those gross margin questions, that would be helpful. Yeah, sounds good. Steve Manco | Chief Financial Officer: Good evening, Brian. In the third quarter, we had a couple items taking place. We had some revenue that passed through that was really almost 100% profit coming through the gross margin line, number one. Number two, we had a couple items that all went in the positive direction on the cost side. So we had a lower than expected warranty accrual given the higher yields in the third quarter. We did a reversal of our STI accrual that was accrued for the first part of the year in the third quarter. And there were some lower expenses that took place in Texas that I want to make sure that we have consistency with that in the quarters to come before we really take credit for that as part of our long-term model. So those were the three or four pieces that all went in the positive direction to really help us have a higher than expected gross margin for the third quarter. Now, that being the case, we think that we gave the range of 17% to 20% for the fourth quarter on the non-GAAP gross margin, and then we concluded the call by saying that going into 2026, we have upped our gross margin expectations from what we talked about about 90 days ago, and that would be the mid to upper teams for next year. Again, with that, we'll have some of the costs coming back in, the STI accruals that were reversed this quarter. We would have the accruals for going forward. And while we did have some savings in the gross margin, we also did have a higher level of OPEX in the Texas operations as well. Brian Shin | Analyst, Stiefel: Great. Appreciate that. And maybe for my follow-up question, a very strong update in terms of the new quantum customers that you signed up during the quarter. And if I heard correctly, you expect to sustain maybe a revenue CAGR in that segment at above 30% next year. I guess maybe one question. Is that higher than when you originally kind of set that $600 million revenue forecast for next year? And I'm just curious, in ATS, quantum compute revenue stream with the new customer contracts, is that typically kind of corporate average profitability or is that sometimes higher than average for APS? Thomas Sonderman | Chief Executive Officer: Yeah, I would say the 30% growth we've been talking about this year, we kind of believed this was going to be a strong year for quantum and that is proving to be true. We expect next year to continue at a similar pace, a 30% like number. As far as the details around each specific contract and the profitability, we don't get into that granularity. But the idea of our ATS model being very much aligned with what our customers are looking for as they try to innovate in this space, I think, bodes well for not just the existing seven customers, but the opportunity to bring in more into our quantum ecosystems. Operator | Conference Operator: Your next question comes from the line of Richard Shannon with Craig Halliams Capital Group. You may go ahead. Richard Shannon | Analyst, Craig Halliams Capital Group: Well, thanks, guys. Hopefully you can hear me. I apologize for the ambient noise. I'm in a cab getting to the airport here. Maybe just a couple of very quick questions here. The first one I have is really just to make sure I understand the dynamics under which you're talking about your prior guidance for next year of $600 million revenue, $60 million EBITDA that could prove conservative. What if you can lay out the dynamics that are allowing you to do that? I think from the last answers to previous questions, you alluded to that on the margin side, but maybe you could also lay that out on the revenue side as well. Thomas Sonderman | Chief Executive Officer: Yeah, I mean, I think, you know, we, back in August, right after the acquisition closed, we laid out, you know, the marker of $600 million and 10% or $60 million in adjusted EBITDA. And obviously, this quarter and next quarter, we feel like we're going to run a little bit ahead of the take or pay agreement. As we took over the facility, we did have more whip in the fab than we anticipated, and so that's allowing us to run hot. As we enter 2026, we believe, you know, based on the take or pay, that an 80 million per quarter run rate is kind of a good baseline. And when you couple that with the other dynamics in the business, you know, we're reinforcing the $600 million number with a strong level of confidence, much stronger than we had back in August. But again, until we get better clarity on some other areas like the A&D side of the business, we're sticking with these numbers. Richard Shannon | Analyst, Craig Halliams Capital Group: Okay, fair enough. Thanks for that, Tom. And my follow-on question is related to quantum. Great to see some more customers coming in here, and Tom, I noted your comments about supporting a breadth of different modalities, which is quite interesting here. I may have missed the comments you made later in your prepared remarks about related to packaging here, but I'm going to tie it to your question, which is, to what degree is there value in having and being able to support more than one modality, even for a singular product? quantum customer, and to what degree does also packaging help you to acquire those customers? Thank you. Thomas Sonderman | Chief Executive Officer: Yeah, so I think, again, the fact that we can operate within different modalities means that we can attract really all types of quantum customers. And whether it's for the quantum processing unit, for the peripheral circuitry, for the interposers, the superconducting interposers that many are utilizing, they're all looking at different bonding technologies These are very conducive to our virtual idea model where we not only do front end wafer fabrication, but also advanced packaging. And I think the fact that we are bringing the foundry model to this space is allowing these companies to focus on what they do best, which is building the quantum systems. We focus on what we do best, which is fabricating their solutions. And I believe that combination is going to allow the U.S. to run at a faster pace than anyone else in the world. And that's critical because quantum is really the next realm of advanced compute, and Skywater intends to be at the center of that with our quantum foundry model. Operator | Conference Operator: Your next question comes from the line of Quinn Bolton with Needham & Company. You may go ahead. Shadi Mewali | Analyst, Needham & Company: Hey, this is Shadi Mewali on for Quinn. Thanks for letting me ask a question and congrats on the solid execution. My first question is on Fab 25. It looks like the transition of ownership is going better than expected. So we're just curious on if we can get the puts and takes for the better performance here and maybe if there's anything that has surprised you guys in terms of running this new fab. Thank you. Thomas Sonderman | Chief Executive Officer: Yeah, so I think again, you know, The synergies that we're seeing as we integrate what we call our unified fab model between both the Austin and Minnesota operations, I think we're seeing immediate benefit with that. I think, as I alluded to, the fact the fab was full, Infineon was clearly running it with a lot of whip, and we've been able to benefit from that. That said, I think the fact that we were able to demonstrate this performance the first quarter of a full ownership of the facility bodes well for, you know, not only our ability to quickly integrate a fab of this size, but also the fact that it's very conducive to our model of, again, having not only a development capability in Minnesota, but a volume capability in Texas. And as we look across all the different synergies that you would naturally expect to have With two fabs running similar type technologies, I think we can expect, you know, to capture more and more of those synergies. And then it gives the backdrop of a strong take-or-pay agreement that basically insulates us for the next several years with any market dynamics. I think, you know, gives us a nice runway to begin to bring in additional non-Infinian capabilities as the take-or-pay contract is executed. Shadi Mewali | Analyst, Needham & Company: Great, great. That was very helpful. And then my follow-up is on quantum computing. Obviously Skywater is doing very well here and it's an important growth vector, but I just want to get some color on what Skywater views as the most important when bringing in view quantum computing customers to ATF and then ultimately converting them to wafer services revenue. Thank you. Thomas Sonderman | Chief Executive Officer: Yeah. So I think, you know, the first thing we look at is compatibility of our existing solutions with their needs. I think the fact that we have a CMOS foundation creates a lot of capability that is very attractive to Quantum customers. I believe the fact that we have advanced packaging that can be coupled with traditional front-end fabrication is very attractive. And when a customer comes in, because of our ATS model, we're able to apply resources quickly, and that allows them to move at a speed that they just wouldn't be able to do if they're working either in their own fab environment where they may not have the frequency of turns within the fab that we have, or they're working with some university lab or some other entity that just doesn't move at the speed of a foundry. And having capability coupled with a business model and a very strong technology team just makes it very easy for customers to choose to move into the FOMRI model versus other approaches. And I think we're going to continue to see that build out. I like to remind everyone that if you look at TSMC, what they're doing with AI, they're basically the fabricator for all the top AI companies. And Skywater intends to be exactly the same thing for all the quantum companies that are now emerging into the marketplace. We intend to be the quantum foundry. Our model is geared towards that. And it also bodes well for the U.S. because we want these technologies to not only be innovated in the U.S., but manufactured in the U.S. Operator | Conference Operator: Your final question comes from the line of Chris Shanker with TD Securities. You may go ahead. Robert Mertens | Analyst, TD Securities: Hi, this is Robert Mertens on the line for Krish. Thanks for taking my questions. I guess the first one, just circling back, could you talk us a little bit more through your thoughts on the current aerospace and defense environment? I know you spelled out some benefits you saw in the quarter in December being a little bit down sequentially because of this, but maybe just looking into next year, how you think projects or trending if they're stuck in a funding limbo, or have there been more commitments or indications that spending patterns might pick up above last year, 2024 levels? Thomas Sonderman | Chief Executive Officer: Yeah, so I think, you know, as we said in our prepared remarks, the anticipation for the second half really hasn't changed. We did have a specific program where funding that we thought was going to occur in Q4 actually got accelerated into Q3. But other than that, it's pretty much the same as when we talked in August. I think, you know, the continuing resolution model is what we were operating under. Now the government shut down. I think, you know, the clarity in terms of what the world will look like when all this gets resolved is obviously something that we're looking forward to. But I will say, and it was in my prepared remarks, that the programs we're working on, the amount of investment that's been made in our Minnesota facility that's now being made in our Florida facility is all geared towards the A&D community embracing the Foundry model, much like we just talked about with Quantum. And the fact that government is looking for efficient ways to do things into the future, the fact that we're moving to drone-based solutions, which requires a lot more silicon semiconductors, I think positions Skywater very nicely for when all these, we'll call it dynamics, that are out of our control get resolved. We continue to make strong progress with our ThermoView platform, which we introduced in January. Continue to see good benefits out of that. We continue to make progress on our RadHeart platform. And again, as I stated, AP continues to move forward. All those are foundry-like platforms that the DoD community will leverage. And we also have our special ASIC business that we do with that community. So it's really just getting the uncertainty resolved around funding. And when that is completed, I believe we're going to be in a very good position for that portion of our business. Robert Mertens | Analyst, TD Securities: Great. Thank you. That's very helpful. And then my other one was just around quantum computing, but I guess we've talked about that quite a bit. Just maybe, I know you have the technologies in supercomputing, photonics, but are there any sort of adjacent hardware technologies or areas such as Iron Trap that would benefit your business that you're looking to pursue? Or is it really more ramping current customers and onboarding additional ones with the technology in place? Thomas Sonderman | Chief Executive Officer: Yeah, I mean, we really see ourselves operating, again, across all modalities. IONTRAP is included in that. And I think there's a whole set of opportunities that are evolving as customers come in. They engage the ability for us to play across that full spectrum. Again, not only allows us to earn ATS dollars as people are kind of determining exactly how they're going to create their end state solutions. But it also allows us to consolidate many of the value chains that they've already created because we have the advanced packaging capability. So when I look at quantum, again, it's a very early stage. Our goal is to be the quantum foundry. And the synergistic approach that we get by having a foundry model, I think, is clear. but we also have the backdrop of being a trusted fabricator for the US government. And when a company comes into Skywater, they know that their IP will be protected. They know that all the same constraints that we apply to our DoD customers get applied to our Quantum customers and frankly, all of our customers. And that gives them confidence that they can innovate, they can be creative with their solutions, but also know that their IP will be protected. And over time, as we become the quantum foundry and these programs move from ideation to commercialization, we expect to be at the center of that. And in many ways, once you figure it out, we can just move faster than anyone else. And I think that's going to be a true advantage. Quantum is very much geared towards our technology as a service model, and we intend to leverage that going forward. Operator | Conference Operator: There are no further questions. I would like to turn the call back over to Thomas Saunderson for closing remarks. Thomas Sonderman | Chief Executive Officer: Thank you, operator. To close today's call, I want to convey the strong confidence we at Skywater have in executing towards our long-term growth and profitability goals and our commitment to building your confidence in us. We look forward to seeing you at our upcoming investor conferences ahead of our plan analyst day in New York in March. We'll report Q4 results in February. And with that, I'll conclude today's earnings call. Operator | Conference Operator: This concludes today's conference. You may disconnect. jsPDF 3.0.3 D:20260606090433-00'00'

NASDAQ:SKYT Q2 2025 Earnings Call Transcript Generated on 6/6/2026 Operator | Conference Call Operator: Second quarter 2025 financial results. All lines been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press the star and one. Please limit comments to one question and one follow-up. I would now like to turn the call over to Claire McAdams, Investor Relations for Skywater. You may begin. Claire McAdams | Investor Relations: Thank you, Operator. Good afternoon, and welcome to Skywater's second quarter 2025 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 the events page of our IR website, we have posted a slide presentation that accompanies today's call. Also posted is our financial supplement. which summarizes 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. Another important comment about our financial supplement this quarter is that we have revised it to reflect the expected revenue and gross margin disclosures we plan to report starting in Q3 to clarify the financial contributions of FAB25, which will serve as a helpful template as you update your models in anticipation of our Q3 report. 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 8K today and our fiscal 2024 Form 10K. 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 IR website. Also on our IR website events page, you'll see that we plan to participate in four investor conferences in Q3, the virtual Needham Semis Conference, Jefferies in Chicago, B. Reilly TMT in New York, and Piper Sandler in Nashville. please feel free to contact me directly for any investor follow-up requests. And with that, I'll turn the call over to Tom. Thomas Sonderman | Chief Executive Officer: Thank you, Claire, and good afternoon to everyone on the call. Revenues for the second quarter came in at the upper end of our outlook provided in May at just over $59 million. With close management of costs and expenses, we delivered upside to our gross margin adjusted EBITDA, and non-GAAP EPS expectations for the quarter. We successfully completed Skywater's first transformative acquisition, acquiring Infineon's FAB25 in Austin, Texas. The transaction was finalized with an upfront payment of $93 million, fully funded through our new debt facility with no future payments required This acquisition is bolstered by multi-year supply agreement with Infineon projected to exceed $1 billion and is further strengthened by the IP license agreement announced last week. With the acquisition closing on the first day of fiscal Q3, our report today reflects entirely Skywater's standalone performance without any contribution from FAB25. This also means that our outlook for the third quarter reflects a full quarter of contribution from Texas. FAB25 brings Skywater a number of significant benefits, both strategic and financial. Strategically, the acquisition of FAB25 firmly establishes Skywater as the largest exclusively US-based pure play foundry service provider, offering dual source support for a foundational node 200 millimeter foundry capacity. Incorporating FAB25 within Skywater increases our 200 millimeter foundry business capacity by four hex here in the US, which we believe provides a long and meaningful growth path into the future. We believe FAB25 occupies a strategic sweet spot in capabilities, delivering the output scale, quality standards, including automotive, and process flexibility needed to meet the evolving semiconductor needs required for a secure U.S.-based supply chain. We expect the acquisition to further enhance our ability to extend our differentiated technology-as-a-service model to a broader range of customers while diversifying our revenue base and advancing our mission as an essential enabler of America's semiconductor on-shoring and industrial resilience strategy. Moving to the financial benefits of FAB25, we expect the acquisition to enable us to roughly double our revenue scale and adjusted EBITDA immediately, with strong free cash flow generation from the outset. With a four-year supply agreement with Infineon, we have an expectation for consistent, steady financial contributions over the next several years. Our goal is to gradually bring in a higher margin mix of products through a combination of product transfers from semiconductor companies seeking to expand their domestic capacity, as well as new platform design wins and ATS development revenue. Additionally, we expect to leverage cost optimization across our Minnesota and Texas fabs by driving synergies in both engineering and operations. As for the expected revenue trajectory ahead for Skywater, there are multiple growth vectors to be excited about today. The first is quantum computing. As we've been reporting for several quarters, we're currently seeing strong momentum in quantum computing applications, a domain of growing strategic importance to both the economy and national security. We are building on a solid foundation in this space by expanding our capabilities in superconducting zone development, interposers, and chip operation enablement, all critical building blocks for scalable quantum systems. Through targeted investments, Skywater has transformed our legacy node fab in Minnesota into a high-value production-capable asset that now serves as a center of excellence for quantum technology development. Since last quarter, we've made meaningful progress engaging with additional new quantum customers, further building upon our unique position as a trusted enabler of early-stage quantum solutions within a secure U.S.-based environment. In the second half of the year, we plan to announce new customer engagements and communicate our plans to release a superconducting design platform for quantum and supercomputing hardware development, which we expect to enable customers to accelerate their time to market. Looking ahead, we expect continued growth in this segment as demand for quantum technology continues to expand and proliferate. Next, exciting progress ramping our advanced packaging operation in Florida continues to build momentum towards more meaningful ATS revenues towards year end. Our overall advanced packaging program has progressed ahead of schedule, despite some ongoing tariff uncertainties, which have delayed the installation of a small number of tools. As we have previously communicated, we expect Florida Tools revenue to be back half loaded in 2025 and we currently expect the majority of this year's tools revenue recognition in Q4. We also expect that increasing ATS revenues from Florida will help drive sequential growth for our ATS business in Q4. In our wafer services business, MIX continues to develop favorably as customers make progress with their designs and system-level qualifications. While Therma V business will continue to be uneven during ramp-up, as we have previously guided, We expect it to be the engine for continued momentum in waiver services through year end and into 2026 before the contribution from PADD 25. Turning to the current environment for our aerospace and defense programs, ATS continues facing headwinds given the government funding picture in Washington, D.C. This is not a reflection of the strong partnership we have established with the Department of Defense where we are developing multiple new products and platforms that are of high strategic value for the U.S. government. However, the government continues to operate at 2024 spending levels, which has created continued funding delays in Washington. Despite our optimism last quarter that these funding issues would be resolved by the second half of the year, we now believe our DOD programs will continue to operate around current revenue levels through 2025. We continue to view these challenges as transitory as our current programs directly support strategic mission-critical national security initiatives across key U.S. Department of Defense priorities. The current administration has clearly outlined its strategic focus areas, including microelectronics, quantum, AI, missile defense, and hypersonics, all domains which align with Skywater's engineering services, security infrastructure, and technology platforms, reinforcing our role as a critical partner in advancing defense technology base. For a couple of DoD programs, we have executed development activities at a pace above the currently funded level, which means that some ATS revenue will immediately be recognized if funding level increases are approved. Until we have better visibility, however, we are not including these releases into our current outlook for the remainder of the year. which brings us to our outlook for the second half of 2025. We are currently forecasting Q3 ATS revenues of approximately $50 million before adding at least $5 million of incremental revenue from Florida in Q4. Quantum computing, our second largest end market, is expected to generate revenue growth exceeding 30% in 2025. We expect quantum momentum to continue into 2026 with a new platform and additional customer engagements. We expect both quantum and advanced packaging to be two key areas of ATS growth as we move into 2026. Within wafer services, we expect to continue to gain incremental traction in new platforms such as ThermaView within our Minnesota operations and continue to expect year-over-year revenue growth for our organic wafer services business in fiscal 2025. The addition of our Texas FAB is expected to add $75 to $80 million of revenue from Infineon for the third quarter and continue at these levels through the next several years, altogether positioning Skywater for significant top line growth in 2025 as well as 2026. Given that we completed the acquisition just over one month ago, today we are not in the position to provide forward guidance for our fiscal 26. However, given the meaningful contributions ahead from our new acquisition, today we will communicate some broad parameters to help shape your expectations for our financial performance in the coming year. In particular, our outlook for the Q4 run rate as we exit 2025 provides a solid baseline from which we can further improve and expand upon as the demand environment begins to take shape for 2026. Our expected revenue profile in the fourth quarter reflects our expectation for total wafer services revenue in the mid $80 million range and ATS revenue in the mid $50 million range. We expect this revenue mix to generate adjusted EBITDA margins of at least 10% in the fourth quarter. When coupled with high levels of confidence for incremental ATS revenue momentum next year in areas such as quantum computing and advanced packaging, Expectations for $600 million of revenue and at least $60 million of adjusted EBITDA in 2026 would be a solid base to expect from Skywater's financial profile in the coming year. Before I hand the call over to Steve, I want to briefly step back and reflect on the broader strategic landscape and why Skywater's momentum aligns so directly with what the market, our customers, and the country now recognize as critical. There's growing consensus that the U.S. needs a stronger, more resilient semiconductor base, not just at the leading edge, but at foundational nodes that power everything from defense systems to vehicles to industrial infrastructure. These mature node chips are essential, yet much of their production remains offshore, often in areas with significant geopolitical risk. Over $5 billion of semiconductors used annually in U.S. defense applications are sourced from China and Taiwan, a clear vulnerability for national security and industrial resilience. The federal government is responding. The Section 232 investigation launched earlier this year and Secretary Letnick's recent remarks suggesting a near-term White House action plan reflect a decisive policy shift. It's no longer a question of if domestic capacity is needed. but how fast it can be established. At the same time, the private sector is undergoing its own transformation. Many IDMs and mature nodes are transitioning to hybrid or fabulous models, focusing internal investment where they have differentiation and outsourcing where utilization is lower. Our external options are now viable. We believe this shift, combined with customer demand for regional diversification and onshoring, creates a clear and sustained signal. The market needs more US-based foundry options for mature node production. Skywater is answering that need. Our strategy focuses on enabling this industry evolution through scaled open access 200 millimeter manufacturing paired with high value IP and specialized process capabilities. We help customers accelerate new product launches, support existing designs onshore and diversify global supply chains. BAB25 is a major step forward, expanding our 200-millimeter capacity by more than 4X and unlocking over $300 million in annual revenue potential. It's purpose-built to serve real, multidimensional demand, from defense programs requiring trusted U.S. production to auto and industrial customers regionalizing their supply chains. to IDMs and fabless firms rethinking their manufacturing models. Beyond that, we're executing across high-impact growth vectors. ThermaView is modernizing defense sensing platforms. Our quantum initiatives are advancing future state compute. And our Florida-based advanced packaging operation is addressing one of the final integration gaps in US-based chip production. These aren't isolated wins. They're components of a long-term infrastructure strategy. As we look towards 2026, Skywater is emerging not just as a growth story, but as a strategic cornerstone in reshaping the U.S. semiconductor landscape, where national interest, customer demand, and technology execution converge. With that, I'll turn it over to Steve. Steve Manko | Chief Financial Officer: Thank you, Tom. Second quarter revenue of $59.1 million came in at the upper end of our guidance range, primarily due to a stronger ATS revenues versus forecast. Our Q2 gross margin exceeded the top of expectations at 19.5%, and the impact of tools in the quarter was 10 basis points. Adjusted EBITDA of $2.3 million was also stronger than forecast as a result of favorable gross margin performance, as well as lower operating expenses. Q2 OpEx was flat to Q1 at $13.5 million, and with continued close management of spending levels, we currently expect our operating expenses for the full year will increase approximately 5% organically compared to the 10% to 15% increase previously forecast for 2025. Our Q2 EPS was favorable to guidance at a loss of $0.11 per share and included a tax expense for the quarter that was higher than forecast at over $700,000. Turning to the balance sheet, we ended the quarter with $49.4 million in cash, roughly flat to Q1, and total debt outstanding at quarter end was $65.7 million. The net increase in borrowings during the quarter was $5.5 million, which funded the slightly negative cash flow from operations, as well as $3.6 million in CapEx. On June 30th, we completed the acquisition of FAB25, and the associated adjustments to our cash, debt, and PPE balances are provided in a supplemental table in today's earnings release, as well as our Q2 earnings presentation. Concurrent with the announcement of the closing of the acquisition, we announced our new $350 million revolving credit facility. The total debt outstanding as of June 30th was $137 million, of which $113 million was used to fund the purchase price plus working capital assumed, as well as all transaction and closing costs. $24 million replaced the existing balance of our short-term borrowings, and the remaining $7 million added the net cash on the balance sheet. As you update your models, please reflect the June 30th balances of cash and debt as provided in today's earnings release. Turning to our outlook, which will now incorporate the P&L contribution from Fab 25. Given the transformative nature of the acquisition and the significant impact on our financial results, in today's financial supplement posted to our website, we have provided the updated presentation of revenue classification consistent with our new reporting, as well as the additional adjustment we will make to the non-cash purchase accounting treatment of acquired assets, namely the depreciation expense we will now record on the full fair market value of FAB 25's building and equipment. The total PP&E added within our supplemental balance sheet table for FAB 25 was $364 million, which is subject to adjustment. The majority of PPE reflects the fair market value of the building and equipment, which we estimate will carry an annual depreciation charge of $30 to $45 million for the next six to eight years. Since the final valuation is not yet complete, please note that our Q3 guidance reflects our best estimate of purchase-to-coming adjustments, but these are subject to change until final. For Q3 guidance specifically, I will begin with FAB 25's expected contribution to our P&L results for the quarter, as these ranges are currently expected to remain relatively consistent each quarter. For the third quarter, we expect wafer services revenue from FAB 25 to be in the range of $75 to $80 million. While the final depreciation figure is currently being determined, at this time we expect a reported non-GAAP gross margin for FAB 25 to be in the range of 4 to 6%. Within this range, we expect purchase accounting depreciation expense to be in the range of $8 to $10 million each quarter. Again, this is the non-cash portion of our FAB25 cost of revenues. The other incremental P&L items related to FAB25 are approximately $5 million per quarter of operating expenses, almost all within SG&A, and approximately $2.5 million a quarter of interest expense to reflect the incremental borrowing to fund the acquisition. Since the announcement, we have communicated our expectation for strong free cash flow generation from Fab 25. In the third quarter, we expect Fab 25 to contribute a strong and steady $8 million of adjusted EBITDA each quarter, equal to just over 10% of quarterly revenues. For our organic skywater business in Minnesota, and now increasingly from Florida, we currently expect Q3 ATS revenue of approximately $50 million. wafer services revenue of $5 to $6 million, and tool revenue in the range of $2 to $3 million. Based on these ranges, we expect to report Q3 consolidated non-GAAP gross margin in the range of 11 to 14%. On our supplement, you will see that in addition to quantifying the impact of tools on our gross margin, we will also quantify the impact of purchase accounting depreciations. Given the expected revenue profile for Q3, we expect tools to impact gross margin by approximately 20 basis points and purchase accounting depreciation to impact gross margin by approximately 600 to 700 basis points. Total non-GAAP operating expenses in Q3 are expected to be in the range of $18 to $20 million. As a reminder, this range reflects our expectation that our organic operating expenses will increase approximately 5% for the full year compared to 2024, as well as approximately $5 million per quarter added from Fab 25. We expect interest expense for the third quarter of $4.5 to $5 million, tax expense of $500,000, and income from non-controlling interests of approximately $1 million. On a consolidated basis, this equates to an expected net loss per share in the range of 14 to 20 cents per share and adjusted EBITDA in the range of 10 to $12 million. Before turning the call over to Q&A, I will provide some additional metrics that reflect our expected quarterly run rate as we exit 2025. While we are taking a more conservative stance with regard to ATS growth, we continue to have confidence in the incremental ATS revenues driven by our Florida operations in Q4, as well as continued momentum for our organic wafer services business. As we move into Q4, we believe that a reasonable expected quarterly run rate for consolidated skywater revenues will be approximately $140 million before tools. We expect this quarterly run rate to provide a solid revenue baseline as we move into 2026. While our reported gross margins may fluctuate as a result of episodic tool revenues, as well as purchase accounting depreciation, As you look at our expectations for Q4's gross margin in the range of 12% to 15%, this reflects the strong flow-through expected on the incremental revenue growth. Our Q4 gross margin expectation assumes $20 to $25 million in tool revenue with a 200 basis point impact, and that purchase accounting depreciation will impact reported gross margins by 500 to 700 basis points. Given these assumptions, our expected adjusted EBITDA generation, in the fourth quarter is currently estimated at approximately $14 million, which represents at least 10% margin on our core revenues. Therefore, as we look to the 2026 financial metric with the highest degree of visibility and predictability, beyond the revenue expectation of at least $600 million, is our expectation for adjusted EBITDA generation of at least $60 million for the full year. As a final reminder, we continue to forecast total customer-funded capex of approximately $200 million in the three-year period spanning 2024 to 2026. But in 2026, we currently expect a smaller portion will be recognized on our P&L as tools revenue. For now, we assume $20 million in tool revenue recorded in 2026. With that, I'll turn the call over to Q&A. Operator, please open the line for questions. Operator | Conference Call Operator: At this time, I'd like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. Your first question comes from the line of Quinn Bolton with Needham & Company. Your line is open. on behalf of Quinn Bolton\ Hey, thanks. This is actually Neil Young on for Quinn Bolton. Regarding margins for FAB25, I was wondering, are there any future milestones that can unlock future margin expansion? And if so, what are the timing regarding those? Thanks. Thomas Sonderman | Chief Executive Officer: Yeah, let me start and Steve can add a little color. Obviously, there's multiple activities underway to expand margins. One, of course, would be bringing in ATS engineering revenue. That's something we'll start immediately. And then, of course, as we bring in new products, new platforms, we'll be charging market prices for those, and that will also give us good levers to further expand margin while we're executing the take or pay. Steve, anything to add? Steve Manko | Chief Financial Officer: I think we started talking about Fab 25 acquisition back in February. We've been pretty clear since that time that the near-term gross margin will be compressed compared to historic levels for the company. While the GM basis points will be compressed in the near term, it is important to remember that we found very economical way to acquire assets in the down market we double the revenue we increase the gross profit dollars so if you remember going back to q1 or q2 of 2024 we're around the 70 million dollar revenue line excluding tools we run a path to non-gap gross margin of around 30 percent so i believe we have a path to exceed gross margin for other foundries looking at our total business put together but the near-term compression on gross margin will exist with fab25 acquisition Thomas Sonderman | Chief Executive Officer: Yeah, and just one other component to keep in mind is we are expecting to drive synergies through cost optimizations now that we have multiple FABs, and we'll be looking at how across both operations and engineering we can drive efficiencies to not only optimize costs but drive more output out of FAB25. on behalf of Quinn Bolton\ Great. Thanks. That's all from me. Operator | Conference Call Operator: And your next question comes from the line of Krish Sinker with TD Cohen. Your line is open. on behalf of Krish Sinker\ Hi, thanks for taking my questions. This is Steven calling on behalf of Krish. I guess a couple questions as well from my side. I guess first off with the FAB25, just wondering, like, in terms of the revenue guidance and expectations going forward from the Infineon business, what does that imply for I guess, FAB loadings and how much capacity is there for external customers to bring in incremental refer demand and how soon can that start? Thomas Sonderman | Chief Executive Officer: Yeah, so obviously, you know, the FAB as it stands today running Infineon product, the FAB is running at close to what they would consider their target utilization. We expect, as we move the FAB from an IDM model to a foundry model, drive our own efficiencies and bring in, you know, again, new capabilities, as I just alluded to, we will have the bandwidth to be able to maintain the output needed for Infineon and drive new customers. One of the things to keep in mind, and we announced this last week, is we licensed some high-voltage IP from Infineon that runs on our 130 network. HV platform. We'll start talking to customers about transfers into FAB25 regarding that kind of IP immediately as we integrate it into our design enablement capability. And then, of course, we've discussed before, you know, the FAB does have advanced capabilities for 200 millimeter. It's 65 nanometer capable. And we'll be looking at opportunities to bring in that kind of capability, which doesn't really exist here in the U.S. So across all those different vectors, we believe there's room for upside while we execute the take or pay and continue to expand our business in Florida with our AP build out, as well as executing the programs we already have in flight here in Minnesota. And all that will drive a margin expansion. on behalf of Krish Sinker\ Tom, I just had to follow up regarding that IP license agreement with Infineon. Can you talk a little bit about how that came about? Was it interest from your side and you approached them, or was it the other way around? And as far as the time and maybe the cost to develop the PDK on your S-130 platform, can you help us understand how long that might take, depending on whether there's customer interest on it? Thomas Sonderman | Chief Executive Officer: Yeah, so for sure, we believe there's customer interest. I think, you know, think of it as we already have the PDK and the design and infrastructure. What we'll be doing is integrating the new IP blocks, both high voltage and copper. That's an important distinction. The capabilities we had in Minnesota were for aluminum. Now we'll have copper for SA, S-130s. And our ability to get those integrated, I think, will happen as this year unfolds, and we'll be talking to customers in parallel. So the expectation would be as we get into 26, we would be able to start, you know, doing what you would typically do in a foundry, which are people taping out to your IP, putting them on multi-project wafers, running those shuttles through the line, and then assuming functionality is as expected, you can begin to transition those to volume products. Again, that typical window is around two years, but the fact that we don't have to bring in new capabilities, we can leverage the current manufacturing basis plus the new IP that we got will be important. And then your question about who brought it up, it was always part of the strategy to get access to that IP so that there could be an immediate avenue for new our products into the fab as we define our longer-term strategies. on behalf of Krish Sinker\ Great. Thank you so much, Tom. Operator | Conference Call Operator: And your next question comes from the line of Richard Shannon with Craig Hallam. Your line is open. Richard Shannon | Analyst, Craig-Hallum Capital Group: Well, thanks, guys, for taking my question. I'm going to ask both of my questions right up front here. As in your prepared remarks, Tom, you talked about two growth drivers as we go into next year, packaging and quantum here. So on the packaging side, I would love to understand where we are in terms of business development there. Do we have contracts or strong leads into filling that up here as we get into next year? And then the quantum side, I think you mentioned supporting superconducting as one modality. I'd love to get a sense of the degree to which you see other modalities as contributing to your long-term contributions in quantum as well. Thank you. Thomas Sonderman | Chief Executive Officer: Yeah, so on the advanced packaging front, clearly, A lot of the focus over the last year has been preparing for the wave of tools that are now coming into Florida. That is underway as we speak. Our goal is to be able to have prototype availability a year from now. That would allow customers to start creating packaging solutions based on our technology. The focus, obviously, coming out of the box is with the defense industrial base. That's why the DOD funded the stand-up of this platform. So there's interactions that are ongoing with that community. Many of those customers are the same ones we deal with for our ThermaV platform as well as our RadHard platform. I also, and we've talked about this before, but we also expect the commercial segment to be very interested in this technology, and we continue to engage with them. And then the last thing I'll remind everyone is we did have a technology, an interposer technology that we set up that was in flight when we took over back in 2021, that capability is now also being marketed to the defense industrial base. So overall, I would say the traction's there and we continue to build momentum with that community in the AP space where we believe we have the only true foundry solution that is available with capabilities that not only exist today with our bonding and interposer, but in the future with our fan-off technology. And then in quantum, obviously, our focus is around superconducting-based film technology. But we've also, as we've alluded to before, been engaged with Psi Quantum. And that's a combination of superconducting technology and waveguide technology via photonics. And so we see those two vectors continuing. Obviously, there's technologies like ion trap that also get discussed a lot in the quantum space. That is an area that we continue to look at in terms of viability. I think capability-wise, we certainly have that as an option. It's just a question of what the right combination of our capabilities coupled with customer need. One thing that we are very proud of is that we not only have our front-end capabilities with superconducting films, but we also have some very strong capabilities now with our interposers and chiplet strategies. And these are foundational, as I alluded to in my remarks, to building out quantum computing capabilities. And so all these will come into play, and we expect to not only discuss later this year our new platform for supercomputing, quantum computing, but also talk about some new customers. Does that answer your question, Richard? Operator | Conference Call Operator: And it looks like Richard removed from the queue. I would like to remind everyone in order to ask a question, please press star then one on your telephone keypad. Our next question comes from the line of Robert Aguano with Piper Sandler. Your line is open. on behalf of Harsh\ Hey, guys. Thank you for taking the questions. This is Robert on for Harsh. you know, congrats on the FAB 25 acquisition closure. Just was wondering what kinds of customers you're going to be targeting to fill that FAB outside of Infineon. And if those conversations have begun to happen just yet, I know you guys just took control of the FAB, but any color on what else you guys think can go into that FAB? Thomas Sonderman | Chief Executive Officer: Yeah, I mean, obviously the FAB is, is targeted towards foundational semiconductors. So these are power management ICs, other ASICs, microcontrollers, embedded memory. These are all capabilities that exist or could exist in the fab. In terms of target customers, the group we're really looking at are what are referred to as the hybrid semiconductor manufacturers. These are companies like Infineon that have both their own fabs as well as outsourced capabilities. NXP, ST Microelectronics, companies that value or will value having sourcing out of the U.S., especially when you look at some of the trade discussions going on. There's other companies like ROM and Renesas from Japan that would be looking for sourcing out of the U.S. So it's really companies that value having their products made in the U.S. that are geared towards our industrial and automotive target verticals. And of course we'll be looking at, as I alluded to, you know, moving more, um, you know, DOD centric products into our fabs here in the U S as you know, the, um, DOD begins to reduce its dependency on foreign made Silicon, specifically China and Taiwanese based Silicon. I think that's a national imperative. So we believe there's going to be a strong market. You also have companies. like Microchip and others that are re-looking at their manufacturing strategies, even considering going to more of a fabulous model. So we think there's going to be a lot of demand. There's a major megatrend underway in domestic sourcing, and we believe having 200 millimeter foundry capacity for foundational nose will be what customers are looking for as the a lot of the administrative level decision-making begins to unfold in terms of action and execution inside the semiconductor ecosystem. on behalf of Harsh\ Fair enough. Thanks, guys. Operator | Conference Call Operator: And at this time, I would like to turn the call back over to Tom Sonderman. Thomas Sonderman | Chief Executive Officer: Thank you, operator. To close today's call, I want to convey the strong confidence we at Skywater have and executing towards our long-term growth and profitability goals and our commitment to build your confidence in us. We look forward to seeing you at our upcoming Q3 investor conferences ahead of our planned capital markets day in Austin. We'll record Q3 results in early November. With that, I'll conclude today's earnings call. Operator | Conference Call Operator: This concludes today's conference call. You may now disconnect. jsPDF 3.0.3 D:20260606090434-00'00'