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. [Operator Instructions] Thank you. With that, I am pleased to turn the call over to Claire McAdams.

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 3 years, including all non-GAAP adjustments and comparisons to our GAAP results as well as the impact of tool sales on our gross margins. During the call, any statements made about our future financial results and business are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially. For a discussion of these risks and uncertainties, please refer to our filings with the Securities and Exchange Commission, including our earnings release filed on Form 8-K today and our fiscal 2023 Form 10-K. All forward-looking statements are made as of today, and we assume no obligation to update any such statements. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release, our financial supplement and in our 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. Riley Quantum Computing Day, a virtual investor event taking place on March 7. Please feel free to contact me directly for any investor follow-up requests. And with that, I’ll turn the call over to Tom.

Thank you, Claire, and good morning to everyone on the call. Turn to Slide 3. Along with our earnings release this morning, we announced our planned acquisition of Infineon’s Fab 25 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 4. I am pleased to announce strong financial results for the fourth quarter, which exceeded our expectations for gross margin and profitability. Total revenue topped $75 million towards 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 $0.04 positive EPS for the quarter and contributing to full year positive earnings of $0.06 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…

Thank you, Tom. I’ll first review our results and guidance before discussing the financial highlights of the Fab 25 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 and another record year for our ATS business was primarily driven by strong A&D demand in 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 4 percentage points higher than expectations, primarily due to roughly $2 million of cost tailwinds, which will not repeat as well as additional cost savings and cost deferrals 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 our combined ATS…

[Operator Instructions] Our first question is from the line of Krish Sankar with TD Cowen. Your line is live.

Yes. Hi. Thanks for taking the questions. I have three of them. First one, Steve, I just wanted to clarify something. You said that the Fab 25 would be $40 million in gross profit dollars from the wafer supply agreement. Is it fair to assume all of Fab 25 output is going to be through the wafer supply agreement, because based on Slide 29, it looks like gross margin percentage is going to come to mid-teens from the standalone SkyWater, which is in the mid-20s.

Yes. The initial supply agreement, of course is to provide Infineon with the products that they are 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 are going to offer. But the agreement is to provide Infineon with the output they are getting today, which is running essentially at what they would define as full capacity for the upcoming multiyear terms of the agreement.

Got it. So, is it fair to assume for the combined company or the fabs post the acquisition, from a customer revenue profile, Infineon will become your largest customer again?

Yes, absolutely. And Infineon has been a strategic partner with our fab in Minnesota, and now they will become a much bigger strategic partner. And our ability to quickly rebalance our ATS to wafer services business with a secured supply agreement over time allows us to not only drive diversification, but capture what we believe is a very strong tailwind to reposition foundational devices here in the U.S.

Got it. And then two other quick questions. For Fab 25, where is the back end being done? Is it done with the OSAT, or do you think that’s an opportunity for your Florida fab?

Yes. Today, Infineon uses the traditional OSATs and maybe internal capabilities to do back-end 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 is certainly opportunities for us to fabricate ASICs that could go into AP fan out based solutions here in this fab in Texas.

Got it. And then a quick housekeeping for Steve, you mentioned advanced compute is the number two end market with over 90% run by Quantum. How much is Quantum in either Q4 of all of calendar ‘24 as a percentage of revenues?

Yes, it would fit that mix. So, it was about 10% there. So, we give the pie chart that you see in that slide presentation that gives a pretty good indication of where we are. That business has been strong for us and growing. We can only talk about the two customers that we have listed there. But again, there has 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.

Got it. Thanks Tom. Thanks Steve. Congrats on the acquisition.

Thank you.

[Operator Instructions] Our next question is from the line of Harsh Kumar with Piper Sandler. Your line is live.

Yes. Hey guys. Congratulations from my end as well on Fab 25. Tom, I had a quick question. You gave us a little few specs about Fab 25, 65-nanometer, 200-millimeter wafers. 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 Fab 25 down the line?

Yes. Great question. And you just reiterated our strategy. If you look at the fab, it has today a 130-nanometer mixed-signal ASIC 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 are 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-nanometer, if not all, certainly in the foundry space is done on 300-millimeter, and we believe there is a real market at 65-nanometer.

And there is 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 you want to refer to Slide 13, there is more detail there on the technologies. And also, I want to make sure we highlight, we think through this acquisition, our SRAM actually expands by $3 billion, so pretty exciting for the long-term growth of the company.

No, absolutely. Thanks for that Steve. And then a quick follow-up there, you wafer services look like it’s bottoming and then you will get this big boost from Fab 25 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 wafer services? Do you anticipate, Tom or Steve, that it would be 50-50, or do you think – maybe just give us some color on how you see this transitioning.

Yes. So, again, great question. The growth that we anticipate in Minnesota, again, we think Q4 was the bottom. We will see growth off of that, which we communicated in our prepared remarks. You are 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 will be taking on the volume down here, which will obviously generate fairly predictable revenue, the $300 million a year 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 at plus basically 5% plus or minus 2%.

Yes. Just want to reiterate, 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 Fab 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.

That’s clear guys. Thank you and congratulations again. It looks like a great deal for you guys.

Thank you.

Thanks for your questions. Our next question is from the line of Quinn Bolton with Needham. Your line is live.

Hi 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 4 years? Thanks.

Yes. Again, great question. I appreciate that diving into the really important aspects of why this is a 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 at full utilization for Infineon through the multiyear 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 are running at, there would certainly be opportunity to backfill that, but we don’t anticipate that happening. We expect to do what we are doing today, execute extremely well for Infineon while adapting businesses. And then as the multiyear agreement begins to expand or expire, we will certainly be bringing other customers to backfill and eventually we will 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 will have a significant scale for domestic sourcing of foundational semiconductors.

Thanks. And you had the really strong combined ATS and wafer 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. So, did the combined upside of gross margin at 28% come from the wafer services piece? And can that momentum continue in 2025?

Yes, good question. So, it was a combination of really the ATS mix 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 wafer services business.

Understood. Thanks.

Thanks for your questions. Our next question is from the line of Richard Shannon with Craig-Hallum. Your line is live.

Yes. Hi Tom and 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 Department of Defense program and budget cycles here. I guess I would love to get a sense of two things. First of all, to what degree or any way you can characterize how much you have judged the year down? And then maybe is there any inside baseball to understanding the conservatism here? We obviously see some headlines. I think there are some questions about what the Trump administration is doing with the defense budgets here. Maybe you can kind of peel the layer back a little bit, please.

Yes. Hi Richard. And I again think that we are all seeing the dynamics that are playing out as we move in with the new administration. The first thing I will 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 is 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 are seeing more and more momentum building back into our ATS business. So, it’s really just making sure that we understand the dynamics we control, the things we don’t control, and we are taking a conservative approach with the 5% overall growth for the ATS and wafer services business that we have currently in the business.

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 are running this fab with full utilization now, but you are expecting to get some efficiencies. I guess maybe if you can describe what those inefficiencies were in the past, how you are going to improve them? And how much and how fast will this provide some excess capacity that you could run new revenues from.

Yes. Again, there is many vectors. And as we get further down the road, I think we can provide those, 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 our 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 have 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 have now expanded through Fab 25 in a way that gives them differentiation. And the fact that there are a lot of companies out there wanting to relook at U.S.-based supply chains and us having a foundry offering as opposed to today where Fab 25 only serves Infineon, we believe is a great opportunity for us. So, it’s really just building off the model we have created. We now have the scale. We have the ability to drive efficiency synergies and bring leading-edge foundry capacity to the U.S. for CMOS-related devices.

Okay. Fair enough. Thank you, Tom.

[Operator Instructions] 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.

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 execution. We look forward to sharing more updates during our Q1 earnings call in early May. Thank you and this concludes today’s call.