Hello, and thank you for standing by. My name is Lacy, and I will be your conference operator today. At this time, I would like to welcome everyone to the SkyWater Technology Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Claire McAdams, Head of Investor Relations. You may begin.

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 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 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 2024 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 Q3 earnings presentation, all 3 of which are posted on our Investor Relations website. Our upcoming investor conferences include the New York CEO Summit on December 16 and the Needham Growth Conference in January. We are also pleased to announce that SkyWater will hold its first Investor and Analyst Day on March 24 in New York City at NASDAQ's MarketSite. Please feel free to contact me directly for any investor follow-up request. And with that, I'll turn over the call to Tom.

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 4 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…

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 purchase 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-in-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 WIP 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 nonrecurring cost savings. These include favorability in warranty expense, where we reversed accruals…

[Operator Instructions] Your first question comes from the line of Brian Chin with Stifel.

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 ex tool revenue, what the kind of normalized gross margin kind of would be into kind of Q1? Does this assume kind of constant 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.

Yes, sounds good. In the third quarter, we had a couple of 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 2, we had a couple of 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 3 or 4 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 teens 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 those 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.

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 just curious, in ATS, is that quantum compute revenue stream with the new customer contracts, is that typically kind of average -- corporate average profitability? Or is that sometimes higher than average for ATS?

Yes. I would say the 30% growth we've been talking about this year, we kind of believe 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 7 customers, but the opportunity to bring in more into our Quantum ecosystem.

Your next question comes from the line of Richard Shannon with Craig-Hallum Capital Group.

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 can prove conservative. I wonder 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 here, but maybe if you could also lay that out on the revenue side as well.

Yes. I mean I think we -- back in August, right after the acquisition closed, we laid out 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 WIP in the Fab than we anticipated. And so that's allowing us to run hot as we enter 2026. We believe 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, 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.

Fair enough. 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 question, which is to what degree is there value in having and being able to support more than one modality even for a singular quantum customer? And to what degree does also packaging help you to acquire those customers?

Yes. 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 IDM 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.

Your next question comes from the line of Quinn Bolton with Needham & Company.

This is [indiscernible] on for Quinn. 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, I was 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 a new fab.

Yes. So, I think, again, the synergies that we're seeing as we integrate the -- 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 WIP, and we've been able to benefit from that. That said, I think the fact that we are able to demonstrate this performance in the first quarter of full ownership of the facility bodes well for 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 buying capability in Texas. And as we look across all the different synergies that you would naturally expect to have with 2 fabs running similar type technologies, I think we can expect to capture more and more of those synergies. And then against the backdrop of a strong take-or-pay agreement that basically insulates us for the next several years with any market dynamics, I think gives us a nice runway to begin to bring in additional non-Infineon capabilities as the take-or-pay contract is executed.

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 new quantum computing customers to ATS and then ultimately converting them to wafer services revenue.

Yes. So, I think 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 the business model and a very strong technology team just makes it very easy for customers to choose to move into the foundry model versus other approaches. And I think we're going to continue to see that build out. I'd 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.

Your final question comes from the line of Krish Sankar with TD Securities.

This is Robert Mertens on the line for Krish. 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 and December being a little bit down sequentially because of this. But maybe just looking into next year, how you think projects are trending if they're stuck in funding limbo? Or have there been more commitments or indications that spending patterns might pick up above last year 2024 levels?

Yes. So, I think 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 the continuing resolution model is what we are operating under. Now the government shut down. I think 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 ThermaView platform, which we introduced in January, continue to see good benefits out of that. We continue to make progress on our RadHard 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.

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 ion 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?

Yes. I mean we really see ourselves operating again, across all modalities. Ion trap 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 at 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 U.S. 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.

There are no further questions. I would like to turn the call back over to Thomas Sonderman for closing remarks.

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 planned Analyst Day in New York in March. We'll report Q4 results in February. And with that, I'll conclude today's earnings call.

This concludes today's conference. You may disconnect.