I wanted to thank the management of SkyWater for coming here. We've got the CEO, Tom, and the COO, John, with us. And I, let me ask you about. You've got a very interesting business model.
Yes.
Let me ask you about ATS development revenues. Talk about how that works, and what are the drivers and the tailwinds that you see in the ATS business that makes that business go up from here?
Yeah, so ATS is Advanced Technology Services. Think of it as a monetized R&D capability that we provide to our customers as a precursor to volume manufacturing. There's really four growth areas that we think are driving that business. First and foremost, is A&D.
Okay.
Aerospace and Defense has been the primary driver over the last eighteen months. A lot of the CapEx investment we're getting is coming from that.
Okay.
Also, next generation bio, so biosensing. We've had several announcements this year about customers converting into volume manufacturing out of ATS, so expect more of that. We also have advanced compute. So we're a leader in superconducting interconnects-
Okay
-which are foundational for things like quantum computing. And then the final area is advanced packaging, where we have a Florida facility, and that'll be our first move to 300 millimeters.
Oh, wow!
Definitely a growth driver as we get-
That's got to be exciting, 300 millimeters wafers.
Yeah.
Super exciting stuff. Let's talk about tool revenues and your strategy. How does that process work? When you recognize tool revenues or you get tool revenues, what makes it happen? What's in it for the customer? What's in it for you?
Yeah. Again, we think it's a great part of the SkyWater story. We're a CapEx-light company, in the sense that we get our customers to fund a lot of our CapEx needs. So when a customer invests in a new tool, it's an indicator of not only the commitment to the program, commitment to SkyWater, but also a leading indicator of ATS revenue. So typically, a tool will come in, we'll recognize the revenue for the purchase of the tool, but then very quickly, once the tool's installed, we can start earning ATS development revenues. And eventually, when the program moves to volume, that will become wafer services revenue. And we don't have to pay for the tool. We don't appreciate the tool. And again, a very important indicator of the health and the commitment of our customers.
So this is totally trust-based. The customer puts the tool in because they need it, but you have a lot of access to it.
Oh, yeah. It's our tool, essentially, in that we run it on a day-by-day basis. They have a priority.
Access
... you know, in terms of accessing the tool. But they actually want us to use it for other customers, because then it runs, you know, on a seven-by-twenty-four.
Fantastic. So that keeps your CapEx low.
Yeah.
You have equipment.
Yeah. It. I don't think you can find a semiconductor manufacturing company with less than $100 million, like, just SkyWater, and that's the main reason for it.
I wanna put the first and the second question together.
Yeah
... because one of them is sort of a services-like business, where you do a lot of consulting, quote, unquote, "help people or help customers out," and then the other is a tool revenue business. So what does that mean for the margins, gross? And then, how do margins grow? What is the interaction between the two sides of the businesses? Does one lend to the other, and so on and so forth?
Yeah. Go ahead, John.
Yeah, so it's a great question. So when we look at the overall margin, we look at it two ways. One is just our core business, which is the ATS and wafer services, and then we also kind of report margin that includes the tool revenue component. But if you look at the last quarter-
Mm-hmm
... we achieved almost 25% gross margin on a high six figures core business, so ATS and wafer services combined. When you add tools in, then there is some dilutive effect on the tools, on the overall margin, because of the fact that that just is lower margin business for us, so we always report it. But we had a great quarter Q2, almost 25% gross margin. If you look at what we guided in Q3, we guided mid- to high-teens, so a 17% kind of midpoint of margin, and we guided $30 million in tools. So if you take out the tool portion of the revenue, our gross margin in third quarter, we guided around the midpoint, around 24% gross margin.
So, tools are dilutive, but the ATS piece is super accretive, and that's kind of the interplay. But you don't pay for the tools, so...
That's right.
Not a lot of CapEx for you.
There's not a lot of CapEx. That's the great thing about the tool model, is that the customers are actually funding the CapEx for the fab itself.
You've got some exciting things going on in Florida. Got some rad-hard and some cool packaging stuff going on. Maybe take a second and talk about what kind of capabilities and business opportunity that advanced packaging facility will unlock for you?
Yeah.
Yeah. So it's kind of interesting because over the last couple of years, there's been a lot of discussion about advanced node manufacturing coming into the U.S. So you see the CHIPS money coming in, you see folks like Samsung, Intel, TSMC, talking about advanced node wafers being built in the United States. I think what most people don't talk about is the fact that, okay, those advanced nodes have to be packaged, and in reality, most of the packaging capability is offshore. So you're gonna be building wafers in Arizona and then shipping them to Taiwan or Japan to be assembled. And so we recently were awarded a $120 million contract to stand up advanced packaging in the United States.
That $120 million is roughly $60 million in tools, so to stand up the production capability in Florida, and then $60 million to develop the actual technology itself.
Okay.
And we're excited about that because it. We're targeting not only the defense industry, but also the commercial industry. So when you look at folks that are building AI solutions, GPUs, you see multiple die within a package. So often you see multiple compute die with some memory stacks, and that takes advanced packaging. And really, today, there is really not a lot of options in the United States for advanced packaging that's not tied to a specific foundry. So, like, Intel might argue they have advanced packaging, but you have to purchase wafers from Intel to get access to that packaging. So our goal is to stand up this advanced packaging and really be agnostic to where those wafers are coming from.
And we're very bullish on that, just because we believe a lot of people want diversity in the supply chain, and they're, one, gonna have a certain amount, certain percentage of their commercial products, like GPUs, AI solutions, that are actually packaged in the U.S. So today, there's almost zero revenue happening in Florida, and really, this could be a very meaningful business as we kind of roll out that capability over the coming years.
So, two takeaways, John. One is not just, you're not just gonna focus on defense and government business, you're actually going to focus on commercial. Sounds like you're going to focus on high volume and high productivity applications, not just analog.
That's right. That's right.
That's a good way to put it?
Exactly.
Okay.
300 mm as well.
300 millimeter.
And with a very compelling solution.
You brought up CHIPS Act. There's a lot of money being thrown around. I think you should be eligible. You do a bunch of cutting-edge stuff. Maybe talk about how much you've gotten, if you feel like there's more to come, or you're done, for this round, et cetera.
Yeah. So first off, we have gotten no CHIPS awards today-
Okay
... for SkyWater. Even though we have all this other investment coming in, so that's an important point. We have submitted our application, targeted for the Minnesota fab-
Okay
-around modernization and automation, and we've given them everything they need and are expecting now to hear back any moment.
How do you feel about it?
Let's just say, and John and I were joking earlier. We'll wait to see what the PMT looks like.
That's right.
As soon as we get a PMT, then, you know, that's a whole other round of negotiations.
Yeah.
Only one customer has actually closed a contract.
Yeah
-with the Department of Defense, and that was the first company announced.
I think we're excited about the prospect of getting a CHIPS award. I think what's really meaningful is the amount of... When Tom talked about earlier, the CapEx that's coming in, it's customer funded. You know, we've guided over $200 million in customer funded CapEx over the next three years, so 2024 through 2026. You know, up to $80 million this year. So when you look at, you know, materially impacting our ability to do ATS and wafer services, really, the big part of it is really the customer funding CapEx.
Yeah.
Our CHIPS application was really around the modernization of the facility and the fab itself, and that's a really important part of what we spend our CapEx on.
Sure.
I mean, we're excited about the prospect of the CHIPS, but when you think about capabilities and driving our, you know, revenue, it's, you know, the customer funding CapEx is really pretty meaningful.
It is, but you also do a lot of very interesting things. I was thinking biosensing-
Yeah
... there's not a lot of companies I can think of-
That's right
... for quantum.
Mm-hmm.
So it makes a lot of sense that you do actually get some sort of funding.
We echo that, by the way, and if you think about the DoD and the primes investing in SkyWater, this is a nice way to complement it.
Yeah.
But it's more of an accelerant to our plans as opposed to.
I wanted to come back to one of your older lines of businesses, the Wafer Services business. You've had one big customer there. Admittedly, the market and this customer is going through a little bit of a rough patch. How do you see things playing out for this customer and also for that particular end market? Do you think that business has a chance to come back in the near to midterm?
Mm-hmm.
Or perhaps it's a little bit of a longer recovery than that?
Yeah. Wafer services is our volume business, and Infineon has been the legacy customer-
Mm-hmm
... that's the one you referred. They're still working their way through inventory. We're primarily targeting industrial applications as it relates to the inventory. And so we do, you know, as we look at exiting this year, we kind of see our wafer services level as we exit the year, being kind of the bottom, and then we expect growth as we get into next year. But most of that is gonna come from ATS to wafer services conversion, so that's the biosensing, thermal imaging, which is targeted towards the A&D space, and then a modest recovery in wafer service, but that we don't see that as a big driver now.
Tom and John, I wanted to ask you to sort of paint a picture of the landscape for us. There aren't a lot of guys that I can think of that do defense-type application and quantum-type applications, let alone fabs. You know, even companies, there's a handful, two or three, that I can think of. Maybe give us an idea of this landscape that is involved in the making of defense chips and interesting technologies like quantum and biosensing, and who else are you running into?
Yeah, go ahead.
Yeah, so it's a good question. I mean, a little bit of the dynamics, you know, let's just talk about the defense. I mean, obviously, there's a general move for semiconductors being onshore, but the defense has always wanted to source semiconductors onshore. So I think we're in a really good position to continue to drive, you know, if there's an upgrade, let's say, in sensor technologies, that in a number of defense systems like aircraft or drones, you know, there, there's really good opportunity. We're seeing a lot of that being growth... If you look at quantum computing, there's just hundreds of millions of dollars going into quantum, both in the private and government funding. And that is a really unique application that takes some unique semiconductors. Specifically, most of them require superconducting, kind of, interconnect-
Yeah
To do quantum, and that's not something that's just broadly available at foundries. That's something that we've developed, that overall process technology, and it gives us an advantage to kind of work with these companies and really produce these kind of cutting-edge chips that are gonna do the next generation quantum computing. So it could take a little while, obviously, for quantum to go into high-volume production, but certainly they're starting to build out systems in larger scale. Certainly that's an opportunity as they start to add systems with you know going from hundreds of qubits to thousands of qubits, and hundreds of thousands of qubits represents a really good growth opportunity as they start to scale out those systems.
When you look at biomedical, I think that's really fascinating because the whole push for doing diagnostics closer to the patient is a big trend. So, you know, we have customers doing diagnostic things, where they wanna do concussion protocol.
Oh, okay.
Today, you know, today, that you have to go to, let's say, an urgent care or emergency room to see if someone has a... The goal is to kind of build capability to kind of put that in a school or put that in a sports facility. And those kind of applications take specialized, kind of, biomedical semiconductors. So think about there's a special chemical coating that goes over a semiconductor. You place a fluid sample over that, and the interaction with the chemistry, you know, changes the electrical response of the semiconductor itself.
So think about instead of now having to go into urgent care to have a concussion protocol or the emergency room, you can go do that in the field with a simple saliva sample, and to be able to do that, that triage out in the field is really interesting. And there's a lot of innovation going on in that space. That is one of the sectors that is kind of driving our business. So a lot of innovative medical companies that we're working with in that kind of application.
Yeah, it's fascinating stuff. And, anybody else that you're aware of, Tom and John, that has these kind of capabilities to manufacture these kind of chips in the U.S., or are you in a-
We're the only ones.
You're the only ones? What about globally?
No, well, again, I think, a couple unique, you know, aspects. One, we are, you know, U.S.-owned. So if you look at a lot of our competitors, GlobalFoundries, Tower, X-FAB, they're foreign-owned.
Mm-hmm.
So that, by definition, kind of segments certain markets towards us. And then, if you look at, you know, for example, onsemi used to do a lot in the thermal imaging space.
Mm-hmm.
They've redirected, that's opening up opportunity for us. So in terms of pure play, U.S. investor-owned, we're kind of the only game in town. And I think our ATS model, you know, is also very attractive to customers that wanna innovate, wanna protect IP. We're a trusted foundry for the U.S. government, and we apply those same rules to all of our customers. So I think, we're in a very unique position for people who value domestic sourcing of critical, applications.
Fascinating.
I think just to add what Tom was saying, I think a part of it is scale. You know, if you're a multi-billion dollar foundry business, you know, you've got to keep a very expensive fab with your own CapEx. You've got to keep that thing full, and you're looking for higher volume applications. Again, given our low, you know, CapEx spend, you know, low overhead overall of the fab, you know, we can make a good, solid, profitable business of engaging in these opportunities that, you know, may not be the huge multi-billion dollar market, but a very material market size when you look at the size of SkyWater itself.
So, I think we're uniquely positioned at 200 mm, the cost of that, and also, you know, aligning to kind of the size of these emerging markets and being a sweet spot for us to be profitable at.
So some of the applications you mentioned are fascinating. The concussion, I'll call it the concussion chip, for lack of a-
Mm
Better technical name. What are some of these new interesting areas that you are finding your customers show up with, and they want you to make chips? What are some of these new cutting-edge areas that you're running into in terms of companies exploring making chips for?
Yeah.
Yeah. Yeah, I think we talked about, you know, a couple of them. You know, we talked about medical, quantum computing as a couple of interesting ones. Another trend we're kind of looking at is a lot of the systems are requiring, you know, chip-to-chip optics.
Yeah.
Okay? So quantum computing has that. You know, there's chip-to-chip optical requirements. But even when you look at the defense industry, when you look at, let's say, a large sensor, where you're taking in a tremendous amount of data through the sensors, and then that data has to be processed, you know, it becomes more economical, you know, and faster to move that data via optics. So I think one of the areas that we are looking at is like, okay, how do we expand chip-to-chip optics and provide a platform for those type of applications? So I think that's an interesting area. Tom mentioned thermal sensing, so that's a really fascinating part. A lot of the early thermal sensing applications are defense-oriented, right?
If you have an aircraft and you have a defense system and aircraft, you're looking for heat signatures from things like missiles, but that same thermal technology can be moved into industrial applications, okay?
Yeah.
And also, you know, things like automotive, as they start to move kind of thermal sensors into kind of ADAS systems, so I think, you know, some things that were developed originally around the defense industry has these commercial applications that we're excited about, so we see that platform expanding into kind of that industrial and perhaps the automotive space.
... Very cool. And if I was to, I know you've got a business, you have a lot going on, parts moving up and down. But if I dream the dream, where can this financial model go to ideally? You know, what kind of profit margins, gross and op, can we expect from you five years from now?
Yeah. Yeah, I mean, going back to kind of... I mentioned kind of Q2, we're showing, you know, we were non-GAAP EPS positive in Q2 because we got the revenue up into kind of the high sixties. So if you look at the model itself, you know, we get to break even around $70 million in revenue, okay? That gets you around 25% gross margin, and assuming kind of an OpEx of around $15 million dollars, it gets you break even. So really, every dollar above that $70 million really kind of flows through, okay, very nicely into the P&L. So if you look at, hey, if we get to a quarterly run rate of $80 million, you get to a gross margin of around 30%.
And then our longer term model is to get the revenue over $100 million, and then you'll be at, you know, 40%, you know, gross margin at that. So at that $70 million, whether it's, it doesn't, you know, it's a mix of wafer service or ATS. We're sort of, we, it, it's really the combination of that two revenue. You get over to $70 million, and you get very, very good flow-through into the P&L from there.
Incremental is very good.
Incremental is very good. And, and part of what we're trying to do as well is, you know, ATS revenue's been the growth driver, but as we build on these platforms, you have a base technology of a platform. For me to add customers onto that platform incrementally has very little cost.
Yeah.
So as these platform matures, we get more and more customers, and, you know, we can ramp revenue without really increasing the OpEx. And really, that's the strategy, you know, is to try to build more and more platforms around the IP that we've collected over the years.
There's one too many, so I think $400 million, 40% gross margin, is the long-term goal.
I'm gonna poll the room real quick to see if... Yeah, yeah.
Yeah, I have some commentary around that kind of thing. One thing that we've come across in the past is maybe what's the timing for when you think seven moments, but maybe what's the timing on that ramp, and ultimately, how big we take that opportunity to do?
Yeah, so that's a great question. So, you know, we did have a milestone. We had our first advanced packaging tool coming in Q2. Most of the tools given on the lead time will really start in earnest, really starting to flow into the fab in 2025, okay? So most of the tooling will be in place in 2025, and then the ATS revenue will start once those tools start coming in. So that's really when the, you know, you can expect to see kind of the, the tool revenue showing up, as well as the ATS revenue contributing there. Our goal is to start engaging with customers, with pilots, both in the commercial and the DoD space, in the beginning of 2026.
So early 2026, we really should start to be able to do some customer prototyping, and then our goal is to have kind of a production status line in the first half of kind of 2027. And at that point, you'd have a production qualified process in which you could start to generate some production volume.
We think that could be like a $100 million business approaching the end of the decade.
Yeah, please.
Just on quantum.
Yeah.
Obviously, been around for a long time.
Yeah.
Big players, Microsoft, who are marketing, have some special players in it as well. What's your best guess when we collect a steady business for you now? Is there any sort of anchor item you think that business have a set function higher?
Yeah, I think the way what we see is that people are developing a proof of concept, right? So today, you know, people are showing hundreds of qubits, okay? You know, then they have a roadmap in the following year to share thousands, and then, you know, the next year, they want to say hundreds of thousands. So I would say, you know, there's a steady, I would say, order of magnitude growth. You know, what I'll say is they're continuing to innovate the semiconductor technology, right? To handle more qubits in a given, you know, square centimeter of silicon.
So I think of like, it's just gonna be one of those kind of things of steady growth over the next couple of years, and then if it really goes, the inflection point, I think is probably three plus, you know, three to four years out, where you might see some scale of a hundred thousand qubits. So I think for us, we view it as very steady business because of the massive amount of R&D going over in three years, and then there's gonna be some winners that get it to work, and I think if you're on that horse, you are gonna get paid of that, you know, kind of that step function in kind of the three to four-year timeframe.
That's kind of my best guess now, and that's, that's what our customers are telling us as far as when you look at their roadmaps themselves. But, you know, there's a lot of execution to go to get to that point.
It's almost like Moore's Law, qubit growth will be like-
Yeah
... dimensional shrinkage.
Yeah, I wonder what other quantum maybe.
Yeah.
But on and then on the last one is on medical, that tech area. It sounds like it's really percolating some centers you point to. What personal use case class?
Quantum-Si, we announced Quantum-Si. They're a publicly traded company.
Yeah.
We just announced them in our last earnings call, Nautilus Bio.
Nautilus Bio.
Yeah.
Those are two that we publicly-
I think there's kind of large DNA sequencing, protein sequencing, and then think about diagnostics like blood or saliva diagnostics. Like, if you look at that segment, I think that's really interesting, okay? Because I think you'll be able to lower the cost of you know, kind of lab development work with these tools, but also push the diagnostic out, you know, closer to the consumer itself, so. I think what ends up happening is there's a lot of startups in that space. Eventually, they'll get bought by a tier one medical company that has the scale to go, you know, really push it out, right? Then get the insurance coverage and, you know, those things, kind of things you need to do in medical. So that's what we expect.
We're largely working with a lot of startups and, you know, we expect a lot of them to get bought, and then tier ones kind of drive significant volume.
Yeah, NanoDx was the example John gave around traumatic brain injury. That's a public engagement we have.
Great. We are almost out of time, so John and Tom, thank you very much for coming to our conference.
Thanks
... and doing this, this presentation.
All right. Thank you. We appreciate it.