SkyWater Technology, Inc. (NASDAQ:SKYT) is a U.S.-based, independent, pure-play technology foundry that offers advanced semiconductor development and manufacturing services. The company has firmly established its unique value proposition within the global semiconductor industry by leveraging existing chip manufacturing infrastructure and introducing new materials and processes to enhance the capabilities of traditional IC flows.

Financials

SkyWater's revenue has grown at a 3-year annual rate of 27%, reaching $286.7 million in the fiscal year ended December 31, 2023. However, the company has yet to achieve profitability, reporting a net loss of $30.8 million for the same period. Despite this, SkyWater's management remains confident in the company's ability to achieve long-term growth and profitability.

First Quarter 2024 Results

In the first quarter of 2024, SkyWater reported record revenue of $79.6 million, up 20% from the same period in the prior year. This growth was driven by a 28% increase in Advanced Technology Services (ATS) development revenue, which reached $61.2 million. Wafer Services revenue declined to $10.0 million, while tool revenue was $8.5 million, lower than expected due to delays in equipment deliveries.

The company's gross margin for the first quarter was 16.9%, lower than the expected low 19% range, due to an $8.0 million charge recorded to reflect the anticipated additional costs required to complete certain development milestones for a significant aerospace and defense (A&D) program. Excluding this charge, SkyWater's gross margin would have surpassed its prior expectations, primarily due to the more favorable revenue mix in the quarter.

Outlook

Looking ahead, SkyWater expects second quarter 2024 revenue to be in the low to mid $80 million range, with ATS development revenue in the high $50 million range, Wafer Services revenue of $4 million to $5 million, and at least $20 million in tool sales. The company forecasts non-GAAP gross margin in the range of 16% to 19% for the second quarter, reflecting the greater mix of tool sales, which are expected to impact gross margin by 300 to 500 basis points.

For the full year 2024, SkyWater continues to expect ATS development revenue growth in the range of 10% to 20%, a significant increase in tool sales, and a meaningful decline in Wafer Services revenue. The company's revenue growth expectations for the year remain largely unchanged since its previous guidance.

Business Overview

SkyWater's business model is unique in the semiconductor industry, as it leverages its existing infrastructure and introduces new materials and processes to create innovative solutions for its customers. The company's ATS development business has become the primary driver of its revenue growth, surpassing its legacy Wafer Services business.

One of the key advantages of SkyWater's business model is its low capital expenditure requirements. The company's customers are funding the majority of its current CapEx needs, which it expects to continue over the next few years. This customer-funded CapEx is expected to total approximately $200 million from 2024 to 2026, representing a significant co-investment in SkyWater's capabilities.

Revenue Breakdown

SkyWater's geographic revenue breakdown for the first quarter of 2024 was as follows: United States (95.7%), Canada (2.8%), Hong Kong (0.1%), United Kingdom (0.4%), and all other countries (1.1%). The company's revenue is primarily driven by its domestic operations, with a growing presence in international markets.

In terms of revenue by service type, ATS development accounted for 76.8% of total revenue in the first quarter of 2024, up from 72.3% in the same period of the prior year. Wafer Services revenue declined to 12.5% of total revenue, down from 26.9% in the first quarter of 2023, reflecting the continued softness in the broader industrial market and SkyWater's increased focus on ATS. Tool revenue represented 10.6% of total revenue, up from 0.8% in the first quarter of 2023, driven by increased investment by customers to acquire tools that advance SkyWater's capabilities for their ATS development programs.

Liquidity

SkyWater's liquidity position remains strong, with $20.0 million in cash and cash equivalents and $62.7 million in available borrowing capacity under its revolving credit facility as of March 31, 2024. The company's capital expenditures for the first quarter of 2024 were $2.0 million, or approximately 3% of revenue, reflecting the significant customer-funded investments in its operations.

The company's financial ratios demonstrate its solid financial position. As of March 31, 2024, SkyWater had a current ratio of 0.95 and a quick ratio of 0.85, indicating its ability to meet short-term obligations. The company's debt-to-equity ratio was 1.41, suggesting a moderate level of leverage.

Risks and Challenges

SkyWater's business is not without risks, however. The company operates in a highly competitive and cyclical semiconductor industry, and it faces the challenge of transitioning its legacy Wafer Services business to its higher-margin ATS development offerings. Additionally, the company's reliance on a limited number of large customers, including the U.S. government, exposes it to customer concentration risk.

Conclusion

Despite these risks, SkyWater's unique business model, strong customer relationships, and growing pipeline of ATS development projects position the company for continued growth and the potential to achieve profitability in the coming years. As the semiconductor industry continues to evolve, SkyWater's ability to leverage its existing infrastructure and introduce innovative solutions could make it an attractive investment opportunity for investors seeking exposure to the micro-cap semiconductor space.