Executive Summary / Key Takeaways

• SkyWater Technology is executing a strategic transformation from a niche technology foundry to a scaled domestic semiconductor manufacturer, anchored by its pending acquisition of Infineon (IFNNY)'s Fab 25, which is expected to significantly increase capacity and provide stable, high-volume Wafer Services revenue.
• The company's Technology-as-a-Service (TaaS) model, focused on co-developing differentiated IP and transitioning it to production, is driving growth in high-value markets like aerospace & defense, advanced compute (quantum), bio-health, and thermal imaging, diversifying its revenue mix away from legacy segments.
• Despite near-term headwinds from U.S. government funding delays impacting ATS revenue in Q1 2025, management maintains its full-year 2025 outlook for modest combined ATS/Wafer Services growth (5% +/- 2%), anticipating a strong rebound in the second half driven by funding resolution and new program ramps.
• Significant customer co-investment in tooling and strategic government initiatives like the CHIPS Act and ME Commons are accelerating capability expansion, particularly in advanced packaging in Florida, positioning SkyWater for future growth and profitability expansion.
• While facing competitive pressures from larger, more efficient foundries and IP licensors, SkyWater's unique U.S.-based, trusted status and specialized technology platforms (e.g., Rad-Hard, ThermaView, MEBL) provide a competitive moat in critical domestic supply chain segments.

Forging a Domestic Foundry Powerhouse

SkyWater Technology, Inc. operates as a U.S.-based, independent, pure-play technology foundry, strategically positioned within the critical domestic semiconductor landscape. Its core business model, Technology-as-a-Service (TaaS), differentiates it from traditional foundries by focusing on collaborative process technology development with customers. This approach leverages proprietary technology, engineering expertise, and manufacturing capacity to co-create intellectual property that enables disruptive microelectronics concepts across diverse applications. Complementing this development work, SkyWater provides volume manufacturing services, known as Wafer Services, for high-growth markets.

The company's history, originating from the transformation of foundational semiconductor IDM assets in 2017, laid the groundwork for its current strategic direction. Operating primarily from its Minnesota fabrication facility, which was part of a sale-leaseback transaction in 2020, SkyWater has steadily built its ATS business. This segment has been a key growth driver, demonstrating strong performance including double-digit revenue growth in 2024, fueled by demand from aerospace and defense (A&D) and advanced compute customers. Expansion into advanced packaging began with the lease of the Center for NeoVation (CfN) facility in Florida in 2021, targeting capabilities like fan-out wafer level packaging with significant outside funding.

In the competitive landscape, SkyWater operates alongside larger, more established players like Intel (INTC) and NVIDIA (NVDA), as well as specialized IP providers like CEVA (CEVA). While giants like Intel and NVIDIA benefit from immense scale, integrated operations, and significantly higher profitability (Intel's TTM gross margin is 33%, NVIDIA's is 75%, compared to SkyWater's TTM gross margin of 21.89%), SkyWater carves out a niche through its TaaS model and focus on specialized, high-value applications where customization, IP security, and a trusted domestic supply chain are paramount. Its gross margins, while lower than the industry leaders, are expected to expand significantly as new, higher-value Wafer Services programs ramp. The company's smaller scale does present challenges in terms of cost efficiency compared to mass-production fabs, potentially resulting in higher operating costs per unit. However, its strategic focus on niche markets with less price sensitivity helps mitigate this.

SkyWater's technological differentiation forms a critical part of its competitive moat. The company develops and offers specialized platforms enabling unique customer solutions. For instance, its Rad-Hard CMOS technology is designed for extreme environments, offering enhanced reliability crucial for defense and space applications. The recent installation of Multi-beam's MEBL system in Minnesota enables sub-50 nanometer patterning on 200mm wafers, a capability that is orders of magnitude faster than traditional e-beam and highly valuable for complex 3D devices like MEMS and photonics, as well as secure chip identification. The newly launched ThermaView platform is a dedicated 90-nanometer CMOS and MEMS technology specifically for the advanced thermal imaging market, leveraging SkyWater's expertise to address a growing $9 billion market opportunity. In the advanced compute space, SkyWater's capabilities in superconducting technology, including proprietary process integration and cryogenic testing, are instrumental in enabling quantum computing innovations, as highlighted by its work with D-Wave (QBTS) and Si-Quantum. These technologies provide tangible benefits such as enhanced performance, increased reliability in demanding conditions, and the ability to realize complex, custom designs that are not feasible in standard foundry flows. For investors, these technological strengths translate into access to high-growth, high-value markets and the potential for higher average selling prices (ASPs) and stronger customer stickiness compared to commoditized foundry services.

Recent Performance and Strategic Momentum

SkyWater's first quarter of fiscal year 2025 reflected a mix of strategic progress and temporary market headwinds. Total revenue for Q1 2025 was $61.3 million, a decrease of 23% compared to $79.6 million in Q1 2024. This decline was primarily driven by decreases in Tools revenue ($1.2 million in Q1 2025 vs. $8.5 million in Q1 2024) and ATS revenue ($52.5 million vs. $61.2 million). The significant drop in Tools revenue was attributed to the completion of customer investment efforts related to prior ATS development programs. The decrease in ATS revenue stemmed largely from an $8.8 million reduction in Aerospace Defense revenue, a direct consequence of prolonged U.S. government budget negotiations and delayed contract awards that impacted program funding. While some of this decline ($2.7 million) was due to programs successfully transitioning to Wafer Services, the overall A&D slowdown was a notable headwind. Wafer Services revenue also saw a decrease, falling 25% to $7.5 million from $10.0 million, primarily due to a $4.2 million decline from a key automotive customer facing oversupply challenges and a $1.0 million decrease from a medical customer. However, this was partially offset by growth from an A&D customer (including the aforementioned transition) and a consumer customer.

Despite the top-line pressure, gross profit saw a modest increase to $14.3 million in Q1 2025 from $13.0 million in Q1 2024, benefiting from a favorable warranty accrual reversal. Operating expenses increased, primarily driven by a $3.9 million rise in Selling, General, and Administrative expenses, including $1.8 million in costs related to the pending Fab 25 acquisition. This resulted in an operating loss of $4.0 million, wider than the $2.2 million loss in the prior year quarter. Net loss increased to $7.3 million from $5.7 million. Adjusted EBITDA decreased to $4.0 million from $4.9 million, reflecting the impact of the ATS revenue headwinds.

Liquidity remains a key focus. As of March 30, 2025, SkyWater held $51.2 million in cash and cash equivalents, a significant increase from $18.8 million at the end of fiscal 2024. This increase was primarily driven by a large cash receipt from a customer intended to fund future tool installations. The company's total debt stood at approximately $60 million, with $23.9 million outstanding on its Revolver and $106.1 million in remaining availability. Management confirmed compliance with all applicable financial covenants. A support letter from Oxbow Industries for up to $12.5 million through March 2026 provides additional financial flexibility. The company has $26.9 million in contractual commitments for capital expenditures expected in the remainder of 2025, which it plans to fund through cash on hand and operating cash flows.

Strategic Expansion and Outlook

The most significant strategic development for SkyWater is the pending acquisition of Infineon's Fab 25 in Austin, Texas, announced in February 2025 and expected to close mid-year. This move is transformative, aiming to significantly expand SkyWater's 200-millimeter manufacturing capacity and capabilities in foundational semiconductor nodes, including 65nm production and high-volume copper interconnect. The acquisition, with a base purchase price of $80 million ($55 million cash at closing, $25 million deferred via wafer credits) plus an estimated $30 million for working capital, is expected to be financed through new debt. Crucially, it includes a 4-year supply agreement with Infineon valued at over $1 billion, which is anticipated to contribute approximately $300 million in annual Wafer Services revenue. This provides immediate, stable revenue and positive cash flow, significantly balancing SkyWater's revenue mix towards Wafer Services and accelerating its path to profitability. The acquisition is expected to make SkyWater one of the largest domestic providers of 200-millimeter wafer foundry capacity, aligning strongly with U.S. semiconductor onshoring initiatives and expanding its total addressable market by over $3 billion.

Beyond the Fab 25 acquisition, SkyWater is focused on several key growth vectors. The strategy of converting successful ATS programs to Wafer Services is gaining traction. New products, led by the ThermaView platform and other recent conversions (like QuantumPsi and NanoDx), are expected to fuel most of Wafer Services growth in 2025, shifting the mix to approximately 60% new products from 90% legacy in 2024. This transition is vital for replacing declining legacy volume and driving higher margins. The Florida advanced packaging business is also poised for growth, expected to contribute to ATS revenue in the second half of 2025 as tool installations (funded by the $120 million contract) and development ramp up, with significant ATS growth anticipated in 2026. Customer co-investment in tooling, expected to total over $200 million between 2024 and 2026, continues to add critical capabilities without substantial capital outlay from SkyWater.

Management's outlook for the full year 2025 remains largely unchanged, anticipating approximately 5% revenue growth for the combined ATS and Wafer Services business (pre-Fab 25). Due to the A&D funding delays experienced in Q1, the year is expected to be more back-half weighted, with a strong rebound in ATS growth projected to begin in Q3. Q2 2025 guidance reflects this near-term softness, with total revenue expected between $55 million and $60 million, including $49 million to $53 million in ATS, $5 million to $6 million in Wafer Services, and less than $1 million in Tools. Gross margin for Q2 is guided between 16% and 19%. For the full year, management aims for positive non-GAAP EPS and adjusted EBITDA of at least 10% of total revenue. Gross margins on the core ATS and Wafer Services business are expected to expand into the 30s in the second half, resulting in a reported non-GAAP gross margin of 23% to 27% for the full year (impacted by approximately $30 million in Tools revenue with little profit).

Risks and Challenges

Despite the strategic momentum, SkyWater faces notable risks. The dependence on U.S. government funding for a significant portion of its ATS revenue exposes it to budget delays and shifts in priorities, as evidenced by the Q1 2025 performance. While management is confident in the long-term viability of these programs, the timing of funding remains uncertain. The weakness in legacy Wafer Services segments like automotive and industrial could persist longer than anticipated, impacting the overall top line until new programs fully ramp. Execution risk exists in integrating the Fab 25 acquisition, transitioning it to a foundry model, and successfully ramping new technologies and customer programs in both Minnesota and Florida. Potential impacts from tariffs and trade policies, while believed to be limited compared to multinational peers, could increase costs for imported materials and equipment. Customer concentration is also a factor, with two customers accounting for 53% of Q1 2025 revenue, making the company vulnerable to demand fluctuations from these key partners. Furthermore, the previously disclosed material weakness in internal control over financial reporting related to the revenue accounting process requires ongoing remediation efforts.

Conclusion

SkyWater Technology is at a pivotal juncture, transforming its business through strategic expansion and leveraging its unique domestic foundry model and differentiated technology platforms. The pending acquisition of Fab 25 is a game-changer, promising significant scale, stable revenue, and accelerated progress towards profitability, while reinforcing the company's position in the critical U.S. semiconductor supply chain. Although near-term headwinds from government funding delays have impacted recent performance and outlook, management's confidence in a second-half rebound and the long-term growth trajectory driven by ATS-to-Wafer Services conversions, advanced packaging, and customer co-investment remains firm. Investors should monitor the successful closing and integration of Fab 25, the resolution of A&D funding, and the ramp-up pace of new, high-value Wafer Services programs as key indicators of SkyWater's ability to execute its strategic vision and deliver on its path to sustainable growth and profitability in a competitive, yet opportunity-rich, domestic market.