Mobile World Congress Kicks Off

Earnings Highlights

SkyWater Technology (SKYT) beat top-line expectations and reported a lower loss than expectations for the December quarter. The company reported revenue of $79.2 million for the quarter vs. analyst consensus expectations of $74.8, its sixth straight quarter of top-line growth, and delivered a non-GAAP loss per share of ($0.02) vs. consensus of ($0.12). This was a pretty decent result given that gross margins dropped to 17.4% in the quarter, down from 20.4% in the prior quarter.

SkyWater grew its advanced technology service (ATS) development revenue approximately 19% Y/Y, which is revenue for technology IP development with its customers. Aerospace and defense was over 60% of ATS revenue in CY23 and 50% of overall revenue. The company was also able to grow its tool revenue from $0.0 in CY22 to nearly $14.7 million in CY23. This was offset by wafer services, which dropped 30% Y/Y, primarily due to softening demand at its largest customer.

The company expects its ATS revenue will grow another 10-20% in CY24, driven by defense, advanced computing and medical diagnostics. This would imply revenue of $259.4 million in CY24 at the mid-point of the range, up from $225.6 million in CY23. However, management stated that it expects tool revenue to grow from $14.7 million to approximately $60.0 million, which implies that its ATS revenue without tools is expected to drop over $11 million in CY24. Wafer service revenue is expected to drop 50% Y/Y in CY24 to $30.5 million despite the anticipated growth in bio health revenue as medical device companies transition to wafer services from ATS. The net result is, according to the mid-range of company guidance, revenue is expected to be relatively flat in CY24 at about $289.9 million, just above the $286.7 million reported for CY23 last night. Importantly, gross margins will continue to be negatively impacted by the drop in wafer services, offset later in the year through the shift to customer-funded capex, and management expects full-year 2024 gross margins to improve by the end the year, enough to achieve non-GAAP profitability.

On a positive note, SkyWater has recently received a $190 million reward from the Department of Defense over the next five years to develop advanced packaging technologies at its Florida facility. Most advanced packaging is currently being produced offshore, specifically in Asia, and the development of US-based packaging capability will be received well by both American defense and commercial companies. This will be a new area of growth for SkyWater, production of these new packages will take time to develop and contribute to overall performance.

While last night’s report was positive relative to analyst’ expectations, the outlook for 2024 calls for relatively anemic overall growth as the company continues its transition. Gross margins were a concern on the call, but management is executing through a difficult transition, especially given the lack of contribution from the CHIPS Act. Given the expected revenue growth in CY24 and the gross margin pressure driven by the revenue mix shift, the outlook likely doesn’t support significant reason for stock appreciation, especially given it has jumped over 100% from under $5.00 in October of 2023. However, the stock does appear to have found its bottom and may continue to rally throughout 2024 if management can continue to execute through the transition and start to deliver on improving gross and operating margins.

In Other News

• MWC kicks off in Barcelona - The world’s largest trade show for mobile communications started yesterday, with all of the latest toys on display. All of the lates smartphones, tablets, laptops watches and now rings will be on display this week, with increasing displays outside of traditional mobile devices including automotive, artificial intelligence “smartphone killers” and other applications. Expect multiple new product announcements over the course of the week as product companies attempt to drive new growth in mobile after a few relatively stagnant years. Mobile World Congress Link

• Wrist Phones - Samsung and Motorola introduced the first concept wrist phones. Both offer bendable displays that can be taken off the arm and flattened to operate much as any existing smartphone today, but then “parked” on the wrist after use, becoming, in essence, a really, really large smartwatch. Whether we ever see either of these phones in production is anyone’s guess, but it is nice that at least two manufacturers continue to find a compelling alternative to the candy bar shaped form factor that has dominated smartphones for over a decade.

• Qualcomm - announced that it was “revolutionizing the future of AI and connectivity with groundbreaking innovations” yesterday, positing that generative AI could add the equivalent of $2.6 to $4.4 trillion in economic benefits annually. (It sourced McKinsey’s June 14, 2023 report) Qualcomm highlights:

  • Qualcomm AI Hub - a new library of over 75 pre-optimized AI models for Snapdragon powered devices, offered on Qualcomm AI Hub, Hugging Face and GitHub

  

  Source: Qualcomm

  • Snapdragon X80 5G modem RF system - the first modem with fully integrated NB-NTN satellite communications support for connectivity to non-terrestrial networks. A dedicated tensor accelerator powers AI optimization that improves throughput, quality of service (QoS), coverage, latency, spectrum efficiency, power efficiency, and mmWave beam management. Download speeds are expected to be in the 10 Gb/s range, with uplink up to 3.5 Gb/s. We expect that this new modem will be included as part of the Snapdragon 8 Gen 4 processor, and is expected to be released in the second half of CY24, potentially in time for the next iPhones.

  • Qualcomm FastConnect 7900 - This new chip integrates Wi-Fi 7, Bluetooth and Ultra-Wideband technologies.

  • AI research demonstrations

    • World’s first ​large multimodal model (LMM)​ on an Android phone — a 7+ billion parameter LMM that can accept multiple types of data inputs, including text and images, and generate multi-turn conversations with an AI assistant about an image — running on an Android smartphone for the first time.

    • Stable Diffusion with Low Rank Adaptation (LoRA) — a technique enabling scalable and customized on-device generative AI across use cases — running on an Android smartphone.

    • World’s first on-device demonstration of a 7+ billion parameter LMM running on a Windows PC that can accept text and audio inputs (e.g., music, sound of traffic, etc.) and then generate multi-turn conversations about the audio.

• Mistral AI - Paris-based start-up Mistral AI launched a new large language model (LLM) called Mistral Large yesterday, to compete with leading models including OpenAI’s Chat-GPT 4 and Google’s Gemini. The service for consumers to access the LLM is called Le Chat and was released into beta yesterday. The company also announced a new partnership with Microsoft, one of its lead investors, which will give Mistral’s engineers access to Microsoft’s Azure supercomputing infrastructure. And, not to be outdone, the European Union’s competition watchdog has already announced that it is looking into the partnership.

Insider Activity

Insider sales over the past couple of days have been relatively tame, although it should be noted that PI’s CFO and COO are getting awfully close to flat in terms of ownership, with the CFO down to 65K shares and the COO down to 52K.

The COO of CRDO sold 30% of their position in the month of February alone, close to $40 million, so not a bad month.

Earnings Calendar

Cover art provided by Andrew Lanson/CNET