Akoustis Technologies, Inc. (AKTS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Akoustis Technologies conference call. As a reminder, this conference call is being recorded. [Operator Instructions] A replay of the call will be available on the Investor Relations section of the Akoustis' website.

Thank you, operator, and good morning to everyone on the call. We are joined today by our Founder and CEO, Jeff Shealy; CFO, Ken Boller; and EVP of Business Development, Dave Aichele. Before we begin, please note that today's presentation includes forward-looking statements about our business outlook. All statements other than statements of historical facts included in this conference call, such as expectations regarding our strategies, operations, costs, plans and objectives, including the timing and prospects of product development and customer orders, our expectations regarding achieving design wins from current and future customers, the possibility of entering into collaboratives or partnering relationships, potential impacts of the COVID-19 pandemic, litigation matters, guidance regarding expected revenue, product orders and milestones for the current and future fiscal quarters and expectations regarding the integration of acquired business operations are forward-looking statements. Such forward-looking statements are predictions based on the company's expectations as of today and are subject to numerous risks and uncertainties. The company and our management team assume no obligation to update any forward-looking statements made on today's call. Our SEC filings mention important factors that could cause actual results to differ materially. Please refer to our latest Form 10-K and Form 10-Q filed with the SEC to get a better understanding of those risks and uncertainties. I would now like to turn the call over to Jeff Shealy, Founder and CEO of Akoustis.

Thank you, Tom, and welcome, everyone. The purpose of today's call is twofold: first, to discuss our acquisition of GDSI, which closed on January 1, 2023; and second, to provide investors an update on our December quarter. Beginning with our recent public release, I am thrilled to announce the acquisition of Grinding & Dicing Services, Inc., or GDSI. The company is engaged in premium wafer services necessary for packaging a broad range of semiconductor chips. Their services include wafer grinding and polishing, automated inspection, dicing, pick and place, general back-end silicon wafer processing and packaging and quality inspection. The GDSI acquisition brings a new high-margin services business that is immediately accretive to Akoustis while supporting over 250 customers annually. From a strategic standpoint, GDSI is a key part of our supply chain, as we increase the usage of chip scale packaging or CSP and wafer-level packaging or WLP in our XBAW RF filter product portfolio. Further, GDSI is a critical piece of our strategy in 2023 to pursue CHIPS Act funding to create jobs, reshore our packaging supply chain on our campus in upstate New York and create an end-to-end semiconductor supply chain supporting national security. Finally, to our current customers, the acquisition of GDSI will enable Akoustis to shorten the time to market for our leading XBAW filters to take on the rapidly expanding demand for BAW filters that operate at frequencies above 3 gigahertz in the 5G mobile, WiFi, network infrastructure, defense, timing control and other markets. GDSI is a private company headquartered in San Jose, California and provided services to over 250 customers in 2022. The acquisition, as mentioned, is expected to be immediately accretive with additional synergies expected over the next 12 months and beyond as we integrate the 2 companies and leverage Akoustis' existing core competencies. GDSI was the first US-based company to offer noncaptive stealth dicing process capability, a key component in our decision to use GDSI services and now bring the capability in-house through this acquisition. GDSI is ISO 9001, an ITAR registered and carries a trusted supplier accreditation with the United States Department of Defense, which aligns with our growing defense business and our continuing success with the Defense Advanced Research Projects Agency, or DARPA. The rationale for this acquisition includes the addition of a diverse high-margin premium services business that is immediately accretive to our operating model. The gross margins of this new business unit are projected to be approximately 60%, achievement of $1 million in cost savings and cost avoidance related to RF filter prototype activity within the next 18 months, strategic alignment with Akoustis' strategy to leverage the U.S. CHIPS Act of 2022 to create new jobs as we reshore core packaging capabilities from Asia to a new advanced packaging center located on our Canandaigua campus in upstate New York. Specifically, this acquisition allows the opportunity to scale-up our back-end core competencies, including wafer grinding and stealth dicing process capabilities, supporting our CSP and WLP onshore package manufacturing. Additionally, it will drive improved rapid prototype and development cycle time for Akoustis' XBAW filters through back-end process integration and supply chain efficiencies. Integration of onshore front-end and back-end supply chain support national security, new synergistic sales channels in the defense market, including an active trusted supplier accreditation with the Department of Defense. Further, the addition of the GDSI management team, along with significant technical talent and wafer grinding and dicing to complement Akoustis' front-end XBAW technology. And finally, the expansion of XBAW RF filter margins through the internalization of the grinding and dicing process supply chains. Akoustis is paying $14 million in cash and $2 million in stock for GDSI with an additional $4 million in the form of a secured promissory note payable over 3 years based upon key employee retention and agreed upon performance for a total of $20 million. Moving on to an update of our guidance for the December quarter. During our last quarterly call with investors, management communicated that Akoustis expects to continue revenue growth in the December 2022 quarter with 5% to 10% sequential growth. After recently completing our December quarter, we are pleased to reiterate this previous guidance despite the ongoing broader environmental challenges in the semiconductor industry that we discussed on our last conference call. Given the acquisition of GDSI did not occur until January 1, 2023, our December revenue guidance update does not contain any revenue related to our acquisition of GDSI. Looking ahead, we expect our new GDSI business unit to add approximately $1 million to $1.5 million in revenue per quarter beginning in March, and we plan to grow the business in calendar 2023 and beyond, both organically and through potential contributions from the U.S. CHIPS and Science Act of 2022. In conclusion, on behalf of Akoustis management and Board, I would like to welcome Joe Collins, President of GDSI, and the entire GDSI team. We look forward to expanding our internal supply chain capabilities and supporting the growth of GDSI business with external customers. The acquisition of GDSI will enable Akoustis to speed the development of our leading XBAW filters to take on rapidly expanding demand for our XBAW filters for mobile, WiFi, infrastructure, timing, defense and other markets. And, as always, I would like to thank all of you who have joined the call today and our shareholders who continue to support our company. Management is currently planning to hold customer meetings at the 2023 CES trade show this week and would welcome the opportunity to meet in person with investors. Please reach out to Investor Relations to schedule such meetings with management. I would now like to open the call to questions from the investment community. Operator, please go ahead with the first question.

[Operator Instructions] Our first question comes from the line of Suji Desilva with ROTH Capital.

Congratulations on the acquisition this morning. So can you talk Jeff about the timing of the close? I think you might have hinted that on the call. I just wanted to be clear on that.

Suji, Jeff here. I appreciate your comments. Yes, in terms of the timing, so the timing occurred on -- the closing of this acquisition occurred on January 1. So as we said -- yes, so as we said in our comments, in terms of our update on the revenue guidance, there is no impact on -- no contribution when we reiterate guidance, there's no contribution related to this acquisition for the December quarter.

Okay. And can you just talk about maybe what you were seeing with the Asian suppliers, either macro or lead times that perhaps precipitated a move like this?

Yes. So we've been talking -- I'll talk a little bit -- also Dave's been looking at that from -- in terms of impact on customers. But let me at least first start by saying we've been pretty vocal with investors about some of the challenges overseas. We've seen flare-ups of COVID that have put -- continue to see shutdowns due to COVID virus spread in the Asia supply chain. And on top of that energy, as we kind of move through the summer months, energy was -- we're seeing some energy challenges in terms of those supply chains actually being able to run. I think that was primarily due to a water shortage. And then the other aspect of this is -- that's key is lead time where we compete and need prototypes to move very, very quickly and having those go overseas and back. We're putting a lot of airline miles on our chips, getting them to customers. So what that ultimately led us to was began looking at an onshore solution and we began partnering with GDSI more than -- approximately a year ago, and that activity has ramped up nicely. Dave, anything you want to add to that?

Yes, I'll make a couple of comments, Suji. The improvement that we're going to see at least on the MPI side is around 3x improvement cycle time for the MPI, which to Jeff's point, some of the customers, the cycle time on WiFi AP for carrier retail and even the enterprise, they're doing -- their spends fairly rapidly. So we want to make sure that we're getting the initial prototypes on to them and any iterative design prototypes in a manner that meets their demand. Additionally, GDSI adds a lot of talent and leadership in the dicing and grinding and making dial-in processes, and we can work with them to transfer that more effectively than work remote with our -- those at overseas. So it adds 2 benefits from an MPI standpoint.

Great. Helpful color. And then third question, is there -- I don't know GDSI's manufacturing footprint. Will there be a technology transfer and/or CapEx added upstate New York to have lines there as well? Or how will that be combined?

Yes. Let me comment on that. As we said in the announcement, so this is a -- what we acquired here was a premium services business. So Dave touched on the expertise that we're getting in the back-end. As investors know, Akoustis has built a front-end expertise in chips in the upstate New York campus. And what we're complementing that with here is the back-end, which is the processes that go into the packaging of those chips. And so from a tech transfer, we've got a profitable stand-alone entity on the West Coast. We would look to expand this brand into our upstate New York campus. I think that creates jobs. It addresses some critical requirements that we need for our upcoming CHIPS Act application with Department of Commerce that we plan on pursuing. And so we really have the opportunity of having some of those services and scale up of those services in our Finger Lakes campus there in Canandaigua, New York. So I think I touched on your question there, Suji.

You did, Jeff. Yes. And last quick question and then I'll get back in the queue. Is this acquisition 1 of maybe several you may need to shore up your supply chain? Or do you feel like this is kind of what you need? Just understanding growth math potential to get to where you want from a footprint capability perspective?