Aehr Test Systems (AEHR) 2003 Q4 法說會逐字稿

Good afternoon ladies and gentlemen welcome to the Aehr Test Systems fourth quarter and fiscal year 2003 results conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (Caller Instructions) As a reminder, this conference is being recorded Tuesday, July 22nd, 2003. I would now like to turn the conference over to Jocelyn Hunter (ph) with F. R. B. Webber Shandwick.

Thank you. Good afternoon and thank you for joining us to discuss Aehr Test Systems' results for the fourth quarter and fiscal year 2003, ended May 31, 2003. By now, you should have all received a copy of today's press release. If you do not have one, please call my office at 310-407-6555 and we will get a copy to you right away.

With us today from management are Rhea Posedale, Chairman, President and Chief Executive Officer, C. J. Meurell, President and Chief Operating Officer and Gary Larson, Vice President of Finance and Chief Financial Officer. Management will review its operating performance for the quarter and fiscal year 2003 before opening the call to questions. I would now like to turn the call over to Gary Larson.

Thank you, Jocelyn and thanks everyone for joining us today. Before we begin, I'd like to go over our safe Harbor statement. Please be advised that during the course of our discussion, we may make forward-looking statements that involve risks and uncertainties relating to projections regarding industry growth and customer demand for Aehr Test products. Actual results may vary from projected results. These risks and uncertainties include, without limitation, economic conditions in Asia and elsewhere, (technical difficulty) acceptance by customers of the FOX, MTX, MAX and diepak technologies; the ability of the company to gain business in China; the company's development and manufacture of commercially successful laser-level (ph) burn-in systems; the potential emergence of alternative technologies which could adversely affect demand for Aehr Test's products in fiscal year 2004. See Aehr Test's 10-K and 10-Q report filed with the SEC for a more detailed description of the risks facing our business. The company disclaims any obligation to update information contained in any forward-looking statement to reflect events or circumstances occurring after the date of this conference call. Now I would like to introduce our Chairman and CEO, Rhea Posedel.

Thank you, Gary. Good afternoon and welcome to our conference call for the fourth quarter and fiscal year 2003.

We are very pleased to report that fourth quarter revenues exceeded 4.6 million, an increase of 31 percent over the same quarter last year and up 15 percent over the prior quarter. This marks the second sequential quarter of double-digit growth and net sales reached their highest quarterly level of the past two years during this protracted semiconductor industry downturn. The quarter-to-quarter jump was a result of an increase in demand for our core test and burn-in systems, a trend we began seeing in the third quarter. While we are focused on driving our topline performance, we remain committed to tightly managing our cost. The combination of revenue growth and cost controls resulted in a substantial reduction in our operating loss for the fourth quarter, compared to both the year ago quarter and the previous quarter. We also reduced our net loss to $677,000, or 9 cents per share, which is a 5 cent improvement over the prior quarter.

Most importantly, our balance sheet remains solid and we further strengthened our financial condition by increasing our cash and investments by almost $2 million over the third quarter's level. For the year ended May 31, 2003, we are proud to report that revenues increased 20 percent to $5.1 million -- $15 million, excuse me -- in an extremely difficult market environment. Also during this downturn, which is by far the longest one I've experienced in my 25-plus years in the industry, we grew backlog at year-end to 5.1 million from 3.9 million at the end of fiscal 2002.

While the outlook in the semiconductor equipment sector remains cloudy, we believe that this could be a positive sign pointing to recovery in our business in fiscal 2004. Gary will go into greater detail about our fourth quarter and fiscal 2003 financial performance later in the call.

Operationally, there are a number of highlights in the fourth quarter to share with you. As I mentioned earlier, our revenue growth was driven primarily by increased demand for our core, test and burn-in products, namely our MAX4 and MTX systems. We are encouraged by the increase in orders for our MAX4 systems used to test and burn-in lower voltage, higher current logic ICs, primarily for handheld and wireless communication products. During the quarter, we sold a MAX4 system to a new customer, a top 10 integrated device manufacturer for reliability qualifications of their new 300 millimeter fab. We believe that we will see additional MAX4 orders over the next few quarters as the need for wireless communication ICs, such as digital signal processors, increases in response to consumer demand with the newest cellphones with color displays and cameras.

Our growth strategy continues to be two-pronged. While we are expanding our markets and enhancing our core MAX and MTX products, we're investing in research and development to expand our FOX product line, which we believe will fuel our growth over the long term. As one of the very few systems that can perform full wafer parallel burn-in test of ICs at the wafer level, the FOX system has the potential of revolutionizing the way ICs are made. We believe that it will allow manufacturers to achieve significant cost savings and reduce cycle times. A unique feature of the FOX system is the wafer pack cartridge, which we have designed to be compatible with a wide range of devices in contact technologies. We are optimistic that the FOX family of products will expand our addressable markets, serving as our long-term growth vehicle to attract new customers and to create new revenue opportunities. We are making significant progress with the FOX product line and are pleased to recap several significant accomplishments for fiscal 2003.

This March, we announced that we had received our first order for a FOX full wafer contact tester from a major semiconductor manufacturer. As you may recall, back in May 2002, we received a $2.2 million engineering development order for the FOX test system. In the third quarter, we completed a development milestone and recognized $750,000 in revenue. We are proud to announce that during the fourth quarter, we reached another development milestone that resulted in the recognition of $400,000 in revenue. Our progress is strong and steady and CJ will talk more about the FOX and its market opportunities later.

Looking forward, the outlook is still cloudy in the semiconductor equipment sector and we believe that our net sales in the first quarter of fiscal 2004 may be down somewhat compared to the fourth quarter's level. Despite limited visibility, we believe long-term that our strategy will enable us to continue to weather this downturn, reduce our operating loss and drive us toward profitability. In the short term, we plan to maintain tight cost controls and we expect the demand for our core products to mostly track to industry's forecasted gradual recovery over the next 6-9 months. At the same time, we will continue to invest in development of FOX products, which with the FOX tester order we announced last March, is beginning to bear fruit.

For more than 25 years of industry and economic ups and downs, Aehr Test remains a market leader by staying ahead of the technology curve, setting the standard in developing new and enhanced products that meet the changing needs of its customers. We're confident about the long-term potential and future of Aehr Test. Now I'd like to turn the call over to CJ Meurrell, our President and Chief Operating Officer. He'll say a few words about the recent SemiCon (ph) show and talk further about the market opportunities for the FOX product line.

Thanks, Rhea. At the Semicon West show last week, we unveiled the MTXP, a new addition to our MTX line of massively paralleled test systems that drives time and cost out of memory testing by performing tests on thousands of chips simultaneously. The MTXP has new and improved signal and power supply electronics, allowing the system's throughput to increase by more than 50 percent with the capability to process over 12,000 of the latest DDR DRAMs at one time. Our competition must offer a larger footprint system to meet similar capacity, therefore absorbing more of the customer's critical and expensive floorspace. We believe this high-capacity MTXP improves our competitive position in the extremely cost-sensitive DRAM market. Additionally, the MTXP maintains software, program and system interface compatibility with our existing systems, making this not only a compelling system to new customers, but also an attractive upgrade to our installed base. This MTXP electronics is being well-received in Taiwan and is currently being evaluated among (indiscernible) test and assembly subcontractors.

The major highlight of the show was the high interest level for our FOX products. A common theme throughout the customer booth visits was heir willingness to pursue full wafer contact for test and burn-in. We were visited by many of the major semiconductor manufacturers to discuss test and burn-in at wafer level. One prospective customer told me that he has been tapped to test and assemble an ever-increasing quantity of their devices with significantly less cost and fewer people. He believes that only way to accomplish this goal is to move to full wafer contact for test and burn-in. We believe the semiconductor industry is ready to invest in the infrastructure required to move from package to wafer test and burn-in. In order for Aehr Test to make this industry opportunity, we have had to make great progress on the FOX family of products.

In the fourth quarter, we successfully accomplished another major development goal, which resulted in the recognition of $400,000 in revenues for the quarter. As Rhea mentioned earlier, we announced in March that we had received our first order for a FOX system, slated to ship in our third quarter of fiscal 2004. We are extremely proud of this major achievement as it shows a leading semiconductor manufacturer has evaluated our technology, found it to meet its performance targets and made the commitment to a purchase system. This accomplishment also demonstrates that our long-term investment is beginning to yield tangible results and gives us added confidence in the potential of the FOX product line. We plan to begin acceptance of this FOX system during the third fiscal quarter.

Utilizing the unique cartridge technology that combines full wafer contactors with industry proven parallel test electronics, the FOX products are being considered by semiconductor manufacturers for a number of different uses and applications. For example, the FOX tester stands apart from the competition and can hit thousands of dies in parallel, compared with a typical memory tester at wafer probe which can only test 32 or 64 die-in parallels. As a result, some IC manufacturers are attracted to our full wafer contact tester as a solution to reduce their escalating test costs for logic and memory products.

Another opportunity is the use our FOX system as a wafer processor monitoring tool to speed up liability qualification of new 200 and 300 millimeter fabs. Our FOX process monitor allows manufacturers to perform burn-in and test at wafer level, thereby saving the extra time needed for multiple cycles of packaging burn-in and testing that usually take weeks to complete. Firmly, our goal is to position our FOX process monitor as one of the yield tools needed for a new 300 millimeter fab. We believe that this is a terrific opportunity for Aehr Test as it expands our addressable market to include front-end manufacturing where capital expenditures are slightly higher than for back end test and burn-in equipment. We expect additional FOX orders before the end of our fiscal fourth quarter and plan to begin acceptance of the first system during that quarter. As you can see, we are very focused on our product development efforts and are convinced that these investments will drive the long-term growth and success of Aehr Test. We look forward to updating you on our continued progress. I would like now to turn the call over to Gary to discuss our fourth quarter and fiscal 2003 financial performance. Gary.

Thanks, C.J. We reported net sales of $4.6 million for the quarter, a significant increase of 31 percent over the 3.5 million we reported for the fourth quarter of fiscal 2002. Due to the previous quarter, net sales grew 15 percent. As Rhea mentioned earlier, the sequential quarterly increase in sales was driven by the increase in demand for our core test and burn-in systems and the milestone completion in the FOX system development project. Gross margin for the quarter was 36 percent, down from the year-ago quarter of 47 percent. The decrease in gross margin was primarily the result of an increase in system sales, which had a relatively lower gross margin and a decrease in the amount of wafer level burn-in milestone revenue, which has a relatively high gross margin. Additionally as we mentioned in the last call, we are seeing pricing pressure resulting from intense competition for business during this protracted downturn.

SG&A expenses were $1.3 million, down from the 1.7 million recorded in the same quarter of the prior year. R&D costs increased to 1.2 million, compared with 1.1 million for the year-ago quarter. As we expected, R&D costs were higher due to increased spending associated with the development of our FOX product line. Fourth quarter operating loss was $864,000, a 28 percent reduction from 1.2 million in the fourth quarter of fiscal 2002 and a 20 percent reduction from operating loss of 1.1 million in the third quarter of fiscal 2003. We reported a net loss for the quarter of $677,000, or 9 cents per share versus a net loss of $3.1 million, or 43 cents per share for the year-ago quarter. Fourth quarter fiscal 2002 net loss included a non-cash charge of $2.5 million, or 34 cents per share related to the deferred tax asset valuation allowance. You will recall that we do not currently record tax benefits for our losses in our Japan or U.S. operations.

For the fiscal year ended May 31, 2003 we generated net sales of $15.1 million, compared with $12.6 million for fiscal 2002, representing a 20 percent increase. Net loss for fiscal 2003 was $4.5 million, or 63 cents per share, compared with a net loss of $5.3 million, or 74 cents per share for the prior fiscal year. As noted previously, the net loss in fiscal 2002 included the non-cash charge associate with the deferred tax asset valuation allowance.

Turning to our balance sheet, as of May 31, 2003, we had no debt outstanding and ended the year with a strong cash position. Cash, short-term investment and long-term investment increased $11.4 million, or $1.59 per share and shareholders equity totaled $25.3 million, or $3.54 per share. We were able to reduce accounts receivable by $2.7 million during the quarter. We continue to buy back shares over time. Throughout this program, we've bought back 523,700 shares. In this most recent quarter, we bought back 7400 shares at an average price of $2.23.

Looking ahead, we anticipate that first quarter fiscal 2004 revenues may be down somewhat compared to those of the quarter just reported. We continue to be optimistic about the long-term future of Aehr Test. This concludes our prepared remarks, and we will be happy to entertain your questions.

(Caller Instructions). Dennis Watson, Adams Harkness Hill.

Thank you. A couple of quick questions. In terms of the Q1 guidance, revenue down somewhat. Anyway you can quantify that at all? And is this going to be roughly a $4 million quarter, is it down just 100,000, is it just that unclear at this point?

In regard to that forecast, we believe there is still a lot of uncertainty in our industry, even though we did see -- we did have a couple of up quarters. Our concern is, as long as I see manufacturers are still losing money, they are just tightly controlling capital expenditures. So we see our customers where they need the capacity, but budgets are tight so things just aren't happening. So that is a concern that systems or orders could be put on hold. So in a way, we are being conservative, but in a way, we maybe are being realistic. Another area that we see that has happened in the past is that, historically, Q1 has been down for us because a number of customers take planned vacations in the July and August timeframe. So -- and our quarter ends in July -- August is the end of our quarter, so these are some of the reasons that we put a cautious forecasts out there. Gary, you want to add anything?

No. I would say that we've probably colored it as well as we can right now. We're not looking for a significant decline, but again, we are anticipating that it might drop down some from the quarter just reported.

So more of a seasonal effect then just uncertainty, but I guess if conditions continued the same or if the activity level continued the same in Q1, you probably would have a little bit better then -- or maybe a similar quarter to Q4? Is that fair?

Say that again? If Q1 --

Activity levels kind of stayed the same in Q4. You probably have a similar quarter, is that fair? Or does the seasonality drop-off kind of make it difficult to see a flat quarter?

That is correct. The summer quarter for us typically has less activity than the fourth quarter.

Okay. The second question on the FOX system and order activity there. You mentioned that you announced the first order in March of this year. Is that the first and only order at this point? Have you signed any new orders? And I'm assuming that is a system order. And I'm just curious as to the other activities in terms of just selling the contact, or the wafer pack cartridge itself in terms of order activity there or revenue activity for that matter.

You asked a number of questions. I will start out and I'll turn it over to CJ. Let me say that that is the first order that we received for a system. We have received other orders for contactors, for the full wafer contactor, and we've also received a large $2.2 million R&D order. So we see -- as C.J. mentioned, there has been a tremendously large activity, even during this downturn for the FOX product. And since it is a new product and the technology is new, we see most of our customers do want to do an evaluation. So their first step would probably be to evaluate the technology and maybe buying the wafer contactor and proving it out first before they made their investment.

Okay, quick question on that. The $2.2 million engineering and development order -- that is separate from the full system order that you recorded in March?

That is correct.

Is that a separate customer?

We would rather not talk about that at this time.

Okay, but that engineering development order, is that for an entirely different project?

It is the same product. C.J., do have anything to add?

As I said (indiscernible) that additional (indiscernible) end of the calendar year, and I do expect orders this fiscal quarter.

Last question. On the more base or core business, both the MTX and the MAX systems, is the activity level changed at all on that side of the business? Have you seen customer activity increasing at all? Obviously that's been driving the majority of the revenue here. Any just macro changes you can talk about there?

I think -- those products address two different markets. The MTX addresses the DRAM business. And through the years, we have seen that go up-and-down. The DRAM opportunities tend to come in larger bunches, whereas the MAX addresses the handheld wireless telecommunication market and tends to be a little bit more stable throughout the year. So it is really hard -- we have not really seen any trends one way or the other for these products. They tend to come in bunches, so we would like to see a long-term trend and what we see is our customers buy systems with very short notice. They run out of capacity and then they need a system within three weeks or something of that sort. We don't get a lot of visibility in those products. One day, you don't see anything and two weeks later, you have orders.

Just to follow-up on what you talked about earlier on the MAX 4, you talked about a machine sold to a top 10 (indiscernible) 300 millimeter fab, and it's a customer for Aehr? You had mentioned in the prepared remarks?

What about it?

That was correct, though, what I just said?

Yes.

So that is a handheld wireless market type of application you're talking about?

Yes, video controllers. That system was going into ST (ph) as our first MAX 4200 into that account.

ST Micro, okay. That machine has not delivered yet, or it has just been ordered?

It is delivered.

Was that revenue in Q4?

No, it's just in this quarter.

In the Q1 quarter? Alright, I guess that doesn't. Thank you very much.

Thanks, Dennis.

Thomas DeMaurier (ph), State of Wisconsin Investment Board.

Good afternoon. Just to clarify. This new product line extension, the FOX full wafer burn-in, did you say that you got the first order for that product in the quarter? I'm just trying to distinguish between a comment about the first order. Which product line does that refer to?

Let me try to answer it more clearly. The FOX order for the first order for the FOX burn-in test system, we received that order in our third quarter ending the end of February. In the fourth quarter, we received an order for the MAX4. This is a new customer for us and a new application for their 300 millimeter fab.

So the MAX4 is a product in an existing market, whereas the FOX is an expansion of your addressable market?

That is correct. It moves us into a, we feel, a much larger, faster growing space.

How large do you think that space is?

That is an excellent question. I think that -- we think it is significantly larger than our market for our core products, but we feel the market will grow over the next 3-5 years.

How fast do you expect your core market to grow over the next 3-5 years?

As I mentioned, I would expect our core products, our core burn-in and test products, grow fairly close to the industry growth projections. So the industry is -- the forecasters, if I quote Insight, they're looking at something like a single digit in 2003, and then probably double-digit growth in 2004-2005. So we think that product line will pretty much track the industry. That is our educated guess. Again, we see our growth, our long-term growth, coming from the FOX products, which we would expect to build on top of our core products.

Right. Is it fair to say that the new FOX product is unique in the industry? No other manufacturer offers that application?

We believe we have a unique leadership position in this area, and payment for test. There are some competitors out there who are offering wafer-level burn-in systems with limited test. We offer those systems, as well as systems for full wafer tests. So we believe we have a leadership position. To say that we're the only one, it's hard to know what other people might have that they are developing. So I don't want to make that statement. But as far as we know, we're not hearing that there is a better product out there.

Does the FOX burn-in tester, is it more applicable for a wider variety of ICs? You mentioned the DRAM is a natural market for your MTX system, and you also mentioned the wireless communication chips for the MAX4. Is this new FOX system something that also could extend to other kinds of chips, like flash memory or analog?

We believe that the technology is adaptable and upgradable to a wide variety of technologies. Obviously, to test analog, flash and microprocessors, the test requirements are widely different. But I think the core technology can support all of those applications. Over a -- given enough time and money, we think we can address a number of markets with the FOX products.

What about gross margins on the FOX products compared to the core market products?

I'll let Gary talk about that.

We are anticipating that the FOX products will have better margins than our current systems do, and we would probably be looking in the high 40s.

Is that on an incremental basis, or is that --

On an incremental basis?

Yes, in other words --

That would be forward (indiscernible).

Okay, well then probably on an incremental basis, the gross margins would be even higher. Is that it fair statement? Okay. Then finally, the 2.2 million E&D order, over how many quarters would you expect to recognize that, and how would margins on that business compare with the existing or traditional core product line?

We anticipate revenues on milestones, just as we complete milestones for the project, and those would be completed over the next three quarters, and those have very high margins historically, because the engineering costs are typically written off during the period, not necessarily at the same time as the milestone revenue is recorded.

Okay. Thank you.

(indiscernible), Chipinvestor.com.

Good afternoon. Good quarter. Can you please give more color on the FOX development project, in terms of technology, what you have accomplished so far?

I think -- let me talk about what we have announced. And I think last quarter, we announced that we proved feasibilities with the contactor technology where we actually contacted a full function wafer and proved that we could test 100 percent of the wafer reliably and repeatedly.

So have you -- if I may ask -- have you made more progress, in terms of checking a precision wafer to wafer or testing on different types of devices or correlating to the customer's other equipment?

I think we announced that as well. We were able to correlate with our testers, so they gave us full functioning parts that had been run on testers and we were able to correlate a very high-level to their testers. And what is remaining is finishing the product, and then obviously, putting it in a production environment and running it over (indiscernible) the wafers. But before we can do that, we do need to finish the product. You want to add anything to that, C.J.?

I think that pretty much sums it up.

Secondly, can you give us revenue breakdown by product types for the fourth quarter?

As you know, we do not generally break it out in a lot of detail but I can give you some general details of the revenue.

Okay.

Just one second. As Rhea mentioned on the revenue, a large, large majority of the shipments were coming from our core products, our MAX and our MTX product. The core MAX type products were approximately 70-80 percent MTX and PTB's were about 20 percent and then everything else was noise level after that.

So both of these were MAX products?

Yes.

You are still selling both MAX3s and MAX4s or are they mostly MAX4s?

Mostly MAX4s. The MAX4 looks like a MAX3 and it has an option for a high current upgrade. So essentially, the MAX4 has taken the place of the MAX 3, in addition, if you need the higher currency capabilities at 200 amps per slot at a later date, you can upgrade your MAX4 to a MAX4 200-amp system. So technically, the MAX4 is a MAX3.

Okay. MTX -- how is the demand environment for the MTXs? Are you seeing interest from new customers, or existing customers?

The demand in the (indiscernible) has been very low due to the pricing of the DRAM market. But in the last few months, I'm seeing a higher interest level now in Taiwan for the MTX, specifically. this new MTXP system that we have announced. And, yes, there are new customers and existing customers who we're talking to and providing quotes.

Can you tell us qualitatively or quantitatively how the bookings were in the fourth quarter?

We don't announce it by quarter, so we just report backlog at the end of each fiscal year.

The reason I ask is because, generally, all of the rates for the back end tools are improving. And you are guiding sequentially sales (ph) in August quarter and you discussed reasons before. In addition to that, is there anything you are seeing with any particular product line, in terms of change of momentum?

No, I think we're just seeing capital being tight. I think one of the points that I made earlier is that our systems tend to come in bunches. If a DRAM manufacturer adds capacity, he orders multiple systems. So it tends to be choppy throughout the year. So for us to look at any month or any quarter, it is pretty difficult to look at our bookings and come up with a trend based upon what one quarter or one month or two months.

Okay, alright.

(Caller Instructions). There are no further questions at this time. Ladies and gentlemen, please continue.

Okay. This is Rhea. C.J., Gary and I would like to thank you again for joining us today. Considering the challenging market environment, many significant 2003 accomplishments give us tremendous encouragement of momentum into fiscal 2004. We appreciate your support and look forward to updating you on our successes in our next quarterly conference call. Thank you and goodbye.

Thank you.

Ladies and gentlemen, this does conclude the Aehr Test Systems fourth quarter and fiscal year 2003 results conference call. If you'd like to listen to a replay of today's conference call, please dial 303-590-3000, or 800-405-2236 and enter the passcode of 545117. Thank you. This does conclude our conference, you may now disconnect.

(CONFERENCE CALL CONCLUDED)