Aehr Test Systems (AEHR) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Aehr Test Systems first quarter conference call.

[OPERATOR INSTRUCTIONS] I would now like the turn the conference over to Erin Cox of the Financial Relations Board.

Please go ahead.

Good afternoon and thanks for joining us to discuss Aehr Test Systems results for the first quarter of fiscal 2007.

By now you should have all received a copy of today's press release.

If not, you can call my office at 310-854-8300 and we'll get one to you right away.

With us today from Aehr Test are Rhea Posedel, Chairman and Chief Executive Officer and Gary Larson, Vice President of Finance and Chief Financial Officer.

Management will review operating performance for the quarter before opening the call to your questions.

I would now like the turn the call over to Gary Larson.

Go ahead, Gary.

Thanks, Erin, and thanks to everyone for joining us today.

Before we begin I would like to make a few comments about forward-looking statements.

Please be advised that during the course of our discussion today we may make forward-looking statements that involve risks and uncertainties relating to projections regarding industry growth and customer demand for Aehr Test products as well as projections regarding Aehr Test's future financial performance.

Actual results may differ materially from projected results and should not be considered as an indication of future performance.

These risks and uncertainties include without limitation economic conditions in Asia and elsewhere, world events, acceptance by customers of our FOX, MTX, MAX, and DiePak technologies and conversion of quote activity to purchase order and acceptance by customers of products shipped upon receipt of a purchase order, the ability of new products to meet customer needs or performance described, the Company's development and manufacture of a commercially successful wafer level test and burn-in system, and the potential emergence of alternative technologies, each of which could adversely affect demand for Aehr Test products in fiscal year 2007.

We refer to you our recent 10-K report and other reports filed from time to time with the Securities & Exchange Commission for a more detailed description of the risks facing our business and factors that could cause actual results to differ materially from projected results.

The Company disclaims any obligation to update information contained in any forward-looking statements, reflect events or circumstances occurring after the date of this conference call.

Now I would like to introduce our Chairman and CEO, Rhea Posedel.

Rhea?

Thank you, Gary.

Good afternoon, everyone, and welcome to our conference call for the first quarter of fiscal 2007.

I am pleased to report that fiscal 2007 started on a positive note.

As we generated the highest level of quarterly revenue and earnings in more than several years.

The income for our first quarter of fiscal 2007 was $557,000.

This is up 5% over the prior quarter and is up 36% on a pro forma basis if stock compensation expense is excluded.

Net sales for the first quarter of fiscal 2007 were about $7.1 million, up slightly over the prior quarter.

As always, Gary will provide more detail on our quarterly financial results.

I will spend my time highlighting other key accomplishments for the quarter in discussing our outlook.

The major event for the quarter continues to be the momentum that's building for our FOX-1 full wafer parallel tester.

In our July conference call, we announced that we completed the final FOX-1 development milestone in June.

Completing the final development milestone was significant because it was verification by our customer that the system is production ready.

On September 22nd we announced the shipment of our first FOX-1 tester to a leading memory manufacturer.

Our FOX-1 tester product consists of two major components, a test head that provides electronics to test thousands of die in parallel and a full wafer contactor that uses our proprietary interconnect technology to make contact at thousands of wire bond pads.

It is important to note that our full wafer contactors need to be custom designed for each unique wafer or device type, and our customer produces many different device types.

Also these custom contactors, which are priced at several hundred thousand dollars each, need to be replaced every year or so because of wafer fab process improvements.

As a result, we expect to see revenues for our consumable contactor business growing more rapidly over time than our FOX-1 tester system revenues.

Another significant event for the quarter was receiving production FOX-1 tester orders.

Today we announced that the customer that receives our initial FOX-1 shipment has placed orders totaling more than $4 million for FOX-1 systems and full wafer contactors.

We expect to ship most of these orders within six months.

The key advantage of the FOX-1 is that it makes full wafer contact and in a single touchdown can parallel test the entire wafer in minutes, versus the hour or more it could take using a conventional wafer prober and tester that requires 10 to 20 touchdowns.

We believe that our FOX-1 will provide significant throughput improvements thus reducing the high cost of testing flash memories.

We are taking a highly target approach with our marketing efforts for the FOX-1, focusing on a handful of leading IC manufacturers that we believe are most likely to meet -- to be among the early adopters of this new technology.

The sales cycle is quite lengthy, as it requires significant time to evaluate the FOX-1 technology.

One of our major opportunities and challenges this fiscal year will be ramping our design and manufacturing capacity to provide the growing number of custom full wafer contactors needed to support the projected Fox 1 tester sales.

The good news is that we are seeing a lot more contactor designs per system than we expected.

The challenge is that over the next few quarters we need to increase our contactor design and operations infrastructure to support this new contactor business growth opportunity.

Turning to other areas of the FOX family of products, we made good progress this past quarter on our development of a production FOX-14 wafer level burn-in and test system for an automotive IC manufacturer.

As you may recall on March 16th we announced that a leading automotive semiconductor manufacturer placed a multi-million dollar order for a FOX-14 with a full complement of 14 wafer packs for production wafer level burn-in.

We hope to receive follow-on orders after successful installation and performance of the first system, which is scheduled for delivery in the first half of calendar 2007.

We believe that the market opportunities for a FOX-14 family of wafer level test and burn-in products will also continue to grow over the long-term as demand for higher liability required by the automotive industry multi-chip package producers drives the need or no good die or burned in and tested die.

The demand for our core burn-in systems for manufacturers of mobile communication and automotive IC's continued through our first quarter, where most of our revenues were from MAX systems and enhancements that we sell into our install base.

Our growth strategy over the last several years has been to grow net sales by expanding our addressable markets and investing in R&D and market development of our innovative FOX full wafer contact burn-in and test products, and our core burn-in and test MAX and MTX products.

We strongly believe that this strategy will pay off over the long-term, and we have already started to see positive results with the announcement of our recent orders for over $4 million in FOX-1 tester and contactors.

In closing, we are cautiously optimistic that the demand for our MAX and MTX systems will continue through fiscal 2007, and we are encouraged by the long-term growth opportunities we see building for FOX full wafer burn-in and test products.

Now I would like the turn the call over to Gary for a discussion of our first quarter results in more detail.

Gary?

Thanks, Rhea.

Net sales increased 54% to $7.1 million from $4.6 million in the first quarter of fiscal 2006.

Gross margin was 46% for the first quarter, compared to 47% in the year ago period and flat with the fourth quarter of fiscal 2006.

SG&A was $1.6 million in the first quarter compared to $1.5 million in the same period of the prior year.

Included in SG&A this quarter was $92,000 in stock compensation expense pursuant to our adoption of SFAS 123-R.

First quarter 2007 R&D expense was $1.4 million, up from $1 million in the first quarter of last year.

This increase is related to development of new products such as the FOX-14.

Also included in R&D was $64,000 in stock compensation expense.

We had $216,000 in other income this quarter.

This is primarily the result of a dividend payment from the Company's investment in ESA Electronics, a Singapore company.

Since this is a discretionary dividend, we cannot give guidance as to expected timing or amount of any future ESA dividends.

This is our fourth consecutive profitable quarter with net income for the first quarter of $557,000 or $0.07 per share, compared with the net loss of $244,000 or $0.03 per share a year ago.

Excluding $163,000 in stock compensation expense, net income in the first quarter of fiscal 2007 was $717,000 or $0.09 per share.

We continue to have a strong balance sheet.

Our cash and cash equivalents and short-term investments totaled $10.3 million at August 31, 2006.

Shareholders equity was $19.9 million or $2.58 per share outstanding at August 31, 2006, and we continue to to have no outstanding debt.

As we transition to manufacturing FOX-1 system and full wafer contactors, we believe second quarter net sales and net income will be relatively similar to those of the first quarter of fiscal 2007.

We're now ready to answer your questions.

Operator?

Please go ahead.

[OPERATOR INSTRUCTIONS].

Our first question comes from Ramesh Misra.

Please go ahead.

Good afternoon Gary and Rhea.

Hi, Ramesh.

Congratulations on the report.

In terms of the customer for this FOX-1 system, when would you be able to publicly announce who this customer is?

That's a good question.

We need to get the -- the customer is very sensitive because they feel they have a strategic advantage, and I think it is something we could pursue downstream, but our first focus was just to book the orders and get the orders.

Right, right.

We didn't want to cross that bridge at this time.

Okay.

So in the November quarter ago, sounds like this customer will account for over 10% of sales, so would you be legally required to?

I think at the end of the year you have to report it in your 10-K.

I see.

Okay.

Not the 10-Q, is that correct?

We don't disclose the above 10% customers on an interim basis but we do at year end in the 10-K.

So you really are at the discretion of when the customer is willing to?

Right, that's correct.

We don't want to do it -- we'd just rather keep them happy at this point in time.

I can imagine.

In terms of this $4 million worth of new orders, can you give us a sense of how much of it for the systems and how much of if is for the contactors?

Probably just roughly you could say about half and half.

Okay.

I don't really want to divulge the price of the systems or the contactors, but that's --

Got it.

The contactors are a significant amount of the system -- I mean of the total orders that we're seeing which is up from what we thought originally.

Right.

And this is simply because there are so many different flavors and --

That's correct, so many different device types that -- way more than we expected or thought, which is good for us.

Okay.

In terms of gross margins for November quarter, what are you thinking of, Gary?

What we've said in the past is that the mid-40's is where we've been recently, and if volume picks up, we would expect to see an improvement in gross margins moving into the upper 40's, and when wafer level becomes a significant part of the orders revenue, then we would expect gross margin to pick up somewhat as well.

Right now we're guiding to similar kinds of revenue numbers, so we wouldn't necessarily see any improvement just from the business volume.

Got it.

Okay.

And could you provide some sort of a breakdown in terms of contribution from the MAX and the MTX system this quarter?

As far as shipments?

Yes.

The majority of the shipments were the MAX product, and as we've said in the past, that often times changes from one quarter to the next, but the MAX was the significant contributor to this quarter's net sales.

Okay.

And then finally one last question and then I will let others jump in.

In terms of the FOX-14.

Yes?

You said that would probably start happening in the first calendar half, so basically by year end of your current fiscal year?

That's correct.

You should record sales of that?

It would happen, yes.

Did you expect multiple shipments before the current fiscal year end or --

Of the FOX-14?

Correct.

No.

It is just one -- it was just one large order that we received.

Right.

That's the one that you received in March.

That's correct.

Okay.

All right.

Thanks very much, and I will get off for now.

Thank you, Ramesh.

Thank you.

Our next question comes from Dennis Wassung with Canaccord Adams.

Hi, Dennis.

Hi, how are you guys doing?

Good.

How are you, Dennis?

Doing well.

Thanks.

Congratulations and good quarter and congrats on the order.

Thanks.

A few quick questions.

First off, you talked about revenue from the contract -- the contactors on the FOX systems essentially growing faster than the systems revenue is designed to turn over and people shrink, you keep switching those designs.

Any thoughts on quantifying how many contactors you could use I guess in one of these instances in the span of a year?

Any kind of ratio we can look at in terms of how many contactors per system you might ship up front and perhaps over the course of four or six quarters, something along those lines?

That's a good question.

I think initially we were looking at maybe one or two per system, and probably now we're seeing more in the range of four or five per system.

Okay.

Obviously pretty significant increase.

That's correct.

It is a two-edged sword.

The good news is you're getting more revenues.

The bad news if there is any, is you have to do more designs, and so it is more of an effort from us from a development standpoint, but we'll take the orders any time.

And I guess you just led into my next question on the design capacity issue and, and I guess the question around that is obviously it is not a trivial task to design these contactors.

I guess first off, how long or -- how long is the design cycle time on one of these contactors, and how would you quantify your capacity for designing these at this point?

How many?

One or two or three a quarter, something along those lines or another metric, and I guess on top of that what are you doing to expand your design capabilities?

One of the things that we're doing up front is we're looking at adding resources, people and we're also looking at improving our processes to speed up the cycle time.

The bottom line is that our customer is looking for the same cycle time for our contactors as they would receive for a pro card, so they're looking in the range of ten weeks or ten to twelve weeks or less, and that's the kind of the target we got to get to, so we're a little bit longer than that now, and we're trying to get down to that range out in the near future.

Okay.

Has that impacted you negatively at all at this point?

Obviously you got to get the first system out there and you got more orders so things are moving in the right direction here.

Is it hurting you at all at this point that you're still working out some of the design challenges?

No, not really.

I think there might be some added engineering expense if we have to hire additional engineers as we would expect, but we think it is hopefully going to be an orderly ramp and we'll be able to design and get these contactors shipped and meet the customer's requirements.

They're working with us during the ramp-up phase.

There is a lot of support and teamwork between us and our customer.

So you have one system installed with this customer at this point, that's correct?

That's correct.

Is that system now in production being used by the customer?

We just shipped it last week.

I am sorry.

Okay.

It is being installed, and we're bringing it up as you speak.

All right.

Perfect.

It is a production system, but it is going to be used by the primarily the engineering group.

That's developing the programs and contactors.

Okay.

Perfect.

And last question from me, more on the demand side of things here, obviously you guys are making some progress here, making some announcements, orders, production ready system announcements.

What is that doing in terms of activities with other customers, applications?

Are you seeing more interest in people knocking on your door at this point?

We just announced the order today.

I believe that it will help -- any type of new shipping products and getting more orders gets other -- customers are always, as you know, are conservative to make changes, and seeing other people adopt the technology and use it in production motivates them to start taking a look at it, so we're optimistic that after today's results get out there, that we would have some other customers interested in at least contacting us and getting demos for the product.

Okay.

Actually one last quick question.

More about the environment.

Anything that you guys can comment on in terms of what you're seeing at the customer level?

Obviously you're in some interesting areas, not necessarily what the broader tester environment is seeing, but with some questions about softness in the second half of the year, and some of the results that some of the other companies have put up.

Have you seen any changes in your customer's buying patterns or order activities or anything along those lines?

Your guidance seems to be pretty consistent with what you've been doing.

Any thoughts will be helpful.

Thanks.

We're still announcing orders.

We don't have a great visibility on some of our products like the MAX.

Typically we sell these products into our installed base of customers, so it is not like we have a six-month sales cycle.

They run with their capacity, and then at some point they need additional systems, and they let us know, so it is really hard for me to answer that question, Dennis.

Okay.

Fair enough.

Thanks, guys.

Take care, Dennis.

Thanks.

Our next question comes from [Jeff Scott with Scott Asset Management.] Please go ahead.

Good afternoon and congratulations.

Thanks, Jeff.

Thank you, Jeff.

A couple quickies.

If I recall last quarter the MTX was the majority of revenue, and this quarter it was the MAX.

What is happening in those two markets that's creating the heavy demand in one quarter and lack of demand in the next?

The MTX -- we sell it as a parallel tester, and recently we've been selling it into flash testing applications, but typically it is fewer customers, and it is more for high volume production application, and we tend to get very lumpy orders, where we'll order 3 or $5 million of systems at one time and they don't order for another six months or a year.

The MAX, on the other hand, tends to just -- there is a broader customer base, and TI has been one of our larger customers, and they tend to add and subtract to that number as we're mostly add or take away from that number as we go quarter to quarter, so it is really hard to predict.

The MTX tends to be very lumpy.

The MAX tends to be somewhat lumpy but less lumpy than the MTX.

One quarter we have more MAX business and one quarter we have more MTX business.

What kind of orders did you get for MTX this quarter that will show up as revenue next quarter?

We didn't -- we don't really talk about backlog or bookings, but we didn't make any huge announcements.

If we had huge orders, we probably would have, but we typically don't announce smaller orders.

Okay.

The net revenue for the quarter was only MAX and MTX, right?

There was no FOX, there was no --

Probably there was a little bit of -- was there any FOX?

There was probably some FOX.

Was there milestone?

Hello?

Just one second.

Jeff, it was a little over 10% for the quarter.

Of FOX?

Yes, FOX.

And was that milestone payments?

Part of that was milestone, and part of that was recognition of a shipment that had taken place earlier.

Okay.

As I recall last quarter you said that gross margins should be up marginally for the first quarter, and that didn't happen.

And that was going to be driven I think by product mix.

Was there something that surprised you in the quarter?

Not particularly.

We're not talking a big difference on margin for the comparative.

We're looking within a percentage point and year-over-year similarly within a percentage point.

That is not uncommon for us if product mix changes slightly we'll see slightly different margins.

It is not unusual.

Okay.

Nollenberger Capital came out with coverage this morning initiating with a sell.

What was the rationalize be behind that.

We are not allowed, according to our attorneys, to comment on any analysts reports.

Unfortunately we'll not be able to help you as far as where that report was coming from.

Can you comment as to whether or not it was an industry call, whether or not it was a valuation call, whether or not it was a market presence call?

No.

We really can't.

You would have to contact that analyst and have discussions directly with that person.

Okay.

Going back to the FOX-1 and the contactors, as I recall, other people were actively looking at the FOX-1.

Do you have to make a or design a contactor for them, let them test that particular contactor and then wait for a purchase decision?

That's a possible scenario.

Most likely I would say, initially.

I think a lot of -- often when we talk to customers about our FOX products, they would want to evaluate it, and the only way they can evaluate it on their wafer is if they make a customer -- custom contactor, and usually we would do that, and we would charge them for that custom contactor.

So --

Not always.

It is possible we could get an order without doing that, and we did that for the automotive manufacturer that we sold to FOX-14 to.

They made their own contactor?

No.

We sold them the system without having to go to an evaluation.

But you designed the contactor?

We designed the contactor, but in general if you want to take a conservative approach, selling a FOX-1 or selling a 14, the first step might be them giving us an order to develop an evaluation contactor for them, prove their technology or prove our technology and show a testing their wafers or their devices.

Okay.

The FOX-1 that was under development has now been shipped as of September 22nd, right?

That's correct.

You do not have in your shop a currently working FOX-1, right?

We are building up the next units, so, yes.

If somebody came to you with a contact they wanted to try on a FOX-1, you wouldn't actually be able to --

But it would be a custom contactor design that we would have to do.

By the time we got a contactor design, we would have a FOX-1 ready to test it on.

Okay.

So the customer can't design his own contactor?

That's correct.

It is proprietary technology that we have.

Okay.

So he has to come through you for the design of the contactor?

Yes.

Is there anything you can share with us as to the number of contactors that are out in the market being evaluated, the number of potential customers in that process right now?

Let me just say in the past in a previous conference call, maybe a couple of quarters ago, I mentioned there was a DRAM manufacturer that had given us an order to develop a custom contactor.

So there is only one right now?

That we have announced, yes.

Okay.

Are there others that you have not announced? .

There have been others.

Let's say that, yes.

We have done a number of contactor evaluations over the last five, six years.

Okay.

On the FOX-14, is the process much the same? .

I believe so, although I think as we build momentum and we sell more systems and we have larger installed base that I think we'll be able to convince customers or potential customers that they don't need to go through that evaluation, you know.

If they want to get on the train, they better hurry up, and if you're going to wait six months or so to evaluate it, they're going to miss opportunities.

Okay.

Is the potential customer base broader for the 14s than for the 1s?

I think it's probably equal.

Okay.

I will let somebody else jump in.

Thanks very much and congratulations.

Thank you, Jeff.

Our next question comes from Joy Mukherjee with State of Wisconsin Investment Board.

Please go ahead.

Hi, Joy.

Good morning and congratulations on the quarter.

Thanks.

Let's see.

In terms of you mentioned that it sounded like the margins on the FOX-1 is kind of incremental.

I was wondering if that's the case even for the initial FOX systems that you're shipping?

Yes, when the initial FOX systems ship, we would expect that the average margin on the systems and the contactors would be higher that be what we're typically running for our other core products.

Great.

In terms of the cash for next quarter, do you see any increase in cash usage given some of the, I guess the R&D costs with the contactor and things like that?

Our cash dropped down a little bit this quarter from the previous quarter, and that was really more a matter of timing.

We had over a million dollars in collections that came in during the first week or two of September, so we were essentially cash neutral if you include that additional time frame.

As you say, as time goes on in we're investing more in the wafer level contactors and the development programs, then cash could come down somewhat, but we're not expecting any severe cash drain out of this development program.

Okay.

All right.

That's pretty much it.

Again, congratulations.

Thank you.

Our next question comes from Walter Ramsey with Walrus Partners.

Please go ahead.

Congratulations.

Great quarter.

I had a few questions about the FOX product line.

Can you just tell me what you think the size of that potential market is?

This is an analysis that we have done and we have looked at the opportunities and looked at it from a total available market, not a forecast from Aehr Test but on our financial presentations we looked at something in the range of $0.25 billion, four, five years out for the FOX-1 and the FOX-14 markets that is they go into.

And that product line, is that entirely different from the existing MAX and MTXs or is there some kind of overlap where those sales might decline a little as the new product line is introduced?

The FOX-1 is completely a new market for us.

It is really -- where we're selling it into is the wafer probe test market.

It has been a market that we haven't been into before.

The FOX 14 on the other hand is a wafer level burn-in market where we're burning in wafers instead of packaged parts.

There could be some cannibalization on our burn-in sales, I guess, if we sold a lot of wafer level burn-in systems.

And the MAX and MTX product lines?

Are they pretty much at a plateau or is there some further growth potential for them also?

I think there is further growth potential in that space, and I think as we talk about in our growth strategy that we're continually investing in R&D to improve those products, and there is things that are in the works that we think can expand the market opportunities for the MTX and the MAX products, so we haven't talked about them at this point, but it is something that we'll talk about in the next quarter or two.

And the FOX product line, is that an entirely new technology or is there competition that it faces or are you coming up with an entirely new system that's available to the entire market or is this more just for new installations?

We look at it as a new innovative technology.

I think if you look at the FOX-1, it is an integrated contactor and test head that we have developed for full wafer test and contact.

We look at it as being leading edge technology, although we know that if the market takes off there will be other competitors and we hear that there are other competitors working on full wafer level burn-in and test products, but we haven't seen anything out there that more than just kind of paper products at this point.

Okay.

And your own manufacturing capacity, can you elaborate as to how far along that is, how many units you can produce at this stage of the game?

Our strategy at Aehr Test is to basically do final test and assemblies, so we subcontract a lot of it, so it is basically ramping up our supply chain.

That's the critical time element, and if we give them enough notice, we can produce a lot of systems.

We have enough space and people to make that happen, so I don't think there is a capacity limitation at this point as long as there is a -- as we get enough lead time.

Okay.

And then just I guess one last thing as far as the MAX and the MTX again, do you have enough visibility there to kind of expect that business to remain fairly solid over the next six to twelve months?

That's a good question.

As I say, we don't see a lot of visibility with these products, and then I get worried about things like Dennis saying, "well the industry is slowing down", so that's why I said we're cautiously optimistic this that business will continue this year.

Yeah, well a lot of people think the PC market is actually going to take off next year.

And we're kind of -- our customers are -- we have a lot of customers, but a lot of times if the overall market goes down, but our business could go up or vice versa.

It really depends what your own customers are doing.

I understand.

Yes.

We always wish we had more, but --

And one last thing, I guess, just there was a decline actually in the deferred revenues.

Is there some explanation for that?

Yes.

The deferred revenue basically represents prior period shipments that have already been paid for by the customer.

For some reason, whether it be acceptance, terms or some other contract provision, we weren't able to take revenue at that time, so when you see the deferred revenue decline, what that says is we were successfully able to convert that deferred revenue or deferred revenue into actual net sales for the period.

Okay.

That's all there is to it.

Thanks a lot.

Appreciate it.

Thanks, Walter.

[OPERATOR INSTRUCTIONS] There are no further questions.

I would now like the turn the call back to management for closing remarks.

I would like to thank you again for joining us this afternoon.

We are pleased that we have gotten off to a good start in fiscal 2007, and look forward to creating additional value for our shareholders in the future.

Thank you again.

Thank you.

Bye.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

Thank you for participating.

You may now disconnect.