Aehr Test Systems (AEHR) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Aehr Test Systems first quarter 2008 conference call.

During today's presentation, all parties will be in listen-only mode.

Following the presentation, the conference will be open for questions.

(OPERATOR INSTRUCTIONS).This conference call is being recorded today, Tuesday, September 25, of 2007.

I would like to turn the conference over to Erin Cox with 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 2008.

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

If not you can call my office at 213-486-6549 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 its operating performance for the quarter before opening the call to your questions.

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

Go ahead, Gary.

Thank you, 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 orders 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 2008.

We refer you to our most recent 10-K report and other reports filed from time to time with the Securities and 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 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.

Rhea?

Thank you, Gary.

Welcome to our conference call for the first quarter of fiscal 2008.

We are pleased to report that our net sales for the first quarter of fiscal 2008 were $7.7 million, up 7% over the same quarter of the prior fiscal year.

As always, the exact timing of shipments and revenue recognition can be difficult to predict.

So although Q1 net sales were down about 7% sequentially, I believe that fiscal 2008 got off to a good start, as we continue to ramp capacity for our FOX-1 systems and full wafer contactors and increase our backlog.

We are very excited about the significant growth opportunities we see for our FOX-1 testers and wafer packs throughout this fiscal year.

Today we announced a $13 million follow-on order for multiple FOX-1 testers for a new 300 millimeter fab.

We believe this is a record single order for Aehr Test.

Our customers buying the FOX-1 system because it can parallel test an entire wafer in a single touchdown, thus dramatically reducing cost versus conventional testers, which take multiple test [pounds] to step across a wafer.

As we have indicated in the past, we believe there is a good chance we could see sizable orders related to the outfitting of this new 300 millimeter fab, in which we are very pleased to see this opportunity start to materialize.

We continued to invest in the development of design tools and manufacturing processes to increase our design and manufacturing capacity for our full wafer test contactors.

I'm pleased to say we made significant progress this past quarter as we shipped multiple custom-designed contactors.

I should point out that our full wafer contactors are custom designed for each unique wafer type and is a key technology that enables our FOX-1 system to parallel test thousands of die in a single touchdown.

We would expect our wafer pack contactor sales to grow rapidly this fiscal year as our installed base of FOX-1 testers increases.

This fiscal year we will invest in R&D to enhance our core parallel test and burn-in systems with the new higher performance hardware and software platforms we develop for our innovative FOX products.

We believe these new enhanced MAX and MTX products will increase our competitiveness in the Asian market and enable to us increase market share in the rapidly growing segments for high-power logic burn-in and massively parallel test and burn-in for DRAMs.

We are also pleased about the development progress we made in our newly designed FOX-14 wafer level burn-in system over the last quarter.

As you recall, a year or so ago we announced selling a FOX-14 system to a leading automotive IC manufacturer for production wafer level burn-in and test.

We have completed the system integration and are now in the test verification phase with customers' wafers.

However, this final verification phase is taking longer than expected.

Making full wafer contactors work repeatedly for wafer level burn-in turns out to be a more technically challenging task than designing full wafer contactors for FOX-1 parallel tester.

This verification phase can sometimes be lengthy, as we experienced with our FOX-1 customer.

Our long-term goal is to add new customers for our FOX products and grow market share in the rapidly expanding automated test equipment market segment for full wafer test and burn-in.

We are seeing an increased -- an interest level for both our FOX products.

We are taking a targeted approach to business development and are focusing on those IC manufacturers that we know have devices that are good matches for our FOX systems.

Importantly, we have made steady progress in building our infrastructure over the last few quarters, which will enable us to cost-effectively ramp our capacity as we add new customers.

In closing, we continue to be encouraged by the bookings potential we see from our initial FOX-1 customer and the opportunities we have to add additional customers for our FOX products over the long term.

Based on our strong backlog of orders for our FOX-1 parallel testers and wafer pack contactors, we expect to grow both revenue and net profit in our second quarter compared to the prior quarter.

Now I would like to turn the call over to Gary and he'll add some color on the first quarter financials.

Gary?

Thanks, Rhea.

Net sales were $7.7 million in the first quarter of fiscal 2008, an increase of 7.3% from the $7.1 million in the first quarter of fiscal 2007.

In the first quarter of fiscal 2008, FOX-1 systems and contactors represented the majority of our net sales.

Gross margin was nearly 55% for the first quarter compared with 46% in the year-ago quarter.

Gross margin increased primarily because FOX products with somewhat higher margins represented a higher proportion of net sales.

On a going-forward basis, we continue to believe that typical gross margin will be in the low 50% range.

SG&A was $1.8 million in the first quarter compared with $1.6 million in the prior-year period.

The increase in SG&A dollars is primarily attributable to an increase in headcount as we added support resources to address the expected growth in our business.

First quarter 2008 R&D expense was $1.6 million, up from $1.4 million in the first quarter of last year.

This increase is related primarily to the development of our FOX systems contactors and other new products.

We continue to expect that as net sales increase we will see SG&A and R&D spending as a percentage of net sales decline from current levels.

Our net income from the first quarter was $779,000 or $0.09 per share compared with net income of $557,000 or $0.07 per share a year ago.

Excluding stock compensation expense in both periods, pro forma net income in the first quarter of fiscal 2008 was $968,000 or $0.12 per share compared to $717,000 or $0.09 per share in the same period of the prior year.

We continue to have a strong balance sheet.

Our cash, cash equivalents, and short-term investments stood at $8.7 million on August 31, 2007.

Accounts receivable was $6.8 million at the end of the first quarter, roughly flat with the end of the prior quarter.

Our inventory was $10.6 million at August 31, 2007, an increase of about $900,000 from the end of the prior quarter.

This inventory build reflects the ramp in production resulting from the strong growth in FOX-1 backlog that we've experienced.

Shareholder's equity was $23.9 million or $3.06 per share outstanding at August 31, 2007, and we continue to have no outstanding debt.

We're now ready to answer your questions.

Operator, please go ahead.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Ramesh Misra with Collins Stewart.

Please go ahead.

Hi, guys.

Hi, Ramesh.

Hi.

This is actually [Gin Yun] sitting in for Ramesh.

Oh, okay.

A couple questions.

Starting with your FOX-1 orders, can you tell me what your backlog is for the quarter?

Well, we don't disclose backlog at the end of our quarters.

The only time we disclose that is in our 10-K or our fourth quarter earnings release.

But has it increased quarter over quarter, or can you at least --

Well, we reported a $13 million order, and our sales for the first quarter were less than that, so yes.

Okay, perfect.

Oh, I was being smart, I apologize.

The $13 million order did not come in the first quarter.

I see.

I have to go back to my previous statement about -- we don't disclose the backlog at the end of the quarters.

And as for your -- can you talk a little bit about your legacy business.

First of all, your gross margins came in slightly higher than what we were anticipating.

Could we -- can you tell me how your legacy business has done in the quarter?

Have you made any -- if you were able to move any units in the quarter?

We did ship some MAXs in the quarter, but in general I would say the -- the legacy or the core burn-in in test products for packaged devices -- I would say the activity level was a little bit slow in the quarter, and that is one of the reasons why we're taking a proactive approach to enhance these products with our FOX technology.

So we could penetrate new markets for those products.

So predominantly most of your sales came from it looks like FOX-1 and like the contactors?

That's correct.

Okay.

And the status on the FOX-14, you mentioned that the burn-in tests to your automotive customers is taking a little bit longer than expected.

Did you expect to ship that this quarter?

We expect to ship it this quarter and that's still our plan, but it's -- the final test verification phase is taking longer than we expected.

But I guess my question was was that expected to ship in the August quarter?

No, it wasn't.

Okay, okay.

And a couple more questions.

On your capacity for FOX-1, can you talk to me a little bit more on the capacity for FOX-1 this year versus last year?

Well, last year we really weren't -- last fiscal year, is that what you mean?

Yes.

Yes.

I think we ramped up -- started last fiscal year shipping -- starting -- shipping in the first quarter and ramped up to a significant number of units in the fourth quarter.

This year we're continuing to increase that capability.

But the major increase in our capacity has been in the design and the manufacture and test of our wafer pack contactors.

So that's been the bigger challenge than building the systems.

Rhea, it's Ramesh.

I'm actually on a plane.

Can you hear me?

Yes.

We can hear you.

Okay.

On the 300 millimeter orders that you received, can you give us a rough breakdown in terms of system versus contactors?

Is it 60/40, 50/50, or?

This order was a single order for systems, and I can say it was over ten systems, no contactors.

Over ten systems and no contactors.

In your past experience, how many contactors are customers taking per system?

You could estimate around two.

Okay.

So -- it's highly like that once -- or as these systems get close to being shipped, you'll get some sizable orders in contactors as well?

That's correct.

Some of the orders -- they might have already ordered some of the contactors for these systems, and there might also be additional contactors ordered.

Okay.

They don't always order them at the same time.

Got it.

And very roughly, Rhea, I know you've shipped the FOX-1s -- 300 millimeter FOX-1s to this customer before.

How many -- how many systems have you shipped year-to -- well, I guess since beginning shipping the 300 millimeter systems (multiple speakers) to this customer?

How many 300 millimeter FOX-1s have you shipped?

A couple, I guess.

A couple.

Okay, so this is a fairly significant ramp on the 300 millimeter side?

That's correct.

Got it.

Very roughly, how much are the ASPs on each contactor?

Somewhere between 2 to 400,000.

2 to 400.

Range.

Depends on the number of die per wafer.

I see.

Okay.

So kind of implicit in this additional order, there could be a fairly meaningful order for contactors coming up as well.

How is your capacity over there?

I know you've been looking at bringing on some outsourced capacity as well to design these contactors.

On an annual basis, where do you see your ability to ship contactors at?

I think -- those are good points.

I think initially we looked at bringing on more design capacity, because it was taking weeks to design the board or the signal distribution boards, and we've taken the approach of designing tools to automate that process.

So it's reduced significantly the design effort and the designers that we need.

So we believe right now we have the capacity to meet our customers' demands and also have the capacity for other customers.

So we need to do some tweaking with resources, but we're in pretty -- much better shape than we were a quarter ago.

Got it.

Shifting gears a little bit on the FOX-14, at SEMICON West a few weeks ago, you had shown a slightly different version of the FOX-14.

I think they're calling it the FOX-15.

Can you tell us what the difference between that and your FOX-14 that you have right now?

Besides the obvious 1X wafer.

I guess the FOX-15 that we had at the show is a newer version of the FOX-14.

So it has our new hardware/software platform and it's designed for 300 millimeter.

So basically that's a newer version of the system, and that's probably typical of the system that we're going to be shipping to the automotive IC manufacturer.

Okay.

Now, not too many of the automotive IC manufacturers have gone on to 300 millimeters, is can you kind of provide a little more background into the 300 millimeter versus 200 millimeters?

The system that we will ship has the capability of working for different wafer sizes up to 300 millimeters.

So our idea was to develop one product for all the wafer level burn-in applications.

So we took this opportunity to upgrade the FOX-14 and made it a 300 millimeter product.

And (multiple speakers) that was done so that we could go after a much broader market rather than just automotive IC manufacturers that are typically on 6 or 8-inch wafers, we wanted to go after the broader market for DRAMs or Flash or other devices that are on 300 millimeter wafers.

Okay, all right.

Then one final question.

In terms of the acceptance of the FOX-1 by your customer, do you expect that to be a lot more rapid than the 14 acceptance taking right now from that automotive customer?

Oh, go ahead, Gary.

Can you repeat which system you're talking about?

Yes.

It would be -- acceptance of the FOX-14 is obviously taking a longer time, because it's probably one of the earlier systems.

On the FOX-1 systems that you expect to ship to cater to this new order, do you expect the acceptance by the customer to be a lot quicker because you shipped previous systems to them?

Yes.

Acceptance shouldn't be an issue on the FOX-1 systems, because as you pointed out, we have shipped these systems already to the same customer.

So we would expect it to be taking revenue at the time of shipment.

Okay.

And then one final question on the FOX-1.

This new $13 million order, is this an order to ship as soon as possible or is that an order to ship over the next two quarters, three quarters, whatever?

I believe it's scheduled out over the next couple of quarters.

Okay.

Okay.

Thanks very much, guys.

Appreciate your help.

Thanks, Ramesh.

Have a good flight.

Thank you.

Your next question comes from Dennis Wassung with Canaccord Adams.

Please go ahead

Hello, Dennis.

Congratulations on the FOX-1 order.

Thank you.

I guess two questions.

There's a few left out there, I think.

The first one, we talked about the technical challenges in getting the FOX-14 ready for ship and tested for repeatability and the like.

Can you go into a little more detail there?

What were some of the key issues that you had, and just wondering if there's any fundamental problems or challenges that you had to overcome that resulted in changes to the product going forward, and just wanted to get a little more input on that if possible?

We seem to be getting some cross-talk somewhere, but that's an excellent question, Dennis.

I know you're a technologist.

One of the challenges that we have for the wafer level burn-in particular for this automotive customer that he wants to -- his temperature excursion is up to 170 degrees centigrade.

So that is a much higher temperature than you would see on a wafer probe tester, which maybe is in the 70 to 90-degree range at maximum.

So you have a temperature coefficient of expansion, mismatch between, say, the contactor and the wafer.

So that's one challenge.

The other challenge -- when you think about it, on our FOX-1 or any other wafer probed tester, the contactor stays on the prober and it can be optimized -- you can optimize force and accuracy of how you want to position that contactor.

But in a wafer level system, where we could stack up, as Ramesh said, 15 wafers into one chamber, you have 15 different unique contactors.

So it's hard to optimize, say, the force and the -- there's not an aligner.

It's all done offline.

The aligner has to look at each contactor independently and size it up and do it pretty quickly, so those are some of the challenges that we're facing.

The system doesn't have a problem, it's more on how do we align these wafer packs when you put them into this offline aligner and do it rapidly and the temperature coefficient of expansion issues.

So it's more of a -- we believe technically it can be done.

It just -- there's some things that have taken us honestly longer than maybe we thought it would take.

There isn't anything right now that we feel that we can't do.

Okay.

That's helpful.

I apologize, I'm also in an airport here, so I've got some background noise.

That's fine.

It so sounds like there's been some issues you had to overcome, but there's nothing really that really flows over into the FOX-1 products or --

No, it's completely different than the FOX-1.

Actually, it would help you -- we're learning things that if somebody ever wants to do high-temperature testing or burn-in on the FOX-1, they'll be able to take that experience we learned from our wafer level burn-in and migrate it to that product.

Perfect.

That helps.

I guess next question is, as you look toward your capacity level, your ability to shift these on the FOX-1 side, this big order, it sounds like you're pretty confident in your ability to ship these over the next couple of quarters.

What do you feel about your capacity challenges, or how quickly can you ship greater than ten systems here on this order?

As we said, we plan on shipping these over the next few quarters.

I think the challenge on the FOX systems is basically having the pipeline filled with materials.

As far as our internal assembly and test process, I think we've reduced the cycle time of that and put in the infrastructure so we could test more systems in parallel.

I think our biggest challenge is probably on the contactor side.

As we're automating that design process, that's the biggest challenge we have.

Okay.

That sounds great.

I guess last question is -- obviously this is a sizable order you guys just press released here.

I'm just wondering what your outlook is for additional orders out there.

Once you get this FOX-14 shipped, does that open the door for follow-on orders?

On the FOX-1 side, do you have additional customers in the mix, or sort of continue driving down the path with this memory customer you're talking about?

Let me answer that in a couple of ways.

I think if you look at the -- if you say, what is the potential for this customer for their 300 millimeter fab, we estimated for a 300 millimeter fab that had 5,000 wafer starts per week, they would need about $50 million worth of FOX-1 systems and wafer pack contactors.

So that gives you kind of an idea of the potential.

Now, it wouldn't happen all at once, but as they outfit that fab, that would be kind of our guesstimate of what the potential for our FOX-1s would be.

So in addition to that, we are aggressively going out and trying to land new customers for either our FOX-1 or our FOX-14 wafer level burn-in and test product.

So we have a -- we're trying to obviously book as much as we can from our existing customer and we're trying to line up some new customers at the same time.

That sounds great.

So congrats and good luck.

Thank you.

All right, Dennis.

Thanks much.

Thank you.

Next question comes from Jeffrey Scott with Scott Asset Management.

Please go ahead.

Good afternoon.

How are you doing?

Good, thank you.

Congratulations.

Thank you.

A couple quick questions.

The quarter came in a bit light on the revenue side from what you would have suggested three months ago.

What was the reason for that?

We were fairly close.

Basically, we looked at possibly at that time shipping a couple of -- say, two to three more wafer pack contactors that we had in our backlog.

I don't know if you've seen that design, but there's what we call a single distribution board that's a very complicated, multi-layer -- kind of like a ceramic substrate that does all the interconnects between our contactor and the system, and our supplier had some manufacturing difficulties and slipped out those units to the end of the quarter.

So we just didn't have enough time to get them assembled and accepted to make it happen.

The schedule was to have it happen two or three weeks earlier.

So that was it.

Going forward we have found a second source.

So we're not going to hopefully get caught in that box again.

So it was two or three contactors for the FOX-1?

That's correct.

Which would be about -- roughly about $1 million.

Was there any MTX in the quarter?

Nothing significant, I don't believe.

Is that getting cannibalized by the FOX-1?

You suggested no before.

No.

The FOX-1 isn't -- is -- hasn't cannibalized the MTX.

Okay.

In the press release you talked about sending the FOX-1, I think, to multiple locations.

Was that correct?

That's correct.

So it's not going to -- this order is not going to one fab, it's going to several 300 millimeter fabs?

No, the first shipments were to a 200 millimeter fab, and the next -- these orders are going to the new 300 millimeter fab.

Okay.

So all of this is going to one 300 millimeter fab?

That's correct.

Last question, are you still on track for a new FOX-1 and a new FOX-14 customer this year?

We are, this fiscal year, we are trying to -- that's our objective for the team.

And you still think you're online for that?

We believe that can still happen.

It takes longer than -- it takes a long time to penetrate these customers for this type of product, but we believe it -- we've seen the interest level increasing and we provided some quotes out there, so we think that it's going to happen.

Okay.

That's good enough.

Thank you.

Okay.

Thanks.

Thanks, Jeff.

Thank you.

Our next question comes from Bill (inaudible) with (inaudible) Wood Capital.

Please go ahead

Hi, Bill.

Hi.

Cash flow from operations was -- it looks like you used a little cash and then invested that in inventory.

Correct.

Used about $900,000 during the quarter and inventory went up by about that same amount.

Right.

And so that is essentially pieces and parts against the big order?

Exactly.

Okay.

But it's against all of our, primarily, FOX backlog that's been growing over the last several quarters.

The big order is obviously part of that, but we had been building for some of the early orders as well.

Okay.

So on a going-forward basis, we should see significant further investment of that time frame?

I'm not really guiding to significantly higher inventory levels.

What we're hoping is that we'll be able to, as orders come through, meet them with current levels of inventory.

It might go up some, but we're not expecting significant growth.

And is there any kind of sensitivity to some kind of scarce part or assembly out there, long lead time assemblies or other --

I think if you look at our 10-Q and 10-K, we're always talking about there being some risk factor with some component.

There's multiple components on our FOX-1 system.

We try and buy parts.

Early in the process we look at the critical parts so we can manage it.

And as I said before, I think the part that we had the most problem with was the single distribution board for our wafer-packed contactors, and that one we've been able to, we believe, qualify a second source for that.

Okay, okay.

Interesting.

Okay, thank you.

Thank you.

All right, Bill.

Thank you.

Next question comes from Jim Gentrup with Meadowbrook Capital.

Please go ahead.

Good afternoon gentlemen, how are you?

Fine, thanks.

I was just curious -- maybe you addressed this a little bit, regarding the MAX and MTX business.

Basic question, why is it kind of continuing to be weak?

That's a valid question.

If you look at the MAX, one of our major customers for the MAX has been Texas Instruments.

And they have been cutting back on their capital expenditures.

And also, they are looking at some -- they're seeing their devices dissipate higher power, and we're looking at moving into that area where we can -- we've talked about enhancing our MAX to go after this higher-power burn-in.

So that possibly is an area that we're focusing on.

But in general, with the MTX, we're -- we've gone after some parallel test applications with that system and we've sold it into DRAM and Flash manufacturers, and we believe if we enhance that hardware and lower the cost and increase the performance, that we can go after some of the Asian business that is lower -- is basically lower cost than our MTX.

Our MTX is a very high performance system.

So basically the markets for these products -- are driven by the overall industry, and we see maybe the overall semiconductor industry is kind of a little bit weak.

It's really hard to say.

But the market share, you're not losing market share, or do you know?

We don't see ourselves losing any business in the last year or two.

So the share seems to be about the same, but our goal is to go after somebody -- there's segments of the market that we haven't competed in that we want to compete in.

Okay.

But the cannibalization issue is not a factor, then, as you said before, with either one of these lines?

No, not yet.

The applications that we're selling our FOX-1 into and our FOX-14, these customers aren't using the MAX or the MTX.

Okay.

All right, very well.

Going back to the FOX-14, you talked a couple of calls ago about four to five contactors per FOX-1 system.

And then I think you mentioned two today, that you expect two is -- has anything changed there and can you elaborate a little bit on those numbers?

Nothing's really changed.

I think when it started out, there were many multiple designs, and the number might have been in the three to four range.

But I would conservative long-term two would be a good number, but it could easily be three or four per system.

Okay.

It's really hard to -- it's hard to guesstimate how many different types our customer is going to need.

I don't even think they know, but you could just as easily have three or four per system as you could have two per system.

And this is a change that occurs every six months to a year, is that what you said?

I would say every year, they would probably -- year to six -- year to year and a half, they would re-tool their wafers and then need new contactors.

And how about the pricing on the FOX-1 systems.

Has that changed any from when you -- have you gotten any pressure there on the pricing?

There's always pressure, but basically the price is about the same.

As we increase quantities, sometimes there might be a break point, but basically the price is the same.

Okay.

That's all the questions I have.

Thank you, guys.

Thank you, Jim.

(OPERATOR INSTRUCTIONS).

Our next question comes from Robert Moses with RGM Capital.

Please go ahead.

Hi Rhea and Gary.

How are you?

Good, thank you.

I just had a question following up on the last caller's question about contactor and the wafer pack as opposed to the system.

So we should think about that as somewhat of a razor blade, if you will.

Can you give me some sense, Rhea, just roughly, if you ship to ten systems, maybe how much the installed base in the 200 and 300 millimeter would be?

Are we talking 20 systems in total if you ship the ten?

That's a close guess.

So really from one customer on a memory application, 20, and we should expect, kind of conservatively, two contactors every year or 18 months?

Yes, that's correct.

To give you -- I mean, I looked at it for a total -- for a 300 millimeter fab, and when I said there was $50 million opportunity for FOX-1 and contactors for a 300 millimeter fab, if you looked at -- the number could be $35 million for the systems and somewhere around $12 to $15 million for the contactors.

And the contactor business would continue year after year.

I got you.

But you also do have $200 millimeter application install base as well?

That's correct, there could -- correct.

And so as we kind of think about the business model, kind of over the next two, three, four years, if we can get another, say, 20 to 40 systems and another 300 millimeter fab for a new customer and get that same, we start building somewhat of an annuity base as we get out two to three years?

That's correct.

If that scenarios happens and we have a couple -- two or three customers, you could conceivably see a $30 million -- $25, $30 million business just for repeat contactor orders.

Is there difference in the -- I mean, the gross margin I guess for FOX-1 in general seems to be a bit better, and your gross margins are probably the best can I remember.

Is there a difference between the contactor and the system itself in terms of gross margin?

Hi, Rob, this is Gary.

I would say generally the contactors have a little bit lower margin in the systems.

Okay, but still pretty good margin, kind of mid-40s, high 40s, something like that?

Mid-40s, high 40s, yes.

And just lastly then -- in terms of -- you mentioned leveraging the SG&A and R&D line, I guess we need to see some increase in that business from -- in that line item from the August quarter as we go forward and ramp-up revenue, but in terms of kind of a business model, as again we kind of look out over the next couple of years assuming we can ramp up, just some sense on a percentage basis how much we could see that come down as a percentage of revenue, or just kind of a mid-term operating margin goal if you care to share that?

The tough one on that is you would have to make some assumption on the net sales level in order to give a projection like that.

And what we've said is that as net sales increase, we do anticipate that the percent of sales, both on SG&A and on R&D, would decline.

Without trying to forecast a particular revenue number out a particular distance, I would say you could easily see four to six percentage point of sales reduction in operating expenses if the net sales go up, as we anticipate.

I got you.

And obviously a move from 7.7 to 8.7 to 9.7, there's just kind of incremental fall through of profit?

Yes.

And Gary, just on that note then, you're booking or accruing very little tax expense.

And I assume that also means you're paying very little if any federal tax.

Give us some sense of the NOLs in terms of how long we can shield kind of cash taxes?

Are we talking, given your plan, several years, or is that time horizon a bit shorter?

I believe our NOL is in the vicinity of $10, $11 million.

So it would just be a matter of how profitable the U.S.

operation was, how quickly that could come down.

We are anticipating that in Japan we will be paying some taxes this year.

Japan was also in a situation where they had not been paying any taxes, so we would anticipate some taxes to be paid there, and we are accruing for that currently.

Okay, great.

Thanks, guys.

Thanks.

Thank you.

Management, there are no further questions.

I will turn it back to you for any concluding comments you might have.

Hi, this is Rhea.

I would like to thank you for joining us this afternoon and we look forward to speaking with you again next quarter.

Bye, now.

Bye-bye.

Thank.

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