Aehr Test Systems (AEHR) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and thank you for standing by.

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

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

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

(OPERATOR INSTRUCTIONS).

This conference is being recorded January 7th, 2008.

I would now like to turn the conference over to Tricia Ross with the Financial Relations Board.

Please go ahead, ma'am.

Good afternoon, and thanks for joining us to discuss Aehr Test Systems' results for the second 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 213-486-6540 and we will 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 to Gary Larson.

Go ahead, Gary.

Thanks, Tricia.

And thank you 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 calendar 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, reflect events or circumstances occurring after the date of this conference call.

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

Rhea?

Thank you, Gary.

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

We are pleased to report that we had one of the best quarters we've had in a number of years.

Net sales for the second quarter of fiscal 2008 were $9.7 million, up 55% over the same quarter of the prior year, and up 26% sequentially.

Importantly, a significant portion of our revenue increase flowed to operating income, which increased by $1.7 million over the same quarter of the prior year.

We continue to be excited about the significant growth opportunities we see for our FOX-1 testers and wafer packs.

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

Our highly parallel FOX-1 full wafer tester and its wafer pack contactors moves the company into the large growing market for wafer probe testing.

This is a new market for Aehr Test, and it significantly expands our addressable markets.

Industry experts estimate that the total available market for wafer probe testing, including the consumable pro cards is in excess of $3 billion per year.

With our FOX-1 product, we are targeting the market segment for ICs with long test times, such as flash memories.

Also, orders for our wafer pack contactors were solid during the quarter, providing further evidence that this can be a potentially strong revenue stream, and we expect additional orders as our installed base of 300-millimeter FOX-1 testers increases.

Our full wafer contactors are custom designed for each wafer device type, and is a key technology that enables our FOX-1 system to parallel test thousands of die in the a single touchdown.

Designing and producing custom wafer pact contactors that can contact thousands of die over a 300-millimeter wafer is a major technical challenge.

During the quarter, we continued to invest in the development of design tools and manufacturing processes to increase our wafer pack capacity and reduce our cycle times.

I'm pleased to say that we made significant progress this past quarter, but we still have a ways to go.

Another major event of the quarter was shipping our first FOX-15 wafer level burn-in and test system to a leading automotive IC manufacturer.

We are proud of the broad technical accomplishments of our engineering team that made this possible.

The FOX-15 system is a second-generation wafer-level burn-in and test system and is our first system to utilize our newly designed configurable hardware and software platform.

Our major technical challenge was developing wafer pack contactors that can work reliably and repeatably during the high-temperature requirements of wafer level burn-in and test.

Importantly, we believe shipping our FOX-15 system helps validate that our technology is a cost effective solution for processing wafers for automotive and known good die applications.

We are now aggressively targeting these growing markets with our FOX-15 wafer level burn-in and test system.

We have installed our FOX 15 system and our customer has started to run qualification wafers.

We expect the acceptance phase correlation studies to be lengthy, as our customer wants to do multiple burn-in runs to ensure that the wafers processed by our FOX-15 system meets their automotive customer's stringent quality and reliability specifications.

This acceptance could take up to six months or more, but we are hopeful that it could happen in our fourth quarter.

Revenue for this multi-million dollar system will be recorded following customer acceptance.

Our near term goal is to add one or two new customers for our FOX products and grow market share in the rapidly expanded automated test equipment or ATE market segment for full wafer test and burn-in.

We continue to see interest in both our FOX products, however, it seems to always take longer than you expect to penetrate production accounts with a new technology.

The balance of this fiscal year, we will continue to invest in R&D to improve the performance of our core parallel test and burn-in systems for package devices.

Our objective is to roll out new products over the next six to 12 months, using our new configurable hardware and software platform developed for our FOX products.

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

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 third fiscal quarter, when compared to the quarter just reported.

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

Thanks, Rhea.

Net sales were $9.7 million in the second quarter of fiscal 2008, an increase of 55% from $6.2 million in the second quarter of fiscal 2007, and an increase of 26% from $7.7 million in the prior quarter.

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

As Rhea mentioned earlier, we shipped the FOX-15 system this quarter.

We expect to record revenue for it upon completion of customer acceptance.

Gross margin was 50% for the second quarter, compared with 47% 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 believe that the typical gross margin will be about 50%.

SG&A was $1.8 million in the second quarter, compared with $1.5 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.

Second quarter 2008 R&D expense was $1.4 million, down slightly from $1.5 million in the second quarter of last year.

R&D expense varies from quarter-to-quarter, depending on product development expenses, and this quarter's level was lower than is typical.

We expect R&D expense to increase somewhat during the second half of this physical year, as we add engineering resources to grow our custom wafer pack contactor business.

Income from operations for the second quarter of 2008 was $1.6 million, compared with a loss from operations of $82,000 for the second quarter of 2007.

Comparing this quarter to the same quarter of the prior year, operating income increased by nearly $1.7 million, while sales were up $3.4 million.

This demonstrates the leverage available to the company when sales are growing and product mix is shifting more towards FOX products.

Our net income for the second quarter was $1.4 million, or $0.16 per share, compared with net income of $687,000, or $0.08 per share a year ago.

And compared with net income in the prior quarter of $779,000 or $0.09 per share.

Excluding stock compensation expense in these periods, pro forma net income in the second quarter of fiscal 2008 was $1.6 million, or $0.19 per share, compared with $856,000, or $0.10 per share in the same period of the prior year, and compared to $968,000 or $0.12 per share in the prior quarter.

Net sales were $17.3 million in the first six months of fiscal 2008, compared with $13.4 million in the first six months of fiscal 2007.

Net income for the six months ended November 30, 2007 was $2.1 million or $0.26 per diluted share, compared with net income of $1.2 million or $0.15 per diluted share in the same period of the prior fiscal year.

We continue to have a solid balance sheet.

Our cash, cash equivalents and short term investments stood at $6.9 million at November 30, 2007.

This total is $1.8 million lower than at the prior quarter end, and results from the increase in accounts receivable during the second quarter.

Accounts receivable was $11.6 million at the end of the second quarter, a $4.8 million increase from the end of the prior quarter.

The increase is primarily attributable to the higher level of sales as well as an increase in the level of of receivables in Japan, which typically has longer payment terms.

Our inventory was $10.7 million at November 30, 2007, essentially flat with inventories at the end of the prior quarter.

Shareholder's equity was $26.6 million, or $3.33 per share outstanding at November 30, 2007, and we continue to have no outstanding debts.

We're now ready to answer your questions.

Operator, please go ahead.

Thank you, sir.

We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS).

Our first question comes from Ramesh Misra from Collins Stewart.

Please go ahead.

Good evening gentlemen, and congratulations on the report.

My first question, Rhea, was for you.

Can you qualitatively talk about what the book-to-bill or the backlog number was?

I know you tend to report backlog only at the end of the fiscal year, but can you at least give a directional indication?

Okay.

As you know, we don't report bookings per quarter.

But we did announce $13 million worth of FOX system orders early in the quarter.

We announced it early in the quarter.

For the prior quarter.

In the quarter just finished, in the second quarter, we announced $13 million worth of FOX system bookings, and we also talked about receiving additional wafer pack bookings for those systems.

So obviously our book-to-bill was higher than what we shipped, but we don't report bookings primarily because we have a very lumpy bookings per quarter and oftentimes, a week or so could make a significant change in whether the bookings, one and-a-half to one book-to-bill or half, depending on when the order comes in.

And oftentimes our customers know that and put pressure on us for discounts at the end of a quarter, book order, so by not reporting bookings, it actually saves trying to accelerate bookings and giving additional discounts.

Okay.

You alluded to the orders for wafer pack for these 10 systems that you received orders for.

Typically, how many wafer packs are ordered for each of these -- each of the FOX-1 systems?

Similar.

I would say one and-a-half to two.

Okay.

So have you received orders for all of -- have you received wafer packs for all of the systems that you received orders for or do you --

They tend to delay somewhat, but I don't know.

We haven't tried to match them up.

Got it.

And in terms of these systems, the $13 million order you received, by when do you expect it to be shipped?

I'm talking shipment, not recognizing revenues.

I think we would actually ship during this fiscal year.

So by end of May you should have them shipped.

If this is a repeat customer, Rhea, would the acceptance cycle be strong?

Yes.

Okay.

Basically on these repeat orders, when the customer has already accepted the initial system, then the revenue is recorded on shipment for the follow-on units.

So basically, it's reasonable to expect that the revenue for these systems, these ten systems, should be recognized also by the end of the current fiscal year?

Yes.

Got it.

Okay.

Now shifting again to the wafer packs, remind us again what the typical ASPs of these wafer packs and can you say if the ASPs are changing relating to complexities of the parts or are ASPs actually declining?

Good question.

I would say that the ASP -- let's say the selling price could vary anywhere from $200,000 to $500,000.

We typically in -- I think a good rule of thumb would be around $300,000.

Conservatively.

Okay.

To answer your other question, it is going up a little bit as we see wafers with more die on them that we obviously have higher number of pins and the selling price is based on the number of contacts or the number of pins we provide.

Got it.

Now clearly the -- one of the issues that you you had previously, Rhea, was the ability to supply enough wafer packs.

Can you talk about that, how you resolved that or how far are you along in the process of resolving that issue?

As I mentioned in the conference call script, producing, designing and producing wafer packs is a major challenge, and I think initially when we started this project, we were selling 200-millimeter FOX-1s and 200-millimeter wafer packs and I think we've been able to overcome the deliveries of the 200-millimeter, at least most of them, and now we're facing the challenge of developing for design -- designing 300-millimeter wafer packs.

As I mentioned, we invested a lot in design tools in order to reduce our cycle times.

So it's -- it's a lengthy process but we feel we're making good progress on that.

Got it.

So related to the delivery of the FOX-1 systems, obviously the customer wouldn't want the system to be sitting there without wafer packs.

Do you have the capability to supply the contactors as well by the time these systems are delivered before the end of the fiscal year?

Yes, I believe so.

Okay.

I think historically they tend to buy more wafer packs than they have systems for.

Right.

We will have enough wafer packs for their -- we believe for our installed base of systems.

Okay.

And again, this entire order was 300-millimeter, all of the wafer packs are 300-millimeter.

Yes, currently the new wafer packs are 300-millimeter.

Okay.

Shifting gears a little bit, your R&D expense, I recognize the fact that year-over-year suggests about -- R&D was down, actually I think it's the lowest level that it has been in the last four quarters or so.

Is this -- obviously, there's a lot of variation in it, but does this reflect the conclusion of any particular project that you might have been working on?

Well, there are always projects that are ongoing and projects that are coming closer to fruition.

What this shows is that a number of the expenses that would more recently have shown up in R&D expense were showing up in inventory and cost of goods, and that's because a product has reached a point of maturity where we're allowed to do that by the accounting rules.

And that was my comment about variations from quarter-to-quarter.

You will see ups and downs in particularly in the R&D expense arena, because we'll have substantial material expenses that will show up in R&D expense and then in another quarter, just as we saw this time around, those similar expenses may be counted as inventory or cost of goods, based on the nature of that particular product.

Okay.

Got it.

And just a clarification on that comment about second half R&D expense.

Are you suggesting that it just goes back to the historical level that it has been or do you think the second half will actually be modestly higher than what the rolling quarter average R&D expenditure has been.

Right, well, definitely higher than the quarter just ended.

That was the message we were trying to send.

But as you point out, since we are gearing up on the wafer pack contactors in a way we haven't before, it wouldn't be surprising if we saw the R&D expense go higher than the recent averages.

Got it.

Okay.

All right.

That helps.

In regards to the tax rate, this quarter tax rate was about 10% or so, Gary.

Yes.

How should we think of tax rate going forward?

And I know it's difficult to predict that with the fine degree of precision, but all the same, it's been running a lot lower than previously and then I presume you might be -- some of your NOLs might be coming to an end.

How should we think of tax rate going forward?

I would say that the best thing you can do at this point is to assume similar rates to what you've seen us booking in the first and second quarter of this fiscal year.

You're right, we do have NOLs in the U.S.

and NOLs in Japan.

Some of those NOLs in Japan are going to be completely consumed this year, resulting in higher effective tax rates and that's what we're trying to reflect.

It will depend on how the business plays out between the U.S., Japan and our other subsidiaries, what the ultimate rate may be.

I would say looking at the rates we've booked in Q1 and Q2 would be the best way to estimate it at this point.

Okay.

Looking at these revenues, Rhea, can you give us a sense of how much of it came from the FOX systems and how much came from your legacy MAX and MTX systems?

Yes, this is me, Ramesh.

In the conference call I mentioned that the majority of our business did come from FOX products this quarter.

Okay.

So do you anticipate -- can you give us any indication of what's happening on the legacy side, further down the line.

Clearly there is a slow down of overall CapEx spending in the industry.

So do you anticipate that your legacy business will remain subdued on account of that?

You're correct in that we're seeing certainly the the capacity buys aren't there for our core products for burn-in and parallel test and this is -- and this is why we're taking a proactive approach to enhance and come out with, roll out new products that allows us to compete in some new marketplaces for our MAX and our MTX.

We believe that we can -- we talked about rolling them out the next six to 12 months.

We think these new products can start adding revenue again in next fiscal year.

So these are basically redesigned MAX and MTX systems?

Right.

They would be a next generation MAX or next generation MTX.

Using the core hardware or software we developed for our FOX products.

We'll migrate that technology to our MAX and MTX.

Got it.

Okay.

Again, kind of trying to look at it more finely, do you anticipate the FOX-1 revenues to be also up in the February quarter?

Up on a quarter-to-quarter basis?

Yes.

We haven't given that guidance, but we are expecting revenue to be up on a quarter-to-quarter basis but we're not breaking that guidance down by product.

Okay.

Got it.

I think that covers most of my questions for now.

Thank you, gentlemen.

Thanks, Ramesh.

Our next question comes from Brian Wilkinson from Lewis Asset Management.

Please go ahead.

Hey, guys.

Fantastic job.

Thanks.

I think Ramesh covered most of what I was thinking about.

I was just going to ask about the addressable market in general, how much of that $3 billion probe card market --

I would say it's wafer probe test market.

Wafer probe test market.

Probers, probe cards, testers.

Yes.

How much do you cover currently with products that you have to market and the customers and prospective customers that you're touching right now?

What's the addressable -- your addressable part of that market?

We provide in our financial pitches a company estimate of what we believe our segment for our FOX products is and we estimate it to be about $250 million by the year 2009.

Okay.

By the year 2009?

Calendar 2009.

And what are you right now for '08?

Say it again.

Ballpark.

What's the current addressable market?

How much for '08?

What we're saying for calendar '08 would be somewhere around $140 million, $120 million.

Okay.

But double that by next year at this time.

Right.

Correct.

Okay.

Thank you.

Thank you, Brian.

Our next question comes from Jeffrey Scott from Scott Asset Management.

Please go ahead.

Rhea, you got a great quarter and you got great snow at Squaw.

Which one makes you happier?

The great quarter.

Couple quick ones.

The FOX-1 you said on the technology side you still have a way to go.

Can you explain what problems remain to be solved?

I meant on the wafer pack.

Reducing the cycle time from when we get the order until when we deliver it.

So the production technology is okay.

It's just a question of the turn-around time?

Correct.

I mean, when you start -- when we started developing wafer packs, initially it took us months and months to design them, which is too long, and then we had to shorten that design phase, where the customer is expecting deliveries in, say, three months, we need to get down to that level, two months, two to three months.

Okay.

So our delivery lead times are too long.

The FOX-15 customer, is that a new customer to Aehr Test?

No, it's a customer that we had sold MAX products to.

It's a new customer to FOX but it's a customer we had sold MAX.

Everything's a new customer for FOX.

So they knew you via the old legacy MAX product?

That's correct.

So that's how we had the relationship and that's how we basically got in and sold, were able to sell them on our FOX technology.

These have been delivered to a U.S.

domestic location?

No, I didn't say that.

Okay.

I would say it's an international location.

International location.

Okay.

How many systems could this particular customer order?

When we talked to them initially, he was saying somewhere between five and 10.

Over a number of years, of course.

Somewhere between five and 10.

You still have just the order for the one; right?

Correct.

So five to 10 would be over some period of time?

Correct.

What do you think you have to do to get the customer to order more?

I think, as I highlighted in the conference call, I think what he is looking for is a system that offers the reliability and the repeatability that he needs to ensure that he meets his customer's stringent requirements for wafer level burn-in.

So he's a very detailed customer.

I mean, certainly we can do the job but he wants to see 100% of his wafers work every time and that's -- you know, that's the challenge that we have to get to, or at least some high number of -- we have to give him a high confidence that we can get some high yield when he processes wafers and that's -- the only way you're going to do that is to run multiple wafers and see what the issues are, and if there are any, then fix them.

Are you expecting significant issues?

I guess you always expect there to be issues, but you're always hoping for the best.

You have to be prepared to deal with some of these issues.

Okay.

The five to 10 over time, those would be delivered to the same location the first one went to?

Yes.

Are there other locations?

This customer just has one location.

Just one location.

Yes.

He would -- what would have to also happen is he probably would need to, as he adds more devices, so this is one device type, so for this one device type it maybe is one or two systems and then as he adds more device types, it could be more systems.

Okay.

But again, I think the leverage here could be that -- the end customer is a leading car manufacturer and if that car manufacturer likes the wafer level technology and if it provides them reliable, quality die, then our hope is they require some of their other IC suppliers to use similar -- to use our FOX product.

So that's where the big leverage could be, if we can be successful on this project.

That would actually play out over some number of years, would it not?

That's correct.

But that would focus -- that would broaden the -- our customer base, instead of one customer, it could be multiple customers would be interested in our FOX product.

All driven by the success --

Of this one large.

As you know, there's only a few large automotive companies in the world.

Right.

Okay.

You talked about the FOX 15 having applications for other people that were in the known good die business.

Correct.

What other, other than autos, would you characterize as being in that space?

One customer that we're talking with is a DRAM customer and they're looking at selling their DRAM chip into a stack package that goes into hand-held communication devices.

So that's a very broad application, so it's stack packages, vertical stack packages, for the hand-held consumer market.

Is that something that would play out over shorter period of time?

Yes, if we're successful with that customer, that could happen within the next 12 months.

Okay.

You still have a goal of one new customer for FOX-1 and one new customer for FOX 15; right?

That's correct.

Or more.

Or more, yes.

Have you been able to -- are you more hopeful now than you were three months ago that you found that particular new customer?

I think we're -- I think shipping the FOX 15 certainly helps on the wafer level burn-in front, you know, because it really validates that our technology works and it certainly reduces barriers that prevent people from buying these kind of products and on a FOX-1 side, I think that we've come closer to selling a few customers, so yes, I think we're further along than we were three months ago.

Okay.

You got a terrific quarter.

Congratulations.

Thanks, Jeff.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS).

Our next question is a follow-up from Ramesh Misra.

Please go ahead.

Hello again, Rhea.

Just a very quick clarification.

You previously talked about the burn-in system as the FOX-14.

Is the FOX-15 just a slightly modified version with one additional slot or are there some additional fundamental changes?

Because I know you had shown the FOX-15 at the show in July last year, not the FOX-14, so ?

That's a good question.

I think initially when we sold the order to the automotive IC manufacturer, it was a FOX 14 system, which was our first generation wafer level burn-in and test system and as we got further into the project, we decided to basically upgrade the technology, the hardware, software, taking it from the FOX-1 and using that hardware, software platform and at the same time we also added one additional wafer slot.

But not only -- it's a 15 slot system.

Basically it's almost from a ground-up, everything is new and enhanced from our FOX 14 system.

So it truly is a next generation wafer level burn-in and test system from the ground up.

Got it.

Okay.

Great.

Thanks very much, Rhea.

Thank you.

Our next question comes from Larry Brooks from Maloney Securities.

Please go ahead.

Thanks, good afternoon.

Good afternoon.

I'm wondering, the approximate value for sale on a FOX-15, what that would go for?

It would be -- if you looked at the system and the 15 wafer pack contactors, it would be in excess of $2 million.

Okay.

Would the current products that you're manufacturing, are you having any supply issues, problems getting the components that you need to make the products?

I don't think any more than we would on MAX or the MTX.

I think we have hired a new VP of Operations, Joel Bustos, and I think he's certainly strengthened the supply chain, so I think -- we see less issues on the material side.

Okay.

With your -- you of course talked about your account receivable and of course it being apparently a Japanese company.

Is this a new group that you're dealing with or is this someone that you dealt with before?

No, we dealt with this customer before.

Okay.

So logically, you don't expect to see any problems?

No.

Okay.

And I guess the last thing is the seasonality of your company.

Are you seeing any issues where one quarter is generally stronger than another?

No, I can't say over the 30 years that we've been in business that we've seen any -- there's been any seasonality.

It varies more, I would guess, with the ups and downs of the semiconductor industry.

Well, thank you and what I can see is a great job.

Thank you.

Thank you.

Thanks, Larry.

At this time, we have no further questions in queue.

I would like to turn the conference back over to management for any concluding comments.

Please go ahead.

This is Rhea.

I would like to thank you for joining us this afternoon, and we look forward to next quarter's conference call.

Thanks again.

Bye.

Thank you.

Ladies and gentlemen, that does conclude the Aehr Test Systems second quarter 2008 conference.

We thank you, again, for your participation today.

You may now disconnect.