Aehr Test Systems (AEHR) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the AEHR Test Systems Fourth Quarter Fiscal 2008 Conference Call.

(OPERATOR INSTRUCTIONS).

This conference call is being recorded today, Tuesday, July 22, 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 fourth 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'd 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'd 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 in projections regarding industry growth and customer demand for AEHR Test's 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 FOX, ABTS, 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's product in fiscal year 2009.

We refer you to our most recent 10-K and 10-Q reports and other reports filed from time to time with the U.S.

Securities and Exchange Commission for more detailed description of the risks facing our business and factors that can 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'd like to introduce our Chairman and CEO, Rhea Posedel.

Rhea?

Thank you, Gary.

Greetings and welcome to our conference call for the fourth quarter of fiscal 2008.

We are pleased to report that fiscal 2008 was an excellent year for AEHR Test.

Revenue was $39 million, a 43% increase over the prior year.

Most importantly, we did an excellent job in managing our cost, so a significant amount of our revenue increase fell to the bottom line.

Our operating profit increased to a record $5.8 million, a greater than five times year-over-year increase.

We also had another strong quarter of revenue growth in the fourth quarter, as revenue increased 32% to $10.9 million over the same quarter of the prior fiscal year.

We had a number of accomplishments since our last conference call.

Our major accomplishment last quarter is that we designed and shipped a record number of 300-millimeter wafer packs for FOX-1 systems.

A special thanks to our engineers for designing the automated layout tools and our manufacturing team for designing-- for implementing the assembly and test processes and the infrastructure for making this happen.

These wafer packs are the enabling technology that allows the FOX-1 system to test over 2,000 die in a single touch down.

Our challenge will be to keep up with our customer's road map, showing the number of die increasing to over 3,000 die per wafer near term.

We expect shipments of our wafer packs to grow this fiscal year to support our increasing install base of FOX-1 and FOX-15 wafer test and burn-in systems.

We expect wafer packs to provide a significant amount of revenue this fiscal year.

Another highlight in the fourth quarter was that our FOX-15 system and its wafer packs were accepted by our customer.

Most importantly, our customer's wafer-level burn-in process was qualified by their end customer, a leading automotive manufacturer.

Having a FOX-15 system qualified and running production wafers puts us into a favorable position in convincing other IC producers that our wafer-level burn-in systems can be a cost-effective tool for burn-in for automotive ICs and known die applications.

We are aggressively targeting these markets for our FOX-15 systems.

Another piece of good news is that our FOX-1 full-wafer parallel test system is running volume production in a leading 300-millimeter flash wafer fab.

We expect our customer to start adding system capacity in calendar 2009, which is the second half of our fiscal year.

We continue to see a high level of interest and activity in our FOX products.

But we believe the slowdown in the semiconductor industry has delayed capital spending and our ability to penetrate new accounts.

Our management team and sales force remain positive and are focused on adding new FOX customers this fiscal year.

A disappointment last fiscal year was a drop-off in our core MAX burn-in and test systems for packaged, integrated circuits.

We believe this was a result of the overall semiconductor industry slowdown, which impacted this segment of our business.

We see some increase in our MAX quote activity and are hopeful that orders will increase over the next few quarters.

One burn-in market segment that has been growing is for high-power logic devices.

This market segment will continue to grow because as chip process feature sizes shrink, device burn-in churn and power increases.

Typically devices that dissipate more than 10 watts require an individual thermal controller to maintain accurate temperature during burn-in.

On July 14, we announced a partnership with Anteres, which is a leading provider of test and burn-in sockets and device thermal and cooling control systems.

We are partnering with them in the hopes of gaining a significant share in the growing market for a high-power burn-in up to 70 watts per device.

This partnership got off to a good start.

We announced that ITH, an Israeli test house, purchased a MAX4-200 system with Anteres individual temperature controllers.

Our plan is to use Anteres' individual device controllers in our high-power MAX-4 and new ABTS systems.

In addition, both companies will jointly market and sell high-power burn-in systems worldwide.

Going forward, our strategy is to grow our core test and burn-in systems sales during this industry slowdown by introducing a family of products using our new ABTS general purpose test electronics.

We believe we can grow our core business by targeting these growing market segments for high-power logic burn-in and low-cost [massively] parallel testers for Flash and DRAM.

We are pleased to announce that, on July 16, we received the first order for our new ABTSL system from IST after their evaluation of the demo ABTS system that we shipped them in May.

IST is a leading Taiwanese test house that focuses mainly on logic devices.

The ABTSL is a high-pin count logic burn-in and test system with the flexibility to process a wide range of devices, which is ideal for a test house with various customer requirements.

We would expect to see additional orders once the first system is installed and running in production.

In closing, since most of industry forecasters are projecting that the current semiconductor equipment industry is facing a slowdown through the first half of calendar 2009, we are cautiously optimistic about our outlook for this fiscal year.

We believe, however, that, with the strength of our FOX products, our first quarter fiscal 2009 revenue will be up over the prior year period.

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

Gary?

Thanks, Rhea.

Net sales were $10.9 million in the fourth quarter of fiscal 2008, an increase of 32% from $8.3 million in the fourth quarter of fiscal 2007.

In the fourth quarter of fiscal 2008, FOX products represented the large majority of our net sales.

Gross margin was 49% for the fourth quarter compared with 53% in the year-ago quarter.

The decline in gross margin reflects a product mix change and the increased cost associated with ramping up production of wafer packs.

We continue to believe that our typical gross margin will be about 50%.

SG&A was $2 million in the fourth quarter compared with $1.8 million in the prior-year period.

The increase in SG&A dollars is primarily attributable to an increase in headcount, as we've added sales and support staff to help drive the growth in our business.

Fourth quarter 2008 R&D expense was $1.6 million, slightly lower than the $1.8 million in the fourth quarter of last year.

R&D spending varies from quarter to quarter depending on the level of development of new product.

We would expect R&D spending to increase somewhat from this level.

This quarter, we recorded a tax benefit of $4.6 million, or $0.53 per share.

This was related to the reversal of the valuation allowance against our deferred tax assets as we determined that these deferred tax assets are more likely than not to be realized in the future.

We will now be recording taxes at rates closer to statutory rates.

We initially anticipate a tax rate of about 40%.

Our net income for the fourth quarter was $6.5 million dollars, or $0.74 per share, compared with net income of $919,000, or $0.11 per share, a year ago.

Excluding stock compensation expense in these periods, pro forma net income in the fourth quarter of fiscal 2008 was $6.7 million, or $0.77 per share, compared with $1.1 million, or $0.13 per share, in the same period of the prior year.

Our cash and cash equivalents stood at $15.6 million at May 31, 2008.

This is a sizeable increase from the end of last quarter, as we had significant collections of our accounts receivable balances.

Our inventory was $10.2 million at May 31, 2008, a $500,000 increase from the end of the prior quarter.

Shareholders equity increased to $37.8 million, or $4.52 per share outstanding, at May 31, 2008.

That's up $1.62 over the last 12 months.

We continue to have no outstanding debt.

Exiting the year, our backlog stood at $18.6 million at May 31, 2008, down from $21.3 million in the prior-year period.

Based on expected shipment schedules for FOX products, we believe our net sales in the first quarter of fiscal 2009 will be higher than those in the same quarter of the prior year.

We're now ready to answer your questions.

Operator, please go ahead.

Thank you.

Ladies and gentlemen, at this time we will begin the question/answer session.

(OPERATOR INSTRUCTIONS).

Our first question comes from the line of Ramesh Misra of Collins Stewart.

Please go ahead.

In regards to your ABTS system, can you provide us a ASP range for the product?

The system that we sold to IST was a high-pin count logic system.

It is a low-powered system, so probably in the range of 400,000 to 500,000.

Okay.

And has this system been formally accepted by IST at this point, Rhea?

No.

We actually, in May, shipped them a small configuration, a configured system for evaluation, and they accepted that.

So now we have to ship them a full-sized system, and that system will be-- Over the next two or three months, we plan on shipping that system.

Okay.

It wouldn't be revenue in the first quarter.

Okay.

Got it.

In regards to the volume of wafer pack shipments in the May quarter, can you provide a rough range of what that volume was?

Was it 10, 20, 50--?

Yeah.

I would say, if you added up the FOX-1 and the FOX-15 wafer packs, it's probably over 20.

Over 20 for both the FOX-1 and the FOX-15?

Were there any FOX-1 deliveries in the May quarter?

I don't believe so.

Nothing that's significant.

Okay.

Now, given that your August quarter is about eight or nine days from ending--

No.

About a month and a half.

We're still in July, Ramesh.

I'm sorry.

A month and a-- yeah, a little more than a month away.

Is it reasonable to expect any FOX-1 shipments during the current quarter, or is it still going to be mostly just wafer packs?

It's reasonable to expect some-- nothing huge, but there could be some FOX-1 shipments in the quarter.

Okay.

In regards to expanding the customer base for FOX-1, any updates from your last commentary about that?

As I mentioned, we're aggressively pursuing customers and have quoted a number of customers for both the FOX-1 product and the FOX-15.

So, if I had to bet today, I would probably put the bet on getting a FOX-15 customer first.

So we have quoted a number of FOX-1s, but, in some cases, the customers that we have quoted systems to have suffered capital freezes and things of that sort that have delayed it.

Right, right.

Are there any 200-millimeter wafer packs being shipped or being requested by clients at this time?

Yes.

There are?

Smaller percentage, but, yes, we are still shipping 200s.

Okay.

Gary, in terms of the tax rate going forward, did you say you're expecting that to be about 40%?

To start with, that's the number that we're targeting.

That's pretty close to the statutory rate.

And that's fairly reflective of what you would see in the U.S and Japan and Germany, where the-- the various places where we expect to be showing income.

Okay.

That's just a pretty remarkable jump considering that your tax rate has never been that high.

Of course, you probably have had some NOLs previously.

What's your status on NOLs at this point?

We, as you know, restored about $4.6 million of our deferred tax asset to the books.

That reflected the large majority of our NOLs, but we do still have some amount of tax assets that are being-- have evaluation asset applied to them.

Okay.

Can you provide a rough estimate of how much of that or--?

I don't have that number available now.

That would come out in the 10-K.

Got it.

In regards to that $4.6 million refund, was any portion of that a refund of the federal R&D tax credit?

It's not a refund.

It's actually just putting the tax asset back on the books.

This is a situation that you'll see periodically with companies.

They'll take a very large tax hit, or they can get a very large tax benefit depending on what their trend of performance has been.

So these are tax assets that we expect to be able to claim in the future.

So if the company continues to be profitable, we will be able to apply those tax assets against our tax returns.

But from the standpoint of our tax accrual, now we're looking at business as usual.

We're looking at applying a tax accrual rate as you would see most profitable companies applying.

So none of this benefit was related to an R&D tax?

Well, some portion of it could have been.

We have any number of different tax assets that come from various sources.

But there was not anything that came imminently.

This is something that-- We have had tax assets that have been value allowanced for a number of years.

Okay.

In regards to the backlog, again, since that number is about a month and a half stale, is it reasonable to expect that with the new order for the ABTS system, that number should be up from the number that you reported?

Say it once again, please.

Your backlog number of $18.6 million as of the end of May--

Yes?

Is it reasonable to expect that number is up meaningfully - the current number is up meaningfully from that reported number?

Ramesh, one of the problems, as you know, is we don't report our backlog on a quarterly basis.

We only report it at the end of the year.

So I think it would be a little bit imprudent of us to try and give guidance as far as where the backlog would be, when, in fact, we're not going to be reporting it at the end of the quarter.

Okay.

You just wanted to know where we are at this point, but, I mean, that's-- Typically, we end up booking a lot of our backlog more at the tail end of the quarter than the beginning.

Got it.

Got it.

Okay.

All right.

That's it for me now.

Thanks very much.

Thanks, Ramesh.

Thank you.

Our next question comes from the line of Marcel [Herbs] with Herbs Capital Management.

Please go ahead.

Hello.

Good afternoon, and congratulations to a solid quarter.

Thank you.

I have a few questions.

First, the low end of your outlook indicates a 23% drop in revenues compared to this quarter.

Are you being conservative at this point due to the economy, or are you already experiencing such a significant drop in customer demand and backlog?

Well, we haven't really given a range.

What we've said is that we anticipate seeing an increase compared to the first quarter of last year.

So there isn't really a range that you could be targeting the low end.

What we're trying to reflect is really that many semiconductor equipment manufacturers, right now, are seeing year-over-year declines in their business.

And so we're pleased that we're seeing an increase for the first quarter on a year-over-year basis.

Yeah.

I see year over year.

Obviously, I was comparing it to your current quarter, where it came in very nicely.

But I was wondering-- It's quite a difference to being up year over year to being close to where you are right now.

So I'm wondering if you're already seeing weakening customer demand or where that is coming from.

I think-- A couple things.

I did mention that our core products - our MAX burn-in and test systems and MTX systems, have been more weak last year.

And I think it's primarily driven by the industry.

They're volume driven; they're not technology driven products.

So that has impacted our business somewhat.

And our FOX business has stayed according to the levels that we thought they should be.

And we do have-- If you look at our FOX business, they're high-ASP systems, and they tend to be very lumpy.

We could get large orders one quarter and nothing for a quarter or two.

So if you look at our-- We do have a strong backlog.

In the first quarter, our challenge is going to be to ship our wafer pack contactors.

A lot of these are new designs.

They're high-pin count designs, something that hasn't been done before.

So our challenge is to make this happen.

And, as you know, when you're pushing the technology envelope, there could be problems that come up.

So, in a way, we're being cautious on what the quarter outlook is.

Okay.

That's fair enough.

Now one question to one of your customer expansion.

I read that, this year, expansion, which is one of your larger customers, is reducing their capital expenditures by about 50%.

How far does this cut affect demand for your product line?

It's hard for me to know what they cut out or didn't cut out.

But I guess the guidance I gave is that I believe they would start adding capacity in calendar 2009 to meet their needs.

And the other advantage of our FOX-1 is that it does lower their cost.

So I would think they would want to continue to purchase our products.

And I remember you mentioning that the FOX-1 tester has the potential to drive additional orders in the weak semiconductor industry environment due to the cost-saving advantages.

Correct.

And you see-- And I know you mentioned that last quarter-- And you don't see a change to that.

You're still expecting that?

Expecting--?

Say it again.

Expecting what?

Expecting that, even in a weak semiconductor industry environment, you will likely see FOX-1 tester orders to come in.

That's correct.

I mentioned that we said our Flash customer would-- The expectations were that they would add capacity in 2009 - calendar 2009.

Obviously, there's always other forces out there in the market that could change that, but that's our best guess at this point.

Okay.

Now one last question.

Looking at your current install dates and your customer end user demand, how close are your customers to capacity; or, in other words, what are current utilization rates?

I would say that on our FOX products the utilization rates are quite high.

And even on some of the MAX products they're relatively high.

But the customers-- For whatever reason, they're being very cautious because of the weak economy, and they're not adding capacity until they absolutely need it, where, in prior years, they would buy betting on the [inaudible] that they're going to need more capacity.

So now they're just holding onto the order.

So we quote a lot of systems, and they just sit there waiting for the customers' production to demand it.

And then they go ahead and order it.

So it just delays the whole process.

Well, that's actually great to hear.

Thank you very much.

Thank you.

Our next question comes from the line of Jeffrey Scott with Scott Asset Management.

A couple of quick questions.

First, for Gary - Interest income had been running at kind of the high double digits, and all of a sudden it's $18,000 for the quarter.

What happened?

During the fourth quarter, our cash balances declined, and that was reducing the interest income.

We were also taking a very conservative action to make sure that all our cash investments are as safe as possible.

So we have redefined the assets that are acceptable for those investments.

But it was primarily cash was being reduced during the quarter, and then, towards the end of the quarter, we saw large inflow of cash.

Okay.

In terms of servicing customers, the logistics of operating on a global scale, Rhae--?

Yes?

Are you happy with your ability to service customers in many locations around the world?

I mean, you have machines going to Taiwan.

If it's accessible, the next machine could be in mainland China.

How are you going to service, get parts to them, get repair people to them, and things like that?

Is that something that you're worried about?

No.

It's something that we planned for.

But that's a good question, Jeff.

If you look at our FOX-1 systems, the good majority of them are going into Japan.

And we had a strong team there.

We strengthened that team to support that customer.

And over the years we built up a strong nucleus of support organizations around the world.

We have teams already in place in the Philippines and China and Taiwan and Japan and in Europe.

So we're pretty much ready for any foreign installation, unless it's off in some unique third-world country that we're not in.

But we have a strong worldwide support organization.

It means adding additional headcount, but we've got the nucleus there to do that.

Okay.

In terms of the-- You said in the fourth quarter there was no FOX-1 delivery.

There was no FOX-15 either, right?

We shipped a-- There was a FOX-15 that was accepted, and we recognized the revenue on the FOX-15.

There was one FOX-15--

--and its wafer packs.

Right.

In terms of the breakout of revenue for '08 - from May '08 - this is the first time that-- I mean, 20 wafer packs is something like $7 million, correct?

That may be a good guess.

We never total it up.

What I was getting at was this is the first time that wafer packs or anything other than machines themselves have ever [talked] to the significant percentage of total revenue.

That's correct.

Are we now at a 20 unit per quarter run rate?

I wouldn't say that.

I think a lot of it was-- Some of it was pent up demand.

So I wouldn't say we're at 20.

Pent up demand for the FOX-1s in Japan?

The FOX-1s and the FOX-15s - I think because we recognized revenue on them, so it all kind of added up together in one quarter.

So the FOX-15 wafer packs are actually easier because they're all the same.

The FOX-1 wafer packs tend to be a number of unique designs.

So adding the FOX-15 wafer packs made the number a lot higher than it typically had been.

Okay.

In the backlog - $18.6 million - do you put wafer pack orders in the backlog number?

Sure.

Okay.

It includes machines plus wafer packs?

Yes.

And all that is for delivery within a 12- month (inaudible)?

Yes.

Have you seen any push out on the orders that were in there?

Not really.

I mean, occasionally, we get push outs where they're not ready for-- You know, there's a space requirement or something of that sort.

Or a wafer gets delayed, so they don't need that wafer pack, but they need another wafer pack.

But nothing of significance.

Okay.

Going back to the expansion, you said that using the FOX product actually brought their per-unit cost down.

What is your estimate of their lowered cost?

Is it 10%, 20%, 30%?

You mean their test costs?

Yes.

I don't know.

I probably wouldn't say if I knew.

Is it material?

One of the things, Jeff-- I think you've seen our presentation before, and this isn't related to any particular customer, but we've estimated that, if a customer purchases our product for a full fab, there would be a significant reduction in their cost approaching, perhaps, 60% or 70%.

On a per unit basis?

Overall, if you look at the cost of the fab.

Okay.

It isn't just looking at a customer's cost; it's looking at the equipment price.

There are other costs that go into it as well.

You look at floor space and other items.

And we take up a lot less floor space than the competitive solution.

I thought you were actually asking for their test cost number versus how much they save.

Well, I guess you think it's going to save them X.

Do they agree with your number in general?

In general.

So they also concur that yours is a less expensive solution to the test process?

That's correct.

And that's the reason they buy them.

So as long as they have dollars to spend, they're better spending it on your product than other things?

That's correct.

It has a higher return on investment to them?

That's correct - as long as they [ramp] capacity.

As long as they ramp capacity to [inaudible]?

Correct.

Okay.

So that gets you to some level of confidence that the forward momentum that you've developed is going to actually continue?

Correct.

They're using our systems on their 65-nanometer technology and below.

(Inaudible).

Yeah.

We can't really say who the customer is.

Okay.

But our customer uses it on their 65-nanometer.

So as they ramp their 65-nanometer processes, they hopefully will need more FOX-1s.

Okay.

You've given some level of guidance for the first quarter.

Could you-- which, I guess, I mean, the other call-- didn't find it terribly useful.

I'm not sure I do either.

Could you take a cut at all of fiscal '09 and whether or not it will be up or down?

Yeah.

That's a difficult question.

Normally we could give you a straight answer, but, with the uncertainty in the industry, we just want to be a little more cautious.

But what you've said so far is that the first quarter fiscal '09 will be down less than 30% on a sequential basis.

Again, our guidance was related to the first quarter of--

Right.

Oh, wait.

I understand the calculation that you're doing.

If it comes in at $7.661 million-- down from $10.914 million to $7.661 million, it's down 30% on a sequential basis.

But it's up $1,000 from last year, so we're supposed to be excited.

Down 30% sequentially doesn't really help us very much in terms of focusing on kind of a long investment cycle kind of company--

But let me just comment.

I think certainly we're bullish long-term with our FOX-1 and FOX-15 products, wafer packs, and now our new ABTS products.

We believe we have a strong growth strategy in place.

And the industry is just so uncertain that we just find it difficult to give you a full-year forecast.

I mean, anything can happen if we make some projection.

Things could get delayed.

But long term, nothing has changed, and we're just as positive as we were ever before.

And I always have a positive outlook, and I think that we've positioned the company to take advantage of any upturn that happens.

I [own] an awful lot of this, and the only reason I do is because I'm awfully encouraged over the longer term--

And we still are.

But it would be very helpful if you would focus on not the next quarter but the next year and put a number out that is at least something we can look at to judge progress over the next three quarterly reporting periods, for what it's worth.

Thanks very much.

I understand your position.

Thanks, Jeff.

(OPERATOR INSTRUCTIONS).

And, management, I'm showing that there are no further questions.

I'll turn it back to you for closing comments.

Hi.

This is Rhea.

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

Thanks again.

Bye.

Bye-bye.

Thank you.

Ladies and gentlemen, that will conclude the AEHR Test Systems fourth quarter fiscal 2008 conference call.

We do thank you again for your participation.

And at this time you may disconnect.