Aehr Test Systems (AEHR) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Aehr Test Systems first-quarter fiscal-2013 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions)

This conference is being recorded today, Wednesday, October 10, 2012. I would now like to turn the conference over to Marilynn Meek. Please go ahead.

Good afternoon, and thanks for joining us to discuss Aehr Test Systems' first-quarter fiscal-2013 results. By now you should have all received a copy of today's press release. If not, you can call my office at 212-827-3746, and we'll get one out to you right away. With us today from Aehr Test Systems are Gayn Erickson, President 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.

Before turning the call over to management, 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 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 -- world economic conditions; the state of the semiconductor equipment market; acceptance by customers of Aehr Test technologies; acceptance by customers of the systems shipped upon receipt of a purchase order; the ability of new products to meet customer needs or performance described; the customers' ability to maintain sufficient cash to support operations; the Company's marketing 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 product in fiscal-year 2013.

We refer you to our most recent 10K, 10-Q, and other reports from time to time filed with the US 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'd like to introduce Gayn Erickson, Chief Executive Officer. Please go ahead, Gayn.

Thank you, Marilynn. It's always fun to follow that upbeat Safe Harbor statement that's always there, so I'll try and go from here. Good afternoon, everyone. Welcome to our conference call for the first quarter of our fiscal-year 2013. I want to start out by saying that I'm pretty pleased with our Q1 results. This quarter, we again were able to improve our top and bottom lines, as we execute against our plan to address new market segments and customers with our ABTS and FOX product lines. With a little over $4.8 million in revenue and a net operating loss of under $300,000, we came close to breaking even for the quarter, and were also near cash flow breakeven. We continue to focus on penetrating key production accounts with our ABTS and FOX families, while improving our product and service margins.

We had a number of highlights in the quarter that I want to take a few minutes to review. We announced today that we received a significant order from a leading semiconductor manufacturer for a development of a next generation FOX-1 system. The new system development is expected to be complete in the calendar-year 2013. This next gen FOX system is expected to provide the customer with increased test flexibility and capacity, and at a lower cost of test. It also expands the markets addressed by our current FOX products, which will continue to provide additional growth opportunities for us in new markets and customers. We did not disclose the amount of the PO or the name of the customer, at the request of this customer, but it will show up as revenue for us over the next several quarters.

Also, we booked an order from a new customer this quarter for a FOX-15 wafer level burn-in system and WaferPak cartridge aligner. The customer is a leading communication equipment manufacturer. We worked very closely with them to design and supply a complete solution to meet their needs, including our patented WaferPak cartridge capable of bringing in over 10,000 die on a single wafer, an aligner for aligning the wafer to the cartridge, and the FOX 15 system capable of burning in multiple wafers simultaneously. The customers told us that this complete solution is very cost-effective compared to package burn-in alternatives.

Also this quarter, we're pleased to announce the multiple system order in excess of $1 million for our new ABTS test and burn-in systems from a leading reliability test house in Taiwan and China. These systems include capability for testing low- to medium-power devices with individual temperature control on every device tested. This allows customers to set multiple unique temperature profiles, and also control each device independently to compensate for [dot]-induced temperature increases during test.

The systems are configured to burn-in and test advanced logic ICs for mobile applications such as smartphones and tablets, which, as most people know, is driving much of the revenue and investments in the semiconductor industry right now. We'll ship the first system from the order this quarter, and expect to be making additional announcements related to our partnership with this company in the near future. We see a great opportunity to extend our relationship and partnership with this company moving forward.

During the last year, we announced orders from two key customers. One announced as, quote, one of the largest semiconductor manufacturers, and the other to a, quote, leading test lab in Korea. These orders are for our ABTS system, but with a new set of test electronics. These systems are the latest in our family of ABTS test and burn-in systems for package device testing. They include both individual temperature control capabilities, as well as a new per pin test architecture. The new per pin architecture allows any pin to have its own format, driver, receive data, timing, and also voltage levels. This is the only tester and burn-in system on the market that has full per pin IO capability on every pin, and also per pin voltage levels.

For example, a leading competitor has only two voltage rails, which for many new mobile processors and other devices is an issue. The mobile processors being tested might have several voltage levels needed, which would otherwise require adding hardware or other work-arounds to achieve the proper test levels. We've now completed the development of these systems. We have already shipped the first one, and will ship additional systems this month. The system has come together very nicely, and we're quite proud of the level of integration and performance of this latest member in our ABTS family. We plan to make additional public announcements on this new product this quarter, so stay tuned.

I want to turn now to the markets, and what we're seeing in our customer base. Last quarter, I highlighted that although there appeared to be a slowdown in semiconductor capital expenditures, as announced by several of the capital equipment suppliers and large semi companies, Aehr Test was simply not seeing the slowdown. In just the last month, we also began to see a slowdown in capital spending by some of our customers. Current interest in our FOX and ABTS products continues to be solid and increasing though, but we want to take a conservative approach, maintaining tight controls of our expenses and inventory to preserve cash heading into an uncertain demand situation in the next couple of quarters. We believe this will position our Company to return to positive cash flow and profitability. We had discussed our expectation that this will happen by the end of this calendar year, and we're still driving for that result.

Gary will now go over the numbers before we open up the lines for questions.

Thank you, Gayn. As reported in today's press release, our net sales in the first quarter increased 3% to $4.8 million from the $4.7 million reported in the fourth fiscal quarter of last year. Gross profit was $2.5 million for the first quarter, or 51% of net sales. This compares to a gross profit of $2.2 million in the fourth quarter of fiscal 2012, or 46% of net sales.

Operating expenses for the first quarter were $2.7 million, down $0.3 million from the fourth quarter of last year. SG&A was $1.8 million in the first quarter compared to $1.9 million in the last year's fourth quarter. R&D expense was $0.9 million compared to $1.1 million in the fourth quarter of fiscal 2012. R&D spending can fluctuate from quarter to quarter, depending on the development phase of our new products. Our net loss of $296,000 in the first quarter of fiscal 2013, or $0.03 per diluted share, showed a good improvement compared with a net loss of $779,000 or $0.09 per diluted share in last year's fourth quarter.

Turning to the balance sheet and changes during the first quarter, our cash and cash equivalents were $1.9 million at August 31, 2012 compared with $2.1 million at May 31, 2012. Our net cash burn, and that's our cash less our line of credit, was $216,000 in the quarter. Removing the non-cash P&L expenses of depreciation, amortization, and stock option expense, we were able to fund operations and be nearly cash neutral. We did use some additional cash in the quarter, as we increased our inventory, which is needed to ship against our backlog and expected orders. I'm also pleased to announce that in early September, we increased the limit on our line of credit from $2.0 million to $2.5 million.

This concludes our prepared remarks. We're now ready to answer your questions. Operator, please go ahead.

(Operator Instructions)

Our first question comes from the line of Tom Diffely from D.A. Davidson. Please go ahead.

Yes, good afternoon. First, Gayn, a question for you. Maybe a clarification on what you're seeing. So you said you are not seeing a slowdown at Aehr Test per se, it's just your customers have slowed down other places and you were going to control expenses in the meantime?

Yes, so Tom, last quarter, actually, on the call we were starting, there were a lot of folks that came out and all were sending up flares and we just weren't seeing it. If anything, everything was continuing to accelerate, and I just wanted to make sure that people understood that, and in fact, that continued through the quarter. About a month ago, there were a couple things, there was some pretty big announcements around Apple's supply chain and other things that were going on that has caused some cautiousness within some of our customers. At the same time, other customers are continuing to barrel through it, and so I just wanted to at least acknowledge that we've seen a little bit of caution in some customers, and that makes me say that we're going to actually take a more cautious tone right now, with respect to our spend. We had planned to do some increases in some expenses, including for example, full reinstatement of pay of some of the officer pay reductions that we've put in place, and I'm going to stay with those pay reductions in place for the time being, until we can fully ensure we're completely out of this.

Okay, but in a sense, it sounds like you're more of a new product story Company than a capacity Company so you may not see quite the impact as the rest of the industry?

There's definitely some of both. Some of the new ABTS line for example,, some of the new orders that we've gotten, with this, we refer to as medium power but the automotive and the mobility side of it, the mobile processors, people are buying equipment for new technology nodes. And as you know, anything that sniffs towards anywhere near -- really some of the automotive and definitely mobility, and as you get closer to Apple particularly, it's particularly hot, and the people are bucking any other macro-level trend to get that capacity in place.

Okay and looking at the quarter, you know looked like you had a nice uptick in margins and a downtick in R&D spending. In light of the new FOX-1 coming out, does R&D go back up again and are those margins sustainable, margin expansions sustainable going forward?

Actually from an R&D perspective that's about what we're going to see. We actually saw some uptick as we were completing the development of the ABTS new electronics, and as we move forward with the FOX development in at least the first initial phases, a lot of that is development effort that doesn't have a lot of actual material cost, and so I think that's a reasonable number to look at our R&D going forward in the near future.

From the standpoint of the product margins, Tom, what our last quarter, 51%, we would see similar numbers, but it is dependent on whatever development milestones have been completed, or whatever software upgrades have been performed, because those typically are the products that have very high margins and can have a big swing on a quarterly basis.

Okay, and then when you look out to the out year, between your two main product lines, the ABTS and the FOX, where do you see more growth coming from?

Well, I think that the story that I've been really internalizing since I got here in January is that anything related to automotive and mobility is where the hotspots are. Automotive, because, in general the reliability expectations are increasing from an already fairly intense level, but also, as you see consumer products, if you will, being embedded into cars -- it's very interesting to meet with a lot of these customers who, quite frankly, never had high reliability standards and test in place as was the case with say engine controllers or things having to do with electronic control systems or brakes and others. And all of a sudden you've got these devices that are going into your dashboard and your panel and you have the likes of at the end-user of Mercedes or a Toyota or someone who has these very high expectations. But they actually go through a middle source with Denso and Conti and Bosch for example, that have these extremely high reliability expectations of the systems. So if you look at a subsystem within a dash panel, they may have an expectation there's fewer than one part per million failure of the dash panel or some number, but it has a hundred components in it, so the expectations of the customers are these very high reliability expectations, and historically they haven't had the test infrastructure or capability to actually test in or test out the failures.

So there's a lot of activity going on with good old fashioned burn-in related to that side of things. The other piece is just mobility, where really, I attribute this to what Apple was doing. Apple really took what I believe a relatively leadership role in expectations of quality and reliability, and they drove all kinds of additional test challenges. At my previous role in ATE, a lot of money was being spent because of the expectations of testing in and test quality and as a result of that, the mid-users of an AT&T or Verizon I think have now increased their expectations of quality on all of their suppliers so there's a lot more talk about the amount of test and the amount of reliability, and that's all pretty good for us test guys, so that's where the hotspots are.

Okay so when you look at Aehr Test next year and the growth profitability, do you think it comes from new customers joining up, or is it just increased adoption of your products in the existing customers that you have?

I think it's a little of both. We actually had -- I mentioned this when I first got here, I think one of the things that was really great is that Aehr Test in the direst of the downturn was making investments in new products and coming out with some very nice fresh products, and we won 14 customers with our ABTS system over the last several years, which, theoretically, that's when you want to do it. You want to win those customers during the downturn. It doesn't always work that way, and so a lot of this is just, we're starting to see the repeat orders and trying to focus to penetrate to make sure to make those customers happy, to gain more market share and more opportunities in addition to adding additional customers.

Finally, Gary, where do you see the current breakeven level for revenues and maybe a cash flow breakeven as well?

We've spoken about this, and we've talked about it on conference calls. Our P&L breakeven would probably be around the $6 million range and if you look at this quarter for example, it would have even been lower than that. If you look at cash breakeven, we've typically said it would be in the low $5 million range.

Okay, all right. Thanks for your time today.

Thank you. Our next question comes from the line of William Smart from Cardinal Value.

I had a question regarding the reliability trends. Is there anything happening on the regulatory front that might increase the demand for reliability?

Bill, I'm not aware of anything, other than again, if you look at the EAC-100 specs of the automotive reliability standards, there's a lot of customers that have never heard of such a thing before, and are asking lots of questions, so we've had meetings with them, with people that, quite frankly, are getting into or trying to address the automotive space and are having to address, what does that mean? And that's a specification that talks about how it's tested, what kind of tests are done for what period, what kind of components need to be, how many components for how long, et cetera. So that's not a new standard, although for some of these customers, it feels new.

A name or a number that's being thrown around a lot is this classic 2 PPM, or sub-2 part per million requirement of the automotive and the Densos of the world are really driving that, because they have to add all those parts up to be able to come up with a system that's ultimately reliable. And you talk to some customers and their eyes roll back, it's like, oh my goodness, how are we going to get there? And that's a real challenge that traditional automotive folks with traditional burn-in methods know, there's processes and procedures to do that. So in some of my trips, I was just visiting a customer with an automotive application that some of this is a learning process for them in new vocabulary, but I'm not aware of one. Are you?

No, but I just thought that it might come about, that somebody starts telling manufacturers that you've got to be more reliable. Another question I had was, this tester you're developing, the development contract you just announced, I assume that will be a product that you could market to other customers as well?

Yes, that's correct.

And that might start at the middle of next year? Or late this year?

Well, I think it's a product that we expect to be primarily finished by the end of the calendar year. We're still looking at the full schedule of that, but it's probably not, this is -- although development revenues can show up, the product-related revenues will not be for a few quarters.

Okay, thank you very much.

Thank you. Our next question comes from the line of Gregory Wilbur from Bay Area Micro-Cap Fund. Please go ahead.

Thank you. So this new FOX system that you have, increasing test flexibility and capability, can you talk about the TAM for that product, and maybe you could talk about the TAM on the various segments of your business at the present time?

Sure. So relative to the TAM of the new product, let me talk a little bit about it, and I'm going to leave it open-ended on the other part. We believe that TAM takes and ultimately replaces what we have with our FOX product. It's a better, stronger, faster version of it, that allows us to, we believe, capture additional market share because of its price points. The thing that is interesting about our FOX-1 product is that unlike our FOX-15 and our ABTS, which are primarily aimed at what I'd call burn-in, whether it be qualification of new devices for lifetime test or for early failure rate in a production burn-in application, the FOX-1 is really more like a functional ATE system, taking the technology that we had in our burn-in systems of massive parallelism, massive number of device power supplies, and the ability to test these devices very cost effectively, and applying it into more of a traditional functional test environment, where you're testing one wafer at a time, for example. And I think the area, not to be elusive, but if you look at low pin-count DFT test modes of memory devices, logic devices, that market segment, even in my previous Company, we would estimate that it's in the $50 million to $100 million range and growing.

But what's interesting though is that displacing what is more in the several hundreds of millions of dollars of functional test, and so the line becomes blurred if today they're using a standard production ATE system and let's say they are buying it for $1 million, and then they buy one of our products for $0.5 million, are we displacing that, or is it really through a new test mode? So we'll be continuing to evaluate that, but this is an area I've been very excited about because I believe there's a real opportunity for Aehr Test to provide a contribution. On the other products, if you will, the burn-in itself and the burn-in TAM, we've been pretty consistent for a while and its been a difficult one to try and get our arms around all of it, but the overall burn-in TAM is somewhere in about $150 million to $200 million of systems that are purchased for a traditional burn-in application.

Most of that by the way, is in the package burn-in side and as you know, we've, with our FOX-15, we have a unique value proposition that allows customers to move that burn-in to wafer level, where there's some real advantages in certain applications to do that, or as we see some new opportunities coming up with a through-silicon via or other applications which never see a package form, the ability to actually do burn-ins in a wafer level, when that device never sees a package. If I try and summarize that, about $100 million TAM of the final functional area, that's best for DFT, and $150 million to $200 million TAM of the traditional burn-in are the kind of thumbnail numbers that you can use for the market.

Okay. Thank you, Gayn.

And Greg, one more thing too. This was something that also as I got to understand here, the size of the consumable within the burn-in is on the order of maybe 3, 4, 5 times larger than the actual test space, so on the burn-in side, if you were to say it's $150 million, that might be $600 million of burn-in boards, sockets and consumables purchased every single year, and that's something that we continue to watch as opportunities for us to potentially play in, and add a value in. As you know, we have done that on the wafer level side with our proprietary WaferPak contactors, where we participate in the consumable on that side, at the wafer level. Today, we really had very little product revenue on what I'd call traditional burn-in boards. Okay?

Okay, that's fine. Could you give us some help on how you got to the $4.8 million as far as orders from the various sources and consumables, things like that?

Yes, I just prefer not to start breaking things down, not to be elusive to anyone, other than my competitor, but we had said, and I think this is still a fair rule of thumb that our base level business of services, support and the consumables to our WaferPaks has been in the maybe $2.5 million to $3 million type range, on a quarterly basis, and without even the numbers in front of me, that seems about right again. And so as we've come out of the downturn, its really been through the growth of product revenue, which is an area that we can scale considerably with our manufacturing infrastructure and supply chain that we have in place here. And then there was a distribution of what I'll call FOX-related products and also our package level products and we continue to sell our MAX line. We talked about the ABTS, which is our latest generation of logic system but we still have customers that buy upgrades and new systems in our MAX line, which is also on our website, as their standard burn-in system.

Okay, Gary, I was disappointed to not see a backlog figure in the quarter. I thought maybe you were going to help us out with a little more disclosure, that would help us monitor your progress.

Well, we haven't made the decision yet to publish backlog on a quarterly basis. As you know, it comes out in our 10-K. We just put the 10-K out. What we did say last quarter was that we had the highest backlog that we've had in over the last three years, and even though it's not anywhere in the published stuff, I can tell you that this quarter, we did have a book-to-bill a little bit higher than 1. So we once again have a backlog that's higher than anything that we've seen in over three years, so that's good news.

Okay, so just one comment on your press release that came out. You have a little paragraph on management conference call?

Yes.

No telephone number.

Yes, we don't typically have the live telephone number. That way we're familiar with who is intending to call in, and we've tried to maintain that, but you're right. There isn't any live phone call-in number on the press release.

And then we always have a fairly large contingent of folks that are listening in on the web as well.

Okay, that's all I have.

Thank you. Our next question comes from the line of Marty Cawthon with ChipChat Technology Group. Please go ahead.

So in the semiconductor industry, there's of course constant change and progress and the big news on the iPhone 5 was support for 4G LTE, but then also we see processors running at higher speeds and logic trace sizes on the devices shrinking -- 90-nanometers, 45 and on down. So these changes in the industry must have an effect on how they are changing their test and burn-in procedures or priority, and my question is how do you see the industry changing due to this, and is it moving towards Aehr Test or away, and what is Aehr Test doing with your products and your future products to try to move into that same space, or service that space?

Marty, well let me handle that one. Its got a little bit of a technology answer to it but it's a very interesting part and it's a dynamic, as it turns out. You hit right at a core of one of the changes that's going on, that I will jump to the punch line, is actually very good for burn-in and for Aehr Test, and I need a white board sometimes to be able to do this, but let me try to simplify it. It turns out, that as you get very large logic cells, large in terms of numbers of transistors, so these very high-end processors are a perfect example of it, and as they go to lower power and then drive towards lower geometry, so as you go below 65-nanometers for example, the burn-in characteristic of those devices changes. To try and simplify it, what happens is, as those devices start to reach these very high temperatures that you want to run them at, to actually get the early failure modes and find and ferret out what the issues are, the devices themselves start to leak, and leak, and this means they start to draw more and more current and consume more and more power. The interesting by-product of that is the devices heat up themselves.

Now that's not such a big challenge, other than they don't all do that, so two devices out of the same lot, one device might draw a little bit more power, and the other one might draw a lot of power, and so as they heat themselves up at different rates. I alluded to this in our new product, with respect to the individual temperature control. What we end up having to do is supply both the test electronics and a chamber that's capable of individually controlling the temperature of every one of those devices, whereby we can either add or remove heat to bring all of them up to the same core temperature, and so one of the big ahas for me, honestly, as I was coming in and investigating, prior to even coming in, and we would be looking at the burn-in side in my previous role, is very interesting, is this isn't the good old fashioned oven. You don't just take a device, heat them up, apply a little bit of power. It's actually very sophisticated in the thermal management and in the electronics, when controlling these devices real-time as they're going through the test programs.

And so that flavor or that type of test is one of the things that's very different about our ABTS product than our competitors and even than those that we sold for the last 35 years. For example, our MAX products do not have the capability, the power, the thermal control, the individual thermal control to be able to do that in our standard MAX-3 products, for example. So that's good, in that it's driving it. It does drive the ASPs up in our world. People tend to actually be able to test fewer devices within a chamber, therefore they need more of our products, and it's an area we believe we are highly differentiated versus our competitors, and it's a big portion of what's driving the new sales, including those -- many of the ones that we've announced this year. We'll be talking more about that over the next, there's some opportunities at some trade shows and all that we'll be talking more about it, but it's pretty exciting time, if you will, in the burn-in space.

Oh, good. Okay, so the key is your individual temperature control is an advantage that you have over competitive offerings at present.

That's correct.

Okay, good. Thank you very much.

(Operator Instructions)

Our next question is from the line of Geoffrey Scott from Scott Asset Management. Please go ahead.

Quick question for Gary, I think I heard you say the gross margin went up 500 basis points. Is that right?

Correct.

Was any of that the benefit of having sold some [written-off] inventory?

No, it wasn't. The biggest part of that gain was related to the milestone completion with regard to the development project that we just announced.

For the new FOX-1?

Exactly.

Okay, so you got your first initial payment on that?

Exactly, we have.

Okay. Typically, you'd give us a revenue forecast for the next quarter. I didn't hear one.

And we are always very cautious about how we do that but--

As usual, yes.

As always and we always have a prepared remark on it, Geoff. Basically, we're at a cautious optimism right now that we will be able to increase our top and bottom lines again next quarter, and as I said, we've just decided to take a more conservative stance on our expenses and inventory just to ensure that we're preserving our cash, so that we can continue on without having to, and our current plan is, not going out and raising any additional cash to meet our operating needs. So I know there's a lot of people that are pretty pessimistic in the semi industry right now. We're not one of them, but I want to leave you with a cautious optimism.

Okay, you announced $4.8 million of revenue. The deferred revenue went down, so shipments for the calendar quarter ending August 31 were probably in the 4.5 range.

That's probably right, yes.

So does that mean for the next quarter we should expect something higher than 4.5 or something higher than 4.8? I hate to be too specific. I just want to know what the baseline is now.

If you're looking at shipments, then that's not really what we're reporting, so the shipments would definitely be over the $4.5 million but what Gayn was responding to I think is, we're cautiously optimistic we'll see an increase in the net sales.

Over what was reported 4.8?

Correct.

Okay, thank you very much.

(Operator Instructions)

We have a follow-up question from the line of Gregory Wilbur from Bay Area Micro-Cap Fund. Please go ahead.

Gary, you might just mention when your Annual Meeting is going to be?

Sure.

So that everyone can put that on their calendar. Don't want to increase your costs per quarter, but --

(laughter) Sure thing, Greg. Our Annual Meeting is October 24, and it's at 4.00 in the afternoon and we do invite our shareholders to join us and we've had the comment in the past from some of our older shareholders that this is the only time they get a dividend from us, so there's snacks there for you, and that's the dividend.

Okay, thank you.

Thanks for mentioning that, Greg.

Thank you. At this time I am showing no further questions in my queue. You may continue.

Okay, well I appreciate it and I thank everyone for joining us and we look forward to a great Annual Meeting with folks that want to join us, as we said, on October 24. If you have some questions there are links on there for people to contact for logistics and directions. Thank you very much.

Ladies and gentlemen, this does conclude our conference for today. This conference will be available for replay until October 17, 2012 at midnight. You may access the replay system at any time by dialing 303-590-3030 or 1-800-406-7325, and entering the access code of 456-6493 pound. We thank you for your participation, and at this time, you may now disconnect.