Aehr Test Systems (AEHR) 2013 Q2 法說會逐字稿

Welcome to the AEHR Test Systems second 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, January 9, 2013. I would now like to turn the conference over to Ms. Marilynn Meek. Please go ahead, ma'am.

Thank you. Good afternoon and thanks for joining us to discuss AEHR Test Systems' second 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 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. We will be making forward-looking statements today that are based on current information and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Factors that may cause results to differ materially from those in the forward-looking statements are discussed in our most recent periodic and current reports filed with the SEC. These forward-looking statements, including guidance provided during today's call, are only valid as of this date and Aehr Test Systems undertakes no obligation to update the forward-looking statements. Now I'd like to introduce Gayn Erickson, Chief Executive Officer. Please go ahead, Gayn.

Thank you, Marilynn. Good afternoon to those joining us on the conference call and also listening in to our online link on the web. Gary will go over our financial details in a few minutes but I want to first start by discussing the overall business and product highlights. Our topline revenue for the first quarter was $5.1 million, the highest we've seen in three years. Our test during burn-in business continued to grow. During the quarter, we installed and received revenue on our new ABTS-P system from three different customers, two of which are new customers for us. These systems are being used for qualification and life test of higher power logic devices, including advanced mobile phone and tablet processors, two very fast growing areas.

We also announced that we received over $2 million in orders in the quarter for our automotive applications which were seeing follow-on production orders. These orders were for our ABTS, or Advanced Burn-in and Test System, as well as our older MAX Burn-in Systems. We continue to see a growing market for semiconductors in the automotive space where high reliability and burn-in needs to continue to increase. As consumer products [meet] with automotive applications, the need for higher reliability and reduced early life failures are driving new companies towards high reliability EFR tests and production burn-in for the first time. After what seemed like a saturated non-growth market, we now see this market reemerging as a growth market for Aehr for many years. Our customer base of the ABTS Systems is now up to 13 customers, with 17 different customer sites and locations. Applications for these systems include automotive, communication, mobile devices that we just described and high-power advanced logic devices and even flash memory.

We're also pleased to have received several very positive engagements with customers on our FOX products in this quarter. We're continuing to see more long-term interest in wafer level test and burn-in for high-volume applications where we have developed intellectual property and have a competitive advantage over alternative test solutions. We expect to capitalize on this going forward.

Last quarter, we announced a deal with a key customer where they're providing us with development funds to drive the requirements and schedule of a new FOX product we're developing that addresses the significant growing market segment for Design for Test focused wafer test. This project is moving forward nicely. We believe that this product will provide Aehr with a significant competitive offering for customers looking for low-cost of DFT-focused alternatives to standard functional tests provided by the ATE industry. We expect this to serve a broad number of customers and devices. While this product will be focused on a single whole wafer test solution using standard wafer probe [list] and probe card solutions, we are also leveraging this into a new multi-wafer solution. Currently, we expect to begin revenue shipments for these products in approximately one year. However, we have three customers now asking us to accelerate the development and pull these FOX products in. We're working with them to ensure they are financially committed to these pull-ins to help to ensure that we focus our resources on the most rewarding opportunities.

We also announced a partnership with AllianceATE to add their VelocityCAE software as an option to Aehr Test Burn-in and Test Systems. This partnership combines the design-to-test capabilities of AllianceATE products with Aehr Test technology to help meet the growing needs of the semiconductor industry for Design for Test needs in both package and wafer level form. This product is well matched with the customer requests for more functional test at burn-in and also our FOX products' expanding capabilities to provide lower cost of tests for both functional test as well as burn-in application.

As discussed last quarter, we began to see a softness that had us cautiously optimistic. Unfortunately, we saw WaferPak sales fall off considerably in the quarter. We're working with our key customers related to their WaferPak forecasts to ensure we're better aligned on their short- and long-term needs so we're not surprised by this in the future. In addition to the WaferPak softness, we saw several customers decrease their system forecasts in just the last month. At the same time, however, these and other customers are pushing us to expedite the integration of new devices and applications on our products as well as development of new systems and enhancements. To take advantage of these customer requests, we're focusing our resources on the most rewarding opportunities. In addition to our continued cost controls, we made the decision to reduce some positions in areas and geographies where we're seeing less demand. The decrease in costs from these reductions will represent about $1 million in annual savings, or a revenue breakeven reduction of about $500,000 per quarter. We took charges related to these reductions of approximately $200,000 in this just announced fiscal quarter.

We continue to be optimistic about Aehr Test's future and feel we're in a great position to benefit from the long-term trends and tests, burn-in and Design for Test changes in the industry. We're focusing on controlling our expenses and dedicating our resources to continue to gain market share in the test during burn-in market space and lock in additional key customer projects for our FOX products. This will provide us with access to even larger markets that will drive our Company's future growth to much higher levels. Gary will 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 second quarter were $5.1 million compared to $4.8 million for the first quarter of fiscal 2013. Gross profit was $2.3 million for the second quarter, or 45% of net sales. This compares to a gross profit of $2.5 million in the first quarter fiscal 2013, or 51% of net sales. Our gross margin decreased due to a change in mix in our system and upgrade business. Last quarter, we had a higher amount of high-margin upgrades, including software, and also the completion of the first milestone of our new FOX product development project compared to this quarter in which we didn't see the level same level of high-margin transactions.

Operating expenses for the second quarter were $3.0 million compared to $2.7 million in the first quarter of fiscal 2013. SG&A was $2.1 million in the second quarter compared to $1.8 million in this year's first fiscal quarter. The sequential increase in operating expenses in the second quarter was primarily related to severance charges, pre-sales, court costs and commissioned sales by sales reps. R&D expenses of $962,000 were basically flat with $930,000 in R&D for the first quarter of fiscal 2013. As stated previously, R&D spending can fluctuate from a quarter to quarter depending on the development phase of our new products.

Our net loss of $811,000 in the second quarter of fiscal 2013, or $0.09 per diluted share, compared to the net loss of $296,000, or $0.03 per diluted share, in this year's fiscal first quarter. Net sales rose 31% to $5.1 million in the second quarter of fiscal 2013 compared to $3.9 million in the second quarter of last year. This quarter, we reported a net loss of $811,000, or $0.09 per share, compared to a net loss of $1.4 million, or $0.15 per share in the second quarter of fiscal 2012.

Turning to the balance sheet and changes during the second quarter, our cash and cash equivalents were $1.2 million at November 30, 2012, compared with $1.9 million at August 31, 2012. Accounts receivable increased by $0.3 million against which we borrowed an additional $0.2 million on our line of credit. This represents a net positive of $100,000. Our inventories decreased sequentially by $0.3 million, which is also good news. We anticipate another decrease in inventories during the third quarter of fiscal 2013 which I'll go to go into in more detail in a minute. Another positive on our balance sheet is accounts payable declined sequentially by $0.5 million, due to the receipt of less material later in the quarter. Though there is a cash consumed in reducing the AP balance, it really reflects the fact that our overall spend rate is declining. That should help us in the future.

Lastly, I'd like to discuss our inventory. During the second quarter, we had several systems out as loaners against a purchase order from a significant customer for our new ABTS-P System. We're getting this inventory back now that our first ABTS System has been released into production by that customer. This will allow us to consume this inventory and also decrease the cost of holding the inventory at this customer site. We feel this will allow us to meet customers' deliveries while also conserving cash while reducing our need to purchase material moving forward. We took reserves against this inventory while it was at the customer site as a standard accounting practice. In addition, we are utilizing inventory of our older MAX and FOX products. This will allow us to turn this inventory into cash and keep our inventory levels down to an appropriate level given our lead times and system forecast moving forward.

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

Thank you sir. We'll now begin the question-and-answer session.

(Operator Instructions)

Tom Diffely, D.A. Davidson & Company.

Maybe one more question on the margins. The resulting 45% gross margin you had for the quarter, is that representative of what you typically see for system sales then without a lot of software?

No. I'd say depending on revenue, it's obviously a big factor of what the revenue level is. We typically see -- 45% to 50% would be a normal system margin.

Which is actually, I think, a little larger than normal on any representative quarter.

Is it the byproduct of just having new systems going out or just the type of system then as well?

It was a little bit more to do with the product mix, I would say. I mean, we had a shift in some of our WaferPaks business. We talked about our upgrades, typically with systems that are out there when we do upgrades, the enhancement, the particular software, those are higher margin business for us. Then the way -- relative to the previous quarter in particular, we have development milestones associated with this new FOX development. We did receive our first milestone the previous quarter. This quarter, we actually did not, which was not the plan. We had anticipated receiving that, and that got pushed into this quarter.

Okay. So Gary, in the past, you've talked about a cash breakeven that was in the low $5 million. Has it gone now down now with the restructuring?

Yes, we think it has. We think both the P&L breakeven and the cash breakeven have probably gone down about $0.5 million. As always, there's a caveat on there that product mix can impact those numbers. So it's not doubtful from one quarter to the next, but yes, the cash breakeven will come down about $0.5 million.

Tom, the way to look at that is the expenses have gone down about $250,000 a quarter, and using that 50% gross margin, that's where that resolution came from.

Okay. So when you look at the SG&A, most of the difference there was those -- the charges, it sounds like, quarter over quarter?

Yes. It was commissions. It was presales, support costs that we incurred. Then there also some severance charges that appeared.

Okay. All right. So when you look at the cash, then, a bigger question is, it sounds like you've [seeded] the market with some nice new products. How do you feel about your cash when it comes time to start ramping up some of these production models?

One of the good things about that is as business comes in, usually we're able to extend our lines, our borrowing lines from commercial banks in those situations. Also what we've been requesting our customers to do when there is a larger project involved is to make a certain percentage payment with the order. that helps us go through the process as well. So as business picks up, we see that as good news. We do anticipate we'll be able to handle that.

Tom, we, actually as we reported in previous quarters, that was part of where our cash was being used, is we were, in fact, ramping that up. So we were buying all the materials for those early shipments as well as some forecasted material. That leads us actually in a position where this quarter we came down a $200,000 on our inventory levels. As we stated, we actually brought back some systems that are re-sellable.

We have targeted customers for that. So that will help us to reduce our inventory further. It turns the inventory in a source of cash, as it should be. I believe our inventories are just too high, but they were appropriate for where we were in the ramp in getting to this point.

Okay. Gayn, you talked a little bit about the FOX and some new high-volume potential customers. So does that mean that they would be ordering multiple systems then for the high volumes or that you just sample tests at the high volumes?

So the target for each of these customers that I alluded to, in particular, the ones that are all asking for pull-ins are actually considerable volume production applications. I tried to allude to it here but let me just restate that one of the big opportunities. This is what we have communicated in our Investor presentations that we see for Aehr Test, is that the functional test steps that were traditionally tested by the ATE companies -- at Teradyne, [Girbon Tests], LTXCs of the world, people have been developing Design for Test modes along with Aehr Test in our original FOX product whereby a lower pin count test modes we can much more cost-effectively test those parts.

The challenge is, is to have the right tester architecture, which I believe Aehr Test is very, if not, uniquely qualified. It's very differentiated in a way from the functional ATE suppliers. So we're getting customers that really see the value that we can provide through a more cost-effective test step. So they're pulling pretty hard. So that's -- it's interesting, because on some hands, this quarter we'll talk more about the expenses and our operating loss if you will, but you've got this mix of some really good news with respect to these customers asking for pull-ins and how fast can we get these products out to them?

Okay. Here you're talking just mainly about the DFT-type tester as opposed to the burn-in tester for FOX?

Yes. In many cases, it's the same. So our FOX products, really, when we talk FOX versus ABTS, FOX is really aimed at wafer-level testing. We have both single wafer solutions and multiple wafer solutions. In the ABTS, it's really a package-level burn-in machine. So what we have in terms of pull-in from customers includes both single- and multi-wafer solutions for FOX, in particular.

Okay. Just finally, on some of the consumables stuff, you talked about the WaferPak business. Is that market changing or is it really just that customers have a little leeway as to when they order stuff and so when things slow down a bit, they just push out those decisions?

I'm not prepared to say anything of a changing market. I know for certain that this customer caught us by surprise in terms of some of the forecasts and dropped a [hole] -- at least just since we've been digging into it. We see that they -- the forecast has come back a little bit and we're trying to get more clarity on it. But I think at this point, I just -- we have been running with a particular baseline. It -- they dropped a hole in there. I've been working with the teams to get a much more clarity with our customers around what that -- their forecasts are.

William Smart, Cardinal Value.

You mentioned the possibility of moving some of the sales of your new products forward. What is the potential calendar move of that? Would it be nine months instead of a year out or sooner than that?

You sound like my customers right now, Bill. (laughter) Quite frankly, part of that is in the discussions and the commitment on the customers. It ranges from re-prioritization to, quite frankly, adding additional resources based upon the financial commitment. I don't believe this is and I've told our customers, I don't believe this is a 9-month pull-in on a 12-month enhancement project. But I think there's still some leeway in there, but I think for expectation setting from a revenue recognition, I think approximately a year out is still the right answer.

Okay.

We're -- as I point out to the customers, I'm every bit as motivated to pull it in as they are because the primary value of us doing this is not through [NRE] or development dollars but it's from actually selling the products to them.

Okay. Another question, I'm not really that familiar with design-to-test. Does that refer to actually changing the design of various chips to make it easier to test? Or --

Yes, that's actually -- that's right, Bill. In fact, the vocabulary in the ATE space, which is, I think I introduced to people as my background for years, if you were to look at a device and, let's say it's, just for simplicity sake, I will call it a memory device. Maybe the memory has 20 pins or so in its normal, and I'll call, user mode. But the designer who uses that chip has power supplies -- goes into those and come out as that are like 20 channels.

Tester companies for decades, the last couple of decades, have figured out how to lower the cost of test primarily through two ways. Testing more of those devices in parallel platform, and to some extent, lowering the cost of the tester. The latter actually has not been as easy because the fundamental electronic costs, et cetera, are pretty much tied on a per pin basis.

About a decade ago, people started to realize that on a [high] was, if they were to design their semiconductors where, instead of what would be referred to as broadside testing of the device where you have all 20 pins that the tester accesses, if instead I only access 4 pins and inside the device, it expands those 4 pins out to the 20, if that gives you a mental picture. It turns out that just for nothing else, the tester just got reduced by 60% in cost. The testers are primarily priced on a per pin basis, right? But there's subtle things associated with that.

The architectures of the ATE systems that are out there were designed around, in many cases, hundreds if not thousands of tester channels, every power supply on the device. Now all of a sudden, there may be only a few tester channels for each power supply. What that means is the testers that are out there are not fundamentally designed very well for this. In other cases, they just have the wrong architecture. If you follow the burn-in market, that Aehr Test was a leader in, the Design for Test methodologies that Aehr Test, in many cases, pioneered for testing these devices and burn-in are more similar than that of the ATE side.

One of my greatest interests in joining the Company was that those architectures are much better suited both in terms of the performance and the types of resources as well as the price points. So therein lies the opportunity as customers develop these Design for Test methodologies and they look for solutions. Aehr Test has both IP and many years of experience with the tester hardware architecture and software that, quite frankly, is very well-suited for this.

(Operator Instructions)

Geoffrey Scott, Scott Asset Management.

Last quarter, you gave us a backlog direction. You said that the book-to-bill was greater than 1. Can you update that [for us], please?

Yes. I started down that path and I [urged] you guys to continue on. In this case, it was actually less than 1. The backlog has gone down a little bit from last time, so each of the last few quarters, I was able to point out that we were raising the watermark each quarter.

Yes.

So that's what I'm prepared to share with you right now, Geoff.

Okay, and the revenue forecast for the current quarter?

Well, I'm trying to -- we're looking at our forecast range right now, which I understand exactly that ends up looking like. I think in the last couple of quarters, we had been able to at least guide with a level of clarity in terms of slightly up or about the same with improving operating results. I'm looking right now and given the uncertainty with what we're seeing in the customers, I'm hesitant to put a number out right now. So I realize that, that's vague, but I think the best -- the prudent thing right now is to not give a forward-looking forecast.

Okay. Going back, you had said, I think maybe last June, that [Spansion] had ordered another FOX-1. Then you said that there was an order for the FOX-15. Have either of those been shipped?

Okay. So I'm quite certain that I haven't mentioned any of my customers that directly --

You said a FOX-1.

Okay. So I --

To an existing customer, so --

I -- many of my favorite customers listen in and I don't want to be getting myself in trouble here but I expect a -- we did mention that we had a FOX-1 that shipped. We did support revenue for.

Which -- but that wasn't revenue last quarter? It was --

No, no. That was a couple quarters ago, Geoff, as I recall, if not three, I think. Then we did make a public announcement of an order for our FOX-15. Actually, we have not shipped that for revenue yet.

Do you have any idea when you might ship it for revenue?

Actually, we're expecting to do that later this quarter.

Later this quarter?

Yes.

Okay. You talked about 13 ABTS customers in 17 sites. What is that number likely to be a year from now?

Well, I'm not even trying to be vague here. I haven't thought of it in that terms. I know I have a forecast. I know we do plan for it to be up. I don't know I'm ready to give you a real number. But we look at the number of customers. The one thing that, in the ABTS, for those people listening in that aren't familiar with our -- with the Advanced Burn-In and Test System, we're very proud of this. But the market for the burn-in side is very well known.

Many people may not know that pretty much every semiconductor device in the world goes through a process of a qualification and early failure rate qual to validate that it will run for so many hours at certain temperature ranges, et cetera. We have a very long list of customers, including the four of the top five semiconductor [companies] in the world that use our products. That is true for all from an engineering and for high reliability applications such as automotive and now we're seeing some in mobility, obviously, defense.

People do what's known as an extended test or a production burn-in that also uses that tool. Why I bring that up is it's not unreasonable to have a very long list of customers. This is not like the memory space, which there's only four or five big guys. So what I will leave you with is that our goal is to continue to increase that number substantially on an annual basis. This isn't like we're going to saturate the market if we [hit] 20 or even 30 customers.

Okay. Of those 13, how many are currently in production with ABTS?

Okay. Let me clarify. Are using it for our production burn-in application is what you meant by contrast to engineering?

Right.

I think we've got a little bit of question -- I'm thinking around five right now off the top of my head.

So 5 production and 8 engineering?

That's right.

How many of those 8 engineering do you think you would convert to production within the next 12 months?

Actually, that's interesting. In general, when I described it as an engineering account, what I meant is that they're using it in what they're called engineering qualification applications. So an engineering customer might buy multiple of them. In fact, we have customers that do that.

In a production account, the application is designed for actually testing the part before it gets shipped to the customer. In engineering, you test the part to validate the design and then you throw it away when you're done. A little subtle, but in general, what you may be alluding to is fair. Production customers tend to buy more.

Right.

We have production customers that have more than 100 systems whereby an engineering customer, I think, we might have a few that are in 10 or more. In many cases, there are a few type systems.

Marty Cawthon, ChipChat Technology Group.

Gayn, you've been the CEO of Aehr Test for just about one year now, just a little bit over one year. I'd like to hear your comments on how the industry has changed in this past year? Just some other comments that you might have on your experience there with Aehr Test, what it looked like a year ago when -- what it looks like now to you?

Okay. That's a good open-ended question. You just missed to say happy birthday because I think it's just been a couple of -- a few days past that. My one-year anniversary. So let's see here. So in many ways, and it feels a little bit full circle, I stand here today feeling very similar to [myself] a year ago. With -- in some cases, even some of the same and other cases, several cases, new customers that are looking towards these production DFT applications in a very positive way.

I feel that we have more time and energy and experience to be able to confidently talk about our ability to build those products for them -- as in one category. Relative to the test and burn-in side, or the more traditional side of our business, I think that we continue to see the same macro-level signs of automotive, that is driving more and more need for reliability. In the last year, I've met with several customers that, quite frankly, come to us and say -- we've got these new automotive applications. Tell us about burn-in.

So it's exciting because in many cases, the historical automotive companies have been doing a long time and understand all there is to know about it. When you look at the new companies where a consumer is meeting automotive and they're new and interesting applications, and so it feels fresh. I think that, at the same time, we've seen some shifts just over this year, which I felt like a year ago, the entire downturn was completely behind us.

But as we look through this last year and some of it may be a little bit more US-focused than we like to admit, with some of the things that are going on in the economy and the change, we had some customers that were a little bit in a [headbaked]. I remember last year at this time, the two or three months right after this call, it seemed like every time we turned around a customer was pulling and asking for more capacity. So we crossed our fingers and hope that, that also repeats itself again. So in some ways, it feels very similar to the comments I made a year ago which is, I actually had this conversation with a couple people this week.

It felt like in my previous life, when I was selling the functional ATE systems, many times the conversations you are having with a customer on a whiteboard were towards test concepts and things they wanted to do to lower cost of test that felt like they were going away from us. They were moving from the way they had been doing it and it was going away. When I sit in the meetings with the customers here, it's the opposite. They all feel like they're coming towards us. So in that sense, I'm left with continued optimism.

I think the challenge is just to try and balance the business that we have, meeting the customer needs, managing our cash and our expenses. Quite frankly, we're still driving towards profitability and not only cash flow breakeven but profitability while we're doing these development of these new projects. We talked about some of the expenses that we've had. We've had our executive team on expense controls. We're withholding our performance-related bonuses so that we can get ourselves to the profitability level that we expect.

I think the last thing is that we're seeing, even more so than a year ago, we are absolutely seeing more FOX wafer-level massive functional test and burn-in than we were seeing in the past. Those meetings are very exciting, because we have two full-long hallway full of plaques of IP and patents related to that. It's pretty exciting to customers about those opportunities.

(Operator Instructions)

Geoffrey Scott.

Quick follow-up. Gayne, you talked about three customers that have bought into the developer of the new FOX-1. From an engineering perspective, are they all targeting the same objective? Is this fairly easy for you all to manage or are they three distinct objectives where you have to prioritize what you're trying to accomplish?

Well, I tell you what, Geoff. So it turns out that not all FOX as you would call it, ones. Actually, a couple of FOX-1s and that would be -- using our vocabulary, more like a FOX-15.

Okay.

What I have explained in some of the Investor conferences in the past, our strategy which, I think, is absolutely the right thing and one of the things I'm driving for from the moment I got here, is to highly leverage our development work into those different form factors, if you will. So each of these projects, leverage development work, that we did in the P system, the ABTS-P.

So that electronics hardware, although morphed into slightly different form factors, but some of the basic circuits and the same software, is applicable into, if you will, a FOX-1, where a lot of resources come down onto a single wafer, or a FOX-15, where we are able to test up to 15 different wafers in parallel using our proprietary WaferPak compact technology. They're all leveraged. They're all slightly different. They're all not competing with each other, themselves as customers. But in the sense that all of them are vying for our precious resources, they're not 100% aligned, other than they all want their products sooner.

How do you decide which one gets theirs first?

That's a good question, that's going to be part of our working with those customers and using our best management judgment. Since many of those customers are on the line right now, I'm trying to do the best I can to publicly answer those questions.

I'm showing no further questions at this time. I'd now like to turn the call back over to management for closing remarks.

Okay. Well, we covered a lot of ground here today. I appreciate folks listening in, those that were calling in and had questions and then the much longer list of folks that were actually calling -- listening in online.

As always, I put the invitation out if folks have follow-on questions or happen to be in town here in the San Francisco Bay area and would like to come in and take a look at what we're doing, we'd be happy to host you. We look forward to our call a quarter out, and look forward to that conference call with everyone. So thank you very much for joining us.

Ladies and gentlemen, this concludes the Aehr Test Systems second quarter fiscal 2013 earnings conference call. If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325, or 303-590-3030, with the access code of 458-5422. AT&T would like to thank you for your participation. You may now disconnect.