Aehr Test Systems (AEHR) 2016 Q3 法說會逐字稿

Good day and welcome to the Aehr Test Systems third-quarter fiscal 2016 financial results call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Jim Byers of the MKR group.

Please go ahead, sir.

Thank you, operator.

Good afternoon and thank you for joining us today to discuss Aehr Test Systems' third-quarter fiscal 2016 financial results.

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

If not, you may call the office of MKR Group, investor relations for Aehr Test, at 323-468-2300 and we will get one out to you right away.

With us today from Aehr Test Systems are Gayn Erickson, President and Chief Executive Officer; Ken Spink, Chief Financial Officer.

Management will review the Company's 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 include guidance provided during today's call and are only valid as of this state, and Aehr Test Systems undertakes no obligation to update the forward-looking statements.

With that said, I'd like to introduce Gayn Erickson, Chief Executive Officer.

Thank you, Jim, and good afternoon to those joining us on the conference call and also listening in online.

Ken will go over the third-quarter financial results later, but first I'll spend a few minutes discussing our business and product highlights, including our continued progress with the development and introduction of our new FOX-P platform of our next generation of wafer level test and burn-in products.

After that, we'll open up the lines for your questions.

As we noted last quarter, our shortfall of burn-in system orders, coupled with the delay in the FOX-1P system shipments, continues to negatively impact our short-term financials.

However, we continue to make significant progress on the rollout of our next generation FOX-P platform of wafer level test and burn-in products, which included achieving key milestones.

We are excited today to report that the lead customer for our next-generation FOX-1P single wafer test system has approved and accepted the final test system milestone prior to shipment.

This milestone was part of an eight milestone development agreement for this initial customer and is related to a larger production system order already received from them.

We are very pleased with the functionality and performance of the FOX-1P system and are now working with the customer in final test and checkout of their wafer prober and full wafer probe card.

These tests are expected to be completed within the next several weeks prior to shipping the initial FOX-1P system to the customer.

Aehr Test has already built up the multiple systems in backlog for this customer and we expect to ship the systems to the customer's production site immediately upon final on-site acceptance of this initial system.

As we announced last month, during the quarter, we delivered our first FOX-XP wafer level test and burn-in system and received acceptance from our lead customer for that system and several FOX-XP WaferPak Contactors.

The FOX-XP system is currently successfully testing multiple different devices at the wafer level for this customer's device qualifications.

We've received very positive feedback from our customer's engineering and management teams on the FOX-XP, including comments that our system is performing very well at a significantly greater capability and usefulness than anything else on the market for this application.

With our high-quality focus and the need for reliability testing at the wafer level for their sensors, this customer is an ideal lead customer for the FOX-XP product line.

While the first system is configured for a single wafer for device qualifications, the FOX-XP system is scalable for up to 25 or more wafers in parallel in a single test cell.

As we've stated before, we believe the success of the engineering test this customer is running on this initial FOX-XP system will lead to volume production orders for them to meet their capacity needs.

We continue to believe that this customer will need a significant number of FOX-XP wafer level test cells to meet their device volume shipments beginning in the fourth quarter of this calendar year, with the ramp continuing through calendar years 2017 and 2018.

It's important to point out that the typical selling price for a production FOX-XP test cell ranges from $4 million to $7 million apiece.

We are very optimistic about the opportunities in the sensor space from other customers as well for this FOX-XP system.

In addition -- and we mentioned this the last call just in January -- negotiations are progressing with our second lead customer for the FOX-XP system, and we believe that they will place an initial order within the current quarter for their first FOX-XP production test cell.

This test cell is expected to include one or more FOX-XP multi-wafer test systems, a FOX WaferPak Aligner, and an initial set of FOX-XP WaferPak Contactors.

This second FOX-XP customer is forecasting device capacity growth that will drive the need for additional production burn-in capacity for multiple years into the future.

We are working with our supply chain to ensure that we can ramp to meet the significant potential system demand from these customers.

There's a considerable amount of work going on to ensure we have sufficient capacity of chambers, test system electronics, WaferPak Aligners, WaferPak Contactors, etc., to be able to deliver large quantities.

The market for our packaged part burn-in systems continues to be soft, though.

But we do have the ability to turn and ship orders quickly.

This shows up in our high inventory levels that Ken will discuss in more detail later.

As the FOX-1P and XP products enter the market, we expect both our revenue and our bottom line to increase substantially over the next year due to higher ASPs and margins for those products.

Earlier this month, we showcased our solutions at the annual burn-in and test strategies, or BITS, workshop in Arizona.

And we are very excited to see great engagement by the customers around the reliability challenges of sensors, optical devices, and mobile platforms.

This event, which was very well attended -- I was actually there and met with a number of customers -- was busier and more upbeat than we've seen in recent years.

Clearly showing an increased awareness of high-quality and reliability requirements for mobile devices and high-end consumer products, which is becoming pervasive and is the big topic at these tradeshows.

With the key FOX-1P milestone completed and the lead customer sign-up of the FOX-XP system, we are very confident in the design and performance of the core FOX-P family of test system electronics and software.

We've now completed and proven multiple FOX-XP WaferPak designs and application test programs for devices, including flash memories, sensors, and optical and communication devices, as well as completed and shipped our new high-performance Fox WaferPak Aligner.

These are key pieces of our new FOX-P platform, which we expect to drive significant revenue growth for Aehr Test in the coming fiscal year and for years to come.

In addition, our ability now to demonstrate our automated wafer level test cells for both our FOX-1P and FOX-XP test systems here at our factory is a tremendous advantage and bodes well for our ability to gain additional new test cell customers and production orders in the near future.

With that, I'll turn the call over to Ken.

Thank you, Gayn.

We started the year with $11.3 million in revenues for the first six months of fiscal 2016 compared to $10 million in revenues in all of fiscal 2015.

However, as discussed in the last call in January, the Company's near-term results are being impacted by the shortfall of packaged part burn-in system orders and revenues as well as delays in the FOX-1P's shipments.

As we reported in today's press release, net sales in the third quarter were $1.7 million compared to $4.6 million in the preceding quarter and $2 million in the third quarter of the previous year.

Third-quarter net sales included revenue from the single wafer configuration of the FOX-XP wafer level burn-in and test system, WaferPak Contactors, and NRE.

Non-GAAP net loss for the third quarter was $2.8 million or $0.21 per diluted share compared to a non-GAAP net loss of $794,000 or $0.06 per diluted share in the preceding quarter and a non-GAAP net loss of $1.5 million or $0.12 per diluted share in the third quarter of the previous year.

The non-GAAP results exclude the impact of stock-based compensation expense.

On a GAAP basis, net loss for the third quarter was $3 million or $0.23 per diluted share.

This compares to a GAAP net loss of $1 million or $0.08 per diluted share in the preceding quarter and a GAAP net loss of $1.7 million or $0.14 per diluted share in the third quarter of the previous year.

Non-GAAP and GAAP net losses include $637,000 of one-time write-downs of excess and obsolete material associated with prior generations of product that have become obsolete with the release of new products, and a final write-down of engineering material for the FOX-P program.

Gross profit in the third quarter was $169,000 or 10% of net sales.

This compares to a gross profit of $1.7 million or 37% of net sales in the preceding quarter and a gross profit of $852,000 or 42% of net sales in the third quarter of the previous year.

The decrease in gross margin reflects the impact of $432,000 and inventory reserves from obsolete Fox-1 system and WaferPak legacy materials as well as excess ABTS materials unique to a specific customer.

Gross margin was also impacted by an increase in labor and overhead costs due to higher unabsorbed overhead charge to cost of goods resulting from lower manufacturing and revenue levels in the quarter and the purchase of turnkey assemblies rather than using internal labor.

Operating expenses in the third quarter were $3 million compared to $2.6 million in both the preceding quarter and the third quarter of the previous year.

R&D expenses were $1.3 million for the quarter compared to $923,000 in the preceding quarter and $1 million in the prior-year quarter.

Both the sequential and year-over-year increases are primarily due to an increase of $300,000 in expensed R&D materials, of which $205,000 was for final write-downs of engineering materials for the FOX-P program.

As stated previously, R&D spending can fluctuate from quarter to quarter depending upon development of our new products.

SG&A was $1.7 million, flat to the preceding quarter and up $100,000 from $1.6 million in the third quarter of the prior year.

Turning to the balance sheet and changes during the third quarter, our cash and cash equivalents were $2.5 million at February 29, 2016, up from $2 million at the end of the preceding quarter.

The increase in cash is primarily due to the $2 million draw on the line of credit in January and an increase in customer deposits and prepayments, partially offset by the loss for the quarter.

Accounts receivable at quarter end was $1.9 million compared to $2.5 million at the preceding quarter end.

Inventories at February 29 were $7.4 million, flat compared to the preceding quarter.

Our quarter-end inventory includes material for the multiple FOX-1P systems and backlog, a FOX-1P system being built for capital, and several packaged part systems, which can be shipped quickly and turned into cash.

Property and equipment was $1.3 million, an increase of $700,000 from the prior quarter.

The increase included an addition of an automated FOX-XP WaferPak handler and Fox WaferPak Aligner, which are part of our multi-chamber FOX-XP test cells.

This is part of our capital and infrastructure improvement plan to showcase our products and enhance our manufacturing in preparation for increased demand.

We are also happy to report that we've successfully implemented our new ERP system with a go-live date of March 1. Along with all of the development activities and getting the new products out, we have made the investment in time and resources to put a new ERP system in place prior to the anticipated ramp of our new FOX-P family of products.

The Company expects to obtain processing efficiencies and improved business intelligence to evaluate opportunities and increase profitability.

We are seeing overlapping investments in our FOX-1P and FOX-XP family of products in both our development and sales activities, which has resulted in maintaining our level of spending to bring these products to market.

We will continue to look aggressively at ways to lower our expenses in an appropriate way to maintain the health as well as the growth prospects of the Company.

This includes a tight management of our cash position.

We believe that we have the ability to manage our cash in the near term with the following: our accounts receivable, our existing backlog of products for which we already have the inventory, and inventory on hand for fast turns in both our packaged parts and wafer level products, and deposits and down payments against significant orders.

With down payments against FOX-1P and FOX-XP test cell orders, we believe that we can finance significant customer ramps.

In addition, as we have stated the past, we believe that we have access to extended lines of credit against customer orders in addition to our current line of credit if needed.

This concludes our prepared remarks.

We are ready to take your questions.

Operator, please go ahead.

(Operator Instructions) Geoffrey Scott, Scott Asset Management.

Good afternoon.

The $2 million draw on the line, is it your intention to repay that after 90 days or convert that into convertible notes?

Thanks, Geoff.

Good question.

The objective is to repay the line.

We have 90 days from the date of the draw, which would be pretty much the middle of April to repay that or roll it over.

So our objective is to repay it, and we also have backlog in hand to be able to also reborrow against that line as needed.

Okay.

On June 25 of last year, there was a press release that said Aehr Test Systems announces $1.7 million follow-on order for ABTS to be delivered during the next six months.

Have those units not been delivered?

No, they were delivered.

They were delivered in our Q2.

They were delivered in Q2?

Okay.

Yes.

The system -- the XP system that was delivered, you recognized revenue on that, correct?

How much --?

Yes.

I think everybody was looking for more.

I mean, this system is a single wafer system.

It's a fully functional system capable of both thermal profiling in all the electronics.

And that initial order, including a few WaferPaks, was about 750,000, 800,000 or so.

I've got a 737,000 in my ear, but that ought to be close enough.

All in for the entire system?

For a single wafer system.

In this case, it was purchased without an automated aligner and is not indicative of what we would see in a full production cell.

Okay.

You had been charging them, presumably recognizing revenue for running wafers on that system?

We actually do -- as we noted in the original press release, we do have an arrangement with the customer for ongoing application services with them, which included actually running some wafers here as well.

Was that a material revenue source or not?

No, it was not.

In fact, we believe there is a continued stream of that ongoing.

But it's not material, no.

Okay.

I'll let somebody else in.

Thanks.

(Operator Instructions) Larry [Labina], Labina Capital.

What is the maximum line of credit that you can draw on that thing?

The maximum of the line was $2 million and it's supported --

Oh, it was $2 million (multiple speakers)

Yes, it's maxed out.

We have the opportunity again to repay and to reborrow against the line as long as it is supported by valid purchase orders.

I see.

And that's only up to $2 million or can it go beyond $2 million?

The current provision is it's only $2 million.

As we have talked about in the past, similar to our lines of credit that we had prior to this one, which is with QVT.

Both Silicon Valley Bank and QVT have expressed willingness to increase our lines of credit as necessary to support our growth.

So in other words -- that's what I was getting at.

If you get a rash of orders of POs, it's conceivable you could get some cash to perform on those from a bank with backing of the POs.

That's correct.

That is correct.

Just so I understand this, with the shipment of the 1P, is this really the big moment that we've been waiting for?

The acceptance and ultimately follow-on orders of that customer as well as others?

Or is there a --

Larry, I think what you are alluding to, and for those listening in online, we've been, quite frankly, talking about getting this acceptance and getting the system out the door for several quarters.

And we talked in the past about some of the key changes that were made to the definition of the product, as the customer's requirements themselves changed as well as some things that we did to ensure that the product had a broader range of applications.

And so although it may seem -- maybe it isn't as overwhelming as people think, but there was a lot of cheers around here as we got that acceptance.

Actually, when we were successfully testing devices, passing diagnostics, and the performance of the machine is actually doing what we want it to do.

We are at the final boards and turns and the software -- in fact, part of the subtlety of the write-down of the couple hundred thousand dollars' worth of towards is we had some board rework that we had debated about whether we would ship it.

And we decided to scrap those boards to ensure that we had perfect new Rev1 boards for the customer and not -- as the same boards that would be used in other applications as well as on the XP.

So it's a big deal.

And you know what?

If you would've asked me probably almost any quarter until now would I have gotten the sign off on an XP before I got a sign off on the 1P, I would've never thought it to be the case, but that's exactly what happened.

You talked in the past the opportunity on the flash memory market.

Is any of that still in the works or has that been put kind of [on the back burner]?

It is, Larry.

It's interesting -- we had been working diligently, and as people have recall, we successfully demonstrated full wafer contact and testing of a state-of-the-art 300-millimeter wafer for flash memory.

That deal -- actually, those customer discussions -- there's been more than one -- actually cooled off during the fall timeline and have recently been kind of reinvigorated.

Interestingly, about the same time it was cooling off, we found ourselves very intensely engaged in the multi-wafer system on the FOX-15 we shipped last year to that new customer as well as the opportunities for the couple few new opportunities for the XP.

So it has certainly been a challenge here from a marketing and sales particular because we are seeing a lot of activity.

And you are kind of in the ebbs, the flows with respect to the customer's timing.

The good news is the product itself and the definition of our XP and our 1P really has been kind of nailed down here for awhile.

And by being able to actually show it here in the facility goes a long way.

It's one of the challenges, I think both for our shareholders and for our customers, is this product is an exceptional idea.

It's leveraged from products that we have already shipped, but it enhances the capability substantially.

And the customers -- there has been a fair amount of let me wait and see.

I'd like to see it first and understand that it's real.

And being able to actually bring the customers in right now and show them waveforms and show them their devices being tested has been a pretty fantastic moment for us here.

And so it's been a long time coming, and we actually think that this will be the catalyst for sort of breaking through some of these customers to make the commitments to move forward.

And we believe that that is in fact going to happen here.

Our first production order will actually come from our second XP customer, then we'll see the first XP customer with production orders.

Well, I'll be looking forward to it.

That's all I had.

Thanks a lot.

(Operator Instructions) It appears there are no further questions at this time.

I'd like to turn the call back over to management for any additional or closing remarks.

Okay.

Appreciate it.

And I know there were some comments related to the timing of our earnings here.

We typically have done it this time of year, so I think we caught a number of people that already started their holiday this weekend.

So good for them.

We will always make ourselves available here for follow-up calls.

If anyone would like, they can contact us.

As we have talked about today, we certainly saw a very soft quarter financially, with our ABTS customer pushouts that really impacted some forecasted orders and revenue and the delays in the FOX-1P, we just need to acknowledge that this was not our stellar financial quarter.

At the same time, we really had a lot of positive progress between the XP and the 1P.

This new XP customer deal that we really feel is imminent upon us.

And other activities surrounding our wafer level burn-in with other customers that we haven't started to really tee up and start to talk to people about.

But we've even seen some signs just recently in the last couple weeks around our packaged part burn-in, which is really encouraging.

Obviously, we are really encouraged by the fact that we are testing customer devices on both the FOX-1P and the XP, which gives us the confidence that we have to start shipping these products and turning all of this work we've had over the last several years and all the money that we have spent and invested and turn that into revenue and bottom lines.

We certainly remain focused on these key new large deals, but we are also working with our installed base and new ABTS customers to sell systems that, in many cases, they forecasted and pushed out.

And we have significant amount of inventory on hand to be able to help people with short lead times.

So again, we appreciate everyone's calls in this time.

And as always, we invite you to come by and host you here if you'd like to come take a look at these exciting new products.

And if not, we'll see you next quarter.

Take care.

Bye-bye.

Ladies and gentlemen, this concludes today's call.

Thank you for your participation.

You may now disconnect.