Aehr Test Systems (AEHR) 2017 Q1 法說會逐字稿

Good day, and welcome to the Aehr Test Systems first-quarter FY17 financial results conference call. Today's conference is being recorded, and at this time I'd like to turn the conference over to Jim Byers of MKR Group. Please go ahead, sir.

Thank you, operator. Good afternoon and thank you for joining us today to discuss Aehr Test Systems first-quarter FY17 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 you a copy right away.

With us today from Aehr Test Systems are Gayn Erickson, President and Chief Executive Officer, and Ken Spink, Chief Financial Officer. Management will review the Company's operating performance for the fiscal first 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 update the forward-looking statements. With that, I'd like to introduce Gayn Erickson, Chief Executive Officer.

Thanks Jim, and good afternoon to those joining us on the conference call, and also listening in online. Ken will go over the first-quarter financial results later, but first I will 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, which is our next generation of wafer-level Test and Burn-In products. After that, we will open up the lines for your questions.

We believe we're off to a great start to FY17, and are pleased to report improved revenue and strong bookings momentum in the first quarter. Revenue for the quarter was $5.3 million, up from $1.6 million last quarter, and during the quarter, we had over $10.4 million in bookings. These bookings included two previously-announced large orders.

The first of these orders was our first production order for our new FOX-XP multi-wafer Test and Burn-In solution for about $4.5 million from a new customer, which is one of the top few semiconductor companies in the world. The second large order was a $4 million multi-system follow-on order for our ABTS package part Test and Burn-In system from one of our current large install base customers.

During the quarter, we began shipments of both the engineering and production systems of our new FOX-1P system, which I have stated before is used for full wafer Testing of single wafers, with up to 16,000 Test system resources on a single wafer, and more device power supplies and I/O channels on a single wafer, than any other system on the market. We announced that we received initial customer acceptance of our FOX-1P and began shipments of production systems previously ordered by this customer and already in backlog. We expect to complete shipment of the remaining systems in backlog to the customer within the current fiscal second quarter.

We were also pleased that during the development of this system, we worked to expand the Test applications for the FOX-1P system to include microcontrollers and other devices, in addition to the initial target of flash memory devices. We've also identified potential opportunities for automotive devices, where extended Test and Burn-In is required, that we believe are also a good fit for the system.

In addition to these FOX-1P systems that we shipped, our fiscal Q1 revenue included revenue from the delivery of portions of the initial FOX-XP Test cell ordered early in the quarter, revenue from system upgrades and WaferPak Contactors from our installed base of FOX-15 Multi-Wafer-Test and Burn-In systems, and also revenue for a couple of ABTS package part Burn-In systems. I'm pleased to see an uptick in our base business serving our install base of FOX systems, and also addressing the package part Test and Burn-In space. This base business had been particularly soft the last few quarters, which put incredible pressure on our financials last year, before our new products began shipping for revenue.

We believe we're on track to complete the shipment of the initial FOX-XP Test cell ordered in the quarter, and expect to ship this Test cell in our fiscal Q3, which ends February 2017. We also continued to work with our other lead customer for our FOX-XP Multi-Wafer system, in anticipation of capacity need from that customer that we have stated before begins in calendar Q1 of 2017, and runs through 2018.

This initial lead customer purchased a single wafer version of the FOX-XP last year, and we successfully delivered, and they accepted that first system, along with several WaferPak designs in February. This single wafer system contains what we describe as a blade, which includes Test electronics for the full wafer, the electrical interface connection, the thermal chuck that controls the temperature of the devices, and our proprietary WaferPak, that contains the wafer and devices being Tested, mated to the wafer contactor in a portable cartridge.

This WaferPak cartridge can be inserted into the FOX-XP blade, and allows off-line alignment of the wafer under Test, in our also proprietary WaferPak Aligner, which loads and unloads wafers into the WaferPaks. The blade and the single wafer system can be installed into our fall FOX-XP high power chamber up to 18 at a time. So the FOX-XP Multi-Wafer system can Test 18 wafers in parallel in one system.

The first FOX-XP Multi-Wafer Test cell that was ordered in June by our second lead customer is an 18-blade configuration, using the same blades and software delivered to our initial lead customer last February. Each WaferPak design is unique to the specific device and electrical pad layout. As customers shrink their devices, change them to add features, or come out with new designs, they will order new WaferPaks for their FOX-XPs from Aehr, that will work with their installed base of FOX-XP Test and Burn-In systems. This quote consumable becomes an ongoing revenue stream for Aehr Test, that grows with our installed base of FOX-XP systems.

As stated during our last call, we're working with our initial lead customer for the FOX-XP system, where reliability and qualification Tests of integrated devices intended for very high volume applications. Based on the success of the device qualification Tests that are currently being run on the initial single blade system, that was delivered and accepted, the customer indicates that they will need production systems to meet capacity needs, beginning as early as calendar Q1 of 2017, which is consistent with the availability of our FOX-XP Multi-Wafer system.

These two lead customers' production applications represent a significant opportunity for Aehr Test, as we expand our unique and highly cost-effective wafer level Test and Burn-In solutions into the rapidly-growing automotive, consumer, mobile and computing markets. These top-tier customers represent a significant opportunity, not only with the initial applications, but also with other application areas. We look forward to expanding our initial customer list as we address the many other opportunities where Multi-Wafer Test and Burn-In systems can deliver a significant cost and quality of Test advantage.

With our new FOX family of wafer level Test and Burn-In products, and the strong relationships we have developed with both new and existing customers, we believe we are well-positioned to capitalize on significant new opportunities ahead. Last month, we were excited to announce an investment in 200,000 shares of our common stock by Semics, Inc, a semiconductor Test equipment provider, that produces fully automatic wafer handling and probing systems.

Semics made this investment as part of our strategic development and manufacturing partnership, which began several years ago. We worked together on a unique dual-head wafer prober that has a very small footprint, in conjunction with two of our FOX-1P single wafer Test and Burn-In systems, and also worked with them on the development of our proprietary WaferPak Aligner, used with our FOX-15 and FOX-XP Multi-Wafer systems. We have enjoyed a very successful relationship with Semics, and look forward to working with them for many years into the future.

Lastly, we're pleased that last week we entered into an agreement, and yesterday completed a very successful private placement offering of approximately $5.9 million in shares of our common stock, with a solid group of institutional and accredited investors. The funds raised from this private placement provide additional working capital that further strengthens our ability to meet significant increases in customer demand for our new family of products.

Looking forward, we believe our new FOX wafer level Test and Burn-In products, along with our ABTS, advanced Burn-In and Test system, provide unique and highly valuable Test and Burn-In solutions for our customers, that increase our total available market from our current market of approximately $100 million to a market of more than $400 million annually, beginning this fiscal year. These products provide Aehr Test with a platform that supports our previously-stated guidance for significant year-over-year growth in our bookings, revenue and bottom line during this fiscal year. With that, I will turn it over to Ken.

Thank you, Gayn. The Company recognized strong bookings in the first quarter of FY17. As we reported in today's press release, bookings in the first quarter were approximately $10.4 million. This booking level represents the highest quarterly bookings since the second quarter of FY08.

While we do not typically disclose quarterly bookings or backlog, other than reporting backlog at fiscal year end, as part of our pre-announcement, we provided guidance on our bookings, and as such, want to report on those metrics in this call. Quarterly bookings included $4.5 million in purchase orders received from one of our lead customers for a FOX-XP system, Aligner and WaferPaks, and $4 million in ABTS system orders. With revenue of $5.3 million, and a backlog at the beginning of the fiscal year of $5.3 million, it is easy to calculate that our backlog at Q1 2017 quarter end was $10.4 million, which was our quarterly bookings number.

Net sales for the first quarter were $5.3 million, compared to $1.6 million in the preceding quarter, and $6.6 million in the first quarter of the previous year. Included in Q1 net sales were FOX-1P system and FOX-XP system revenues. Net sales also included multiple ABTS packaged part systems sales. The increase in the packaged parts business is very positive, given the recent softness in ABTS revenues in prior quarters.

Non-GAAP net loss for the first quarter was $543,000 or $0.04 per diluted share, compared to a non-GAAP net loss of $2.8 million or $0.21 per diluted share in the preceding quarter, and a non-GAAP net income of $613,000 or $0.04 per diluted share in the first quarter of the previous year. Non-GAAP results exclude the impact of stock-based compensation expense. On a GAAP basis, net loss for the first quarter was $755,000, or $0.06 per diluted share. This compares to a GAAP net loss of $3.1 million, or $0.23 per diluted share in the preceding quarter, and a GAAP net income of $294,000 or $0.02 per diluted share in the first quarter of the previous year.

Gross profit in the first quarter was $2.2 million or 41% of sales. This compares to a gross loss of $98,000 or negative 6% of sales in the preceding quarter, and a gross profit of $3.4 million or 51% of net sales in the first quarter of the previous year. The decrease in gross margin from prior year was due to Q1 2016, including a benefit of $215,000 to cost of sales related to the sale of fully-reserved inventory.

Operating expenses in the first quarter were $2.8 million, flat compared to $2.8 million in the preceding quarter, and down $131,000 or 5% from $2.9 million in the first quarter of the previous year. The year-over-year decrease includes [$132,000] decrease in outside commissions, resulting from lower sales in regions or to customers where we pay external representatives commission on sales.

R&D expenses were $1.1 million for the first quarter, compared to $1 million in the preceding quarter, and $1.1 million in the previous year quarter. As stated previously, R&D spending can fluctuate from quarter to quarter, depending upon the development of our new products. SG&A was $1.7 million, flat compared to $1.7 million in the preceding quarter, and down $129,000 from $1.8 million in the first quarter of the prior year.

Turning to the balance sheet and changes during the first quarter, our cash and cash equivalents were $2.3 million at August 31, 2016, compared to $939,000 at the end of the preceding quarter. Accounts receivable at quarter-end was $1.8 million, compared to $522,000 at the preceding quarter end. Inventories at August 31 were $6 million, down approximately $1 million from $7 million at the preceding quarter end. The decrease in inventories from prior quarter is due to the sale of FOX-1P systems and ABTS systems that were on hand at May 31, 2016. Property and equipment was $789,000, compared to $1.2 million in the prior quarter.

During the quarter we reported that we extended the maturity date of our convertible note with our strategic investor by two years from April 10, 2017, to April 10, 2019. This extension helps our working capital later in the fiscal year, which helps us with the anticipated ramp of our FOX-P products, and improves our cash position to meet current liabilities for FY17.

As Gayn mentioned, yesterday we closed a successful private placement offering of our common stock with certain institutional accredited investors, that resulted in gross proceeds to the Company of approximately $5.9 million before expenses. Craig-Hallum Capital Group served as the sole placement agent for the offering. In addition to increasing capital, it further strengthens our ability to meet significant increases in customer demand for our new family of products. This incremental equity raise allows us to address the delisting notice we received by NASDAQ, and discussed on previous calls.

We plan on filing an 8-K shortly describing the transactions, and our belief that the Company has regained compliance with the stockholders' equity requirement for continued listing. With this 8-K filing, we believe that we will receive formal notification from NASDAQ that we are in full compliance of listing requirements for the NASDAQ Capital Markets.

We're very pleased that six of the participants in the private placement are new institutional investor firms for Aehr Test, and we're glad to see the endorsements from these firms in our growth story, and the opportunities ahead for the Company. Also, based upon the offering price of $2.15 per share, there was no conversion price adjustment to the $2.30 conversion price of our convertible notes.

This concludes our prepared remarks. Now, we're ready to take your questions.

(Operator Instructions)

Christian Schwab, Craig-Hallum.

Congratulations on a strong start to the year. Gayn, when you look at the new products and the two lead customers, instead of trying to figure out the opportunity by different product lines, but as we know, expand that TAM from $100 million to greater than $400 million, what type of market share objective do you think you could achieve 2 to 3 years out, given the lead customers' interest in your new products?

You start off swinging right there, Christian. We haven't been historically giving forward-looking statements, particularly of that type of magnitude. One of the challenges of course, in this, is getting those products out, getting those customer commitments, and then in fact identifying those markets where those dollars will be spent. We've not specifically given those kind of numbers, but we believe that we can take a, call it, significant portion of that market share.

The bulk of that, breaking it down, the $100 million is primarily or mostly made up of the packaged part space, plus some of the smaller niche areas that we believe we had been addressing with our previous FOX products. The FOX-XP, because of its increased power, functionality, and resources, expands the TAM to several different market opportunities that we've included -- include automotive devices; flash memory devices, particularly NAND; sensors that are going into both mobile- and automotive-type applications.

And without even talking about the IoT, or Internet of Things, there is just a number of different areas that pose an opportunity for us. So although we would probably expect a continued high concentration of customers, we actually see a diversification to multiple different customers, and multiple applications within each of those customers, as we grow into those TAMs.

Great. That's a very fair answer. As we talked about earlier, production systems with one customer starting in Q1 of 2017 and going through all of 2018. When would you expect to begin to see order activity for that? Would it be right in line with Q1 of 2017, and we go right away, or how should we be thinking about bookings and orders on a go-forward basis?

So a couple of things with respect to our standard lead times. With the first tools that we took orders for, often we will talk about 6 to 9 months to get a tool from the time it is ordered until it's shipped. And that would be a consistent number, for example, with the FOX-XP order we took in June.

But as we develop the product, and then we have the pieces completed, it's our expectation that we would -- the customers would like the shortest lead times possible. I think, in this market, having something, a 12 to 16 week lead time would be a good, solid number for them. And to some extent, having shorter lead times is an advantage for us. When the products come out, and they are newer products, they tend to be longer lead times. As they become mature, we would like to get to those types of lead times.

One of the subtleties about the capital raise that we did last week, or that closed yesterday, is we anticipate using some of that to buy some of the longer lead material items, and to put inventory in place on some of those, so that we can in fact have not only shorter lead times, but be able to address capacity on a shorter term. Having said that, there's always a struggle.

We would like orders as quickly, as early as possible, and the customers would like to delay them as late as possible. But if people want systems delivered in Q1, which is just by the math, is March of 2017, we would certainly want orders a couple, few, if not four or more months ahead of time. If I can leave you at that, I think that's probably best.

I think that is great. I don't have any other further questions at this time. Thank you.

Geoffrey Scott, Scott Asset Management.

Congratulations on everything. A couple questions, will bookings be a quarterly event, or is this a one-off deal?

When we prepped for this call, the first question we thought was that you were going to ask us that question. You know what? We have been pretty clear in the past that we try to avoid talking about bookings, and we realize that is a goal we all want to shoot for. But in order to not throw customers around -- I am sorry, to throw shareholders around by having bookings that come late in the quarter that we can still meet shipments, or not having bookings that imply maybe we can't meet shipments, we've chosen not to, because our bookings tend to be more lumpy than our revenue is.

So we will continue to take a look at it. We made a specific example this time to put them out there, and maybe at this point, I will say maybe, but maybe not.

Okay.

Okay. I apologize, but I think that's just a hard thing. We will always try and give you some sort of forward, and why don't I just do that in advance, because your next question is going to be, what does next quarter look like? What we're actually anticipating, we head into this quarter with almost all of our anticipated shipments in backlog, and as such, we think we are going to have another fairly strong quarter. It's probably down a little.

One of the challenges is that ASPs of our ABTSs, for example, are $800,000 a piece. Plus or minus one of those can swing our numbers that much. That is one of the challenges that we have, until we start to ship in higher volume across the larger markets with the FOX systems. We will also expect that the WaferPaks, particularly over time, will help us to provide an increasing level of base business.

Okay. The geographic breakout for revenue of this quarter, $5.3 million, how much of that was US?

The US allocation was about 60% in the US, Southeast Asia was 35%, the balance being in Europe.

Okay. It included a large part of that $4 million ABTS order. That was more than just US deliveries? That was world-wide deliveries?

Just to give a little color on the breakout, the Southeast Asian numbers that I was referring to, that accounted for 35%, those were our ABTS systems, which are actually in the Philippines. And the US was predominantly the FOX-XP and the FOX-1P systems, as well as our service contract-related and spares activity, customer service-related.

Okay, that's very helpful.

It's pretty typical, Geoff, that even with our customers, and we have a high concentration of customers that are decision making, and often even purchasing in the US, that the bulk of the production systems do show up overseas. It's one of the reasons we have such a large number of service employees.

We have direct employees located in Japan, and Korea, Taiwan, China, the Philippines, amongst other places. And then we also have additional service people that we have through some of our reps. But fundamentally, we tend to put service people right where our customers are.

Yes. Circling back to comments made on the package parts business, the ABTS deliveries were all for that one order, that one $4 million order? Or did it go to more than one customer?

We had some ABTS and some additional accessories that were going to other customers. But the bulk of it was in fact to the one customer, against the most recent order.

You said there was uptick in package parts business. Was that uptick from just the one $4 million order, or were you seeing orders come in from other customers?

We had one order from another customer, and we had -- we are seeing some additional resurgence of some of the forecast that we had from customers, in the middle of last year, that they simply pushed out. And I talked about in the last couple of quarters, those have not booked yet, but just in general, it feels like there is a firming up of the install base, and we saw some -- a pretty good bookings quarter that were for systems that would ship over actually a couple, few quarters range.

But that uptick in package parts inquiries does not actually show up in that $10.4 million of bookings? It is inquiries?

Part of it was. We haven't -- a $4 million plus order from one customer for multiple systems is a pretty strong number.

Yes, it is. The property, plant, and equipment went from $1.204 million to $789,000 during the quarter. Depreciation typically is $50,000 a quarter. Did you sell a piece of equipment that was in PP&E for demo purposes?

Scott, that's a great question. Actually, in my narrative, I had a little bit more color on that, and yes --.

The answer is yes.

The answer is yes, we sold equipment. What we do is, even though we have capital equipment, if it is capital equipment that we sell in our normal course of business, we move that to inventory and flow it through cost of sales, as though it were in our inventory originally.

Okay. Quick question on the TAM for the NAND flash: At the Flash Summit in, I guess it was August, there was less talk about 3-D NAND, and Micron spent an enormous amount of time talking about their XPoint. I wasn't there the second day, but I understand Samsung also talked about their competitor to XPoint.

Is there something going on in that 3-D NAND market? That was what was going to drive that very large $300 million number, and it seems to have slowed down a little bit. Can you talk about what the XP is doing in that market, and what it's likely to do in the future?

Okay. So there's a lot in there. I'm going to try and cover it in two areas. One is, the things that are driving what we still believe is an opportunity within the NAND space are not actually impacted significantly, the original pieces, if you will, whether it be standard NAND, 3-D NAND, or either a XPoint or high buffer memory, or these other technologies that are intended to be a high-speed version of a non-volatile memory.

The basic premise that existed, and we believe continues to exist, is that when devices are placed into a package, multiple devices at a time, and then go through an extended test or burn-in, one of the devices that is embedded in that package can fail, and as a result, will create a yield loss of the other devices in the package. NAND, particularly the SSDs portion of it, which is solid state drives, which is driving at least 30% of the total NAND, and almost all of the growth, are inherently being stacked higher and higher number of die per package, for several reasons, but fundamentally, density matters.

And so, the fastest-growing segment or the primarily growing segment, the largest segment in and of itself is seeing devices stacked together. And when they fail, they are actually creating a failure of the other devices. To my understanding, all of the devices that I just described, standard NAND, 3-D NAND, XPoint, other densities, they are all tested today in package form for reliability testing before they are put into SSDs. And they all have a significant yield impact as a result of burning them in, and one of the die fails, failing the other sometimes seven die in an eight-die stack, 11 and 12.

There is 16, and I think Samsung announced higher than that, 24 die stacks on the horizon. That trend is continuing, and we believe is a perfect opportunity for customers to look and use our new FOX-XP system to test those NAND wafers at wafer level, before they are singulated and then put into the package form. So the thesis, I think, is still the same.

What has happened, for those that have followed along with us, is that was one of the primary applications that we developed the FOX-XP for, and had engaged with several NAND manufacturers along those lines. What we have said in previous calls is, for several reasons, the customers have pushed out the evaluation and/or the imminence of ordering systems from us. And in fact, our two lead customers were both customers that have taken a look at the FOX-XP for NAND, and chose the FOX-XP for a different application. We believe, long term, there's still opportunities and time at both those customers and others.

One of the challenges I believe that has happened is that the transition to full wafer testing of the NAND suppliers is a very major commitment. It probably entails the fab should start with that from the early goings. And I believe a lot of the feedback from customers has been that the risk associated with doing that, particularly with such a small vendor as Aehr Test, was just too much, in particular because the tester wasn't out yet.

Now we're able to show customers these systems, and as we start production shipments of the FOX-XPs, that they themselves could test NAND devices. We think that risk profile can change, and certainly as we grow as a Company, I believe that we will be a more attractive alternative for those customers. So in our long-term strategic plan, looking out past probably a year, or maybe as soon as a year, we think that there is an opportunity for us to start really pounding on that drum again, and drumming up some business in that space.

That's very helpful. I will drop off, and let somebody else get on. Well done.

Larry Chlebina, Chlebina Capital.

Ken, I got a quick question. On your revenue recognition process, how do you -- take the XP, the production tool that was announced in June, how is that revenue booked? I know you get a big down payment, and so on.

In that instance, there wasn't down payments on this tool. We actually had components of their purchase order available to transfer all risk and rewards of ownership. So basically, they took possession in title of several line items on their PO, which allowed us to recognize revenue on those items.

You're talking about -- you recognize revenue in Q1?

Correct.

For the XP announced in June?

Correct.

Okay. You didn't break that out. How much was that of the total?

There was about $1.4 million of the total that was XP related.

And I thought we had said that in the press release (multiple speakers). The last quarter, I believe, we said that already.

I think you did. Okay. But on an ongoing basis, is your revenue recognition such that if you get a down payment, that's booked at the point of receiving that down payment with the order?

No. We show, if you take a look at our balance sheet, in our liabilities, we have the customer deposits, and we do not show any revenue until it is earned. So those cash upfront deposits show on our balance sheet as a liability under customer deposits and deferred revenue.

So you don't book the entire revenue, the cost of the machine or the price of the machine on acceptance? You get a portion on shipment?

So let me try that Larry, because our historical standard that we offer to customers is, for our large systems, that we require a 30% down payment upon booking. We will -- and then we get 70% upon shipment. And we would score that revenue at that time.

For the first tool at a site, or for a customer, we will defer 20% of the revenue, so that they pay 30% down, 50% upon shipment, and 20% is deferred until final acceptance. But then follow-on systems would be the 30%/70%.

Okay.

Larry, I am going to say something. Ken is reminding me of something. At times, based upon revenue recognition, particularly of a first tool, even though the payment structure is as we described, we may defer all of the revenue until final acceptance.

I see. That makes sense. The extra $300 million in TAM with the P products, what breakdown is it to the XP versus the 1P of the $300 million?

I think, based upon the numbers that we have been tracking so far, the XP would be most of that. I think the 1P probably is a $50 million to $75 million range, although we have just -- we continue to identify some new ones that are interesting. But I have even stated this before, we approached several customers about the 1P over the last couple of years, and many of them immediately looked over its shoulder and said, tell me about the XP.

So remember, the 1P and the XP uses the same identical hardware. The difference being that the 1P can take effectively eight blades of hardware and test one wafer, whereas on an XP, one blade worth of hardware tests one wafer. So certain wafers make more sense to be in the multi-wafer, and others would only be in a single wafer configuration. But the bulk of the particular opportunities that we have seen, where we are the most unique and differentiated, is in the multi-wafer FOX-XP.

XP. So just for my own benefit, the 1P, the reason for the 1P being competitive versus what you can generally get from the ATE industry is what, exactly? Why would somebody go with a 1P from Aehr, versus just a run-of-the-mill ATE test that is available in numerous suppliers through the industry?

The key difference is that we hear, that we believe and hear from our customers primarily, is that the test system has been optimized around design for testability functionalities, for devices that use a level of built-in self test, devices that use low pin count test interfaces, that historically have a very high ratio of device power supplies to functional pins. Semiconductor ATE platforms from Advantest, Teradyne, Xcerra, and historically Verigy where I came from before Advantest purchased us, they are the opposite, where they tend to be 8 or 10 or 20 or more device functional pins per power supply. And so the platforms just aren't really optimized around this.

And in addition to that, on a per-pin basis, our cost per pin is substantially lower than alternatives. We do that through a level of integration and architecture that looks unique, compared to the ATE suppliers. And so our FOX-1P, there is not a product that is like it, as an alternative from our direct competitors.

The application space in this case by definition is quite a bit smaller. If we talk about a TAM for that of $50 million to $70 million, by contrast to a high-speed multi-gigabit ATE platform, the total available market for semiconductor ATE last year was over $2 billion. So it plays in a smaller niche than the rest of those suppliers, but we believe there is some interesting applications that are going to grow with us over time.

So are you working on someone other than the lead customer, exploiting the potential of that market?

Yes. We in fact, just recently we had another customer poke their head up, which is a pretty interesting automotive application. We had been -- to be blunt, we had been pretty focused on our XP and 1P customers in hand. And with the release of the 1P, we've gone out and have continued to talk with some, both new and existing customers, about that platform. And it's our expectation that we will grow the install base of customers for that platform, as well.

Very good. Last question for me on the -- your lead XP customer that is currently running evaluations on your single blade unit, it does seem that if their time frame is first quarter to get some into production, is the evaluation pretty well complete? Is it going according to plan? Because it seems as though they should be ordering any production tools needed, any day now.

If you would give them a call and poke them, I'd appreciate it.

Reason for me asking is, you mentioned that they are going through evaluations now. Do you have a sense -- is that looking good, is it nearing completion? I don't know if you have a sense of what they are really looking for, and where you stand, timewise, how that is going?

I don't want to be elusive here. We are particularly sensitive about giving any detail towards specific customers, but I would say they are overlapping evaluations, some of which have been completed and were very positive, some of which are not completed, none of which have failed. And then, and as such, it is not just a single device.

So we are encouraged. We continue to stick by our guns. We believe that we will get production orders and revenue from that lead customer, as well. And the timing of it, we don't have a perfect understanding of the timing of everything on those devices.

All right, that's all I had. Thanks a lot.

Orin Hirschman, AIGH Investment.

Congratulations on the progress. If you had to pick just one, the most important thing that is finally driving Wafer-Level testing and Wafer-Level testing like this, after all these years of people saying it's coming, it's coming, it's coming, what would you pick as the number-one driver? Is it the tiny devices, is it the fact that devices have to all be tested because the failure rates are unacceptable? What would you point to that?

If there is such a thing as a crossing, it is the crossing of devices that are getting smaller and smaller, and are as such, ending up in their final form in a package that's a multi-chip package, or module, or system, or whatever you will. And that system's requirement for reliability, in excess of what the normal test standards historically would serve, ie, if you test those devices, just like you've always tested them, the resulting reliability will not be adequate for the end-use application.

And that transition is driving people towards wafer-level and singulated die type testing right now. The type of applications that we talk about at a high level are the easiest ones to understand will be things like automotive, as a consumer, and the automation, and the autonomy, if you will, not automation, the autonomous vehicles, are driving a sense of urgency within the Tier 1's that may be totally unprecedented.

The other thing is, it's well known in the industry that large companies within the mobile space, within the SSD space, a few of these applications are driving for a level of quality that was not historically there before, and it's harder to get that quality than it was a few years ago. And so that's creating an opportunity for us right now.

Thanks so much.

Thank you. Operator, just a quick one. Ken is saying that we were both right. We technically had six new institutional investors, two of which placed part of the funds in two funds each. So there were eight names, or nine names on there. I'm sorry, three of them that did it.

Nine funds, yes.

Tom Diffely, D.A. Davidson.

Hoping you could maybe give us a little more information about what you feel your long-term target model might look at, either margin and earnings expectations at different revenue levels, or maybe just margin guidance, something along the lines that we can start to model, what we think this might look like long term?

Okay, so, Tom, let me do it -- I'm going to make it pretty simple. If you were to just take a straight line model of the last six or eight quarters, you can project it fairly well from where we are at. And what you would realize is that we wake up each quarter, and we are going to go spend something like $3.5 million, $4 million a quarter. And that includes some of the non-GAAP items of options expenses, so it's not even real cash.

Of that, about $1 million is R&D, $1 million is typically our manufacturing costs that get embedded into our manufacturing cost of sales, and about $1.5 million is SG&A. Remember, we're still a public company. And then I've left out about $0.5 million of rounding error in there. Okay?

Our systems, we typically sell somewhere in the 50% to 60% type margins, and that's an incremental margin from there. And so, we believe we can make a good business out of that. It's a good rule of thumb.

We don't have to charge the margins that some of the larger players do, because we have a much lower overhead. And so, our scalability is, you go through that math, and somewhere around $6 million, $7 million, depending on what the margin is of that make up at that time per quarter, we're at breakeven. And then we are making $0.50 on the dollar thereafter.

As we scale, one of the great things about this Business is that you need to start with some level of infrastructure. Maybe that's a bad thing. We're going to spend that money, whether we ship anything or not, but then I can ship a significant amount of capacity.

We put in place a supply chain, a world-class supply chain, to be able to address these new products with every subsystem, major subsystem, has a second source, so that we can supply capacity well, well in excess of our current revenue levels. If you come to our facility, you can see our infrastructure here is similar to that which I had in my last company, where we were doing literally $200 million, $300 million a year. Okay?

I'm not projecting that. That's not what I'm trying to put in forward statements here. But what's important is, if a customer comes along and needs to order a number of systems, you need to have the ability to be able to ship those, both on the short lead times, and within a burst type capacity.

So that's a simple model for you. Again, one of the first questions from Christian was how big can we be? We're not projecting that out, but we certainly do anticipate that we will have significant growth this year, and will continue that into the following year.

Okay. So just to confirm, or go back through it, the gross margins in the mid 50%s ultimately provides an operational margin drop-through close to 50%? So there's very little incremental spending?

That's correct. If you were to look at us in a scaled fashion, the types of things that scale with this would be small amounts of direct labor. We have some commissions.

We do have warranty reserves, pretty typical of the industry, of a couple percent type of range. And those we would put into what we call our incremental costs. So when I talk about those margins, I was excluding those. So we're talking about truly 50%-plus incremental margins that drop straight down.

Okay, that's great. That's a ton of leverage then. And then finally, when you looked at the last round of financing, what other forms did you look at? Did you look at straight debt or converts at the same time?

We did. We actually looked at a number of different scenarios. We have been doing that over the last quarter. It's been a continuous discussion on each of these calls, and with our key shareholders.

On one hand, people have been proud of us for being able to run as lean as we have. On the other hand, we might be working too hard. And so, the Board took a look, and looked at a number of different alternatives, and determined that this in fact was our best call, to make at this time.

Obviously this helps us shore up our balance sheet. It allows us to do some things like some of the long lead time items and all that I'd like to do to be able to shorten lead times for customers, and to meet burst demands.

And as Ken pointed out, I don't want to be too subtle with this, as we had stated in writing and at the last couple of calls, due to a shareholder equity falling below minimum standards on NASDAQ capital markets, we needed to address that in order for us to stay within compliance. We believe that based upon this raise, we meet not only that but the market cap requirement, as well. We just don't have the letter in hand yet, and as soon as we have it from them, but we have a positive acknowledgement from them, we believe that this is enough to cover that base.

I'd like to add something there, too. One of the things we took a look at from a debt standpoint, our current loan that we have with QVT is very restrictive. We are not allowed to have added any debt, which is not subordinate to their debt, which is secured by all assets of the Company.

Also, they had restrictions on the amount of the interest rate, which it couldn't be below the 9%. And also their restriction is any new debt added had to have a maturity date after 90 days after the termination of agreement. So when you take a look at all of those factors, it would be difficult, if not impossible, to really get debt, and really the Company literally doesn't want to get involved in debt with those onerous terms.

Okay, I understand. That makes sense. And look forward to an exciting year ahead.

Us, too, Tom.

Marty Cawthon, ChipChat.

Gayn, here's a question: If you look out two years from now, and you can see what's going on now, if you imagine that most things go pretty well, something is always going to go wrong, but two years from now, what do you think the installation list for the FOX P machines might look like?

What's your next question? I'm just kidding, Marty. How do I want to answer that? Again, we're trying to avoid any grandiose -- let me answer a different question that you didn't ask.

Here's what I am really looking for: We talk about engineering applications, which is like, typically one machine, and production applications, which is many machines. But how many (multiple speakers)?

Marty, you are right on with where I was going to go. Let me tell you, this is how -- you were thinking the same way, where I was going to go next. So let me talk generically.

We believe that many of these applications that we have looked at are measured in multiple units of our FOX-XP systems for a given device. So it would not be atypical for us to anticipate that one device could drive tens of systems over some period of time. So this is scalable. We don't believe that a typical application will only have one system, for example. Although that one system, the customer would continue to buy WaferPaks on probably every 18 to 24 month basis is what we're currently modeling in.

We do expect that these applications, and people ask, that's a lot of systems, you have 18 wafers in there already, that's a lot of capacity. The applications that we are driving for are much longer test times. So an example, and this would be generic industry knowledge, a flash memory fab might have several hundred systems on their sort floor at wafer level testing for functional test. But the test times are measured in minutes, or fractions of hours for certain.

The burn-in times for devices like a flash memory, or for these automotive devices or these sensors typically start at a couple, few hours. We have testers out there that are doing burn-in at, I think, 90 minutes or two hours is the minimum. And we have some that are doing 96 hour burn-in.

So when you start looking at -- the test times are literally 10 times as long, so an 18-wafer system only looks like two wafers of production capacity from a functional tester. So that's why there is scalability to this. So we think we're onto some large, exciting markets, and so we would expect a fairly significant installed base out there, a couple years from now, if everything goes well, if I can repeat what you asked.

Okay. So, per device, and some of the lead customers even are looking at more than one device applications, is that true?

Yes.

Okay. So we have got three lead customers, and maybe two of them have two applications, and so that gives a total of just say five applications? And 10 machines times five applications might be 50 machines?

Operator, do we have any other questions? I am kidding with you, Marty.

Okay. And that thinking is okay, even though I (multiple speakers)?

I think that thinking is okay, Marty.

Okay. Good. That answers my question. Thanks.

Thanks, Marty. Sorry for joking with you like that.

At this time, I show there are no further questions left in the queue. Mr. Erickson, I will turn the call back over to you, for any closing remarks.

Thank you, operator. And thank you, everybody. We really appreciate you joining us.

This was a little longer than our normal calls. We appreciate the time and all the great questions, and we know we have our work ahead of us. We know what we have in front of us, and we're looking forward to a great year this year. Take care. Bye.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.