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Aehr Test Systems (NASDAQ:AEHR)

F2Q09 Earnings Call

January 6, 2008 5:00 pm ET

Executives

Tricia Ross – Financial Relations Board

Rhea J. Posedel – Chairman of the Board, Chief Executive Officer

Gary L. Larson – Chief Financial Officer & Vice President Finance

Analysts

[Jeffrey Scott – Scott Asset Management]

[Marcel Herbs – Herbs Capital Management]

Operator

Welcome to the Aehr Test Systems second quarter fiscal 2009 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) As a reminder this conference is being recorded today, Tuesday, January 6, 2009. I’ll now turn the conference over to Ms. Tricia Ross, Financial Relations Board.

Tricia Ross

Thanks for joining us to discuss Aehr Test System’s results for the second quarter of fiscal 2009. By now you should have all received a copy of today’s press release. If not, you can call my office at 213-486-6540 and we’ll get one to you right away. With us today from Aehr Test are Rhea Posedel, Chairman and Chief Executive Officer and Gary Larson, Vice President of Finance and Chief Financial Officer.

Management will review its operating performance for the quarter before opening the call to your questions. I’d now like to turn the call over to Gary Larson.

Gary L. Larson

Before we begin I’d like to make a few comments about forward-looking statements. Please be advised that during the course of our discussions today we may make forward-looking statements that involve risks and uncertainties relating to projections regarding industry growth and consumer demand for Aehr Test’s products as well as projections regarding Aehr Test’s future financial performance.

Actual results may differ materially from projected results and should not be considered as an indication of future performance. These risks and uncertainties include without limitation economic conditions in Asia and elsewhere, world events, acceptance by customers of our FOX, ABTS, MTX, MAX and DiePak technologies and conversion of quote activity to purchase orders and acceptance by customers of products shipped upon receipt of a purchase order, the ability of new products to meet customer needs or performance described, the companies development and manufacturer of a commercially successful wafer level test and burn-in and the potential emergence of alternative technologies, each of which could adversely affect demand for Aehr Test’s products in calendar year 2009.

We refer you to our most recent 10K and 10Q reports and other reports from time-to-time filed with the US Securities & Exchange Commission for a more detailed description of the risks facing our business and factors that could cause actual results to differ materially from projected results. The company disclaims any obligation to update information contained in any forward-looking statements to reflect events or circumstances occurring after the date of this conference call.

Now, I’d like to introduce our Chairman and CEO Rhea Posedel.

Rhea J. Posedel

Welcome to our conference call for the second quarter of fiscal 2009. I don’t need to mention how much the current economic downturn has severely impacted our industry. While it finally caught up to us last quarter. We saw a number of our customers delay new orders and had some Wafer Pak delivery push outs at the end of our quarter that impacted our results.

In spite of the contracting market for semiconductor equipment, we had a pretty decent quarter. Revenue was $9.2 million, down about 4% from the prior quarter. Importantly, we did an excellent job of delivering a net income of $872,000 up slightly from the prior quarter. Most importantly, we increased our cash position during the quarter to $13.7 million, up over $4.3 million compared to the prior quarter ending August 31st.

One of our major objectives during this industry downturn is to maximize our cash position. This will give us the cushion to implement initiatives that will strengthen the company long term. Our strategy during this downturn is to develop more new products and to aggressively sell our new and existing products to expand our customer base and our markets.

Our objective is to come out of this downturn a stronger company when the industry recovers. Even though I see manufacturers aren’t adding capacity, they will purchase systems that can lower operating cost and/or provide the new technology needed to meet their future testing and burn-in requirements such as Known-Good Die or KGD. The demand for KGD is driven by the industry’s migration to multichip packages or stack packages which will happen even during a downturn. We believe our FOX wafer level burn-in systems can provide a cost effective solution for producing KGD.

The good news for Aehr Test is that we have a very strong product portfolio to build from with our FOX and ABTS platforms. Today we announced receiving an order from a leading European embedded wireless IC provider for a new ABTS system configuration for burn-in of high powered logic devices. This order is significant because it allows us to address a new growing market for high power burn-in, up to 50 watts per device requiring individual device temperature control.

Last month we showed our new ABTS at Semicon Japan and the interest level exceeded our expectations in this slow market. Fortunately, the market for logic and mix signal burn-in is still active in Japan. Customers were interested in the ABTS product because the ABTS platform offers lower cost of ownership and advanced thermal and electronic technology to parallel test and burn-in a wide range of logic and memory devices.

We believe you can sell new technology products even in down markets. We are working aggressively to sell our FOX-1 tester and FOX-15 wafer level burn-in system and there remains a high interest level for these products. The problem is that the companies we were targeting, memory and automotive IC manufacturers are in the hardest hit markets and as a result are delaying capital purchases. We are making good inroads and would hope to penetrate new accounts when our industry turns around.

One positive last quarter is that we saw some increased activity from our MAX product line. Even though it’s a small segment, the military and aerospace sector still has budget and as a result we did book a MAX burn-in system and some system upgrade orders. We have a large install base of MAX systems for a wide variety of applications so we are hopeful we can sell additional MAX burn-in systems and upgrades during this semiconductor downturn.

To provide any guidance or outlook is extremely difficult. Most of our customers were shocked by what’s happened with the economic meltdown during the last few months. For example, their end customers such as cell phone manufacturers, stopped taking deliveries of ICs in November and December and as a result our customers delayed both capital equipment spending and shipments.

If I had to guess, I would say that the next two quarters will be very difficult for Aehr Test. Our customers are telling us that they don’t see their capacity increasing until the second half of calendar 2009 at the earliest. With all the uncertainty in the economy and with our customer base we are unable to provide guidance at this time.

With that said, we believe that Aehr Test is in a favorable position to grow market share during this downturn enabling us to return to the growth trajectories we had over the last few years when our industry recovers. We have exciting new technology with our FOX full wafer test and burn-in products and will roll out new ABTS products to address new market segments for parallel test and burn-in of packets integrated circuits.

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

Gary L. Larson

Net sales were $9.2 million in the second quarter of fiscal 2009 compared with $9.7 million in the second quarter of fiscal 2008. In the second quarter of fiscal 2009 FOX-1 Wafer Pak contactors and FOX-1 system upgrades represented the large majority of our net sales. Gross margin was 50% for the second quarter of fiscal 2009, essentially flat with the year ago period.

The 50% gross margin is in line with our stated expectations given the costs associated with ramping up production of Wafer Paks. We anticipate that if net sales decline we will see lower gross margins. SG&A was $1.8 million in the second quarter, flat with the prior year periods. Second quarter 2009 R&D expense was $1.6 million, slightly higher than the $1.4 million in the second quarter last year. R&D spending varies from quarter-to-quarter depending on the level of development of new product.

We have $384,000 in other income during the second quarter of fiscal 2009. This was primarily attributable to foreign exchange gains on settlement of transactions in our Japanese subsidiary. Pre-tax income was $1.6 million in the second quarter of fiscal 2009 and that’s $51,000 higher than the year ago quarter. Our effective tax rate was 46% in the second quarter compared to 13% in the second quarter last year.

As we indicated on our last two calls on a going forward basis we expect to accrue tax expense at close to the statutory rates for the countries in which we generate income namely, the United States, Japan and Germany. This rate is expected to be in the vicinity of 45%.

Our net income for the second quarter was $872,000 or $0.10 per diluted share compared with net income of $1.4 million or $0.16 per diluted share a year ago. Excluding stock compensation expense in these periods, pro forma net income in the second quarter of fiscal 2009 was $1.1 million or $0.13 per diluted share compared to $1.6 million or $0.19 per diluted share in the same period of the prior year.

Our cash, cash equivalents and short term investments stood at $13.7 million at November 30, 2008. This is an increase of more than $4.3 million from the end of last quarter which is primarily attributable to a reduction in our accounts receivable balance. Our inventory was $10.5 million at November 30, 2008, a slight decline from the end of the prior quarter.

Shareholders’ equity increased to $40.8 million or $4.83 per share outstanding at November 30, 2008 and we continue to have no outstanding debt. We’ve always run a tight ship at Aehr Test and have a low headcount with a high percentage of variable expenses in our cost structure. Our objective is to maximize our cash during this downturn.

In response to the challenging business conditions, we implemented a two week shutdown of our facilities in December and are actively exploring other measures to control or reduce our expenses until capital spending in the semiconductor equipment industry returns to more normal levels.

We are not expecting a meaningful improvement in this difficult operating environment until the second half of calendar 2009 at the earliest. We believe that it would be imprudent to provide guidance at this time. We’re now ready to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from [Jeffrey Scott – Scott Asset Management].

[Jeffrey Scott – Scott Asset Management]

SG&A was down a bit from the prior quarter, is that true reduction or was that a reversal of some accruals in the prior period?

Gary L. Larson

It wasn’t a dramatic reduction from year-to-year so it was basically –

[Jeffrey Scott – Scott Asset Management]

Not year-to-year but it was $2.1 in the prior quarter and $1.8 this quarter.

Gary L. Larson

Okay. I think what we saw in the prior quarter is we saw some additional expenses accrued that were not recurring this quarter. The level that we’re at is probably a more realistic level.

[Jeffrey Scott – Scott Asset Management]

You said that there was an order booked for a MAX, at one point somebody in the defense industry was looking at buying a ABTS, was the MAX order in lieu of that ABTS order?

Rhea J. Posedel

No, this was always a MAX order.

[Jeffrey Scott – Scott Asset Management]

Did anything happen with the ABTS?

Rhea J. Posedel

I can’t remember which one we were talking about when I mentioned it to you but, I don’t believe we lost any ABTS business.

[Jeffrey Scott – Scott Asset Management]

Did you book any new ABTS orders?

Rhea J. Posedel

We did. We announced a new ABTS order along with our press release. We sold a high powered version of our ABTS system to a European embedded RF manufacturer. That was a major accomplishment. It’s a new product and a new customer for us.

[Jeffrey Scott – Scott Asset Management]

What’s the reaction been from the ABTS in Taiwan?

Rhea J. Posedel

So far it’s been good. We announced that we had received an order from [IST], a logic test house I believe last quarter and we said we’re going to ship it over the next three to six months and so we haven’t shipped it yet.

[Jeffrey Scott – Scott Asset Management]

I thought it had already been shipped?

Rhea J. Posedel

We shipped an evaluation which they liked well enough to place a production unit.

[Jeffrey Scott – Scott Asset Management]

But you have not actually shipped a production unit to Taiwan?

Rhea J. Posedel

Not yet. Soon, we hope.

[Jeffrey Scott – Scott Asset Management]

Has there been any further development on the kind of joint venture with [Enteris]?

Rhea J. Posedel

Not as much progress in that area as we would have liked. We’re still working together and we would have hoped to have a little more business in that market but I think just the overall slowdown in the industry as affected our progress in that joint marketing development.

[Jeffrey Scott – Scott Asset Management]

The first FOX-15, have there been any other follow on orders from that particular customer?

Rhea J. Posedel

That’s a good question. We’ve been told that the customer – obviously it’s an automotive IC manufacturer so their end customer has seen some slowdown in demand but they’re telling us they need another FOX-15 probably in the second half of 2009. We should see possibly a Wafer Pak contactor order this quarter from them so not a system but buying more of the consumables from us so that’s good. The more consumables they buy then the more system capacity they’re going to need down the stream.

[Jeffrey Scott – Scott Asset Management]

And they are telling you that another order may be forthcoming?

Rhea J. Posedel

For the system, yes.

[Jeffrey Scott – Scott Asset Management]

Spansion has announced that they are going to sell part of their Chinese test facility in a joint venture with ASE?

Rhea J. Posedel

Right, I believe they’ve already done that, but that was a backend facility. It’s not a wafer start or wafer test facility.

[Jeffrey Scott – Scott Asset Management]

So none of your FOX’s are at that facility?

Rhea J. Posedel

That’s correct. I think we do have some MTXs at that facility but no FOXs.

[Jeffrey Scott – Scott Asset Management]

Will that development affect in any way your relationship with Spansion going forward?

Rhea J. Posedel

No, I don’t think so. Most of the backend testing was already moved – the areas that are using our systems are in different parts of Malaysia and so forth so we had very little of our installed base there in Suzhou China.

[Jeffrey Scott – Scott Asset Management]

Most of your FOXs are down in Malaysia?

Rhea J. Posedel

No, the MTXs that they were using for backend testing. The FOXs are mostly in Japan.

[Jeffrey Scott – Scott Asset Management]

Do you have any significant relationship with ASE?

Rhea J. Posedel

Yes. ASE has a number of our MAX systems that they use for a wide variety of applications so we’ve had a long term relationship with ASE.

[Jeffrey Scott – Scott Asset Management]

Does ASE have any experience with your FOXs in Japan? Have they seen them and things like that?

Rhea J. Posedel

I can’t say. I think ASE really does package part assembly and package part test. I don’t think they do much wafer test or wafer sort as they call it.

[Jeffrey Scott – Scott Asset Management]

In the press release you said a number of orders have been deferred. Could you put a dollar figure on that?

Rhea J. Posedel

I would say at the end of the quarter it could have been $1 million.

[Jeffrey Scott – Scott Asset Management]

That were deferred that are finished goods sitting in your facility?

Rhea J. Posedel

Correct. That were pushed out.

[Jeffrey Scott – Scott Asset Management]

So in fact, if those orders had been included you would have been spot on or indeed a little bit ahead of the original?

Rhea J. Posedel

That’s correct. I think it was like two to three Wafer Paks, maybe three that moved out.

[Jeffrey Scott – Scott Asset Management]

So in fact it was a very decent quarter just a very lousy outlook.

Rhea J. Posedel

Correct. We executed perfectly in the quarter and executed the plan.

Operator

Our next question from [Marcel Herbs – Herbs Capital Management].

[Marcel Herbs – Herbs Capital Management]

I have a follow up question on Spansion, what percentage of revenue did they contribute for the first half of the fiscal year?

Gary L. Larson

We haven’t given out the exact percentage yet. You’ll see it in the Q but it was a very high percentage. Spansion has been a very high percentage of our revenue for the last several quarters.

[Marcel Herbs – Herbs Capital Management]

Going forward how dependant are you on Spansion as a customer?

Rhea J. Posedel

As Gary mentioned, Spansion has been a significant part of our business the past 12 months. We are aware of that and we’re aggressively – we don’t want to reduce the business with Spansion, we want to increase the other business that we have with selling FOX products to new customers and selling or ABTS products. I think that you will see the percentage of our business with Spansion going down, the non Spansion business should go up as a percentage of revenues going forward although Spansion will probably still be our most significant customer.

Operator

There are no further questions at this time. Please continue with any closing comments.

Rhea J. Posedel

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

Operator

Thank you ladies and gentlemen. This does conclude the Aehr Test Systems second quarter fiscal 2009 conference call. If you would like to listen to a replay of today’s conference you can do so by calling 1-800-405-2236 or 303-590-3000, input the access code 11124067.

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