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Aehr Test Systems (NASDAQ:AEHR)

F3Q2013 Earnings Call

March 28, 2013 5:00 pm ET

Executives

Marilynn Meek - Vice President of Marketing, Investor Relations

Gayn Erickson - President, Chief Executive Officer, Director

Gary Larson - Chief Financial Officer, Vice President - Finance

Analysts

William Smart - Cardinal Value

Marty Cawthon - ChipChat Technology Group

Geoffrey Scott - Scott Asset Management

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Aehr Test Systems third quarter fiscal 2013 earnings conference call. During today's presentation, all participants 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, Thursday, March 28, 2013.

At this time, I would now like to turn the conference over to Marilynn Meek. Please go ahead ma’am.

Marilynn Meek

Good afternoon, and thanks for joining us to discuss Aehr Test Systems' third 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 will get one out to you right away.

With us today from Aehr Test Systems are Gayn Erickson, President and Chief Executive Officer and Gary Larson, Vice President of Finance and Chief Financial Officer. Management will review its operating performance for the quarter before opening the call to your questions. Before returning the call over to management, I would 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, with that said, I would like to introduce Gayn Erickson, Chief Executive Officer. Please go ahead, Gayn.

Gayn Erickson

Thank you Marilynn, and 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 fiscal quarter was $3.3 million lower than our previous quarter's revenue of $5.1 million but higher than the prior year's revenue of $2.9 million.

Naturally, we are not satisfied with the sequential quarter revenue performance but this is our fourth consecutive quarter of improving revenue year-over-year. This improvement points to the continued success we are having in addressing new market segments and customers with our ABTS and FOX product lines. The lower sequential revenue was due to overall caution in our customer base during the quarter which we noted in our last quarter's conference call and was consistent with what we were hearing across the entire semiconductor cap market.

You may recall that at the time of our last conference call, the tone in our customer base was underscored by recent announcement of cutbacks and slowing of their businesses. Recently however some of these customers have come back and raised their forecast to the street. We are also seeing an increase in capacity requirements and an overall increase in customer activity particularly following the Chinese New Year.

We believe this to be consistent with the general comments in the semiconductor test industry by the larger ACE players where they have depicted this quarter as a toss in a cycle and have generally made positive statements on the revenue forecast for the balance of the calendar year. Still, we are very aggressive in managing our expenses, cash and inventory during the quarter and we will continue to do so until our business level returns to appropriate profitability levels.

Regarding our expenses, we have implemented cost saving measures across the company including temporary reductions in salaries and bonuses while keeping our focus on product delivery and product roadmaps. I will let Gary discuss our cash management in more detail but as stated in previous calls, we have raised our inventory in anticipation of our new ABTS-P product deliveries and to address interim capacity needs of our customers with loaner systems until the ABTS-P was shipping.

With initial ABTS-P systems now shipped and accepted, we are able to consume that inventory and lower our inventory back to an appropriate level freeing up this cash. With these measures and with tight management of cash in other areas, we were actually able to increase our cash flow in the quarter even with a quarterly P&L loss. As discussed in our conference call last quarter we are seeing increasing interest in the next generation FOX system which provide wafer level test and burn-in of single and multiple wafers in parallel.

In our last call, we mentioned a total of four different customer engagements for these products. Each of these engagements are still in play. During that last quarter, we received inquiries from three additional potential customers that are top-tier IDMs and (inaudible). While these may not all turn in to sales, of course, this level of interest is important as it validates our belief that wafer level test and burn-in using our products which incorporate a unique design for test methodology and architecture is a significant opportunity for our company.

These engagements with both current and new customers. So we feel this has the opportunity to significantly expand our market size and penetration. As mentioned previously, we expect to begin shipping these FOX products for revenue in the first calendar quarter of next year. We have seen a real interest in customer working with us including discussions of early orders, prepayments or NRE payments to lock-in and accelerate the development of these products. These commitments and discussions serve to confirm our belief that these products provide a significant value and cost of ownership advantage over alternative test vendors and/or test strategies.

Lastly, I want to discuss our recent stock sale. This month, we closed on a stock offering where we raised approximately $1.2 million in cash. As detailed in the documents filed with this offering, most of Aehr Test officers and directors participated in this offering which I am really pleased with. Keep in mind that these same officers are on pay cuts recommended by themselves to help the company get through this difficult period and to help us achieve our goals of reaching revenue levels and profitability which we believe Aehr is capable of.

I am also happy that we are able to accomplish this private placement without the normal cost associated with the banker and also have a favorable but still appropriate stock price and terms. The detail on our stock sale, including the participation levels have all been filed with the SEC and are linked on our website, if anyone has any questions.

Based on the growing interest in our family of products, improving market conditions and the flexibility that our recent cash infusion provides our company, we remain most optimistic about Aehr's future. Gary will now go over the financials before we open up the line for questions.

Gary Larson

Thank you, Gayn. As reported in today's press release, our net sales in the third quarter were $3.3 million, down compared to $5.1 million in the second fiscal quarter of 2013 but up compared to $2.9 million in the third quarter of the prior fiscal year. Our net loss of $1.5 million in the third quarter of fiscal 2013 or $0.16 per diluted share compared with net loss of $811,000 or $0.09 per diluted share in this year's fiscal second quarter and compared with net loss of $1.4 million or $0.15 per diluted share for the third quarter of fiscal 2012. Gross profit was $765,000 or 23% of net sales. This compares to gross profit of $2.3 million in the second quarter of fiscal 2013 or 45% of net sales.

In addition to the reduction in gross profit that would be typical of such a decrease in net sales, gross profit was also impacted by our inventory reserves related to our older MAX products as our new ABTS products move into volume production. Operating expenses for the quarter were $2.2 million compared to $3.0 million in the second quarter of fiscal 2013.

SG&A was $1.5 million compared to $2.1 million in the second fiscal quarter of 2013. The sequential decline in operating expenses included aggressive steps taken by management to control spending including salary cuts, extra time taken off and including during the holiday season and reduced sales related to expense commensurate with the reduction in our topline.

R&D expenses were $685,000 for the quarter compared to $962,000 in the fiscal second quarter of 2013. As stated previously R&D spending can fluctuate from a quarter-to-quarter depending on the development of our new products but again this was also reduced due to shutdowns during the holiday season.

Turning to the balance sheet and changes during the third quarter. Our cash and cash equivalents increased to $1.4 million at February 28, 2013 from $1.2 million at November 30, 2012. Accounts receivable decreased sequentially by $1.3 million. Our inventories decreased sequentially to $0.7 million. Our line of credit decreased by $0.5 million which means that our net cash which is cash with our line of credit improved by $0.7 million.

These numbers do not include the $1.16 million proceeds which we received in March from the private placement stock sale. We did have non-cash related expenses in the quarter that hit our P&L. Those included FAS-123R stock option expenses, amortization on dental equipment, excess and obsolete material expense in addition to more regular run rates of scrap, warranties, fixed asset depreciation and everything totaled to over $6.6 million for the quarter.

Certainly managing our cash has been and continues to be a clear focus for Aehr Test management. This concludes our prepared remarks. We are now ready to take your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) First question is from the line of William Smart with Cardinal Value. Please go ahead.

William Smart - Cardinal Value

Yes, I was just wondering what the outlook is for replaceables and how that went in the quarter, such as your contactor plates?

Gayn Erickson

Hi, Bill, this is Gayn. During the quarter, I would say we had about an average or a little less than average run rate for our WaferPak business and right now looking forward, it looks to be running about that same rate over the next quarter or so. So what we really thought in the quarter was not so much a hit on that We actually just saw some systems that maybe consistent with what we had seen in the previous year where we typically saw at this time of the year. Remember this fiscal quarter includes December, January and February leading up to Chinese New Year which I had also seen in the ATE space, historically, was relatively soft.

William Smart - Cardinal Value

So the WaferPak business is pretty much on track, as far as you are concerned?

Gayn Erickson

I would say its at about normal levels or maybe a little bit softer that what we have obtained in, perhaps, last year.

William Smart - Cardinal Value

Okay, thank you.

Gayn Erickson

Thanks, Bill

Operator

Thank you. Next question is from the line of Marty Cawthon with ChipChat Technology Group. Please go ahead.

Marty Cawthon - ChipChat Technology Group

Yes, hello.

Gary Larson

How are you, Marty.

Marty Cawthon - ChipChat Technology Group

Good, how are you doing?

Gary Larson

Fine.

Marty Cawthon - ChipChat Technology Group

My question is about the recent stock offering, where you raised about an additional $1.2 million.

Gary Larson

Yes.

Marty Cawthon - ChipChat Technology Group

The market cap of Aehr Test is about $10 million. So that’s roughly, you raised 10% of the market cap. My question, I have two of them. The first one is, how much of that money was raised by insiders? The people who have inside information on the company.

Gary Larson

About 60% of the total deal was insiders, Marty.

Marty Cawthon - ChipChat Technology Group

Okay.

Gary Larson

So the directors and officers and as Gayn mentioned, most directors and officers participated in the deal.

Marty Cawthon - ChipChat Technology Group

And about how long did it take from conception to closing?

Gary Larson

It was actually very fast. I would say two or three weeks, probably that timeframe.

Gayn Erickson

Yes, I mean we discussed it as a board for perhaps about one month period but by the time we went out and started to talk to potential investors, undergone disclosures, for example, till the time we closed, it felt like it was about less than a month.

Gary Larson

Yes, less than a month in total, including all the paperwork and the closing et cetera.

Marty Cawthon - ChipChat Technology Group

So to raise about 10% of the market cap in additional funding, in about two to three weeks, from company insiders, it seems like a bullish sign to me. Would you comment on that?

Gayn Erickson

Marty, I participated. I, as did Gary, we are certainly believers in our company and in general, and certainly as we continue to participate in this and I leave the bullish comments for the folks that do this for a living.

Marty Cawthon - ChipChat Technology Group

Okay, all right. Thank you.

Gayn Erickson

Thank you, Marty.

Operator

Thank you. (Operator Instructions) Our next question is from the line of Geoffrey Scott with Scott Asset Management. Please go ahead.

Geoffrey Scott - Scott Asset Management

Good afternoon.

Gary Larson

Hello, Geoff.

Geoffrey Scott - Scott Asset Management

The inventory reserve for MAX, was that on machines or was that on parts?

Gayn Erickson

It was really on the tail of parts, I would say, is the case. We, of course, assess our inventory every quarter and look against both, our forecast, usage of forecasted sales as well as long-term parts usage and this is as much as any as part of the parts usage over a period of time and now that the ABTS really its family s in full production including the latest P or the major software release right now, where we have just taken another snapshot look and we believe that while we will still sell a handful of MAX's and we will continue to offer it to customers given the way we do our accounting of course, we looked at some and decided that there was some parts of this that didn’t make sense for us to keep on our books.

Geoffrey Scott - Scott Asset Management

Realistically, will you be able to sell those parts over not the next 12 months, but the next 24 or 36 or 48 months and you have so many of these machines out there.

Gayn Erickson

Actually, that’s a good question. The way we do, as is normal accounting practices, if you are not going to sell within a space of a period of time by real usage, you should be writing it down or if you don’t see it over its entire life. Never say never that it wouldn’t be sold, but our current belief is those parts that we wrote down would not be sold. That’s why we actually did write them down.

Geoffrey Scott - Scott Asset Management

Okay, do you have more or less visibility than you had three months ago.

Gary Larson

That’s a pretty good question. I don’t know that I ever have tremendously more visibility. I feel more optimistic right now, just from the tone of the customers than I did three months ago but it may just maybe this is difficult to see through the patterns. But it does feel like just in general, of course, we are in the U.S. and the U.S. economy and it feels like its an uptick. Certainly, we are seeing in Taiwan and China and broadly in Asia, it feels like, and I just got back from there, that post-Chinese New Year, there seems to be an upswell in activity. That’s pretty encouraging. It has felt now, for me, and I have been in this industry for while, really in the last decade and five, six, seven years. Historically, I can recall, around January and February, it seems to be the least visibility of understanding what people are doing and its never fails to amaze me that right after Chinese New Year, people have a different tone. I may actually just put a stake in the balance and say, I will let people know after Chinese New Year how I think the year is going to go. It is amazing, especially throughout all of Asia.

Geoffrey Scott - Scott Asset Management

Why don’t you let us know how the year is going to go, then?

Gary Larson

Of course, I don’t know how the year is going to go. Nice try, though. Thank you.

Geoffrey Scott - Scott Asset Management

Okay, thanks very much.

Gayn Erickson

Thank you, Geoff.

Operator

Your next question is a follow-up from the line of William Smart with Cardinal Value. Please go ahead.

William Smart - Cardinal Value

Well, I am just wondering what the outlook is for the Japan market? I know that slowed quite a bit after the tidal wave over there.

Gayn Erickson

I will tell you what, Bill, such that I don’t imply that I am giving outlook at all because, obviously, where we are at and it’s a historical norm. We don’t forecast forward-looking but I will take this time to say that Japan really does seem to be soft with everyone I talk to. It feels particularly late in the fall, look back six to nine months ago, as the whole world was really in an uncertainty. That seemed to be where it was amongst the softest. Then you look at where they were with the strength of the Yen which hurt them tremendously on the open market. It does feel like a lot of the Japanese customers and vendors were really feeling that. As the Yen has softened, if you will, there seems to be a tone that they themselves feel more competitive and so there is an uplift. So, again, I am not an economist here, but it feels very different right in the last couple of months than it would have maybe six, seven months ago in a positive sense.

William Smart - Cardinal Value

Okay. Well, I recently bought a Honda Odyssey and they have a reputation for quality. It was assembled in the U.S. but I was wondering, I am impressed because there was so much electronics in that thing that they must have spend a lot of time on their quality to be in control and plus they made a comment to that.

Gayn Erickson

One of my favorite topics to how much electronics are going into automotive and that plus mobility in these smart phones and the sophistication of them and what's that doing to test in general, which if you are in the test business, its very good and for reliability, it's really feels like every quarter we are talking to one or more customers, their products are moving into an Apple iPhone, or Samsung smart phone or something where the quality expectations are significantly higher than what they have experienced the past or they are finding themselves competing for semiconductor content in a dashboard of one of our favorite automobiles and it takes their breath away to think about what the quality expectations are now that that semiconductor device is being put in the dashboard. The analogy I use is, no knock on a Garmin or whoever the little handheld GPS units, but if it dies in a year or two, I guess you move on but you stick that in the dashboard of a Tesla or my car, and it dies five years later, that’s a big problem. Automobiles around the world you have to live in Phoenix, Arizona, or in North Dakota to experience the extremes that we test at, by the way. They take a lot of abuse and so its really pushing people for quality, reliability and greater testing which is a rising tide, if you will, that lifts all test and as we think is particularly good for Aehr Test.

William Smart - Cardinal Value

Okay, Gayn. Well, thank you very much.

Gayn Erickson

You are welcome.

Operator

Thank you, and at this time, there are no further questions. I would like to turn the conference back to management for any closing remarks.

Gayn Erickson

All right, well, I appreciate everybody being on the call with us and for joining us this afternoon. We look forward to next quarter's conference call. Thank you. Bye-bye

Operator

Thank you, sir., Ladies and gentlemen, if you would like to listen to replay of today's conference, please dial, 1-800-406-7325 or 303-590-3030 using the access code of 4607351 followed by the pound key. It does conclude the Aehr Test Systems third quarter fiscal 2013 earnings conference call. Thank you very much for your participation. You may now disconnect.

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