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Executives

Rhea Posedel - Chairman & Chief Executive Officer

Gary Larson - Vice President of Finance & Chief Financial Officer

Tony Rossi - Financial Relations Board

Analysts

Jeffery Scott - Scott Asset Management

Aehr Test Systems (AEHR) F4Q09 Earnings Call Transcript July 28, 2009 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen thank you for standing by. Welcome to the Aehr Test Systems fourth 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 open for questions. (Operator Instructions) This conference call is being recorded today Tuesday, July 28 of 2009.

I would like to turn the conference over to Tony Rossi with Financial Relations Board. Please go ahead sir.

Tony Rossi

Thank you, operator. Good afternoon and thanks for joining us to discuss Aehr Test Systems results for the fourth quarter of fiscal 2009.

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 up the call to your questions.

I would now turn the call over to Gary Larson. Go ahead, Gary.

Gary Larson

Thanks, Tony and thank you to everyone for joining us today. Before we begin, I would like to make a few comments about forward-looking statements. Please be advised that during the course of our discussion today, we may make forward-looking statements that involve risks and uncertainties relating to projections regarding industry growth and customer demand for Aehr Test 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, world economic conditions, the timing of the recovery of the semiconductor equipment markets, the Company’s ability to maintain sufficient cash to support operations, acceptance by customers of Aehr Test technologies, acceptance by customers of the system shift upon receipt of a purchase order, resolution of Spansion of bankruptcy action, the ability of new products to meet customer needs or performance described, the Company’s development and manufacture of a commercially successful wafer level test and burn-in systems and the potential emergence of alternative technologies, each of which could adversely affect demand for Aehr Test’s products in fiscal year 2010.

We refer you to our most recent 10-K and 10-Q reports and other reports from time-to-time filed with the U.S. 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 would like to introduce our Chairman and CEO, Rhea Posedel. Rhea?

Rhea Posedel

Thank you, Gary. Good afternoon and welcome to our conference call for the fourth quarter of fiscal year 2009. The semiconductor manufacture saw their business drop significantly during the fourth quarter of calendar 2008 to the first quarter of calendar 2009 as a result of the worldwide economic meltdown. The response was to freeze capital spending. As a result, the semiconductor capital equipment sector is experiencing the largest contraction I have seen in my 30 plus years in the business.

This, coupled with Spansion, our largest customer going bankrupt in our third quarter has led to another difficult quarter for Aehr Test. Revenue for our fourth quarter was $1.2 million, flat with the prior quarter. Revenue for the fiscal year ended May 31st, 2009 was $21.4 million, a year-over-year reduction of 45%. The pro forma net loss for fiscal 2009 was $1.9 million. The pro forma numbers exclude the AR and inventory write-offs mostly caused by the Spansion bankruptcy.

Some good news, industry tracking surveys are now saying that the equipment sector bookings have bottomed out and have even improved somewhat over the last few months. Importantly, we see some positive signs that our businesses maybe starting to recover as well as we have booked three new ABTS orders since our last conference call. In mid July, we announced booking a follow on ABTS logic burning system to IFT, a new high pin count logic ABTS burning system to a leading aerospace company. Also, we received an order from a new Chinese customer for a mixed signal logic and analog version of our ABTS L-36 system platform.

We continue to be encouraged by the interest levels we see for our new ABTS product family. A new market segment that we are also targeting with the ABTS is high power logic burning applications requiring individual temperature control per device. We believe that this market will continue to grow as feature sizes shrink to 45 nanometer and below causing burning leakage currents and power to increase.

Another large target market for the ABTS platform is for parallel test and burn in of DRAMs and flash memories. Even though the memory market is in the tank today, we are starting to see a recovery in memory ASPs and hope to see capacity expansions until the late calendar 2010. Another bright spot was our announcement at the semiconductor wafer test workshop in June of a new WaferPak Contactor technology with finer pitch capability to 85 micrometers. The fine pitch contactor development was a result of our partnering with a leading probe company for full wafer for applications for our FOX systems.

This new WaferPak Contactor technology is significant because it allows us to expand the target market for our FOX-1 and FOX-15 systems by addressing finer pitch applications for wafer level burning and test of DRAMs and micro controllers. We are also working aggressively to sell our FOX-1 tester and FOX-15 wafer level burning systems. In the last few months, we have seen a rebound in the interest for our FOX-15 system for automotive IC applications and for producing known-good die.

As a number of die increases in stack packages, the cost model should tilt in our favor. We believe that long term, more customers will need to purchase wafer level burn-in systems as a cost effective process for producing known-good die. Our strategy during the downturn is to conserve our cash and win as many production accounts as possible with our new FOX and ABTS products. This will allow us to expand our customer base and grow market share. We are optimistic about our opportunity to achieve this goal as we have the strongest competitive product portfolio in our history.

Combined with the expense reduction actions we have taken over the past two quarters, we believe we will have sufficient working capital to run our operation until semiconductor capital expenditures turn around. There could also be some upsize this fiscal year if Spansion's business continues to grow and they purchase additional FOX-1 system upgrades and WaferPaks with their Austin Fab. Spansion has adjusted in their money losing wireless business and they have scaled down to a level where they are now generating cash. We are hearing that Spansion expects to come out of bankruptcy this year by yearend as a billion dollar embedded flash company.

The good news last quarter was that we booked a small FOX-1 upgrade order from Spansion. We are hopeful to receive some WaferPak and/or FOX-1 system upgrade orders over the next three to six months. Another potential upsize when Spansion exit its bankruptcy would be the payments of a portion of the Spansion accounts receivable that we had previously written off. At this time, I expect the next couple of quarters to be difficult for Aehr Test. Most industry experts are saying that the semiconductor manufacturers are not going to add sufficient capacity until some time in 2010.

With all the uncertainty in economy and with our customer base, we are unable to provide guidance at this time. With that said, we believe Aehr Test is in a favorable position to grow market share during this downturn enabling us to return to a growth trajectory when the industry recovers. We have exciting new technology with our FOX full wafer test and burning systems and WaferPak Contactors and we feel confident that we can continue to add new accounts with our new ABTS products which address new market segments for parallel test and burning and package integrated circuits.

Now, I would like to turn the call over to Gary and he will discuss the fourth quarter and yearend financials in more detail. Gary?

Gary Larson

Thanks, Rhea. Net sales were $1.2 million in the fourth quarter of fiscal 2009 compared with $10.9 million in the fourth quarter of fiscal 2008. The decrease in net sales for the fourth quarter of fiscal 2009 resulted primarily from the decrease in net sales of the Company’s wafer level products.

Gross loss was at $1.5 million for the fourth quarter of fiscal 2009, compared with gross profit of $5.4 million in the year ago period. The difference was primarily the result of a $1.5 million provision for excess and obsolete inventory reserves and the significant decline in net sales.

SG&A was $1.4 million in the fourth quarter of fiscal 2009, compared with $2.0 million in the prior year period. The decline in SG&A expense was primarily due to expense reduction initiatives we have taken over the past two quarters.

Fourth quarter 2009 R&D expense was $1.1 million, compared with $1.6 million in the fourth quarter of last year. R&D spending varies from quarter-to-quarter depending on the level of development of new products.

The net loss for the fourth quarter was $4.0 million or $0.48 per share, compared with net income of $6.5 million or $0.74 per diluted share a year ago. The pro forma net loss in the fourth quarter of fiscal 2009 was $2.2 million or $0.26 per share, compared to pro forma net income of $6.7 million or $0.77 per diluted share in the same period of the prior year.

In determining the pro forma or non-GAAP net loss in Q4, the following items were excluded; $1.5million, provision for excess and obsolete inventory; $0.2 million in severance and a credit of $0.3 million for the settlement of cancellation charges accrued in the third quarter of fiscal 2009. Of the above three restructuring and asset impairment items, all but the severance payment are non-cash. The non-cash total of these items is $1.3 million. Additionally, one more non-cash pro forma item in Q4 is the stock compensation expense of $0.3 million.

Our cash, cash equivalents and short term investments stood at $4.4 million at May 31, 2009. This is a decrease of approximately $3 million from our end of last quarter. We continue to remain free of debt. We expect that our cash consumption rate will decline in the first quarter of fiscal 2010.

We are now ready to answer your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeffrey Scott - Scott Asset Management.

Jeffery Scott - Scott Asset Management

A couple of questions; your claim against Spansion is a claim against Spansion Inc. US, is that correct?

Gary Larson

The large majority of our claim against Spansion is in the US bankruptcy action, yes and then we do have a claim also in the Japanese courts against Spansion Japan but it is a smaller claim.

Jeffery Scott - Scott Asset Management

How much smaller is it..?

Gary Larson

Three to four million dollars in that range and the claim that we filed in the US courts against Spansion is approximately $18 million.

Jeffery Scott - Scott Asset Management

So, 18 against Spansion Inc. and $4 million against Spansion Japan?

Gary Larson

Roughly, yes.

Jeffery Scott - Scott Asset Management

Okay. You said that there was a FOX-1 upgrade. Was that for Spansion Japan or Spansion Austin?

Rhea Posedel

Actually, it was for Spansion Sunnyvale.

Jeffery Scott - Scott Asset Management

For Sunnyvale.

Rhea Posedel

Sunnyvale has an R&D center with a new development and they have a couple of FOX-1 systems there.

Jeffery Scott - Scott Asset Management

Okay.

Rhea Posedel

It is possible that upgrade would also later on be purchased by the Austin Fab.

Jeffery Scott - Scott Asset Management

Okay, have you heard anything about claims against Spansion Japan or when those will be resolved?

Gary Larson

We have not heard anything formally. I know that claims have been submitted there. They actually had an earlier cutoff in Japan than they did in the US but we are not getting much feedback as far as the process there.

Jeffery Scott - Scott Asset Management

Yes, I am getting no feedback. How many of your FOX-1 machines are in Japan rather than physically in the United States?

Rhea Posedel

I think somewhere around 25 in Japan and maybe 6 in the US.

Jeffery Scott - Scott Asset Management

And those were in Sunnyvale?

Rhea Posedel

Sunnyvale and Fab 25 in Austin.

Jeffery Scott - Scott Asset Management

Yes, okay. For the yearend, are you going to have any discussions with the auditors over going concern inclusion?

Gary Larson

Since our audit is still on going and it will be until our 10-K gets filed in late August, I do not have any answer for you there.

Jeffery Scott - Scott Asset Management

Okay, I guess for Rhea, what are the prospects for additional FOX-15?

Rhea Posedel

Yes, I have mentioned that we have seen increased activities on the automotive front and that is good news and I think that there is a possibility that with the next quarter or two, we could see additional FOX-15 from an automotive or we are hopeful we are going to see an additional FOX-15 order from an automotive device manufacture.

Jeffery Scott - Scott Asset Management

Will that be the same one you took in the first 15?

Rhea Posedel

Possibly, yes. We are talking to a couple of them, yes but that is a strong possibility I would say.

Jeffery Scott - Scott Asset Management

So, a second order from that first customer would be the most likely?

Rhea Posedel

Correct. I think they see their demand increasing and they realized that the FOX-15 is able to save them money in doing variants for automotive applications.

Jeffery Scott - Scott Asset Management

Okay. There was a press release from Spansion, I think it was today. Did you see it?

Rhea Posedel

We did. It supports what we were saying.

Jeffery Scott - Scott Asset Management

It said that their cash position had improved very substantially.

Rhea Posedel

Correct.

Jeffery Scott - Scott Asset Management

Does that give you some sort of hope going forward that you will be able to send some more goods into Austin?

Rhea Posedel

I think that is true. Well, it is not just the cash. I think the important part of the press release is it said their business was strengthening. So, I think our systems were used on their 50 or 65 nanometer technology and Austin is doing both 90 and 65, so I think as they move more to 65 nanometer flash, then I think you will see more of their wafers going on the FOX-1. So, as I said, we are hopeful that we will see some additional WaferPak Contactor orders and as a minimum, FOX-1 upgrade orders over the next three to six months for Fab 25 in Austin.

Jeffery Scott - Scott Asset Management

Do they have a choice between shipping the machines from Japan back to Austin or would Austin opt to buy new equipment from you?

Rhea Posedel

That is a good question and I think, I am not sure if they can get the systems out of Japan because it is a different legal entity. I was told they cannot move product or equipment from Japan so again, we are hopeful that they will have to buy new equipment for the Austin Fab. But if that change, then I guess they could buy or take the equipment from, or they have to pay the equipment adds in the Japanese Fab. It is basically two different companies.

Jeffery Scott - Scott Asset Management

Yes. I just have not heard much about what the forecast is for the Japanese company going forward. How much it is going to be able to do? How much do you intend to do? How much it would like to do?

Rhea Posedel

We have not either, I mean the only thing we have heard is that they have gone to a significant layoff to try and minimize their cash burn.

Jeffery Scott - Scott Asset Management

Yes. I just wonder if whether or not if in fact Japan was going to decrease its activity substantially whether or not it would have the excess machines that would be available for sale to Austin and which would take you out of the new equipment business for that.

Rhea Posedel

Sure. Yes, I don’t know.

Jeffery Scott - Scott Asset Management

Okay, I will hop back in. Thank you.

Rhea Posedel

Right. One thing Jeff I can add is that there is still will be WaferPak Contactor business because the wafers that Austin is producing or have a different layouts typically have been the ones that are produced in Japan so there will still be purchases of WaferPak Contactors.

Jeffery Scott - Scott Asset Management

Okay, at least there is some good news.

Rhea Posedel

Some good news.

Operator

(Operator's instruction) Management, it looks like there are no further questions. I will turn it back over to you.

Rhea Posedel

Okay, this is Rhea and I would like to thank you for joining us this afternoon and we look forward to next quarter’s conference call. Thanks again, bye.

Gary Larson

Bye.

Operator

Thank you. Ladies and gentlemen that will conclude today’s teleconference. We do thank you for your participation and at this time, you may disconnect. Have a nice day.

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