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Aehr Test Systems (NASDAQ:AEHR)

Q4 2013 Earnings Conference Call

July 18, 2013, 05:00 PM, ET

Executives

Scott Eckstein - Investor Relations

Gayn Erickson - President and Chief Executive Officer

Gary L. Larson - Vice President of Finance and Chief Financial Officer

Analysts

William Smart - Cardinal Value

Jeffrey Scott - Scott Asset Management

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Aehr Test Systems Fourth Quarter Fiscal 2013 Earnings 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). This conference is being recorded today, Thursday, July 18, 2013.

I would now like to turn the conference over to Scott Eckstein. Please go ahead.

Scott Eckstein

Good afternoon, and thanks for joining us to discuss Aehr Test Systems fourth 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'll 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 turning 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 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 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 forward-looking statements.

Now I'd like to introduce our Gayn Erickson, Chief Executive Officer. Please go ahead, Gayn.

Gayn Erickson

Thank you, Scott. 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 few minutes but I want to first start by discussing the overall business and product highlights. Our top line revenue for our fiscal fourth quarter was 3.3 million, basically flat with revenues reported in our previous quarter. We feel the revenues for the quarter were indicative of the industry wide softness that has affected our company along with other companies in the semiconductor test space in the recent past.

We are pleased to have sequentially improved our bottom line for the quarter having reported a loss of $0.08 per diluted share compared to a loss of $0.16 per diluted share in our third quarter. We accomplished this as a result of improved margins and the absence of the one-time charges related to write-downs of all those product inventory that we recorded in our previous quarter.

We are continuing to make inroads towards our goal of growing our business with new, both new and existing customers as reflected in the orders we received during the quarter. With these orders we head into the fiscal year with a solid backlog of $9.1 million. In late May we received the first order from multiple production systems of our next generation FOX semi-conductor test system from a leading manufacturer of Flash memory devices. As this client ramps capacity in several of its facilities worldwide we believe we will receive additional orders from multiple follow-on systems. We expect to begin shipping these production systems in the first half of calendar 2014.

Equally important several other new and existing customers have expressed interest in our new FOX products for functional tests, wafer level burn-in and process monitor applications. We are both excited and encouraged by this growing interest. During the quarter we also received over $4 million in follow-on order for multiple FOX-1 parallel test systems and WaferPak contactors from a leading manufacturer of semi-conductor memory devices.

Similar to the FOX next generation systems order I just mentioned we received down payments against these orders to lock-in delivery spot and volume purchased pricing discounts. These systems and WaferPaks will ship through our third quarter of fiscal 2014. Importantly, we believe these orders basically demonstrate the customer's continued commitment to our products for their wafer sort needs.

The global interest that we see for our package level burn-in and test systems is also continuing to increase. These test systems which are designed to be a cost effective solution for production burn-in and reliability screening of a wide range of ICs are of particular interest for manufacturers of the ICs for the automotive and mobility markets.

These are market segments that we believe present an on-going growth opportunity for Aehr Test. Both our ABTS and MAX products serve the test and burn-in requirements of those two markets. In our fourth quarter we announced orders for these products from a leading manufacturer of advanced logic ICs for embedded processing DSP, automotive and analog devices. This customer continues to have a strong forecast with us into the fiscal year.

In early June, we also announced an expanded relationship with IST, a leading sub-contract manufacturer of reliability and test services in Taiwan and China, with their addition of our new ABTS-Pi test systems for testing devices with up to 70 to 80 amps per device. These systems are large configurations that allow testing of high pin count devices with high power and feature temperature control of both heating and cooling of each device individually. This allows customers to do reliability and burn-in tests of these higher power devices at higher depth parallelism and at a much lower cost than any other competitive system on the market.

To summarize we are able to provide a highly competitive test solutions for end customers and sub-contract manufacturers serving the growth opportunities in the automotive and mobility package level test and burn-in market, while at the same time enhancing our solutions for wafer level burn-in and whole wafer functional tests that open up significantly greater market opportunities for Aehr Test Systems.

Looking at our overall business we would have liked to have seen more progress during the year, but given the headwinds we faced for much of our fiscal year we are pleased with the advancements we made in addressing new market segments and customers with the ABST and FOX product lines.

We are confident in the validity of our strategy and believe we are well positioned to capitalize on this plan in fiscal 2014. This is particularly true for the second half of our fiscal year when our new FOX products will be released and we begin to ship products to address new markets and customer opportunities.

As mentioned we have a backlog of over $9 million, but much of that is focused on shipments later this year. We are expecting revenue in our first quarter of fiscal 2014 to be similar to that of the fourth quarter of fiscal 2013 although we do expect an improved bottom line as a result of improvements in margin. We're continuing to concentrate our efforts in R&D spending on addressing new customer and market opportunities while at the same time we remain focused on managing cost in order to return to profitability to benefit our company and shareholders.

In closing I'd like to acknowledge those who have asked specifically about our year's forecast. However we want you to be particularly cautious that it's very difficult to predict business levels a year out. Having said this based on our backlog and indication from customers we currently expect our revenue for fiscal 2014 to exceed that of 2013 and we also believe that we will be profitable for fiscal 2014. Gary will now go over the financials before we open up the lines for question.

Gary L. Larson

Thanks, Gayn. As reported in today's press release our net sales in the fourth quarter were $3.3 million flat with net sales $3.3 million in the third fiscal quarter of 2013. Our net loss of $854,000 in the fourth quarter of fiscal 2013 or $0.08 per diluted share compared to the net loss of $1.5 million or $0.16 per diluted share in this year's fiscal third quarter. Gross profit was $1.3 million or 40% of net sales.

This compares to gross profit of $765,000 in the third quarter of fiscal 2013 or 23% of net sales. As stated last quarter, in addition to the reduction in gross profit would be typical with the decrease in net sales, gross profit in the third quarter was also impacted by inventory reserves related to older MAX product as our new ABTS products moved into volume production.

Operating expenses for the quarter were $2.1 million, compared to $2.2 million in the third quarter of fiscal 2013. SG&A was 1.5 million, basically the same as the third quarter of 2013. Our lower operating expenses reflect aggressive steps taken by management to control spending. R&D expenses were $634,000 for the quarter compared to 685,000 in the fiscal third quarter of 2013. We've been transferring some R&D expenses to cost of goods sold related to our next generation Pak system development. Excluding those transfers R&D expenses would have increased slightly sequentially. As stated previously, R&D spending can fluctuate from quarter-to-quarter depending on the development of our new product.

Turning to the balance sheet and changes during the fourth quarter, our cash and cash equivalent increased to $2.3 million at May 31, 2013, up from $1.4 million at February 28 2013. Accounts receivable increased sequentially by $1.1 million. Our inventories decreased sequentially by $0.4 million. Our line of credit decreased by 0.1 million which means that our net cash, that's cash less our line of credit improved by $1.1 million. Certainly managing our cash has been and continues to be a clear focus for Aehr Test management.

This concludes our prepared remarks. We're now ready to take your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question is from the line of William Smart with Cardinal Value. Please go ahead

William Smart - Cardinal Value

Yes, good afternoon. The 9.1 million in backlog that seems, I don't think you announced that, I don't recall but that seems to be higher than sort of previously, is that true?

Gary L. Larson

Yes that's higher than we had reported in the previous four years.

William Smart - Cardinal Value

That's great, that means you have a substantial amount booked for the next four quarters. My second question is on the replaceables, do you have a number for that, that you care to give us?

Gary L. Larson

So actually I think you mean like our consumables, our services business?

William Smart - Cardinal Value

Yeah

Gary L. Larson

And the WaferPak?

William Smart - Cardinal Value

Yeah.

Gary L. Larson

Actually typically we talk in general terms that we have not been breaking those out individually. I think that it is basically flat quarter-to-quarter but it's -- I actually don't have that number right here sorry.

William Smart - Cardinal Value

I remember you had a problem forecasting that a couple of quarters ago and you seemed to overcome that.

Gary L. Larson

Try that again I'm sorry, on forecasting it?

William Smart - Cardinal Value

Yeah, you had a problem forecasting your consumables didn't you and…

Gary L. Larson

In general what we've seen is our consumables part of our business has been running at may be $0.5 million to $1 million a quarter type of run rate. What we actually did report we didn't break out the separation of it, but one of our key customers actually placed an order for a number of WaferPaks as well as systems for deliveries over the first few quarters of our fiscal year.

William Smart - Cardinal Value

Okay

Gary L. Larson

So we actually got more than a normal run rate in one shot last quarter in booking that we expect to be shipping in another six plus months or so.

William Smart - Cardinal Value

Okay great. Thank you

Gary L. Larson

You're welcome.

Operator

Thank you. Our next question comes from the line of Jeffrey Scott with Scott Asset Management.

Jeffrey Scott – Scott Asset Management

Good afternoon.

Gayn Erickson

How are you Jeff?

Jeffrey Scott – Scott Asset Management

First a comment. Thank you very much for the annual projection. We will not hold you to it on a quarterly basis but it's nice to know what your target is and what our target should be for the full year. I certainly do appreciate it.

Gayn Erickson

Thank you, Jeff.

Jeffrey Scott – Scott Asset Management

Couple of questions. The increase in deferred revenue, does that represent customer deposits or does that represent deferred revenue on shipments that have already been made to customers that have not yet technically been accepted?

Gary L. Larson

Jeff, this is Gary. This is really primarily the advanced payments that we've received, the deposits if you will, when the orders come in that Gayn has alluded to previously. There is a small amount related to services and things like that but by far the large amount is those deposits.

Jeffrey Scott – Scott Asset Management

Would it be more usual to characterize those as customer deposits rather than deferred revenue then?

Gary L. Larson

No, this is the way we've been reporting this and our auditors are comfortable with this, so…

Jeffrey Scott – Scott Asset Management

I just, since you've gone to kind of advance cash deposits required…

Gary L. Larson

The word deposit may be not the right word. It is really just an early payment. So he's paying us early in the contract but it's not a deposit, for example most of time deposits are held aside or…

Jeffrey Scott – Scott Asset Management

Yes, when I think of deferred revenue I think of something that has been shipped and not yet accepted and this is earlier in the production process than that.

Gary L. Larson

You're right about that and that's exactly what we're showing is money that's been received prior to shipment.

Jeffrey Scott – Scott Asset Management

Right. Okay, next question. On your website you currently have two job openings posted. Are those replacement positions for people who have left or are they incremental increases in headcount?

Gayn Erickson

They are actually incremental.

Jeffrey Scott – Scott Asset Management

Should we read into that a positive scenario?

Gayn Erickson

We actually -- I am expecting us to increase our R&D spend both with internal and external contractors throughout the remainder of this year because of the new products that are coming out and as we stated in several past conference calls we have a very real demand and we have very -- we have both commitments to customers with the caveat they've asked us to please ship them sooner.

Jeffrey Scott – Scott Asset Management

Yes.

Gayn Erickson

And so with the balance of managing our cash and our expenses in our bottom line we're actually trying to keep our R&D spend quite frankly as high as possible I think there is a very good return on those dollars.

Jeffrey Scott – Scott Asset Management

Okay both of those positions were on the software side as opposed to the hardware or field application engineer kind of position. Does that say something about where the entire business is going in terms of software being a more important part of the total package than it has been the case in previous years?

Gayn Erickson

I wouldn't say that. I mean explicitly we are bringing on a couple of contractors in the hardware as well but they didn't get posted the same way. So in that case it's somewhat balanced.

Jeffrey Scott - Scott Asset Management

Okay. The next question is more industry related and it has to do with what I was reading in the transcript of a SanDisk conference call yesterday and the answer that was given by Sanjay, and he talked about reading from -- and second aspect of course is having controls in the systems expertise in the firmware, it's work with the flash, to manage the flash to really give the reliability in the performance of the enterprise grade applications. He talked about difficulty in tests in advanced packaging and the more complicated systems that they are trying to develop. Are you seeing that across the industry?

Gayn Erickson

No, I think that's actually a fair observation and it's something that as I stated even a year ago first when I got here that in the ATE world where I came from automated test equipment which as you know is about $3 billion total business, the test requirements are both getting more stringent in terms of reliability, expectations of obviously things like consumer products that go in to automotive, think of like the GPS.

But even in all of the components that go into a cell phone, 10 years ago cell phones were truly disposable and you know with my iPhone and my Galaxy 4 dies, Apple and Samsung have a big problem with that and that's a very big contract that is really driving around the industry. Then you see things like and I think what Sanjay was referring to is I can remember a time where the NAND manufacturers of not even a decade ago were talking about tests, it is non-value added it's not that necessary because the commoditization of for example NAND flash was such that who cares if you lost a bit. You have a single bit lost out of a JPEG picture on your cell phone or on your camera and nobody really cared.

But now if you look at the applications where these things are actually an enterprise disk drives or in holding code stored within a camera device the reliability expectations are very intense and they are quite a bit more substantial in the end use market than they were in the past and the expectations are being driven up and you know quite frankly as people need to do more testing and as they need to think about reliability, those are all really good things both for the test industry if you will as rising tide but particularly I believe for Aehr Test.

Jeffrey Scott with Scott Asset Management

Yes, I just -- I can't remember another time when the CEO of a significant company has been talking about test being a problem in a conference call and the fact that you know he spent actually two or three paragraphs talking about test and how important is the increased yield and things like that it sound as though your argument that you have been making for couple years is finally coming to fruition and buyers are finally getting on board.

Gayn Erickson

Further context is that he talks about the challenges and how the important of test rather than the problems of test, if you don't mind.

Jeffrey Scott - Scott Asset Management

Right, his problem is to make sure that his yield is high enough.

Gayn Erickson

But you know what this is something we are seeing really across the board and you look at the DRAM guys and the challenges going on with through-silicon via and 3D stacking many of the fundamental challenges was implementing the technology and volume production include test challenges. And another piece is just the cost of test.

As we talked before our test systems are highly differentiated in their ability to test a massive parallelism of low pin count DFTs, designed for test or built in stock test modes which is where all of these devices need to go in order to be able to be tested long enough to achieve the reliability and so the more pressure there is on people for cost of test the better it is for our company.

Jeffrey Scott - Scott Asset Management

Well I was tickled to hear him talk about it as one of the things that keeps him up at night, so I found it very encouraging.

Gayn Erickson

I am glad, I hadn't heard that. I still follow SanDisk. So I appreciate…

Jeffrey Scott - Scott Asset Management

My pleasure, as I said I just read the transcript last night and it gave me something nice to go to sleep by.

Gayn Erickson

That's good.

Jeffrey Scott - Scott Asset Management

Thank you. I will pass on here and let somebody else.

Gayn Erickson

Thank you, Jeff.

Gary L. Larson

Thank you, Jeff.

Operator

Thank you. (Operator instructions). And I am showing no further questions in the queue at this time.

Gayn Erickson

Well I appreciate it and I just want to thank everybody on the call and particularly those, I know we have typically a much broader group of folks that are listening online. I appreciate you listening in our quarterly call and as always we will make ourselves available if you have follow-on questions. You ever want to come and visit us here in California, thank you very much.

Operator

Ladies and gentlemen, this concludes the Aehr Test System fourth quarter fiscal 2013 earnings conference call. If you would like to listen to a replay of today's conference please dial 303-590-3030 or 1-800-406-7325 with the access code 4627842. We thank you for your participation. At this time you may now disconnect.

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