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Aehr Test Systems (NASDAQ:AEHR)

F1Q2011 Earnings Call Transcript

September 30, 2010 5:00 pm ET

Executives

Lasse Glassen – IR, Financial Relations Board

Gary Larson – VP of Finance and CFO

Rhea Posedel – Chairman and CEO

Analysts

Geoffrey Scott – Scott Asset Management

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Aehr Test Systems first quarter fiscal 2011 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 Thursday, September 30th of 2010.

I'll turn the conference over to Lasse Glassen of the Financial Relations Board. Please go ahead, sir.

Lasse Glassen

Thank you. Good afternoon and thanks for joining us to discuss Aehr Test Systems' results for the first quarter of fiscal 2011. By now you should have all received a copy of today's press release. If not, you can call my office at 213-486-6546 and we will get you one 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 would now like to turn the call over to Gary Larson. Please go ahead, Gary.

Gary Larson

Thank you, Lasse, and thanks 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 state of the semiconductor equipment market; acceptance by customers of Aehr Test's technologies; acceptance by customers of the systems shipped upon receipt of a purchase order; the ability of new products to meet customer needs or performance described; the company's development, manufacture, and marketing of a commercially successful wafer-level test and burn-in system; and the potential emergence of alternative technologies, each of which could adversely affect demand for Aehr Test's products in fiscal year 2011.

We refer you to our most recent 10-K and other reports from time to time filed with the U.S. Securities and 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 first quarter of fiscal year 2011. Net sales for the first quarter of fiscal 2011 were about as we expected at $2.2 million, up compared to the prior year's first quarter net sales of $1.3 million. The net loss for the quarter of $1.5 million compares to a net income of $1 million in the first quarter of the prior year, but it should be noted that last year's number included a $3.3 million benefit from the sale of a portion of our Spansion U.S. bankruptcy claims.

We had four highlights during the first quarter that I would like to bring to your attention. To begin with, in our previous conference call I mentioned that Spansion, a leading NOR flash producer, has exited from bankruptcy and is winning more business and adding capacity. As a result, they are running more products through our FOX-1 full wafers or testers. During the first quarter, we announced receiving approximately $2 million in orders for our FOX full wafer WaferPak contactors. We expect to receive additional orders for WaferPak contactors and FOX-1 system upgrades over the next few quarters.

Second, we are pleased to report that we shipped and received acceptance for a new version of our MAX-4i Burn-in system, supporting individual device temperature control. The customer is a major Japanese consumer electronics IC producer and we remain hopeful that they will – we will receive follow-on orders later this fiscal year.

Third, in the first quarter we announced that we are partnering with ISE Labs, the largest semiconductor test services provider in Silicon Valley, which will provide burn-in services for low to high-power devices using our new ABTS-L56i system. The ABTS-L56i system was shipped to ISE Labs in our first quarter and we expect to recognize revenue on this system later this fiscal year.

As we have mentioned in the past, we are targeting the high-power logic burn-in market of up to 70 watts per device with our new ABTS-L56i system, which provides individual device temperature control. Having an ABTS system at a leading test lab like ISE is important, because this should increase our visibility and credibility with other potential customers in this growing market segment. Our field data shows that the ABTS system offers higher capacity and cost savings advantages, which should allow us to gain share in the growing market for high-power logic burn-in.

And finally, our development team continues to make progress on a new low-cost ABTS platform for low to medium-power logic devices. As you may recall, last March we announced the sale of a special ABTS system to a major Japanese integrated device manufacturer for burn-in of high-end microcontroller devices. This first system is scheduled to ship in the second quarter. We expect follow-on production orders from this customer after the system is qualified for production.

Our challenge in fiscal 2011 is to grow revenue for both FOX full wafer test and burn-in systems and the ABTS systems for burn-in of packaged devices. We are most excited by the increase in activity we are seeing for FOX-1 and FOX-15 wafer-level test and burn-in systems in the past few months.

There is interest from a broad range of customers and applications, such as wafer-level burn-in for automotive microcontrollers and sensors, as well as VCSELs and flash devices. Most importantly, the number of active customers interested in our FOX products is at the highest level than I could remember. We believe with such a high number of potential customers, it bodes well for booking new FOX-1 or FOX-15 accounts this fiscal year. The main difference now compared with the last couple of years is that the automotive IC producers are profitable again and their end customers are requiring known-good die for multi-chip module applications.

We are also encouraged by the activity we see for our ABTS family of products for packaged device and Test During Burn-in. The ABTS is a flexible platform that can be configured to address multiple markets. The largest market segment we are targeting with our ABTS product is for production, test, and burn-in of DRAMs and flash devices.

Another large ABTS target market is for burn-in for high-power logic, requiring individual temperature control per device. With the delivery of our first ABTS-L56i system to ISE Labs, we are off to a good start. We expect more orders in the future as the burn-in power levels of complex logic ICs continues to increase for each new process shrink.

In closing, we expect to report better results in the second quarter. Based on our current forecast, we feel confident that our second quarter net sales will be higher than in the first quarter. Our strategy continues to be focused on penetrating as many production accounts as possible with our new ABTS and FOX products. This will allow us to expand our customer base and grow market share.

We will continue investing in R&D over the next few quarters to accelerate new product development initiatives, such as our low-cost ABTS platform, which we expect will help the company achieve our growth objectives. We have unique technology with our FOX systems and WaferPak contactors. We feel confident that we can continue to win additional new accounts with our new ABTS products, which are addressing growing market segments for high power logic burn-in and memory parallel test and burn-in.

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

Gary Larson

Thanks, Rhea. As Rhea mentioned, net sales were $2.2 million in the first quarter of fiscal 2011. This compares to $1.3 million in the same quarter last year. The increase was driven by shipments of FOX-1 products and revenue recognition of the previously announced order for MAX-4i Burn-in and Test System from a leading Japanese semiconductor manufacturer. Gross profit was $0.9 million for the first quarter of 2011 or 44% of net sales.

Moving on to look at operating expenses, SG&A was $1.5 million in the first quarter of fiscal 2011, up from $1.3 million in the prior-year period. First quarter R&D expense was $1.1 million compared with $0.9 million in the first quarter of last year. R&D spending can fluctuate from quarter to quarter depending on the development phase of new products.

Net loss in the first quarter was $1.5 million or $0.17 per diluted share compared with net income of $1.0 million or $0.11 per diluted share a year ago. Net income in the first quarter of fiscal 2010 included a pretax gain of approximately $3.3 million from the sale of a portion of the company's bankruptcy claim against its customer Spansion Inc.

Pro forma net loss in the first quarter of fiscal 2011 was $1.4 million or $0.16 per diluted share compared to a pro forma net loss of $2 million or $0.24 per diluted share in the same period of the prior year. In determining the pro forma or non-GAAP net loss in the first quarter 2011, we have excluded the gain from the Spansion Japan bankruptcy claim of $0.2 million and non-cash stock compensation expense of $0.3 million.

Turning to the balance sheet, our cash and cash equivalents were $5.4 million at August 31st, 2010 compared to $7.8 million at May 31st, 2010. The decrease is primarily due to our operating loss, as well as the increase in AR and in inventory. We continue to remain debt free.

As Rhea said earlier, we believe that Aehr Test is in a favorable position to expand our market share and grow our revenue in fiscal 2011. One positive recent development was last month's announcement that Texas Instruments completed the acquisition of Spansion Japan's wafer fab facility as part of Spansion Japan's emergence from bankruptcy reorganization.

At the same time, TI agreed to support Spansion U.S. by providing testing services through at least June 2012. This wafer fab facility currently has a good number of FOX-1 systems which have not been utilized to any significant extent during Spansion Japan's bankruptcy action. With the facility now owned by TI, we expect that usage of the FOX-1 systems at the facility will increase, which provides us with the opportunity to sell more WaferPaks and system upgrades.

This concludes our prepared remarks. We are now ready to answer your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Geoffrey Scott with Scott Asset Management. Please go ahead.

Geoffrey Scott – Scott Asset Management

Good afternoon.

Rhea Posedel

Hi, Geoff.

Gary Larson

Hi, Geoff. How are you?

Geoffrey Scott – Scott Asset Management

Good. Thank you. In last – the last call, you said you were working with a Taiwanese manufacturer for an ABTS for DDR3 and DDR4 DRAM.

Rhea Posedel

That's correct. That was one of the opportunities that we are targeting for this fiscal year.

Geoffrey Scott – Scott Asset Management

Can you show any progress on that?

Rhea Posedel

We have made progress, visits, and there is a qualification that we have to perform here and so there is a timing issue that we are working towards. So there is nothing that I could announce right at this point.

Geoffrey Scott – Scott Asset Management

You said that the competition was going to be in-house and local.

Rhea Posedel

Probably local, yes. Not in-house, but local.

Geoffrey Scott – Scott Asset Management

Okay. So that hurdle has not yet been overcome?

Rhea Posedel

That's correct. We are making progress on what we – on the initiatives that we need to do for that, but nothing that's a major milestone that we could announce at this point.

Geoffrey Scott – Scott Asset Management

Okay. New FOX-15 customers for automotive microcontrollers, you are still hopeful for fiscal 2011?

Rhea Posedel

We are. I mean, we are – the management team, myself – I mean, I put a lot a time into working on new business for FOX and I think we are making a lot of progress. And as I mentioned, I think – we were targeting automotive IC manufactures.

Geoffrey Scott – Scott Asset Management

Yes.

Rhea Posedel

And we were doing that before 2008 crash or 2009 and things got put on hold. And some of these customers are now coming back, talking to us again.

Geoffrey Scott – Scott Asset Management

Yes.

Rhea Posedel

And we have made new contacts. So I think with the drive for known-good die for multi-chip modules that they are being pressed to provide the auto – so the IC manufacturers provide the automotive system houses. So that's providing them with the initiative to push for FOX systems.

Geoffrey Scott – Scott Asset Management

Yes. I mean, I am surprised it's taking so long for this to catch on.

Rhea Posedel

Well, they just didn't have – they were losing money and they just didn't – they just didn't have any capital for doing this. So they just – I guess, they just buried their head in the sand and take the yield hits.

Geoffrey Scott – Scott Asset Management

I guess so. The MAX-4 for the Japanese IC.

Rhea Posedel

Yes.

Geoffrey Scott – Scott Asset Management

Has that been qualified for production now?

Rhea Posedel

It has been accepted, yes, at the end of the first quarter.

Geoffrey Scott – Scott Asset Management

Okay. So revenue was recognized for that?

Rhea Posedel

Yes, yes.

Geoffrey Scott – Scott Asset Management

Are you still expecting additional orders this year?

Rhea Posedel

We are. So I think that there is a – there is a good possibility that they will order follow-on systems. I mean, their business has been hurt slightly by the – it has been hurt by the strong Japanese yen, so they export a lot of products. So their export business has slowed slightly.

Geoffrey Scott – Scott Asset Management

Okay.

Rhea Posedel

So it slowed the ramp.

Geoffrey Scott – Scott Asset Management

Fourth quarter revenue was $3.6 million, of which about – I make it about $1.6 million to $1.8 million was recognition for previously shipped product, so something on the order of $1.8 million of shipments during Q4. Q1, $2.2 million revenue and you had recognition of a previously shipped MAX-4. So were you roughly equal Q1 to Q4 in actual shipments?

Gary Larson

Geoff, the MAX-4 that you are talking about was actually shipped in Q1 and revenue was recognized in Q1. So that was not a time-delayed item.

Geoffrey Scott – Scott Asset Management

Okay. (Multiple Speakers)

Gary Larson

The language talked about revenue recognition, but that was just because there was an acceptance provision in the contract and so we looked at revenue recognition taking place at a different time than shipment. But both occurred in Q1.

Geoffrey Scott – Scott Asset Management

Okay. During Q1, were there any substantial shipments that have not yet been revenue recognized?

Rhea Posedel

ISE. It's not – so we shipped –

Gary Larson

There are some, but there are not large dollar amounts.

Geoffrey Scott – Scott Asset Management

Not large dollar amounts? Okay. I mean, you are still looking at break-even somewhere north of $5.5 million a quarter.

Gary Larson

I think the number we have put out is in the $5 million to $6 million and I think that's a reasonable number, yes.

Geoffrey Scott – Scott Asset Management

Your – you dropped cash of $2 million in Q1 over year-end.

Gary Larson

Correct.

Geoffrey Scott – Scott Asset Management

So we have a race going on with cash (inaudible) and revenue hopefully getting higher.

Gary Larson

Correct.

Geoffrey Scott – Scott Asset Management

Tell me which one is going to win.

Gary Larson

We have confidence that we have sufficient cash to meet our plan this year. So we don't see the issue that you are describing. And we also expect that in the second quarter that our cash burn will decrease from the cash burn that was reported in our first quarter. We have been, as you can see, increasing our AR. We have also, to some extent, increased our inventory. So we have a number of systems which we would be prepared to ship on very short notice. So we are really anticipating the sales increase that Rhea had alluded to.

Geoffrey Scott – Scott Asset Management

Okay. I have yet to see the 10-K. Were there any discussions with the auditors over any sort of going-concern language?

Gary Larson

There has been no discussion of going-concern in the 10-K.

Geoffrey Scott – Scott Asset Management

Outside the 10-K, were there discussions?

Gary Larson

Well, I don't normally talk about our discussions with the auditors outside of the 10-K.

Geoffrey Scott – Scott Asset Management

Okay. You are confident that cash is not going to be an issue during fiscal '11?

Gary Larson

Yes. We don't believe cash is a problem during the year. We have reported that.

Geoffrey Scott – Scott Asset Management

Okay. Thank you.

Rhea Posedel

Yes. Thanks, Geoff.

Operator

Thank you. (Operator Instructions) And I am showing no further audio questions at this time. I will turn the call back to management for any closing remarks.

Rhea Posedel

Yes. This is Rhea. I would like to thank all of you for joining us this afternoon and we look forward to next quarter's conference call. Thanks again.

Operator

Thank you, sir. Ladies and gentlemen, this concludes our conference call today. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 and entering the access code 4368273. We like to thank you for your participation and you may now disconnect.

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