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Aehr Test Systems (NASDAQ:AEHR)

F2Q2011 (Qtr End 12/31/10) Earnings Call

January 6, 2011 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

Ladies and gentlemen, thank you for standing by and welcome to the Aehr Test Systems Second Quarter Fiscal 2011 earnings conference call. (Operator Instructions)

This conference is being recorded today, Thursday, January 6th of 2011 and I would know like to turn the conference over to Lasse Glassen of Financial Relations Board. Please go ahead, sir.

Lasse Glassen

Good afternoon, and thanks for joining us to discuss Aehr Test Systems results for the second quarter 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’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.

Now, I’d 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’d 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 related 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 condition, the state of the semiconductor equipment market, acceptance by customers of Aehr Test’s technologies, acceptance by customers of the system shipped upon receipt of a purchase order, the ability of new products to meet customer needs or performance described, the company’s development, manufacturing and marketing of a commercially successful wafer-level test and burn-in system, and the potential emergence of alternative technology, these of which could adversely affect demand for Aehr Test products in the calendar year of 2011.

We refer you to our most recent 10-K, 10-Q and other reports from time to time filed with the U.S. Securities and Exchange commission for more a more detailed description of the risks facing our business and factors that could cause actual results to different materially from projected results.

The company disclaims any obligation to update information contained in any forward-looking statement 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.

Rhea Posedel

Thank you, Gary. Happy New Year, everyone. Good afternoon, and welcome to our conference call for the second quarter of Fiscal Year 2011.

Net sales for the second quarter of Fiscal 2011 were $3.6 million, up 65% on a sequential-quarter basis compared to net sales of $2.2 million in the first quarter Fiscal 2011. The net loss for the quarter was $759,000 or $0.09 per diluted share, which is an improvement from the prior quarter’s loss of $1.5 million or $0.17 per diluted share.

During the second quarter, we benefited from a significant increase in shipments of our FOX-1 WaferPak contactors for full wafer-sort testing of NOR Flash.

In March, we announced receiving about $2 million in FOX-1 WaferPak contactor orders from a leading NOR Flash producer. This is good news because WaferPaks are consumables and new orders are driven mostly by new wafer designs.

We had a number of other highlights during the second quarter that I’d like to bring to your attention. First, Spansion, a leading NOR Flash producer is growing its market share now that they have exited from bankruptcy.

In December, we announced booking another $3 million in orders for multiple WaferPak contactors. We believe these new WaferPak orders validate the cost savings advantages of using our FOX-1 tester, which can test a full wafer with thousands of die in a single touchdown.

Most importantly, these recent orders show that Spansion is committed to using their large install based of FOX-1 testers located in Austin and Japan.

Second, we’re pleased to announce today that we booked over $1 million in WaferPak contactors for multiple new designs from Micronics. This automotive customer continues to see the growing demand for automotive sensors and they believe our FOX-15 wafer-level burn-in system is a cost effective solution for burn-in.

We hope to see additional WaferPak contactor orders for these new designs over the next few quarters as the worldwide automotive business continues to strengthen.

Third, in November we announced an order from a leading U.S. Military Defense customer for our newly-configured ABTS-L72. ABTS-L72 is a highly flexible system with a high number of channels and power supplies per burn-in board. And with the added capability of a pattern generator per slot, our customer can do reliability testing on up to 36 different devices at one time.

The ABTS-L72 is an ideal system for qualifications and reliability applications; particularly for the requirement to process many small lots.

And finally, we are pleased to report that we shipped a cost-optimized ABTS system 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 production burn-in of high-end microcontroller devices.

I’d like to give a special thanks to our engineering team. They did an excellent job developing this system to an accelerated deliver schedule. We expect to get system acceptance and recognized revenue in our third fiscal quarter. We also expect to spin off other new ABTS products using this new low-cost platform.

We are encouraged by the increase in WaferPak contactor orders from our FOX customers and the quoting activity we are seeing for our FOX-1 and FOX-15 systems the past few months. We are seeing interest in our FOX products 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.

We believe with such a high number of potential customers we are hopeful we can penetrate one or more new FOX-1 or 15 accounts over the next few quarters. We are also encouraged by the activity we see for our ABTS family of products for package-device test and burn-in.

ABTS is a flexible platform that can be configured to address multiple markets. A large 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.

We expect this high-power logic market to continue to grow as the power levels for complex logic ICs increase for each new process node.

In closing, based on the activity we are seeing for ABTS and FOX products and our recent increase in WaferPak bookings, we believe that our third quarter net sales will be higher than the prior 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, 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 address growing market segments for high-power logic burn-in and memory parallel test and burn-in.

Now, I’d like to turn the call over to Gary, who will discuss the second quarter financials in more detail. Gary.

Gary Larson

Thanks, Rhea. Before I get into the second quarter, I wanted to clarify our $2 million WaferPak order that Rhea referred to was actually in August. So we picked that up. It was not in March as was stated earlier. My apologies for that. Now to the second quarter numbers.

As Rhea mentioned, net sales were $3.6 million in the second quarter of Fiscal 2011. That compares with 1.6 million in the same quarter of last year. The increase was driven primarily by shipments of FOX-1 product.

Our shipments in the second quarter of 2011 were actually higher than the recorded revenue number as the ABTS system shipment to the Japanese customer must be formally accepted before we recognize revenue.

Gross profit was 1.4 million for the second quarter of Fiscal 2011, or 38% of net sales. That compares to gross profit of 0.3 million, or 21% of net sales in the second quarter of last year.

Moving on to Operating Expenses, SG&A was 1.5 million in the second quarter of Fiscal ’11, down slightly from 1.6 million in the prior year period. Second quarter R&D expense was 1.2 million compared with 1.1 million in the second quarter of last year. R&D spending can fluctuate from quarter to quarter depending on the development phase of new product.

Included in other income for the second quarter was a 0.6 million dividend received from ESA, a Singapore firm which we pulled the minority interest. And that’s an infrequent dividend so there’s no schedule for anything with regard to follow-on dividends.

Net loss in the second quarter was $759,000, or $0.09 per diluted share compared with net loss of $2.2 million, or $0.25 per diluted share a year ago.

Pro forma net loss in the second quarter of Fiscal 2011 was $521,000 or $0.06 per diluted share compared to a pro forma net loss of $1.4 million, or $0.16 per diluted share in the same period of the prior year.

In determining the pro forma, or non-GAAP net loss in the second quarter of 2011, we’ve excluded the gain from the non-cash stock compensation expense of $238,000. Turning to the balance sheet, our cash and cash equivalents were $5.1 million at November 30, 2010 compared to $7.8 million at May 31, 2010. The decrease is primarily due to our operating losses and we continue to remain [inaudible].

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.

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). We have a question from the line of Geoffrey Scott with Scott Asset Management. Please go ahead.

Geoffrey Scott – Scott Asset Management

Good afternoon.

Lasse Larson

Hi Geoff.

Rhea Posedel

Hello, Geoff, how are you?

Geoffrey Scott – Scott Asset Management

Well, thank you. The $3 million order that was noted in the December press release, how much of that was shipped in the second quarter?

Rhea Posedel

Very little of that was shipped in the second quarter.

Geoffrey Scott – Scott Asset Management

Okay, the L72, is that exact machine capable of being shipped to other customers or do you have to make adaptations to it?

Rhea Posedel

We would expect to ship that to other customers with similar applications, you know, it’s a very flexible system. You know, initially we shipped an L36, which had 36 burning boards, so this is a double-oven, double-capacity system so it’s more cost effective and can test and burn-in more different device types than an L36. So we expect to sell a number of those to other customers as well.

Geoffrey Scott – Scott Asset Management

The L72s?

Rhea Posedel

Correct.

Geoffrey Scott – Scott Asset Management

Will the contractor that took the first ones take more?

Rhea Posedel

Say that again?

Geoffrey Scott – Scott Asset Management

The customer to whom you shipped the first L72, is it your expectation that he will take more?

Rhea Posedel

It’s not a – it’s a defense manufacturer so I mean; I look at it more quality and reliability. So more, but you know, one every few years kind of thing.

Geoffrey Scott – Scott Asset Management

Okay. The higher quoting activity, is the quoting activity to existing customers or new customers?

Rhea Posedel

I would say to new customers. Some existing customers, but all of them are mostly new customers for ABTS. Some customers, you know, were MAX customers early on.

Geoffrey Scott – Scott Asset Management

When one of your customers asks for a quote where are they along in the purchase decision? Are they typically quite far along or are they still comparing your machine to an alternative product?

Rhea Posedel

I’d say in general they’re fairly far along. I mean, they usually don’t ask for quotes unless they have a requirement. So in general, they first have a requirement, then they get a quote and then they go out and get budget approval. Typically, it works like that. Sometimes they have the budget approval first, but generally they go out for a quote and budget approval and then submit the budget and hope that it’s going to be approved.

Geoffrey Scott – Scott Asset Management

But by the time they ask for an official quote, have they generally made the decisions that they want to buy an Aehr Test product machine?

Rhea Posedel

When they have the initial quote, then it usually goes out to us or other people. Hopefully we can influence how the quote goes out from the spec that’s written around our system.

In general, they usually go out to multiple suppliers in most cases unless we’re doing some partnership or custom work with our customers, which we do sometimes.

Geoffrey Scott – Scott Asset Management

Okay. What is kind of an average conversion of quotes to orders? Is there any such thing as 50%, or 25%, or 75%?

Rhea Posedel

Yeah, I’d probably say it’s maybe like 25 to 35%. Maybe 1/3 of our quotes get converted to orders.

Geoffrey Scott – Scott Asset Management

And how many quotes are out there?

Rhea Posedel

How many quotes?

Geoffrey Scott – Scott Asset Management

Yeah, I mean, are we talking about one or two quotes or are we talking about –

Rhea Posedel

We’re talking about ten, in that range. It’s a different company, so it could be multiple systems from the same company.

Geoffrey Scott – Scott Asset Management

Right, but you have ten different companies that have received quotes from you?

Rhea Posedel

For different products, yes, at least.

Geoffrey Scott – Scott Asset Management

On the FOX side?

Rhea Posedel

I’m just saying ABTS and FOX, it’s over ten, the number.

Geoffrey Scott – Scott Asset Management

Okay. But is it still your expectations sometime during this fiscal year you’re going to get another FOX customer?

Rhea Posedel

That’s our objective.

Geoffrey Scott – Scott Asset Management

Okay. I’ll let someone else in.

Gary Larson

We’re focusing our team on that and we’re committed to do that.

Rhea Posedel

Okay. I’ll let somebody else hop on. Thanks.

Rhea Posedel

Thanks, Geoff.

Gary Larson

Bye, bye, Geoff.

Operator

Thank you. (Operator Instructions). At this time, I’d like to turn the conference back over to management for closing comments.

Rhea Posedel

Hi. This is Rhea, and I’d again like to wish everyone a Happy New Year and thanks for listening to today’s conference call. We look forward to reporting our results next quarter. Thanks again.

Operator

Ladies and gentlemen, this does conclude the Aehr Test Systems Second Quarter Fiscal 2011 earnings conference call. If you’d like to listen to a replay of today’s conference please dial 303-590-3030 or 1-800-406-7325 with an access code of 4395104 #. We thank you for your participation and at this time you may now disconnect.

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