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Aehr Test Systems (NASDAQ:AEHR)

Q3 2011 Earnings Call

March 31, 2011 5:00 pm ET

Executives

Gary Larson - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Lasse Glassen - Senior Vice President of Financial Relations Board Division

Rhea Posedel - Founder, Chairman and Chief Executive Officer

Analysts

Geoffrey Scott

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Aehr Test Systems Third Quarter Fiscal 2011 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Lasse Glassen. Please go ahead, sir.

Lasse Glassen

Good afternoon, and thanks for joining us to discuss Aehr Test Systems' results for the third quarter of fiscal 2011. By now, you should've all received a copy of today's press release. If not, you can call my office at (213)486-6546 and we'll 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'd 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'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 relating to projections regarding industry growth and customer demand for Aehr Test's 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 semi-conductor equipment market; acceptance by customers of Aehr Test 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 ability to maintain sufficient cash to support operations, impact of the Japanese earthquake and tsunami upon the company's operation; 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 calendar year 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 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'd 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 third quarter of fiscal 2011. Net sales for the third quarter of fiscal 2011 were $4.2 million, up 19% on a sequential-quarter basis compared to net sales of $3.6 million in the second quarter of fiscal 2011. The operating loss for the quarter was $920,000, which was an improvement from the prior quarter's operating loss of $1.3 million.

Before going deeper into the third quarter results, I'd like to provide a few words about the impact of Japan's earthquake on our business. First, I'd like to say we're all saddened by the loss of life and damage by the horrific earthquake and tsunami in Japan earlier this month. Fortunately, none of our employees or their families had any injuries. Our FOX-1 systems and WaferPak contactors at TI's [Texas Instrument] Aizu factory were not damaged and the systems are ready to be returned into production. Also, most of the customers in Japan that we are targeting for our ABTS and FOX products are located south of Tokyo, which was impacted less by this disaster than regions further north. We are hopeful that the customers we are targeting will still move forward with their CapEx purchases this year. With that said, during the third quarter, we benefited from an increase in shipments of our FOX-1 WaferPak contactors for wafer sort testing and NOR flash. These shipments were both contactors for existing and new designs, which indicates to us that our customer’s achieving ongoing cost and throughput benefits with the FOX-1 full wafer contact solution.

In addition to this, we had a number of highlights that I'd like to bring to your attention. First, Spansion, a leading NOR flash producer, continues to invest in upgrading their FOX-1 full wafer parallel testers and buying WaferPak contactors for new devices. On March 21, we announced booking over $2 million in orders for FOX-1 WaferPak contactors and system upgrades. Most importantly, with these recent WaferPak orders, Spansion is now returning to service most of their FOX-1 testers at TI's facility at Aizu, Japan and Fab 25 in Austin. Secondly, we were very, very pleased to report that we booked a new FOX-1 wafer-level burn-in customer. Today, we announced that a leading telecommunications company purchased a FOX-15 WaferPak cartridge to run for product qualifications on Vixel laser diodes. We expect additional WaferPak orders and a purchase of a FOX-15 system from this customer as a wafer-level burn-in process is qualified and the customer moves into production volumes.

Third, in March 17, we announced an ABTS-L36 order from a military aerospace division of a leading U.S.-based microcontroller mixed signal IC producer. The ABTS-L36 is a highly flexible system with a high number of channels and power supplies for burn-in board. And with the added capability of a pattern generator per slot, our customer can do reliability testing on up to 18 different device types at one time. Importantly, this is another new customer for our ABTS product. The ABTS product family is an ideal system for qualification and reliability applications.

And finally, we are pleased to announce that we received acceptance earlier in March on a special ABTS system that we shipped in November of last year to a major Japanese IDM for production burn-in of high-end microcontroller devices. The customer acceptance took somewhat longer than we expected, but the good news is that we will be able to recognize revenue in our fourth quarter. We believe that our customer's pleased with our system performance. Importantly, we expect to start receiving follow-on orders this quarter.

We remain encouraged by the activity we see for our FOX products. We are seeing interest from a broad range of customers and applications such as wafer-level burn-in for automotive micro-controllers and sensors as well as Vixel laser diodes and flash devices. With this number of active prospects, we are hopeful that we can penetrate another new FOX-1 or FOX-15 account over the remainder of this calendar year. We are also seeing an increase in activity for our ABTS family of products for packaged device test and burn-in. The ABTS is a flexible platform that can be configured into various versions to address multiple markets. A large market segment we are targeting 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.

Looking ahead to the fourth quarter, we expect net sales will be similar to the third quarter, while our bottom line results are expected to improve on a sequential-quarter basis due to favorable product mix and cost-reduction initiatives. Our strategy continues to be focused on penetrating as many production accounts as possible with our new ABTS and FOX products. We have unique technology with our FOX systems and WaferPak contactors. We feel confident 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 third quarter financials in more detail, Gary?

Gary Larson

Thanks, Rhea. As Rhea mentioned, net sales were $4.2 million in the third quarter of fiscal 2011. This compares to the net sales of $5.2 million in the same quarter last year. But you have to keep in mind that in the third quarter of last year, the company sold the remainder of its Spansion U.S. bankruptcy claim for net proceeds of approximately $4.6 million. Of that, $2.7 million was revenue related to cancellation charges. So on a pro forma basis, we had a significant increase on a year-over-year basis.

Excluding the impact of the sale on the Spansion claim, last year's third quarter pro forma net sales were $2.5 million. Compared with the pro forma sales number, our third quarter fiscal 2011 showed an increase of 73%. Gross profit was $1.6 million for the third quarter of fiscal 2011 or 38% of net sales. This compares to gross profit of $4.0 million in the third quarter of fiscal 2010 or 77% of net sales. As noted earlier, the $2.7 million in gross profit related to the Spansion bankruptcy claim.

Moving on, we'll look at operating expenses. SG&A was $1.5 million in the third quarter of fiscal 2011, down from $1.7 million in the prior-year period. Second quarter R&D expense was $1.0 million compared with $1.5 million in the third 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 third quarter was $946,000 or $0.11 per diluted share compared with net income of $1.5 million or $0.18 per diluted share a year ago. Pro forma net loss in the third quarter of fiscal 2011 was $723,000 or $0.08 per diluted share, compared to a pro forma net loss of $1.5 million or $0.17 per diluted share in the same period of the prior year. In determining the pro forma or non-GAAP net loss in the third quarter of 2011, we've excluded the gain from the non-cash stock compensation -- we've excluded the non-cash stock compensation expense of $223,000. In determining the pro forma or non-GAAP net loss in the third quarter 2010, we've excluded the gain on the sale of the Spansion bankruptcy claim of $3.3 million and non-cash stock compensation expense of $324,000.

Turning to the balance sheet, our cash and cash equivalents were $3.8 million at February 28, 2011, compared with $5.1 million at November 30, 2010. The decrease is primarily due to our operating losses. We continue to remain debt-free.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we do have a question from the line of Geoffrey Scott with Scott Asset Management.

Geoffrey Scott

Good afternoon, guys. For the FOX-15, the new customer, they have bought contactor boards, correct?

Rhea Posedel

A contactor. A WaferPak full wafer contactor.

Geoffrey Scott

Okay. Where are they going to use that?

Rhea Posedel

They're going to do the qualification in one of our systems, so we'll rent it to them as they do quals [qualifications].

Geoffrey Scott

That's one of your systems you have in...

Rhea Posedel

In our engineering lab.

Geoffrey Scott

In Fremont?

Rhea Posedel

Yes. That's a good question, yes.

Geoffrey Scott

Okay. How long will that qualification process take?

Rhea Posedel

It will take, I'm guessing probably, a few months from delivery, once we finish the WaferPak. So the overall process maybe is four to five months, something like that.

Geoffrey Scott

So something like two to three months to produce the WaferPak and then a couple of months to...

Rhea Posedel

Yes, say three months to produce the WaferPak and then one or two months to do the quals.

Geoffrey Scott

So you'd be talking about a purchase order sometime in the mid-summer time frame?

Rhea Posedel

You mean this summer? Yes, it's possible, but I would probably say in the fall. Also, as they ramp their capacity, then they would need to -- they could continue to use our system if their capacity is low. But as they continue to ramp capacity, then they'll need to buy a system, and that's probably an event that's probably going to happen at the end of this fiscal calendar year.

Geoffrey Scott

But in the meantime, you will be renting the FOX-15 that you have on your floor?

Rhea Posedel

Correct.

Geoffrey Scott

Okay. The machines that TI is using in Japan, did you say they're up and running again now? Or they're just ready to go up and run?

Rhea Posedel

I think, they're -- what I said was they were ready to run, and I believe they're starting to run them. I mean, they were running devices or wafers before the earthquake, and then TI shut down the factory because of power. And I believe, in checking our systems, they weren't damaged. So I believe the power's going to come on probably in April, and they'll start running them again.

Geoffrey Scott

So it's an electricity-supply issue as opposed to anything else?

Rhea Posedel

There was no damage, I don't believe.

Gary Larson

Geoff, this is Gary. And one of the announcements that TI made was that in their Aizu factory, they were going to be starting production basically now, and they expected to be in full production by mid-April.

Geoffrey Scott

Okay. Question on your relationship with NASDAQ these days, where do you stand?

Rhea Posedel

We have changed our listing. We transferred to the Capital Markets, and we're a customer in good standing with NASDAQ.

Geoffrey Scott

Are you going to try to get back to where you were? Or are you happy staying on the Capital Markets?

Rhea Posedel

There's really not a significant difference from the investor's standpoint. The ticker is the same and there's no real difference either than the size of the other members of the market. So if we qualified to re-enter the global market, we'd be happy to transfer back up. But that's not something that we're anticipating happening near term.

Geoffrey Scott

Okay. You said that fourth quarter revenue looked similar to just reported third quarter. Anything you'd like to share about fiscal '12 with us?

Rhea Posedel

I mean, right now, we're putting together our plan for next fiscal year. So I mean, again, I think we said that we're encouraged by what we see in terms of activity, and I think that we talked earlier in other conference calls about penetrating new accounts in Japan that we'd expect to see follow-on business. I think we're -- I mean, overall, I mean, I would expect that things would improve next year over this year, just because our run rates are up higher than they were this -- if you look at the beginning of this year, we started at a low shipment rate per quarter, and we've increased that every quarter so far. And the projections at the semiconductor industry will continue to grow this year. So I think we're optimistic in fiscal 2012.

Operator

[Operator Instructions] And at this time, there are no further questions in queue. I'd like to turn the call back over to management for any closing comments.

Rhea Posedel

Hi, this is Rhea, and I'd like to thank you for joining us this afternoon, and we look forward to next quarter's conference call. Thank you. Bye.

Gary Larson

Goodbye.

Operator

Thank you. Ladies and gentlemen, this concludes the Aehr Test Systems Third Quarter Fiscal 2011 Results 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 followed by pass-code of 4426864. Thank you for your participation, you may now disconnect.

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