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Aehr Test Systems (NASDAQ:AEHR)

Q2 2012 Earnings Call

January 05, 2012 5:00 pm ET

Executives

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

Gayn Erickson -

Rhea J. Posedel - Founder, Chairman and Chief Executive Officer

Marilynn Meek -

Analysts

Geoffrey Scott

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Aehr Test Systems Second Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions] This conference call is being recorded today, Thursday, January 5 of 2012. And I'd now like to turn the conference over to Ms. Marilynn Meek. Please go ahead, ma'am.

Marilynn Meek

Thank you. Good afternoon, and thanks for joining us to discuss Aehr Test Systems' second quarter fiscal 2012 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 to you right away.

With us today from Aehr Test Systems are Rhea Posedel, Executive Chairman; Gayn Erickson, 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 L. Larson

Thank you, Marilynn, 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 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 technologies, acceptance by customers of the systems shipped upon receipt of a purchase order, the ability of new products to meet customer needs or perform as described, the company's ability to maintain sufficient cash to support operations, the company's 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 products in calendar year 2012. 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 Executive Chairman, Rhea Posedel. Rhea?

Rhea J. Posedel

Thank you, Gary. Good afternoon, and welcome to our conference call for the second quarter of fiscal year 2012. Let me begin by saying I'm pleased to announce that on Tuesday, Gayn Erickson was appointed CEO of Aehr Test. I'm in excellent health and was planning to work until I was 70, but with the acquisition of Verigy by Advantest last year, Gayn became available. We are fortunate to have hired a senior executive with 23 years of semiconductor, test and general management experience. With Gayn's strong marketing and engineering background from a top-tier test company, we are confident that he will do an outstanding job and has the management skill set needed to take Aehr Test to the next level. I will remain with the company as Executive Chairman and will work with Gayn on strategic plans to grow the company.

Since Gayn just started this week, I will be giving today's conference call. Gayn will, however, say a few words at the conclusion of my talk.

On a positive note, net sales for the quarter were $3.9 million, 8% higher compared to the second quarter of fiscal 2011. We had several highlights that I'd like to bring to your attention. First, we are very pleased to report that our valuation ABTS-L56i burn-in system passed its qualification at a leading IDM. Most importantly, we expect to receive an order to record revenue for this evaluation system this quarter. This would be a major win for us because it's a production account, and we believe this customer could order significant number of ABTS-L56i systems over the long term. Their target application is for burn-in of high-power logic devices requiring individual temperature control per device.

Second. Last month, we report -- announced selling a high-power ABTS burn-in system with individual device temperature control to one of the world's largest IC manufacturers. Their target application is for reliability testing and qualification of 2x nanometer technology, including mobile and tablet processors. This is another major win for our ABTS product family, and we hope to see follow-on orders after the delivery and acceptance of the first system.

Third, we shipped 3 additional ABTS burn-in systems to a leading Japanese microcontroller producer, and we expect to receive a follow-on order from their Singapore production site this quarter. This customer is a production account for us, and we believe they will purchase higher quantities of systems as their capacity ramps in the second half of calendar 2012.

Fourth, we designed and have shipped the first article of 4 new FOX-15 WaferPak cartridge designs to a leading automotive provider of magnetic sensors. This is important because we hope to see follow-on orders for production quantities of WaferPaks as their sensors are qualified by automobile manufacturers later this calendar year.

There is also an upside that an additional FOX-15 system would be needed to support their capacity if a high number of these new WaferPak cartridges are ordered.

Fifth. We completed an evaluation WaferPak cartridge design and got acceptance from a large communication company. This was an engineering challenge for us as we had to contact and apply power to stress [ph] over 12,000 VCSEL devices per touchdown. We are currently selling wafer-level burn-in services to this customer, but we believe there is a good possibility that they could become a new FOX-15 customer as their volumes increase.

Finally, we are pleased to have announced that we have shipped our 100th WaferPak contactor. This is a major accomplishment since our WaferPak contactors are complex designs before wafer test and burn-in, usually for high-die-count wafers and extreme temperatures up to 170 degrees C. Since a new WaferPak design is needed for each new device type, this has become a significant business segment for us.

Our strategy to grow revenues long term by focusing on penetrating production accounts with our families of ABTS and FOX products is starting to bear fruit. We are most encouraged by the inroads we are making with our ABTS products in penetrating major accounts. If the orders for our valuation system happens as we expect this quarter, then we will have sold our ABTS system to 3 of the 5 world's largest semiconductor manufacturers. This would be a major accomplishment, and we believe it will give us a strong customer base to grow our business on long term. Importantly, we believe there is a potential for these customers to order multiple ABTS systems this calendar year.

We are also pleased to report that already this quarter, we have added an additional 2 new customers, a U.S. automotive IC producer and a Japanese logic fab, to our growing ABTS customer list. Importantly, there is continued interest in our FOX products for wafer-level burn-in to produce Known Good Die for automotive microcontrollers, sensors and VCSEL devices. We are chasing a number of opportunities, and we are hopeful that we will announce a new FOX account this fiscal year.

Looking ahead, we believe our business will start turning up in a couple of quarters out as we ship and recognize revenue for the new ABTS orders we have received the past few months.

After running Aehr Test for over 34 years, I believe we have our strongest product portfolio ever with our ABTS and FOX products. Most importantly, we have sold our ABTS and FOX products to a broad base of customers, including ABTS systems to 2 of the world's largest semiconductor companies. We are confident that we can continue to win additional new accounts with our new ABTS products, which address the growing market segments for high-power logic burn-in and memory parallel test and burn-in. We also remain very positive about the growth potential for our innovative FOX systems and WaferPak contactors from lowering the cost of wafer sort testing of flash wafers and wafer-level burn-in for producing Known Good Die. With our new ABTS and existing FOX production accounts, we believe we now have a solid platform which to grow our revenues on long term.

In closing, I would like to mention that developing our FOX wafer-level burn-in system was a major challenge. Many competitors, most of them many times larger with more resources, have tried to produce wafer-level burn-in systems and weren't successful. And we believe we are the worldwide market leader in this space.

We are extremely proud of our R&D team on your perseverance and innovative technology breakthroughs to make wafer-level burn-in a reality. We have been granted 37 U.S. patents with most relating to our FOX wafer-level burn-in product invention.

I would like to give a special thanks to all of our employees and former employees who have supported me and the company. It's been an honor to work with you over the past 34 years. Before turning the call over to Gary, who will discuss the second quarter financials in more detail, Gayn would like to say a few words. Gayn?

Gayn Erickson

Thank you, Rhea. I'm very pleased to be joining Aehr at this time and excited by the many opportunities we have to grow our company. I actually respected Aehr Test's leadership in the semiconductor test and burn-in space for many years, and I'm impressed by their technology, the products and the people that I've seen here at Aehr so far.

As you mentioned earlier, the successful evaluations and qualifications of the new ABTS system is really a great endorsement of the company's new product family. It's impressive that Aehr has emerged from this recent industry downturn with new, highly competitive products and also customers that are top-tier semiconductor manufacturers in Korea, Japan, China, Europe, in addition to this traditional strength we've had here in the U.S. There are new opportunities in test that are developing out of the shift in the semiconductor industry from an IT/computing-dominated application space to consumer, mobile and automotive applications. I feel that Aehr is in a great position to capitalize on those opportunities.

I look forward to working with Rhea and the Aehr Test team to profitably expanding our company while continuing to satisfy our customer needs. And an offer if there are any shareholders or potential investors who would like to set up some time to talk with me personally where I can answer any questions, I'd be happy to set some time aside and to meet with you in the near future. Again, thanks, Rhea.

Rhea J. Posedel

Thanks, Gayn. Gary?

Gary L. Larson

Thank you, Rhea. As Rhea mentioned, net sales rose 8% to $3.9 million in the second quarter of fiscal 2012 compared to $3.6 million in the second fiscal quarter of last year. Gross profit was $1.1 million for the second quarter of fiscal 2012 or 29.2% of net sales. This compares to gross profit of $1.4 million for the second quarter of fiscal 2011 or 37.9% of net sales. Now the lower gross profit margin was primarily related to a change in mix of product. As Rhea mentioned, we shipped 3 early production systems to the Japanese microcontroller producer. While manufacturing those systems, we incurred onetime start-up and higher initial material costs. We expect to improve the margins on follow-on shipments for those systems.

Taking a look at operating expenses, SG&A was $1.5 million in the second quarter, about the same as the SG&A expense in the prior year period. Second quarter R&D expense was $1 million, down about $0.2 million from the second quarter of last year. R&D spending can fluctuate from quarter to quarter depending on the development phase of new products.

In the first 6 months of fiscal 2012 -- in the first 6 months of fiscal 2011, operating expenses were reduced by $155,000 related to partial proceeds from the Spansion Japan bankruptcy claim. In the first 6 months of fiscal 2012, we reported a gain of $990,000 from the sale of our interest in ESA Electronics to a Singapore private company. In the second quarter, we reported a net loss of $1.4 million, or $0.15 per share, compared to a net loss of $767,000, or $0.09 per share, in fiscal second quarter 2011. Included in the results for the second quarter of fiscal 2011 was the receipt of a dividend payment of $600,000 related to a long-term investment reported in other income.

Turning to the balance sheet, our cash and cash equivalents were $3.1 million at November 30, 2011 compared with $4.0 million at May 31, 2011. Although we have access to a $1.5 million line of credit, we've not yet borrowed against that line. We expect that our operating results in the third quarter of fiscal 2012 will improve when compared with the preceding quarter.

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

Question-and-Answer Session

Operator

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

Geoffrey Scott

A couple of quick questions. Actually, first, a comment. Rhea, you could have knocked me over with a feather after that press release. A couple of questions. The -- this is the first press release I can remember or first conference call that didn't have a sales projection, revenue projection for the next quarter compared to the year previously. All Gary said was that operating results would improve.

Gary L. Larson

What we expect is to see sales in a -- fairly similar to this most recent quarter, but the important part to us was that we do expect the operating results to improve.

Geoffrey Scott

So that would be sales down from last year's third quarter?

Gary L. Larson

We're just saying sales we expect to be similar to the preceding quarter.

Geoffrey Scott

Which would be lower than the third quarter of last year?

Gary L. Larson

That's correct.

Geoffrey Scott

Okay. The press release referring to the latest ABTS system, was that a domestic shipment, Rhea?

Rhea J. Posedel

It's not a shipment yet. It's an order. But...

Geoffrey Scott

Is it going to a domestic customer?

Rhea J. Posedel

It's an international customer. We'll leave it at that, Geoff.

Geoffrey Scott

An international customer?

Rhea J. Posedel

Yes. All right. Thanks, Jeff. Please stop by, and I'd like to have you meet Gayn, if you're out here.

Geoffrey Scott

I will certainly take advantage of it. I'd love to.

Rhea J. Posedel

Thanks, Geoff. Thanks for all your support, Geoff, over these years.

Operator

[Operator Instructions] And I show no further questions at this time. Please continue.

Rhea J. Posedel

Well, this is Rhea. I'd like to thank you all for joining us this afternoon. Happy new year to everyone, and we look forward to next quarter's conference call. Thank you very much. Bye.

Operator

Ladies and gentlemen, if you would like to listen to a replay of today's conference, you may dial 1 (800) 406-7325 and enter the access code of 4499152. Thank you very much for your participation. You may now disconnect.

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