Aehr Test Systems' (AEHR) CEO Gayn Erickson on Q1 2017 Results - Earnings Call Transcript

| About: Aehr Test (AEHR)

Aehr Test Systems (NASDAQ:AEHR)

Q1 2017 Earnings Conference Call

September 29, 2016 05:00 PM ET

Executives

Jim Byers - IR, MKR Group

Gayn Erickson - CEO

Ken Spink - CFO

Analysts

Christian Schwab - Craig-Hallum

Geoffrey Scott - Scott Asset Management

Larry Chlebina - Chlebina Capital

Orin Hirschman - AIGH Investment

Tom Diffely - D.A. Davidson

Marty Cawthon - ChipChat

Operator

Good day, and welcome to the Aehr Test Systems' First Quarter Fiscal 2017 Financial Results Conference Call. Today’s conference is being recorded.

And at this time, I’d like to turn the conference over to Mr. Jim Byers of MKR Group. Please go ahead, sir.

Jim Byers

Thank you, operator. Good afternoon and thank you for joining us today to discuss Aehr Test Systems first quarter fiscal 2017 financial results. By now, you should have all received a copy of today’s press release, if not, you may call the office of MKR Group, Investor Relations for Aehr Test, at 323-468-2300 and we will get you a copy right away.

With us today from Aehr Test Systems are Gayn Erickson, President and Chief Executive Officer and Ken Spink, Chief Financial Officer. Management will review the company’s operating performance for the fiscal first quarter before opening the call to your questions. Before turning the call over to management, I’d like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are 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 the 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 the forward-looking statements.

And now with that, I’d like to introduce Gayn Erickson, Chief Executive Officer.

Gayn Erickson

Thanks, Jim, and good afternoon to those joining us on the conference call and also listening in online. Ken will go over the first quarter financial results later, but first, I’ll spend a few minutes discussing our business and product highlights, including our continued progress with the development and introduction of our new FOX-P platform, which is our next generation of wafer level test and burn-in products. After that, we’ll open up the lines for your questions.

We believe we’re off to a great start to fiscal 2017 and are pleased to report improved revenue and strong bookings momentum in the first quarter. Revenue for the quarter was $5.3 million, up from $1.6 million last quarter and during the quarter we had over $10.4 million in bookings. These bookings included two previously announced large orders, the first of these orders was our first production order for our new FOX-XP multi-wafer test and burn-in solution for about $4.5 million from a new customer, which is one of the top few semiconductor companies in the world.

The second large order was $4 million multi-system follow-on order for our ABTS packaged part test and burn-in systems from one of our current large installed base customers. During the quarter, we began shipments of both the engineering and production systems of our new FOX-1P system, which I’ve stated before, is used for full wafer testing of single wafers with up to 16,000 test system resources on a single wafer and more device power supplies and I/O channels on a single wafer than any other system on the market.

We announced that we received initial customer acceptance of our FOX-1P and began shipments and production systems previously ordered by this customer and already in backlog. We expect to complete shipment of the remaining systems in backlog to the customer within the current fiscal second quarter. We were also pleased that during the development of this system, we worked to expand the test applications for the FOX-1P system to include microcontrollers and other devices in addition to the initial target of flash memory devices. We’ve also identified potential opportunities for automotive devices, where extended test and burn-in is required that we believe are also a good fit for this system.

In addition to this FOX-1P systems that we shipped, our fiscal Q1 revenue included revenue from the delivery of portions of the initial FOX-XP test out ordered early in the quarter; revenue from system upgrades and WaferPak contractors from our installed base of FOX-15 multi-wafer test and burn-in systems and also revenue for a couple of ABTS packaged part burn-in systems. I’m pleased to see an uptick in our base business serving our installed base of FOX systems and also addressing the packaged part test and burn-in space. This base business had been particularly soft the last few quarters, which put incredible pressure on our financials last year before our new products began shipping for revenue.

We believe we’re on track to complete the shipment of the initial FOX-XP test cell ordered in the quarter and expect to ship this test cell in our fiscal Q3, which ends February of 2017. We also continue to work with our other lead customer for our FOX-XP multi-wafer system in anticipation of capacity need from that customer that we have stated before begins in calendar Q1 of ’17 and runs through 2018.

This initial lead customer purchased a single wafer version of the FOX-XP last year and we successfully delivered and they accepted that first system along with several wafer pack designs in February. This single wafer system contains what we described as a blade which includes test electronics for the full wafer, the electrical interface connection, the thermal chuck that controls the temperature of the devices and our proprietary wafer pack that contains the wafer and devices being tested made it to the wafer contractor in a portable cartridge. This wafer pack cartridge can be inserted into the FOX-XP blade and allows offline alignment of the wafer under test in our also proprietary wafer pack aligner which loads and unloads wafers into the wafer packs. The blade in the single wafer system can be installed into our full FOX-XP high powered chamber up to 18 at a time so the FOX-XP multi-wafer system can test 18 wafers in parallel in one system.

The first FOX-XP multi-wafer test cell that was ordered in June by our second lead customer is an 18 blade configuration using the same blades and software delivered to our initial lead customer last February. Each wafer pack design is unique to the specific device and electrical pad layout. As customers shrink their devices, change them to add features or come out with new designs they will order new wafer packs for their FOX-XPs from Aehr that will work with their installed base of FOX-XP test and burn-in systems. This “consumable” becomes an ongoing revenue stream for Aehr Test that grows our installed base of FOX-XP systems.

As stated during our last call we're working with our initial lead customer for the FOX-XP system for reliability and qualification tests of integrated devices intended for very high volume applications.

Based on the success of the device qualification tests that are currently being run on the initial single blade system that was delivered and accepted, the customer indicates that they will need production systems to meet capacity needs beginning as early as calendar Q1 of '17 which is consistent with the availability of our FOX-XP multi-wafer systems. These two lead customers’ production applications represent a significant opportunity for Aehr Test, as we expand our unique and highly cost effective wafer level test and burn-in solutions into the rapidly growing automotive, consumer, mobile and computing markets.

These top tier customers represent a significant opportunity, not only with the initial application but also with other application areas. We look forward to expanding our initial customer lists as we address the many other opportunities where our multi wafer test and burn-in systems can deliver a significant cost and quality of test advantage.

With our new FOX family of wafer level test and burn-in products and the strong relationships we have developed with both new and existing customers we believe we are well positioned to capitalize on significant new opportunities ahead.

Last month we were excited to announce an investment in 200,000 shares of our common stock by Semics Inc, a semiconductor test equipment provider that produces fully automatic wafer handling and probing systems. Semics made this investment as part of our strategic development and manufacturing partnership which began several years ago. We work together on a unique dual-head wafer prober that has a very small footprint in conjunction with two of our FOX-1P single wafer test and burn-in systems and also work with them on the development of our proprietary wafer pack aligner used with our FOX-15 and FOX-XP multi-wafer systems. We have enjoyed a very successful relationship with Semics and look forward to working with them for many years into the future.

Lastly, we're pleased that last week we entered into an agreement and yesterday completed a very successful private placement offering of approximately $5.9 million in shares of our common stock with a solid group of institutional and accredited investors. The funds raised from this private placement provide additional working capital that further strengthens our ability to meet significant increases in customer demand for our new family of products.

Looking forward, we believe our new FOX wafer level test and burn-in products along with our ABTS, advanced burn-in and test system, provide unique and highly valuable test and burn-in solutions for our customers that increase our total available market from our current market of approximately $100 million to a market of more than $400 million annually beginning this fiscal year. These products provide Aehr test with a platform that supports our previously stated guidance for significant year-over-year growth in our bookings, revenue and bottom line during this fiscal year.

With that, I'll turn it over to Ken.

Ken Spink

Thank you, Gayn. The Company recognized strong bookings in the first quarter of fiscal 2017. As we reported in today's press release, bookings in the first quarter were approximately $10.4 million. This booking level represents the highest quarterly bookings since the second quarter of fiscal 2008. While we do not typically disclose quarterly bookings or backlog other than reporting backlog at fiscal year-end, as part of our preannouncement we provided guidance on our bookings and as such want to report on those metrics in this call.

Quarterly bookings included 4.5 million in purchase orders received from one of our lead customers for a FOX-XP system, aligner and WaferPak and 4 million in ABTS system orders. With revenue of 5.3 million and our backlog at the beginning of the fiscal year of 5.3 million it is easy to calculate that our backlog at Q1 '17 quarter end was 10.4 million, which was our quarterly bookings number.

Net sales for the first quarter were 5.3 million compared to 1.6 million in the preceding quarter and 6.6 million in the first quarter of the previous year. Included in Q1 net sales were FOX-1P system and FOX-XP system revenues. Net sales also included multiple ABTS packaged parts system sales. The increase in the packaged parts business is very positive given the recent softness in ABTS revenues in prior quarters.

Non-GAAP net loss for the first quarter was 543,000 or $0.04 per diluted share compare to a non-GAAP net loss of 2.8 million or $0.21 per diluted share in the preceding quarter, and a non-GAAP net income of 613,000 or $0.04 per diluted share in the first quarter of the previous year. Non-GAAP results exclude the impact of stock based compensation expense.

On a GAAP basis, net loss for the first quarter was 755,000 or $0.06 per diluted share. This compares to a GAAP net loss of 3.1 million or $0.23 per diluted share in the preceding quarter and a GAAP net income of 294,000 or $0.02 per diluted share in the first quarter of the previous year. Gross profit in the first quarter was 2.2 million or 41% of sales.

This compares to a gross loss of 98,000 or negative 6% of sales in the preceding quarter and a gross profit of 3.4 million or 51% of net sales in the first quarter of the previous year. The decrease in gross margin from prior years due to Q1 '16 including a benefit of 215,000 to cost of sales related to the sale of fully reserved inventory.

Operating expenses in the first quarter were 2.8 million, flat compared to 2.8 million in preceding quarter and down a $131,000 or 5% from 2.9 million in the first quarter of the previous year. The year over year decrease includes a $132,000 decrease in outside commissions resulting from lower sales in regions or to customers, where we pay external representatives commission on sales.

R&D expenses were 1.1 million for the first quarter compared to 1 million in the preceding quarter and 1.1 million in the previous year quarter. As stated previously R&D spending can fluctuate from quarter to quarter depending upon the development of our new products.

SG&A was 1.7 million flat compared to 1.7 million in preceding quarter and down a 129,000 from 1.8 million in the first quarter of the prior year. Turning to the balance sheet and changes during the first quarter, our cash and cash equivalents were 2.3 million at August 31, 2016 compared to 939,000 at the end of the preceding quarter.

Accounts receivable at quarter end was $1.8 million compared to $522,000 at the preceding quarter end. Inventories at August 31 were $6 million, down approximately $1 million from $7 million at the preceding quarter end. The decrease in inventory from prior quarter is due to the sale of FOX-1P Systems and ABTS systems that were on hand at May 31, 2016. Property and equipment was 789,000 compared to 1.2 million in the prior quarter.

During the quarter we reported that we extend the maturity date of our convertible note with our strategic investor by two years from April 10, 2017 to April 10, 2019. This extension helps our working capital later in the fiscal year, which helps us with the anticipated ramp of our FOX-P products and improves our cash position to meet current liabilities for fiscal 2017. As Gayn mentioned, yesterday we closed a successful private placement offering of our common stock with certain institutional and credited investors, that resulted in gross proceeds to the company of approximately 5.9 million before expenses.

Craig-Hallum Capital Group served as the solid placement agent for the offering. In addition to increasing capital that further strengths our ability to meet significant increases and customer demand for our new family of products, this incremental equity raise allows us to address the delisting notice we received by NASDAQ and discussed on previous calls. We plan on filing a 8-K shortly, describing the transactions and our belief that the company has regained compliance with the stock holders equity requirement for continued listings. With this 8-K filing, we believe that we will receive formal notification from NASDAQ that we are in full compliance of listing requirements for the NASDAQ capital markets.

We were very pleased that nine of the participants in the private placements are new institutional investor firms for Aehr Test and we’re glad to see the endorsements from these firms in our growth story and the opportunities ahead for the company. Also based upon the offering price of $2.15 per share, there was no conversion price adjustment to the $2.30 conversion price of our convertible notes. This concludes our prepared remarks, now we’re ready to take your questions.

Gayn Erickson

And Operator before you jump in, I just noted something, Ken you said there were nine new institutions, there were six I believe. So I think we should double check our math on that. Okay thanks, Operator go ahead with questions.

Question-and-Answer Session

Operator

[Operator Instructions] We’ll take your first question from Christian Schwab with Craig-Hallum.

Christian Schwab

Congratulations on strong start to the year. When you -- Gayn, when you look at the new products and the two lead customers and I’m just kind of trying to figure out the opportunity by different product lines, but as we now expand that TAM from a 100 million to greater than 400 million what type of market share objective do you think you can achieve two to three years out given the lead customer’s interest in your new products?

Gayn Erickson

You start off swinging right there, Christian. So we haven’t been historically giving forward-looking statements particularly of that type of magnitude. A lot of the challenges of course in this is getting those products out, getting those customer commitments and in fact identifying those markets where those dollars will be spent. We’ve not specifically given those kind of numbers, but we believe that we can take a, call it significant portion of that market share. The bulk of that, breaking it down the $100 million is primarily or mostly made up of the packaged parts base plus some of the smaller niche areas that we believe we had been addressing with our previous FOX products.

The FOX-XP because of its increased power, functionality and resources expand the TAM to several different market opportunities that we’ve included - include automotive devices, flash memory devices, particularly NAND. Sensors that are going into both mobile and automotive type applications and without even talking about kind of the IoT or Internet of Things, there is just a number of different areas that pose an opportunity for us. So although we would probably expect a continued high concentration of customers, we’d actually see a diversification to multiple different customers and multiple applications within each of those customers as we grow into those TAMs.

Christian Schwab

Great. That’s a very fair answer. As we talked about earlier, production systems with one customer starting in Q1 of ’17 and going through all of 2018, when would you expect to begin to see order activity for that? Would it be right in line with Q1 of ’17 and we go right away or how should we be thinking about bookings and orders on a go forward basis?

Gayn Erickson

So a couple of things with respect to our standard lead times. With the first tools that we took orders for often, we will talk about six to nine months to get a tool from the time it is ordered till it’s shipped and that would be a consistent number, for example with the FOX-XP order we took in June. But as we develop the product and then we have the pieces completed, it’s our expectation that we would -- the customers would like the shortest lead times possible, I think in this market having something 12 to 16 week lead time would be a good solid number for them, and to some extent to having shorter lead times is an advantage for us. When the products come out and they are newer products, they tend to be longer lead times as they become mature. We'd like to get those types of lead times.

One of the subtleties about the capital raise that we did last week or week that closed yesterday is we anticipate using some of that to buy some of the longer lead material items and to put inventory in place on some of those so that we can in fact have not only shorter lead times but be able to address capacity and a shorter term.

Now having said that, there is always a struggle, we would like orders as quickly, as early as possible and the customers would like to delay them as late as possible. But if people want systems delivered in Q1 which is just by the math is March of '17, we would certainly want orders, a couple, a few if not four or more months ahead of time. If I can leave you at that I think that's probably best.

Christian Schwab

I think that's great, I don’t have any other further questions at this time. Thank you.

Gayn Erickson

You're welcome.

Operator

We'll take our next question from Geoffrey Scott with Scott Asset Management.

Geoffrey Scott

Good afternoon. Congratulations on everything. Couple of questions. Will bookings be a quarterly event or is this a one-off deal?

Gayn Erickson

Well, when we prepped for this call, this first question we thought was that you were going to ask us that question. You know what, we have been pretty clear in the past that we try to avoid taking about bookings and we realize that that is a goal we all want to shoot for. But in order to not throw customers -- sorry, to throw shareholders around by having bookings that come late in the quarter that we can still meet shipments, or not having bookings that imply maybe we can't meet shipments we've chosen not to because our bookings tend to be more lumpy than our revenue is. So we will continue to take a look at it. We made a specific example this time to put them out there and maybe at this point I'll say maybe, but maybe not.

Okay, I apologize, but I think that's just a hard thing, we will always talk, try and give you some sort of forward -- and why don't I just do that in advance because your next question is going to be what's the next quarter looks like. What we're actually anticipating, we head into this quarter with almost all of our anticipated shipments in backlog and as such we think we're going to have another fairly strong quarter. It's probably down a little, one of the challenges is that ASPs of our ABTSs for example are $800,000 a piece plus or minus one or those can swing our numbers that much. That's one of the challenges that we have until we start to ship in higher volume across the larger markets with the FOX systems. We'll also expect that the wafer packs particularly over time will help us to provide an increasing level of base business.

Geoffrey Scott

Okay, the geographic break up for revenue of this quarter 5.3 million, how much of that was U.S.?

Ken Spink

So the U.S. allocation was about 60% in the U.S., Southeast Asia was 35%, the balance being in Europe.

Geoffrey Scott

Okay. The -- it included a large part of that 4 million ABTS order that was more than just U.S. deliveries, that was worldwide deliveries?

Ken Spink

So to just give you a little color on the breakout, the Southeast Asian numbers that I was referring to that accounted for 35%, those were our ABTS systems which are actually in the Philippines, and the U.S. was predominately the FOX-XP and the FOX-1P systems as well as our service contract related and spares activity, customer service related.

Geoffrey Scott

Okay, that’s very helpful.

Gayn Erickson

It's pretty typical just that even with our customers and we have a high concentration of customers that are decision making and often even purchasing in the U.S. that the bulk of the production systems do show up overseas. It's one of the reasons we have such a large numbers of service employees. We have direct employees located in Japan and Korea, Taiwan, China, the Philippines amongst other places and then we also have additional service people that we have through some of our reps. but fundamentally we tend to put service people right where our customers are.

Geoffrey Scott

Circling back to the comments made on the packaged parts business, the ABTS deliveries were all for that one order, that one $4 million, or was it more than one customer?

Ken Spink

No, we had some ABTS and some additional accessories that were going to other customers. But the bulk of it was in fact to the one customer, again form the most recent [technical difficulty] order.

Geoffrey Scott

Yes, you've said there was an uptick in packaged parts business, was that uptick from just that one $4 million order or were you seeing orders come in from other customers?

Ken Spink

We had one order from another customer and we had -- we are seeing some additional resurgence of some of the forecast that we had from customers in the middle of last year that they simply pushed out. And I had talked about in the last couple of quarters, those have not booked yet, but just in general, it feels like there is a firming up of the install base and we started some, a pretty good bookings quarter that we’re for instance that would chip over actually a couple of few quarters range.

Geoffrey Scott

But that uptick in packaged parts inquiries does not actually show up in that 10.4 million of booking, its inquiries --?

Ken Spink

No, part of it was. I mean, we have been -- you know $4 million plus order from one customer for multiple systems is a pretty strong number.

Geoffrey Scott

Yeah it is. The property plant and equipment went from a 1,204,000 to 789,000 during the quarter. Depreciation typically is 50,000 a quarter. Did you sell a piece of equipment that was in PP&E for the demo purposes?

Ken Spink

Yes, Scott that's a great question. Actually in my narrative, I had a little bit more of color on that and that, yes, the answer is yes.

Gayn Erickson

The answer is yes. We sold equipment and what we do is even though we have capital equipment. If it capital equipment that we sell in our normal course of business. We move that to inventory and flow it through the cost of sales as though it were in our inventory originally.

Geoffrey Scott

Quick question on the TAM for the NAND flash. At the flash summit, I guess it was August, there was less talk about 3D NAND and micron spent an enormous amount of time talking about their cross point, I wasn't there the second day, but I understand Samsung also talked about their competitor to cross point, is there something going on in that 3D NAND market? I mean if that was what was going to drive that there very large $300 million number and it seems to have slowed down a little bit. Can you talk about, what the XE is doing in the market and what it’s likely to do in the future?

Gayn Erickson

Okay there is a lot in there, I going to try to cover kind of two areas. So one is the things that are driving, what we still believe is an opportunities within the NAND space, are not actually impacted significantly the original thesis if you will, whether it be standard NAND, 3D NAND or either a cross point or high buffer memories or these other technologies that are intended to be a high speed version of a nonvolatile memory. The basic premise that existed and we believe continues to exit is that when devices are placed into a package multiple devices at a time and then go through an extended test or burn-in, one of the devices that’s embedded in that package can fail. And as a result will create a yield loss of the other devices in the package.

NAND particularly the SSDs portion of it, which is Solid State Drives, which is driving at least 30% of the total NAND and almost all of the growth are inherently being stacked higher and higher number of die per package, for several reasons but fundamentally density matters. Right and so the fastest growing segment or the primarily growing segment, the largest segment in and of itself is seeing devices stacked together and when they fail they’re actually creating a failure of the other devices.

All to my understanding, all of the devices, that I just described standard NAND, 3D NAND, crosspoints, other densities they are all tested today in package form for reliability testing before they are put into SSDs and they all have a significant yield impact as a result of burning them in and one of the die fails, failing the other, sometimes seven die and then eight dies stack, 11 and 12. There is 16, and I think Samsung announced higher than that, 24 die stacks on horizon. That trend is continuing and we believe is a perfect opportunity for customers to look and use our new FOX-XP systems to test those NAND wafer at wafer level before they are cingulated and then put into the package form.

So the thesis I think is still the same, what has happened for those that have followed along with us is that was one of the primary applications that we develop the FOX-XP for and had engaged [ph] with several NAND manufactures along those lines.

What we said in previous calls is for several reasons, the customers have kind of pushed out the evaluation and/or the eminence of ordering systems from us and in fact our two lead customers were both customers that had taken a look at the FOX-XP for NAND and then chose the FOX-XP for a different application. We believe long term there is still opportunities or in time at both those customers and others. One of the challenges I believe that has happened is that the transitions to full way for testing of the NAND suppliers is a very major commitment, it probably entails the fab should start with that from the early going. And I believe a lot of the feedbacks from customers has been that the risk associated with doing that particularly with such a small vendor as Aehr Test was just too much in particular, because the tester wasn’t out yet.

Now we’re able to show customers these systems and as we start production shipments of the FOX-XPs that themselves could test NAND devices. We think that that risk profile can change and certainly as we grow as a company, I believe that we will be a more attractive, alternative for those customers. So in our long-term strategic plan looking out past probably a year or maybe as soon as a year, we think that there is an opportunity for us to start really pounding on that drum again and drumming up some business in that space.

Geoffrey Scott

That’s Very helpful. I’ll drop off and let somebody else get on.

Operator

We’ll take our next question from Larry Chlebina with Chlebina Capital.

Larry Chlebina

Hi guys. Ken I have quick question. On your revenue recognition process. How do you like take the XP that you use in the production tool that was announce in June, how is that revenue booked? I know you get a big down payment and so on.

Ken Spink

Yes. In that instant there wasn’t down payments on this tool. We actually had components of their purchase order available to transfer all risks and rewards of ownership. So basically they took position and title of several line items on their PO, which allowed us to recognize revenue on those items.

Larry Chlebina

You talked about, you recognized revenue in Q1 before the -- like you announced in June?

Ken Spink

Correct.

Larry Chlebina

Okay. We didn’t break that out. How much was that of the total?

Ken Spink

There was about 1.4 million of the total that was XP related.

Gayn Erickson

And I thought we had told -- said that in the press release last quarter [multiple speakers].

Ken Spink

I believe we said that all this.

Larry Chlebina

I think you do. Okay. But on an ongoing basis is your revenue recognition such that if you get a down payment that’s booked at the point or receiving that down payment with the order?

Ken Spink

No we show -- if you take a look at our balance sheet in our liabilities, we have the customer deposits and we do not show any revenue until it is earned. So those cash upfront deposits shown on our balance sheet as a liability under customer deposits in differed revenue.

Larry Chlebina

So you don’t book the entire revenue, the cost of the machine or the price on machine on acceptance? You get a portion on shipment or do you --?

Gayn Erickson

Let me try that Larry. Because our historical standard that we offer to customers is for our large systems that we required a 30% down payment upon booking. We will -- and then we get 70% upon shipment and we would score that revenue at that time. For the first tool at a site or for a customer, we will differ 20% of the revenue, so that they pay 30% down, 50% upon shipment and 20% is differed until final acceptance. But then follow-on systems would be the 30%-70%.

Larry Chlebina

Okay. The --.

Gayn Erickson

Yes, Larry I'm going to say something, I'm getting -- Ken's reminding me of something. At times based upon revenue recognition particularly of a first tool, even though the payment structure is as we described we may defer all of the revenue until final acceptance.

Larry Chlebina

I see. The extra 300 million in TAM with the P products, what breakdown is it to the XP versus the 1P of the 300?

Gayn Erickson

I think we based upon the numbers that we have been tracking so far the XP would be most of that, I think the 1P probably is a $50 million to $75 million range although we've just -- we continue to identify some new ones that are interesting, but the, I've even said this before, we approached several customers about the 1P over the last couple of years and many of them immediately looked over its shoulder and said tell me about the XP. So remember the 1P and the XP uses the same identical hardware, the difference being that the 1P can take effectively 8 blades of hardware in test one wafer whereas on an XP one blade worth of hardware tests one wafer.

So certain wafers make more sense to be in the multi-wafer and others would only be in a single wafer configuration. But the bulk of the particular opportunities that we have seen were where the most unique and differentiated this in the multi-wafer FOX-XP.

Larry Chlebina

XP. So just for my own benefit, the 1P -- the reason for the 1P being competitive versus what you generally get from the ATE industry is what exactly. Why would somebody go with a 1P from Aehr versus just a run of the mill ATE test that's available in numerous suppliers through the industry?

Gayn Erickson

The key differences that we hear -- that we believe and hear from our customers primarily is that the test system has been optimized around a design for testability functionalities. It's for devices that use a level of built in self-tests, devices that use low pin count test interfaces that historically have a very high ratio of device power supplies to functional pins. Semiconductor ATV platforms from a bond [ph] test Paradigm, Xcera and historically Verigy where I came from before Vantage purchased us.

They are the opposite, where they tend to be eight, or 10 or 20 or more device functional pins per power supply and so the platforms just aren't really optimized around this, and in addition to that on a per pin basis, our cost per pin is substantially lower than alternatives. We do that through a level of integration and an architecture that looks unique compared to the ATV suppliers. And so our FOX-1P there is not a product that is like it as an alternative from our direct competitors.

The application space in this case by definition is quite a bit smaller, if we talk about a TAM for that, a $50 million to $70 million by contrast to a high speed multi-gigabit ATV platform, the total available market for a semiconductor ATV last year was over $2 billion. So it plays in a smaller niche than the rest of those suppliers what we believe there is some interesting applications that are going to grow with us over time.

Larry Chlebina

So are you working on someone other than the lead customer, that started to exploring the potential of that market?

Gayn Erickson

Yes, we in fact, just recently we had another customer poke their head up which is a pretty interesting automotive application. We had been to be blunt, we have been pretty focused on our XP and 1P customers in hand, and with the release of the 1P, we've gone out and have continued to talk with some of both new and existing customers about that platform. And it's our expectation that we will then grow the installed base of customers for that platform as well.

Larry Chlebina

And then last question for me on the, your lead XP customer that is currently running valuations on your single blade unit, it does seem that if their timeframe is first quarter to get some into production, is the evaluation pretty well complete? Is it going according to plan? Because it seems as though this will be ordering any production tools needed any day now?

Gayn Erickson

If you would give them a call and help them, I'd appreciate it.

Larry Chlebina

I’m just reasonably asking is, you’ve mentioned that they're going through evaluations now. Do you have a sense is that looking good, is it nearing completion? I don’t know if you have a sense of what they're really looking and where you stand time wise on how that's going?

Gayn Erickson

I don't want to be allusive here. We're particularly sensitive about giving any detail towards specific customers. But I would say they're overlapping evaluations some of which have been completely and we're very positive. Some of which are not completed, none of which have failed. And as such, it is not just a single device. So we're encouraged, we continue to stick by our guidance and we believe that we will get production orders and revenue from that lead customer as well. And the timing of it, we don't have a perfect understanding of the timing of everything on those devices.

Operator

We'll take our next question from Orin Hirschman with AIGH Investment.

Orin Hirschman

If you were to picture from one, the most important thing that’s finally driving wafer level testing and one wafer level testing like this, after all these years of people saying it’s coming, what would you pick as the number one driver, did the tiny devices is the fact that the device [indiscernible] will be tested because the failure rates are unacceptable, what would you point at?

Gayn Erickson

It sort of a -- if there is such a thing as some -- a crossing, it is the crossing of devices that are getting smaller and smaller and are as such ending up in their final form in a package that's a multi-chip package or module or system or whatever you will. And that systems requirement for reliability in excess of what the normal test standards historically would serve it i.e., if you test those devices just like you have always tested them the resulting reliability will not be adequate for the end use application. And that transition is driving people towards wafer level and cingulated die type testing right now.

The type of applications that we talk about at a high level are the easiest ones to understand, will be things like automotive as a consumer and the automation and the autonomy, if you will, not automation. Autonomous vehicles are driving a sense of urgency within the Tier 1s that may be totally unprecedented.

The other thing is, it’s well known in the industry that large companies within the mobile space, within the SSD space, a few of these applications are driving for a level of quality that was not historically there before and it’s harder to get that quality than it was a few years ago. And so that’s creating an opportunity for us right now.

Orin Hirschman

I agree, okay, thank you so much.

Gayn Erickson

Thank you. Hey Operator just a quick one, Ken is saying that we were both right. We technically had six new institutional investor, two of which placed part of the funds in two funds each. So there were eight names on there or nine names under I guess -- there were three of them that did nine funds.

Operator

We will take our next question from Tom Diffely with D.A. Davidson.

Tom Diffely

Hoping you could may be give us a little more information about, what you feel your long term target model might look at, there margin and earnings expectations at different revenue levels or may be just margin guidance, something along those lines that we can start to model of what we think this might look like long term?

Gayn Erickson

Okay, so Tom let me do it -- let me make it pretty simple, right? This is, if you were to just take a straight line model of the last six or eight quarters, you can project it fairly well from where we’re at and what you would realizes is that, we wake up each quarter and we’re going to spend something like $3.5 million to $4 million a quarter right? And that includes some of the non-GAAP items of options expenses, so it’s not even real cash. Of that about $1 million is R&D, $1 million is about -- is typically our manufacturing costs that get embedded into our manufacturing cost of sales and about 1.5 million is SG&A, remember we’re still a public company and then I’d left out about $0.5 million of rounding here and there.

Our systems, we typically sell at somewhere in the 50% to 60% type margins and that’s an incremental margin from there. And so we believe we can make a good business out of that, it’s a good rule of thumb, we don’t have to charge the margins that some of the larger players do, because we have a much lower overhead and so our scalability is, you go through that math and some around 6 million to 7 million depended with the margin is that makes up at that time, for the quarter we’re at breakeven and then we’re making $0.50 on the $1 there after.

As we scale, one of the great things about this business is that, you need to start with some level of infrastructure maybe that’s the bad thing. We’re going to spend that money, whether we ship anything or not. But then I can ship a significant amount of capacity. We put in place to supply chain, a word class supply chain to be able to address these new products with every sub-system, major sub-system has a second source. So that we can supply capacity well, well in excess of our current revenue levels.

If you come to our facility, you can see our infrastructure here is similar to that which I had in my last company where we were doing literally $200 million to $300 million a year. I’m not projecting that, that’s not what I’m trying to put in forward statements here. But what’s important is if a customer comes along and needs to order a number of systems, you need to have the ability to be able to ship those both on short lead times and within diverse [ph] type capacity.

So that’s a simple model for you. Again, one of the first questions from Christian was, how big can will be? We’re not projecting that out, but we certainly do anticipate that we will have significant growth this year and we’ll continue that in the following year.

Tom Diffely

Okay. So to confirm that -- to go back though it the gross margins in the mid-50s ultimately provides an operational margin drop close to 50%, so there is very little incremental spending?

Gayn Erickson

That’s correct. If you were to look at us in scaled fashion, the types of things that scale with this would be small amounts of direct labor. We have some commissions, we do have warranty reserves, pretty typical of the industry, we have a couple of percent type of range and those we will put into, what we call our incremental costs. So when I talk about those margins, I was excluding those. But we’re talking about truly 50 to 50 plus incremental margins that drop straight down.

Tom Diffely

Okay. That’s great, that’s ton of leverage. And then finally when you looked at the last rounds of financing. What other forms did you look at, did you look at straight debt or converts at the same time?

Ken Spink

We did, we actually looked at a number of different scenarios, we’ve been doing that over the last quarter. It’s been a continuous discussion on each of these calls and with our key shareholders. On one hand people have been proud of us for being able to run as lean as we have. On the other hand, we might be working too hard. And so the Board took a look at a number of different alternatives and determined that this in fact was our best call to make at this time.

Obviously this helps us shore up our balance sheet, it allows us to do some things like from a long lead time items and all that I’d like to do to be able to shorten lead times for customers and to meet burst demand. And as Ken pointed out I don’t want to be too subtle with it, as we had stated in writing and at the last couple of calls due to a shareholder equity falling below minimum standards on NASDAQ capital markets. You needed to address that in order for us to stay within compliance. We believe that based upon this raise, we meet not only that but the market cap requirement as well. We just don’t have the letter in hand yet, and as soon as we have it from them, but we have a positive acknowledgement from them, we believe that this is enough to cover that base.

Gayn Erickson

So I’d like add something there too. One of the things we took a look at from a debt standpoint. Our current loan that we have with QVT [ph] is very restrictive. We are not allow to have added any debt which is not subordinate to their debt, which is secured by all assets of the company. Also they had restrictions on the amount of the interest rate, which couldn’t be below the 9% and also their restriction is any new debt added had to have a maturity date after 90 days after the termination of agreement. So when you take a look at all of those factors, it would be difficult if not impossible to really get debt and really the company literally doesn’t want to get involved in debt with those onerous terms.

Tom Diffely

Okay. Now I understand, that make sense and look forward to an exciting year.

Gayn Erickson

That’s true Tom.

Operator

We’ll take our next question from Marty Cawthon with ChipChat.

Marty Cawthon

So Gayn here is a question, if you look out two years from now. And you can try to -- you see what’s going on. If you imagine that most things go pretty well, some things always going to go wrong. But two years from now, what do you think the installation list for the FOX-P machines might look like?

Gayn Erickson

What’s your next question? I’m kidding Marty. That’s -- how do I want to answer that, again we’re trying to avoid any grandiose. Let me ask -- answer a different question [multiple speakers].

Marty Cawthon

Okay. Here is what I’m leaving looking for is, we talk about engineering application, which is like typically one machine and production applications, which is main machines. But how many?

Gayn Erickson

So Marty you’re right on, where is where I was going to go. So let me tell you, this is how. So you’re thinking the same way, where I was going to go next. So let me talk generically. We believe that many of these applications that we have looked at, are measured in multiple units of our FOX-XP systems for a given device. So it would not be atypical for us to anticipate that one device could drive tens of systems over some period of time. So this is scalable, this is, we don’t believe that a typical application will only have one system for example.

Although that one system, the customer would continue to buy WaferPak on probably every 18 to 24 months kind of basis is what we’re currently modeling in. We are -- we do expect that these applications and people ask well that’s a lot of systems, you got 18 wafers in there already that’s a lot of capacity. Well the applications that we’re driving for are much longer test times. So an example and this would be sort of generic industry knowledge.

A flash memory fab might have several hundred systems on their sort [ph] floor at wafer level testing for functional tests. But the test times are measured in minutes or fractions of hours for certain. As burn-in times for devices like a flash memory for these automotive devices or these sensors typically start at a couple of few hours. We have testers out there that are doing burn-ins at I think 90 minutes or two hours is the minimum, and we have something that are doing 96 hours burn-in.

So when you start looking at it, the test times are literally 10 times as long. So an 18 wafer system only looks like two wafers of production capacity from a functional tester, so that’s why their scalability to this. So we think, we’re onto some large exciting markets and so we would expect a fairly significant installed base out there a couple of years from now if everything goes well, if I can repeat what you've asked.

Marty Cawthon

So per device and some of the lead customers even are looking at more than one device applications, is that true?

Gayn Erickson

Yes.

Marty Cawthon

So we got three lead customers and maybe two of them have two applications, and -- so that gives a total of just 5 applications and 10 machines times 5 applications might be 60 machines?

Gayn Erickson

Operator do you have any other questions? I am kidding with you Martin.

Marty Cawthon

Okay, let's just -- so that thinking is okay even though the [multiple speakers] --.

Gayn Erickson

I think that thinking is okay, Marty.

Operator

And at this time, I show there are no further questions left in the queue Mr. Erickson, I'll turn the call over to you for any closing remarks.

Gayn Erickson

Okay, well, thank you operator. And thank you everybody, we really appreciate you jointing us. This is a little longer than our normal calls, we appreciate the time and all the great questions. And we know we have work ahead of us. We know what we have in front of us and we're looking forward to a great year this year. Take care.

Operator

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.

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