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Aehr Test Systems (NASDAQ:AEHR)

Q3 2012 Earnings Call

March 29, 2012 5:00 pm ET

Executives

Marilynn Meek -

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

Gayn Erickson - Chief Executive Officer and President

Analysts

Geoffrey Scott

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Aehr Test Systems Third Quarter Fiscal 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, March 29, 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 third quarter fiscal 2012 results. By now, you should have all received the 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 on the call today from Aehr Test Systems are Gayn Erickson, President 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 L. Larson

Thank you, Marylinn, and thanks, 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 future financial performance. Actual results may differ materially from projected results and should not be considered an indication of future performance.

These risks and uncertainties include without limitation world economic conditions, the state of the semiconductor equipment market, acceptance of 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 performance 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 Chief Executive Officer, Gayn Erickson. Gayn?

Gayn Erickson

Thank you, Gary. Welcome to everyone and thank you for joining us on our third quarter conference call.

As I indicated last quarter, I'm extremely pleased to be here at Aehr Test, and I'm very excited about the opportunities for our company. In the past 3 months, I had the chance to visit a significant number of customers, I think a little over 20, in the U.S., Taiwan, Japan and Korea with many more to see. The reception that I received universally was both welcoming and encouraging, as our customers are very optimistic about the business prospects. This optimism is translating into our seeing increased activity the likes of which we have not seen since before the downturn. This, coupled with the growing recognition of our products' value proposition and our competitive advantage, resulted in a significant increase in orders during the third quarter. Aehr Test ended the quarter with the largest backlog that we have had in the past 3 years.

Let me take a few minutes to bring you up-to-date on recent orders and significant milestones we have achieved. We announced in January that we received an initial order for our ABTS, which is the Advanced Burn-in and Test Systems for our high-powered device burn-in system from a leading logic, analog and mixed signal semiconductor manufacturer. This is a major milestone for us at our company as we believe that they will purchase additional ABTS systems for both production and engineering burn-in requirements as they ramp capacity for new higher-powered wireless and mobile processors. The purchase signifies the successful completion of extensive qualification of the ABTS system performed at the customer site.

Also today, you'll see we announced 3 additional significant orders for us on the line. One order was for our ABTS from a leading test lab in Korea that focuses on reliability qualification and High Temperature Operating Life testing. Labs such as this one in Korea demand premium performance and reliability from their test and burn-in system to the duration of the test, which often lasts 6 weeks or longer. A typical HTOL or High Temp Operating Life test lasts 1,000 hours for a single lot of devices. This ABTS system features high-power logic device testing capability, using our dynamic individual temperature control and advanced test capabilities. The second order is a follow-on production order for our ABTS systems from a leading provider of embedded wireless technology. This order confirms that the burn-in and test process using the ABTS system is effective for this customer's wireless devices that are used in the automotive market, which requires that the ICs be qualified to operate extremely reliably in harsh environmental conditions.

And the third order we announced, was another follow-on order for our ABTS system from a leading Japanese semiconductor IDM or Integrated Device Manufacturer. This system is also being used for production test of devices serving the automotive IC market. We see the trend here. We work very closely with this customer to provide high-volume solution using factory automation capabilities of our ABTS environmental chamber. Aehr Test designs our own custom environmental test chambers to meet our stringent requirements for quality, thermal specifications and system reliability. These chambers are manufactured by our own supply chain with 2 subcontract manufacturers in Asia that deliver lower cost, high quality and confidence in our assurance of supply of these chambers.

Additionally, we achieved another significant milestone during the quarter. We completed the validation and shipped in ABTS Advance System to a large semiconductor supplier in South Korea for testing medium and high-power logic devices. This is a different customer than the new order I just mentioned. Historically, Aehr shipped and installed many systems into Korea, but this was our first ABTS system into Korea for logic device testing and it's a major milestone for us.

Last quarter, we mentioned that we have gained a new customer in the automotive sector, an area we believe has good growth potential for us. We're continuing to see growth in the automotive and mobility integrated circuit reliability needs driving our package burn-in system as well as several new opportunities for wafer-level test and burn-in for our FOX products. We believe both of these areas represent good growth opportunities for Aehr going forward.

The rising tide of activity and purchase orders is also showing up in our installed base of FOX wafer-level burn-in and wafers to our test systems. Our installed base utilization is improving across the board and we are seeing a notable increase in orders and forecast for our WaferPak contractors. This is good base business for us at Aehr Test.

In Q3, just to talk a little bit about it, our revenue was just $2.9 million. Reflecting primarily a baseline level of business in service, support, our WaferPak consumables, upgrades to our installed base and only a small number of system. Our net loss of $1.36 million versus a loss of $1.37 million, our revenues of $3.9 million in the previous quarter reflects an improvement in gross margins and a proactive reduction in operating expenses made during the quarter. We took several cost-cutting measures, including some appropriate shutdowns and an Officer and Board of Director salary reduction that we implemented within a couple of weeks of my getting here. We decided not to take extreme measures to permanently reduce expenses further at this time. We feel we need these resources to meet our customers’ needs in R&D, manufacturing and shipping our backlog, and supporting our new installations and installed base. With our strong backlog, the rising tide in our customer base and our conservative management of operating expenses, we expect our revenue and operating results to improve significantly during the next several quarters and we expect to achieve positive cash flow within the calendar year.

Before turning the call over to Gary, I'd like to reiterate my optimism for Aehr Test. There is great talent and energy throughout our organization. We have some of the best and largest customers in the world and we're expanding those relationships even as we look to add new customers to our roster.

Gary, let me turn it over to you now.

Gary L. Larson

Thank you, Gayn. As reported in today's press release, net sales declined to $2.9 million in the third quarter of fiscal 2012 compared to $4.2 million in the third quarter of last year. Gross profit was $1.1 million for the third quarter or 38.8% of net sales, which compares to a gross profit, $1.6 million in the third quarter of fiscal 2011 or 37.8% of net sales.

Taking a look at operating expenses, SG&A was $1.5 million in the third quarter, about the same as SG&A expense in the prior-year period. Third quarter R&D expense was $933,000, down about $100,000 from the third quarter of last year. R&D spending can fluctuate from quarter-to-quarter depending on the development phase of our new product.

In the third quarter, we reported a net loss of $1.4 million or $0.15 per share, compared to a net loss of $946,000 or $0.11 per share in the fiscal third quarter of 2011. The first 9 months of fiscal 2011, operating expenses were reduced by $155,000 related to partial proceeds from Spansion Japan bankruptcy claim. In the first 9 months of fiscal 2012, we reported a gain of $990,000 from the sale of our interest in ESA Electronics, a Singaporean private company.

Turning to the balance sheet. Our cash and cash equivalents were $3.0 million at February 29, 2012, compared with $3.1 million at November 30, 2011. We took an advance of $0.7 million on our line of credit in the third quarter to fund our working capital needs and expected AR growth. We have requested and expect to receive an increase in our line of credit with Silicon Valley Bank against our AR and certain inventory orders from key customers. Based on our improving business prospects, improvements on customer payment terms and our line of credit, we're comfortable that we have enough necessary cash to meet our needs until we're generating cash later in the calendar year.

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 our first question comes from the line of Geoffrey Scott with Scott Asset Management.

Geoffrey Scott

Gary, last quarter you said that revenue would be similar to the second quarter and operating results would be improved.

Gary L. Larson

Correct.

Geoffrey Scott

What happened?

Gary L. Larson

Basically, the...

Gayn Erickson

Yes, I can actually take that for you. Hi, Geoff.

Geoffrey Scott

Hi, Gayn.

Gayn Erickson

So as you mentioned, last quarter and actually in the Q&A section, we discussed the expectation of similar results -- revenue at the previous quarter and also to pull that out 1 year as well, we have talked about an improving operating results. The net was our revenue, in fact, was $1 million less and effectively have the same bottom line, I think, worth $10,000 higher, but right, the same. Specifically, we had a couple of deals that we had expected, that were due to come in and score revenue late in the quarter. And one of those actually was delayed by the customer and the other one had a short delay on our side, that effectively pushed it deeply into this quarter. Easily, meaning they will be in this quarter. So in this case, it was -- we were able to manage our expenses to effectively be able to hit the same bottom line with $1 million less in revenue, but the net is those 2 revenue and their margin will be pushed in to this quarter.

Geoffrey Scott

So there were system shipments that didn't happen by February 29?

Gayn Erickson

Yes, one was a system and one was actually an upgrade, Geoff.

Geoffrey Scott

Okay. We've been spending the last many number of years talking about customers, not much focus on the engineering and cost reduction side on the manufacturing plan. Is it about time to start focusing more efforts on the cost of goods sold?

Gayn Erickson

There's probably a few different things that we are also focusing on, so I expect a follow-on question with this one too, Geoff, but the current -- the answer is, absolutely, we have been focusing on both cost of goods sold but another area that we have been pushing on very specifically is our margins in terms of the value that we're seeing with the customers. I think last quarter, as noted before, we have a mix, if you will, a high degree of systems that went out the door that actually have very low margins on them. The good news is that the orders that we have been seeing reporting here are all at substantially higher margins and so an expectation is that as we are shipping products, we're getting the value out of the competitiveness and getting the value out of the ABTS that we put that investment in to actually get increased margins.

So when I think of cost of sales, I'm equally as concerned about our -- we're sitting on our material costs and do -- within our supply chain, do we have an ability to lower cost? As I am to keep on to ensure that we are getting the value out of the products that we have, and that is one of my pet peeves coming here in the company, and I believe we can do that. That has been one of the things very encouraging when I've been meeting with his customers and the deals that we're winning. We're winning in an appropriate margin that allow us to continue to make the investments, because that's what our customers also want us to do is to be able to make the investments in R&D to make enhancements and some new programs that we are talking to customers about.

Geoffrey Scott

If I'm reading between the lines correctly, I'm hearing that, one, your cost went down as the learning curve goes up as you produce more machine. And secondly, there might be a little bit less price pressure from your customers as they understand the value of what they're getting and they're letting you increase prices a bit?

Gayn Erickson

Well, I would be more specific that were able to maintain the appropriate pricing that we entered the deals with. I have not -- customers, it's not that we're actually raising prices. We have taken in a couple of scenarios, have worked with customers on improving term, especially if there's any -- ever any discussion about some additional discounts, one thing we're trying to be is a lot more conservative with respect to the terms and conditions, and in terms of net terms and payments upfront in many cases.

Geoffrey Scott

Okay. Are you at all worried about the quality of the receivables?

Gayn Erickson

I don't know, backlog you're saying?

Gary L. Larson

We don't have any concerns about the quality of our receivables. We do have provision for bad debt that has been in place for quite some time, and we've not been in a situation where we needed to apply that.

Gayn Erickson

Another comment on this, there is actually, we have a number of customers appropriately with the LCs that ensured that, and the test of also the quality of the orders that we're getting is the agreement that we have with Silicon Bank, in fact, has provisions for, if you will, a creditworthy -- or level of creditworthiness of the customers. And our installed base, typical of our industry and ourselves, we don't talk about the specific customers, but we have 3 of the 5 largest semiconductor manufacturers. These are very large multinational companies that we believe are of low-risk backlog.

Operator

[Operator Instructions] And gentlemen, I show no further questions in queue at this time, please continue.

Gayn Erickson

Okay, well, thank you very much and for folks on the line and on the web, actually, similar to last quarter, we had a large number of folks that were sitting on the web, which I know aren't too easy to call in. We don't have a provision for clicking and sending any e-mail questions, but I do want to do give the same offer that I did last quarter, and that is I'll make myself available for a one-on-one, any questions, and please contact us if you'd like to do that. I could do that either in person. We'd love to have you come in and see the products and exciting things that are happening here. We can do it over a phone call as well. And I'd like to thank everyone for joining us this afternoon and we look forward to next quarter's conference call. Thank you.

Operator

Ladies and gentlemen, that concludes our call for today. If you'd like to listen to a replay of today's conference. You may dial 1 (800) 406-7325 or (303) 590-3030 and enter the access code of 4525341. Thank you very much for your participation. You may now disconnect.

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