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Aehr Test Systems, Inc. (NASDAQ:AEHR)

F3Q08 Earnings Call

March 25, 2008 5:00 pm ET

Executives

Trisha Ross – Financial Relations Board

Rhea J. Posedel – Chairman of the Board & Chief Executive Officer

Gary L. Larson – Chief Financial Officer & Vice President Finance

Analyst

Ramesh Misra – Collins Steward LLC

Operator

Good afternoon ladies and gentlemen. Thank you so much for standing by. Welcome to the AEHR Test Systems’ third quarter fiscal 2008 conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) I’ll now turn the call over to Ms. Trisha Ross with the Financial Relations Board. Please go ahead.

Trisha Ross

Good afternoon and thanks for joining us to discuss AEHR Test Systems’ results for the third quarter of fiscal 2008. By now you should have all received a copy of today’s press release. If not, you can call my office at 213-486-6540 and we will get one to you right away. With us today from AEHR Test are Rhea Posedel, Chairman and Chief Executive Officer and Gary Larson, Vice President of Finance and Chief Financial Officer. Management will review its operating performance for the quarter before opening the call to your questions. I’d now like to turn the call over to Gary Larson. Go ahead, Gary.

Gary L. Larson

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, economic conditions in Asia and elsewhere, world events, acceptance by customers of our FOX, MTX, MAX and DiePak technologies and the conversion of quota activity to purchase orders and acceptance by customers of products shipped upon receipt of a purchase order, the ability of new products to meet customer needs or performance described, the company’s development and manufacture of a commercially accessible way for level test and burn in system and the potential emergence of potential technologies each of which could adversely affect demand for AEHR Test products in calendar year 2008. We refer you to our most recent 10-K and 10-Q Reports and other reports filed from time to time with the US 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 J. Posedel

Good afternoon and welcome to our conference call for the third quarter of fiscal 2008. We are pleased to report that we had another strong quarter. Net sales for the third quarter of fiscal 2008 were $10.7 million up 90% over the same quarter of the prior year and up 12% sequentially. Most importantly our net income for the third quarter was $1.9 million a significant 7X increase over the same quarter of the prior year. Our growth for the last few quarters has been driven mainly by our FOX-1 System and wafer pack products and we continue to remain excited about the growth opportunities we see for these products long term. Our highly parallel FOX-1 full wafer tester can test an entire wafer in a single touchdown offering significant cost savings advantages for conventional testers. We believe the cost saving advantages of our FOX-1 tester will continue to drive additional orders even in a weak semiconductor industry environment. The FOX-1 tester and its wafer pack contactors moves us into the $2 billion plus total available market for wafer pro-testing and pro-cards. This is a new market for AEHR Test and it significantly expands our addressable markets. With our FOX-1 product we are targeting the market segments for ICs with long test times such as flash memories.

Orders for our wafer pack contactors continued during the quarter providing further evidence that this can be a potentially strong recurring revenue stream and we expect additional orders as our install base of 300 millimeter FOX-1 tester’s increases. Our wafer pack contactor is custom designed for each wafer device type and is one of the key technologies that enable our FOX-1 system to parallel test thousands of die in a single touchdown. Designing and producing custom wafer pack contactors that can contact thousands of die over a 300 millimeter wafer have been a major technical challenge. Over the past few quarters we have invested in design and manufacturing infrastructure to increase our wafer pack capacity and reduce cycle times. In our fourth quarter we expect a significant part of our revenues to come from wafer pack contactors.

Another major event is that our first FOX-15 wafer level burn in system that we shipped in the second quarter is now running production wafers. The good news is that yesterday we announced that our customer, a leading automotive IC producer, has accepted the system and wafer packs. Getting the first system of a new technology platform qualified and accepted in such a short time was a major accomplishment. A special thanks to our technical and support team for making this happen. This was an extremely challenging application for our FOX-15 system because of our customer’s requirement to burn in wafers at temperatures up to 170 degrees centigrade. The FOX-15 system is a general purpose system that can provide wafer level test and burn in on a wide range of ICs.

Now that we have a FOX-15 system running production wafers we believe it will help us convince other customers that our technology works and can be a cost effective tool for processing wafers for their automotive and known good die applications. We are now aggressively targeting these growth markets. This past quarter we continued to see strong interest from potential customers for our FOX products. We have provided multiple quotes for our FOX products and are now progressing through the sale cycle. We continue to be optimistic that we will receive an order from a new customer in the next few quarters.

Also we have seen increasing quoting activity for our MAX products the past few months. Although orders for our core products in the third quarter were slow reflecting the semiconductor industry’s caution about adding new capacity. One bright note was selling our MTX system to SMART Modular for reliability testing of their advanced dim modules. SMART is a leading producer of advanced memory modules and this is a new application for MTX massively parallel tester and we believe this could lead to additional system orders. Going forward one our growth strategies is to leverage our new AVTS test electronics developed for our FOX systems and roll out a family of new parallel test and burn in products for package devices over the next 12 months. We’re excited about our newly developed AVTS hardware and software platform which was first used on the FOX-15 system. This is a highly configurable and flexible set of test electronics which will allow us to burn in and parallel a wide range of ICs from memories to microprocessors. We believe we can grow our core market share by targeting the rapidly growing segments for high power logic burn in and massively parallel test and burn in of flash memories and D-rams.

Another objective of our AVTS product strategy is to have common test electronics and software for all products thereby reducing engineering and support cost and increasing our manufacturing economies scale. The targeted customers where we have introduced the AVTS family of products are very positive about its capabilities and the low cost of ownership that it provides. We would expect to start shipping evaluation units over the next three to six months.

In closing we continue to be encouraged by the bookings potential we see from our initial FOX-1 customer along with the opportunities to add additional customers for our FOX products and new AVTS products over the longer term. Based on our backlog of orders for our FOX products we expect to end our fiscal year with another solid quarter of profitability with net sales up somewhat compared to the quarter just reported.

Now I’d like to turn the call over to Gary and he’ll add some color to the third quarter financials.

Gary L. Larson

Net sales were $10.8 million in the third quarter of fiscal 2008 an increase of 90% from $5.7 million in the third quarter of fiscal 2007 and an increase of 12% from $9.7 million in the prior quarter. In the third quarter of fiscal 2008 FOX-1 systems and contactors represented the large majority of our net sales. Gross margin was 51% for the third quarter compared with 58% in the year ago quarter. Our gross margin last year was positively impacted by a one-time NRE fee as well as higher than normal performance test board royalties which are all essentially 100% margin. On a going forward basis we continue to believe that our typical gross margin will be about 50%. SG&A was $2 million in the third quarter compared with $1.6 million in the prior year period. The increase in SG&A dollars is primarily attributable to an increase in headcount as we added sales and support resources to address the expected growth in our business.

Third quarter 2008 R&D expense was $1.8 million an increase from $1.6 million in the third quarter of last year. The increase in R&D is primarily attributable to additional staffing and spending on project materials necessary to continue growing our custom wafer pack business. This quarter we recorded a tax benefit of $130,000. This was a result of a change in our transfer pricing approach. The tax benefit is a retroactive adjustment for the entire fiscal year. Our net income for the third quarter was $1.9 million or $0.23 per share compared with net income of $265,000 or $0.03 per share a year ago and net income in the prior quarter of $1.4 million or $0.16 a share. Excluding stock compensation expense in these periods pro forma net income in the third quarter of fiscal 2008 was $2.1 million or $0.25 per share compared to $433,000 or $0.05 per share in the same period of the prior year and compared to $1.6 million or $0.19 per share in the prior quarter. Our cash, cash equivalents and short term investments stood at $6.1 million at February 29, 2008. This total is about $800,000 lower than at the prior quarter end resulting from the increase in accounts receivable during the third quarter. Accounts receivable was $18 million at the third quarter a $6.4 increase from the end of the prior quarter. The increase is primarily attributable to the higher level of sales as well as an increase in the level of receivables in Japan which typically have longer payment terms. Our inventory was $9.4 million at February 29, 2008 a $1.2 million decrease from the end of the prior quarter. Shareholders’ equity increased to $29.5 million or $3.66 per share outstanding at February 29, 2008 and we continue to have no outstanding debt.

As Rhea mentioned earlier we expect net sales in our fourth quarter to be somewhat higher than in the third quarter. We expect to be solidly profitable in the fourth quarter. The normal tax accrual will result in a tax expense rather than a credit in the third quarter. Also in the fourth quarter we expect to see additional expenses as wafer production ramps up so although the sequential comparison of net income will be a bit challenging we do expect net income in the fourth quarter to be somewhat similar to that recorded in the third quarter.

We’re now ready to answer your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) Ramesh Misra with Collins Stewart, please go ahead.

Ramesh Misra – Collins Steward LLC

My first question was related to the proportion of your contactor revenue as part of your FOX sales, I know you didn’t provide much of a breakdown on that but is it reasonable to think that it’s on the order of about 25% or in that ball park in Q3?

Rhea J. Posedel

I would say that most of the shipments were related to the FOX-1 system. I didn’t really estimate the percentage but most of it was probably the FOX-1 system.

Ramesh Misra – Collins Steward LLC

And you did say that in Q4 you expect the proportion of contactors to rise -

Rhea J. Posedel

Correct.

Ramesh Misra – Collins Steward LLC

- meaningfully. Again, perhaps really looking for guidance but what kind of a ball park should we think of? Could we start thinking of that approaching a quarter of the FOX system revenues?

Gary L. Larson

I think generally, again, we’re not planning on breaking out the splits between contactors and systems. As we have said in the past, a system is generally going to sell for about $1.2 million. A contactor can really vary quite a bit, it can go from $300,000 up to $500,000 so if a customer is buying one contactor per system you’d generally be looking at about 25 to 30% of the total being contactors. But oftentimes we see a customer buy more than one contactor for a system.

Ramesh Misra – Collins Steward LLC

Yeah, that’s the basis that I was getting to, that 25% kind of number, Gary. But I would presume that there is a little bit of pent up demand for the contactors. Is that correct?

Rhea J. Posedel

That’s correct because the customer has purchased more contactors than systems. As they add new device types they need to continually add new wafer pack contactors. We expect that to continue over the long term. That the orders or the shipments for contactors would probably exceed the system level shipments.

Ramesh Misra – Collins Steward LLC

On the FOX-15, are you pursuing other customers in that regard?

Rhea J. Posedel

We are for both our FOX-15 and FOX-1, yes. We are actively aggressively going after different customers for different applications for these products.

Ramesh Misra – Collins Steward LLC

Okay. In terms of pricing obviously since you’re pretty much a sole source supplier of these kind of tools but given the overall weakness in the semicap equipment environment are you seeing any more aggression or any more pressure in terms of pricing from customers?

Rhea J. Posedel

I think it’s always there. As a semiconductor equipment provider our customers are always asking for cost down whether their business is doing well or isn’t doing well. They’re always pushing for long term price reductions. It’s our challenge to continually reduce our costs and improve our efficiencies so we can maintain a decent margin.

Ramesh Misra – Collins Steward LLC

Okay. In regards to the MTX system that you just announced yesterday the [inaudible] SMART Modular, remind me again Rhea has SMART Modular bought MTX systems from you before?

Rhea J. Posedel

No, this will be our first opportunity to sell an MTX to SMART and for us that was exciting. SMART is probably one of the leading advanced memory module providers so we look at that as an opportunity to get in with one of the leaders and hopefully that business can flow to some of the other second or third tier modular manufacturers.

Ramesh Misra – Collins Steward LLC

In regards to your historical legacy business both on the MTX and MAX, obviously TI has been an important customer over there and it has been very lumpy but qualitatively what can you say about that portion of your business and the prospects of the next few quarters?

Rhea J. Posedel

I think what I mentioned is we’re seeing quoting activity increase for the MAX product this past quarter and we would expect probably the orders to start increasing in decent volumes probably in our next fiscal year so probably Q1 or Q2. But we’re taking really a proactive approach with our core products for package burn-in and parallel test. We’re developing a new platform we call it the ABTS which is advanced burn-in test platform, new set of electronics, new set of software. So, we’re actually going after a couple of large segments that we haven’t been competitive in in the past and one of them is for high power burn-in logic devices and the other is for tester burn-in or massively parallel test of DRAMs and flash memory. So we think with our new ABTS platform we can go after these new segments so we’re aggressively trying to increase our market share in the core products area.

Ramesh Misra – Collins Steward LLC

As you mentioned, ABTS is basically leveraging your efforts on the FOX type so the pursuit of this is not really going to result in meaningfully higher R&D expense?

Rhea J. Posedel

Correct. It’s going to be more of a packaging configuration, new chambers, new interfaces but the core technology, the hardware, the software, the communication interfaces, that structure was all designed for the FOX systems and we shipped the first of the ABTS electronics with the FOX-15. So, a large portion of that R&D has already been done and the risks so that’s a good observation on your part Ramesh.

Ramesh Misra – Collins Steward LLC

Then final question for Gary, your accounts receivable as you said did go up fairly significantly, should we think of this kind of level being your new kind of target? Or, do you anticipate, at least in the near term, that accounts receivable number should be coming down?

Gary L. Larson

We would hope to bring it down somewhat. As I mentioned, what we’re really seeing is a fairly large shift of our AR into the Japanese marketplace and typically the payment terms stretch out a lot longer in Japan than they do in the US so we’re experiencing that. But generally, we are working with our customers trying to maintain AR at as reasonable levels as we can.

Ramesh Misra – Collins Steward LLC

Was any part of that AR increase on account of the FOX-15 shipment?

Gary L. Larson

No. Not in the third quarter.

Operator

(Operator Instructions) I’m not registering any further questions, I’ll now turn the conference back to the management team for any closing remarks.

Rhea J. Posedel

I’d like to thank everyone for joining us this afternoon and we look forward to next quarter’s conference call. Thanks again.

Operator

Ladies and gentlemen this does conclude the AEHR Test Systems third quarter fiscal 2008 conference call. You may now disconnect. Thank you for using AT&T conferencing. Have a very pleasant rest of your day. At this time you may disconnect.

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