Aehr Test Systems (AEHR) CEO Gayn Erickson on Q2 2019 Results - Earnings Call Transcript

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About: Aehr Test Systems (AEHR)
by: SA Transcripts
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Earning Call Audio

Aehr Test Systems (NASDAQ:AEHR) Q2 2019 Earnings Conference Call January 10, 2019 5:00 PM ET

Company Participants

Jim Byers - Senior Vice President, MKR Group, Inc.

Gayn Erickson - President and Chief Executive Officer

Ken Spink - Vice President of Finance and Chief Financial Officer

Conference Call Participants

Christian Schwab - Craig-Hallum Capital Group LLC

John Barton - B. Riley FBR, Inc.

Larry Chlebina - Chlebina Capital

Geoffrey Scott - Scott Asset Management

Operator

Good day, ladies and gentlemen, and welcome to today’s Aehr Test Systems’ Second Quarter Fiscal 2019 Financial Results Call. I would like to remind everyone that this call is being recorded.

And at this time, I’ll turn the floor 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’ second quarter fiscal 2019 financial results.

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 second quarter of fiscal 2019 before opening the call to your questions.

Aehr Test announced its second quarter results and a press release issued this afternoon, which is available on the company’s website at aehr.com. And in addition, this call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of the company’s website.

Before turning the call over to management, I would like to make a few comments about forward-looking statements. The company 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 the company’s 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 with that said, I’d like to now introduce Gayn Erickson, Chief Executive Officer. Please go ahead, Gayn.

Gayn Erickson

Thanks, Jim, and good afternoon to those joining on today’s conference call and also listening in online. Ken will go over the second quarter financial results later in the call. But first, I’ll spend a few minutes discussing our business and product highlights, including our continued progress with our FOX-P platform for wafer level singulated die test and burn-in. We’ll then open up the lines for your questions.

While our revenue in the second quarter was lower on a year-over-year basis, it was in line with the expectations that we discussed in last quarter’s call for a softer first-half of the fiscal year, with many of our customers’ capacity ramps expected in the second half of our fiscal year. We continue to feel positive about the second half, but they’re in fact, both positive and negative events that impact our expectations for the fiscal second half and full year.

Let me start with the positive news and highlights in our business. Our lead customer for our FOX-XP system for production wafer level burn-in of silicon photonics devices continues to drive increased business for us. This customer, who is one of the world’s largest semiconductor manufacturers, has a very strong forecast for their capacity ramp, which will consume the system capacity they have ordered to date.

We continue to expect orders for a significant number of our WaferPak Contactors by the end of this fiscal year to populate their FOX-XP systems, as well as orders for additional FOX-XP systems and WaferPak Contactors throughout calendar year 2019 and beyond.

As we previously announced early in the second quarter, we received an order from this lead customer for another fully configured FOX-XP Multi-Wafer Test and Burn-in System, along with another FOX WaferPak Aligner to provide additional test capacity. We successfully shipped this system and Aligner during the quarter.

We’re pleased to announce today that just this week we received a commitment from another new customer to use our FOX-P Platform for test and burn-in of silicon photonics devices. This additional production burn-in customer will utilize our new FOX-NP system to begin their production ramp and then transition to high volume production test and burn-in of 100% of their silicon photonics devices using our FOX-XP systems, which in their configuration has a capacity to test and burn-in over 4,600 singulated die devices in parallel. We are expecting eminent placement of an order by this customer for their initial production needs.

The FOX-NP, which we announced today, is a new product within Aehr Test’s FOX-P family that offers a lower-cost entry-level system to provide a configuration and price point for companies to do initial production qualification and new product introduction, enabling an easier transition to the FOX-XP for full production test. This new FOX-NP system is 100% compatible with the FOX-XP system and is configurable with up to two blades per system compared to up to 18 blades in the FOX-XP system.

Each blade allow simultaneous test and burn-in of one wafer or one DiePak. Our proprietary DiePaks allow independent testing of up to 1,000 devices in parallel with individual test resources, including precision current drivers and independent optical test resources per device.

Customers use of the FOX-NP will allow an easier transition to our FOX-XP production system. In addition, customers have forecasted purchases of multiple NP systems to enable them to run many wafers at different temperatures in parallel and at completely different burn-in and test conditions for their reliability and characterization needs. Each FOX-NP system has its own thermal control system to allow independent thermal temperature and control of its FOX blades.

We believe that the new FOX-NP will significantly expand the market and number of customers for our FOX products. The FOX-NP is affordable and low risk for smaller companies or new applications where the initial volumes are low. It also opens up a new application for reliability screening requiring different temperatures.

Although the wafer sample size for reliability qualification may be low, there are many unique wafer types, and also the test times for qualification can be very long measured in hundreds of hours or even thousands of hours, so customer may use many FOX-NP systems.

The FOX-NP system will begin volume shipments just a couple of months away in early fiscal Q4. We continue to see increasing forecast for the silicon photonics market, and believe the silicon photonics and photonics sensors markets will be significant growth drivers for Aehr Test.

According to market research engine, silicon photonics for data center and high-performance computing is projected to grow at a compounded rate of approximately 27% from 2017 through 2024. With the addition of the new silicon photonics customer announced today, we now have three key customers in this space so far, and believe we’re well-positioned to gain the number one market share in this segment.

Today, most burn-in test for photonics devices is done at the package level or system level. We firmly believe that most companies will move to adopting a wafer level or singulated die level burn-in once they understand the lower-cost and higher-value resulting from the yield improvements provided by Aehr Test’s family of FOX-P solutions. This is particularly true for the integrated silicon photonics market.

These devices are being targeted at big data storage, data server, the Internet backbone, and 5G infrastructure markets. We will be showcasing our FOX-P family of products at the SPIE Photonics West Conference, February 5 through 7 next month. We welcome anyone attending the show to stop by or booth to learn more about our new products and how they uniquely address the photonics test, burn-in, and stabilization market.

Our initial lead customer that’s using our FOX-P systems for mobile sensors is still expecting to purchase our DiePak carrier consumables this fiscal year. Though as we reported last quarter, their forecast for incremental systems pushed out beyond this fiscal year. They continue to use our systems in multiple applications, including 100% burn-in and also sampling.

Sampling is used when device quality levels are not at a level, where 100% confidence is needed for quality or reliability. This is a qual made by the customer based on failure rates and impact in return levels. We continue to see a wide variation in range of customer opinions on how much sampling is required versus 100% burn-in, but our systems are very cost-effective with either method. And so we’re well-positioned to work with each customer on whichever strategy they feel is best.

Having said this, we still feel that ultimately the quality and reliability needs of some of the newest and upcoming applications for these sensors could likely drive customers towards 100% burn-in, which would considerably increase the market size for our Test Systems products and consumables.

Now let me go ahead and turn over to the traditional package for test and burn-in business. As we predicted at the beginning of the year, our traditional core business for package for burn-in systems and OEM chambers has been soft this year.

As we discussed at both of our last two conference calls, our largest customer for AB Test Systems for package parts burn-in, who purchased a significant number of systems last year, continues to indicate they do not expect any incremental need for AB Test Systems this fiscal year, as they continue to absorb the systems that we delivered to them in the past year.

They continued to do smaller upgrades on their older fleet of their burn-in systems to add high-voltage capabilities, as well as provide a base revenue stream to us for support of their large installed base. We do continue to see a number of system upgrades into our installed base and a small number of systems, orders and shipments such as the latest AB Test System we ship to a leading wireless communication chipset company for using high-volume production burn-in and automated devices to the rest of this fiscal year.

We also continue to have service and support contracts that provide revenue for our large installed base package part test and burn-in systems. We continue to see customers in the automotive space express concern about how they will meet their ever-increasing reliability requirements coming from the automotive companies.

For the first time, the industry is transitioning from the PPM, or Part Per Million metric coined in the 1980s, which referred to the defective Parts Per Million unit that automotive companies were driving for, for initial and long-term product quality goals. The new term being used is PPB, or Parts Per Billion, with goals of several hundred Parts Per Billion failure rates being set as goals for automotive semiconductors. It is unclear that there is anyway to meet these goals for many types of semiconductors without 100% burn-in.

However, traditional burn-in methodologies of using manual or even automated handlers that pick and place devices individually into individual sockets are unlikely to be able to ever meet these goals as the very event of handling devices individually creates the potential to damage the devices at higher than the PPM rates much less PPB, or Parts Per Billion rates.

Aehr Test believes that the only way to achieve such both failure rates is with massive parallel handling and test and burn-in techniques, such as offered by our FOX-P line of products. The FOX-P allows thousands of devices to be tested in parallel with a single insertion.

Devices in wafer, panel or strip form can be handled with precision mass handling and alignment with our proprietary FOX WaferPaks and Aligners that then allow validation of an effective test and burn-in in – of every single device. This provides 100% confidence in validation, as well as traceability without human intervention.

We believe that customers across many segments will be driven to adopt new test and burn-in methodology and handling techniques in order to meet the critically low failure rates demanded by these new applications, where safety, security, confidence are absolutely critical.

As we had discussed last quarter, many of our customers had substantial forecast for bookings and shipments that we forecasted by the end of our fiscal year. We have seen push outs of orders for capacity increases from our installed base due to customer device delays that do not appear to be related to macro industry trends.

We also believe some of our customers have taken a cautious stance – sorry, which has impacted the timing of their orders to Aehr due to general market concerns and trade uncertainties between the U.S. and China, as well as slowdowns in the mobile space that have been widely reported. Specifically, we are seeing orders that are delayed such that we will no longer be able to ship them within this current fiscal third quarter and/or our fiscal year.

As a result of the current customer product delays and market conditions, as well as specifically delays in expected orders this quarter, we are lowering our revenue guidance for fiscal 2019 from a range of $30 million to $35 million to a new range of $20 million to $25 million. However, we expect to see an improvement in bookings in our second-half, with an increase in backlog heading into our fiscal 2020, which begins June 1, 2019.

We believe that the long-term fundamentals for Aehr Test Systems have not changed. We continue to see an increase in semiconductor content in every part of life, as well as the increased need for reliability, security, safety, and confidence in those semiconductors and electronic products.

We also see the macro trend of semiconductor devices with heterogeneous integration or stacked die, increasing the need for reliability and burn-in of devices before they are integrated or stacked into multi-die packages. The impact of a failed device is exponentially more expensive in stacked die packages, as the failed die causes the entire package to fail.

We have several new customer opportunities for production burn-in with our FOX products that we expect to transition to production wins in the second-half of the fiscal year. We look forward to providing more information on those opportunities in the near future, as they progress further.

As we continue to focus on our selling resources and processes, as mentioned last quarter, we’ve been shifting our operating costs around to enhance our sales and marketing capabilities. As part of this effort, we’re excited to have announced during the quarter the appointment of Vernon Rogers as Executive Vice President of Sales and Marketing.

Vernon will oversee all aspects of our customer-facing sales, marketing and support team and brings a proven track record in successfully building multichannel sales distribution and support organizations in both the semiconductor and system level test space.

Aehr Test’s unique products allow our customers to test and burn-in their devices with 100% confidence in traceability, which are needed to address the reliability, safety, security and confidence for mission-critical applications, and we feel we’re well-positioned to capitalize on those long-term market trends.

With that, let me turn it over to Ken.

Ken Spink

Thank you, Gayn. Net sales in the second quarter were $5.9 million, compared to $4.7 million in the preceding quarter and $7.9 million in the second quarter of the previous year. The sequential increase from Q1 is primarily due to an increase in FOX-XP system sales, including two key shipments that we had anticipated near the end of Q1, but pushed into the second quarter, as we noted on last quarter’s call.

The decrease from Q2 of the prior year included a decrease in package parts and ABTS OEM chamber revenues of $2.3 million, offset by increases in wafer level burn-in revenues of $0.1 million and customer service revenues of $0.2 million.

Non-GAAP net loss for the second quarter was $405,000, or $0.02 per diluted share, compared to a non-GAAP net loss of $1.3 million, or $0.06 per diluted share in the preceding quarter and non-GAAP net income of $424,000, or $0.02 per diluted share in the second quarter of the previous year. The non-GAAP results exclude the impact of stock-based compensation expense.

On a GAAP basis, net loss for the second quarter was $629,000, or $0.03 per diluted share. This compares to a GAAP net loss of $1.5 million, or $0.07 per diluted share in the preceding quarter and GAAP net income of $60,000, or $0.00 per diluted share in the second quarter of the previous year.

Gross profit in the second quarter was $2.4 million, or 41% of sales, compared to gross profit of $1.6 million, or 33% of sales in the preceding quarter and gross profit of $3.1 million, or 40% of sales in the second quarter of the prior year. The sequential increase in gross margin is primarily due to higher other cost of sales in Q1 related to inventory scrapped and tooling and setup charges, as well as operational efficiencies gained through higher utilization and manufacturing overhead. The year-over-year increase in gross margins primarily reflect a benefit due to product mix.

Operating expenses in the second quarter were $3 million, compared to $3 million in the preceding quarter and $2.9 million in the prior year second quarter. R&D expenses were $986,000 for the second quarter, compared to $1.1 million in both the preceding quarter and the previous year second quarter.

SG&A was $2 million for the second quarter, compared to $1.9 million in both the preceding quarter and in the prior year second quarter. The slight increase in SG&A, both sequentially and year-over-year is primarily due to employment-related expenses associated with headcount additions.

Turning to the balance sheet for the second quarter. Our cash and cash equivalents were $14 million at November 30, a decrease of $1.9 million from $15.9 million at the preceding quarter-end.

Accounts receivable at quarter-end was $3.9 million, compared to $2.3 million at the preceding quarter-end. Inventories at November 30 were $10 million, compared to $9.6 million at the preceding quarter-end.

Property and equipment was $1.1 million, compared to $1.2 million at the preceding quarter-end and customer deposits and deferred revenue was $2.3 million, compared to $2.7 million at the preceding quarter-end.

Bookings in the quarter totaled $4.1 million and included $2.7 million of bookings from one of our lead FOX-XP customers for a FOX-XP system and WaferPak Aligner. Backlog at November 30 was $4.3 million, compared to $6.1 million at the end of the preceding quarter and $12.2 million at the end of the second quarter of the previous year.

Now turning to our outlook for fiscal 2019. As Gayn noted, as a result of the current customer product delays, market conditions as well as delays in expected orders, we are lowering our revenue guidance for fiscal 2019 from a range of $30 million to $35 million to a new range of $20 million to $25 million. However, we expect to see an improvement in bookings in our fiscal second-half, with an increase in backlog heading into our fiscal 2020, which begins June 1, 2019

In terms of operating costs, we’re focused on increasing our investment in sales and marketing to address opportunities from both current and new customers. On an overall basis, we are slowing our spending and are revising our forecasted increase in SG&A, R&D and manufacturing overhead for fiscal 2019 to approximately 7% over fiscal 2018. This compares to a 9% increase over fiscal 2018 and our previous forecasts.

Our convertible note matures in April 2019. While we are uncertain if the lender will convert the note, the company is forecasting in an adequate cash position to repay the note at maturity. And we anticipate that the existing cash balance, together with income from operations and deposits from down payments against significant orders, will be adequate to meet our liquidity and requirements.

Lastly, on an Investor Relations front, later this month, Aehr will be exhibiting at the spot SPIE Photonics West conference taking place in San Francisco February 5 through the 7. We welcome any attending investors to stop by our booth.

This concludes our prepared remarks. We are now ready to take your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] And first from Craig-Hallum, we have Christian Schwab.

Gayn Erickson

Hey, Christy.

Christian Schwab

Hey, great. Thanks, guys. Good afternoon. So as we look at the – I think last quarter, you guys talked about your previous largest customer being Apple that their business would be flat to slightly up year-over-year, despite the push outs that you saw last quarter and that your other two leading customers would be up nicely. Can you just, in that context, update us on the push outs that you’re now seeing?

Gayn Erickson

Okay. So, Christian, actually, I want to say nice try, but that might be a little too friendly. We – we’ve actually never specifically called out any of our customers by name. As you know, we do need to, by SEC regulations, note our 10% customers on an annual basis and companies like Apple and Intel and TI and Cypress have been some of the notable ones over the last several years.

So more specifically, let me just talk about kind of our FOX-XP customers and some of our lead customers. And I know it’s been confusing with people, because we originally talked about our lead customer for mobile, then we talked about our lead customer for silicon photonics wafer, and then we’ve since added now a couple of customers for silicon photonics in a singulated die form.

Last quarter, I think what – the way we described it is for certain, but – one of our lead mobile customers we were seeing flatness, which was down from our original plan for the year, where they had forecasted a substantial amount of revenue for us at the end of our fiscal year. And they had 10 [ph] at that time and we guided at that time, pushed that forecast for the incremental capacity need outside of our fiscal year.

So in that case, we’re just restating that. We do believe that, we will continue to get consumables and some support contracts and some notable small enhancements and all, but we’re not seeing the – a large capacity of a new program as we had originally forecasted for this fiscal year due to push outs that to some extent, they have noted publicly with other people in the market.

We have actually seen in general a strengthening in our FOX products and other customers and new interest that includes the new silicon photonics customer that we announced today, our lead customer in silicon photonics that continues to ramp and we believe we’ll have a very strong forecast for us as we go into the rest of the year.

The challenge has been for us very specifically and this may come up several different ways. We had anticipated orders early in this fiscal quarter that would have allowed us to actually ship during the quarter end or into the fiscal Q4 that have not as of yet been booked.

And so given lead times on our cost and consumables as well as some of our products that would – that has forced us to – that’s the primary source of the lowered guidance as anticipated bookings are not going to come in, in time for us to be able to ship both this quarter and a big chunk of it in Q4 got moved out.

Christian Schwab

Okay. Can you remind us roughly if you can how much revenue in the trailing four quarters you’ve done with your leading OEM chamber customer?

Gayn Erickson

We did not specifically call out that in any of our previous numbers.

Christian Schwab

Okay, that’s fine.

Gayn Erickson

But I guess, I’d say, it was up maybe a little less than a few million dollars. And it was, as we reminded before, although we’re thrilled to death with that incremental business, it’s amongst our lowest margin business as an OEM business.

Ken Spink

Yes. I think also two we – as part of our 10-K, Gayn mentioned, we need to identify over 10% customers, and that was reflected in our last 10-K, publicly as being 12% of revenues.

Christian Schwab

Okay.

Ken Spink

…for FY 2018.

Christian Schwab

Thank you. Given recent consolidation, what is your outlook there?

Gayn Erickson

Okay, you’re stitching lots of things together here, Christian. I think what you’re referring to is one of our 10% customers, as noted in our SEC filings of last year, there was a public announcement that they are being acquired by a mutual – effectively potential competitor of both of our companies.

We have been told specifically and they have acknowledged that the contract that we have in place is sustained and that they – there is no threat to our relationship with them. The chambers that we provide are very unique and highly differentiated both in their performance and capability, but in our actual manufacturing supply chain to be able to build that many.

I actually – it was good to hear them reconfirm it, but I was quite confident that there is nothing like our chambers at that particular company that’s acquiring them. We have heard specifically that our contract that includes exclusivity would be maintained and taken over by the acquiring company, and so there’s believed to be no threat to our business related to the acquisition.

Christian Schwab

Great. Thank you. And then lastly, I know – thank you for giving guidance for 2019 on a yearly basis with a couple of quarters left. As we think about fiscal year 2020 and some of the positives and negatives in the near term as far as push outs or delays and delayed product ramps, et cetera, sitting here today without global economic conditions worsening or becoming worse than they are today, you would expect 2020 to be a growth year again, right?

Gayn Erickson

So let me just talk about it this way, Christian. We had a lot of discussion here about whether or not we want to go ahead and guide it relative to the following year. And our position is the same and that we really want to do it once a year unless we have some notable change. And please don’t read one way or the other into that.

But I do want to at least call your attention to some of the statements that we have made here. We really do believe that we’ll have stronger bookings in the second-half that we will have a, call it, a material improvement in our backlog going into next year.

A lot of our customers and we believe that a good portion of our customers’ purchases have really more to do with specific product-related launches and timing. But it’s always hard sometimes to discern that from maybe global hesitations that are going on. Our customers are reaffirming forecasts with us. They explain to us the importance of us. Many are increasing forecasts.

And as I alluded or specifically stated in the prepared remarks, we’re engaged with multiple customers that we believe will turn into production wins in our second-half, and that we would be talking about those as those happen.

So, what – it’s an – it’s a very interesting environment to be in right now, but we’re generally very optimistic about where our position is. That’s tough to say when you have to dive down as we did in this case. But we’re just facing the reality of the timing of the customer orders and our ability to turn those within our fiscal year and forced us to do that guide down. But generally speaking, I think we’re feeling very good about our business.

Christian Schwab

Great. I don’t have any other questions. Thank you.

Gayn Erickson

All right, Christian.

Ken Spink

Thanks, Christian.

Operator

Moving on, we have John Barton with B. Riley.

John Barton

Thank you.

Gayn Erickson

Hey, John.

John Barton

Hi. I think I heard at the beginning of the call comments that guidance was somewhat consistent with last quarter. I just want to make sure you understand it’s not last quarter, you said you expected revenue to progressively ramp during the quarter. We don’t see that, that’s a second quarter with a guide down and pointing to customer delays, obviously, it’s distressing.

What confidence or what evidence can you give us, or what evidence do you have to say that a push out is now – a push out that’s going to materialize you’re pointing towards an expectation of a higher backlog towards the end of the year? What’s that based on and why doesn’t that get pushed out?

And can you explain a little bit more, I mean, the push out happens every now and then, but twice in a row, it’s a little more concerning. So can you explain why the push out – I mean, you’ve added the commentary this time that market conditions are part of the story too and that’s something that a push out you expect to see in the subsequent quarter, market conditions maybe…?

Gayn Erickson

Yes. So John, let me – I think I can explain it as best I can, and I’ll try to differentiate where we’re very confident versus we’re reading the tea leaves. Last quarter very specifically, the – actually, the only indication that we were seen from any of our customers was from one customer that had a very specific program that was pushed out that they had forecasted a specific number of systems to specific locations. And we had at that time, even a conservative estimate of how many that would be, that would be within our fiscal year.

So last quarter seemed quite discrete to us. And that when we guided down, we had a combination of their forecast pushing out. But generally speaking, our other customers forecasts had somewhat improved from the early part of the year, right? So our guide down from, I think, at least $35 million to a range of $30 million to $35 million was trying to be entirely encapsulate all of that information.

What has happened in this quarter has been, we have seen a couple of specific things. That particular customer also had a little softening. I don’t think that is as material as the large, but it added to a little bit of it. But we also had a couple of programs with other customers that we’ve already won that had planned ramps with our device with our – actually our FOX products. That was reflective of incremental capacity purchases, as well as a large quantity of WaferPak Contactors for them.

Those customers we have specifically seen changes in their device plans that we have visibility of, because we’re actually designing all of the contactors for those devices. So we have pretty unique and specific visibility of exactly what their plans are for those devices. And we have seen push outs related to that, that now are reflected in a different date and expectation for us to ship.

So that seems pretty discrete and clear. That’s not to say that something else couldn’t change again, but we have a pretty high level of visibility with respect to that. Now there are a couple of other $0.5 million here or something, where we’ve seen some customers and we don’t have the same visibility that instead they said, they’re planning to buy it and it didn’t come in yet. And we’re looking at the tea leaves and saying, “Well, is this just everybody’s tightening up because of the environment that’s out there and that type of thing”.

So we try to have, as I described it, a balance of those, where we clearly see some device change ramps. We see some general softness in the market. And the most distinct thing that we’re discretely pushing out are things that we didn’t get orders for yet that we expect to get orders for that we will not be able to ship, in this case, either this quarter and the chunk of it in Q4 that gets pushed into next fiscal year.

John Barton

That’s more detailed and that’s helpful. Thank you. With respect to the backlog, the path has been $12.6 million and now $4 million. You said you’ve indicated – you expect it to be directionally higher at the end of the fiscal year. Can you give any indication of magnitude towards them?

Gayn Erickson

I’d like to simply say substantially higher than that number, but that’s a pretty small number honestly. I mean, we’re looking at this the $4.3 million backlog number. And in that are pieces that, in fact, aren’t even necessarily – that kind of get spread out.

We do have the ability to do turns within a quarter, but it’s certainly you can see, because we’re pretty – most of the time, we’re announcing any material order, you can see the challenge we have in that – at starting with a $4.3 million backlog, not reporting any substantial orders.

You can see the pressure on us in terms of this quarter and then going into next. But we do believe that we will have the second-half as forecasted and a pretty reasonable backlog going into fiscal 2020.

John Barton

Okay. Given the path that people will see in your financials, can you address the convertible note prior to maturity and clean up your balance sheet to make sure customers see you as stable? And how much cash do you think you need on the balance sheet to signal customers that you’re sticking around?

Gayn Erickson

[indiscernible] anyone of the color in.

Ken Spink

I’d be happy to jump in. So from a cash standpoint, currently, we have $14 million in cash that we reported. The note matures on April 10, $6.1 million. And based upon our current forecast if it’s converted, so we book some orders. Stock price pops up a little bit. We forecast in the range of $14 million to $16 million in cash. And that’s consistent with our model with a range of revenues of $20 million to $25 million, plus we have an additional, at least, we’re starting now, will lead into some of that at $10 million worth of inventory that we can ship products off of.

John Barton

Okay.

Ken Spink

So clearly…

John Barton

Go ahead.

Ken Spink

…clearly, I think from a cash position, we’re adequate. And should the lender not convert, again, you take the $6.1 million, we’re going to be in great cash position. Also I believe that opportunity to get other borrowing at much more favorable terms than we have in the existing note should be available to us. And that $6 million is costing us $500,000 a year in interest too, which is, I’d love to see off of our books, too.

Gayn Erickson

Correct.

John Barton

I think we all would. Thank you very much.

Gayn Erickson

Okay. Thank you.

Operator

Next we have Larry Chlebina with Chlebina Capital.

Larry Chlebina

Hey, did I hear you right in the last quarter that you get any OEM chamber sales?

Gayn Erickson

We have not announced any OEM chamber sales that…

Larry Chlebina

So relative to last fiscal year, I guess, we would assume chamber sales would be down this year over last, that would be a fair assumption?

Gayn Erickson

I think that is and, in fact, baked into the numbers that we guided. Our current expectation is little to no OEM chamber revenue in this fiscal year embedded in that range forecast.

Larry Chlebina

Okay. Inventory is being up to $10 million. Is that an indication of your belief that some sales may materialize be much stronger in the second-half or just the fact that sales did not occur your view?

Gayn Erickson

They’re kind of the same actually. So Larry, I mean, for certain, we have inventories. If you come and see here, we have FOX-XP. In fact, some of the inventories coming in on the new FOX-NP platform that allows us. We have ABTS material here, that some of which we had anticipated actually shipping in the quarter had the orders come in, in time.

So for certain, the inventory is reflective to some extent to the fact that, the orders had not come in, in time. I think, we would’ve and maybe Ken doesn’t need to correct me here. But had we booked what we thought we would have booked earlier in the quarter, I think our inventories, so the inventories actually even last quarter and this quarter inventories would have been down.

So there’s a little bit of a bow wave of inventories when the orders didn’t come in. In this case, then you slowdown a little. So you’re not driving the inventories up, because you have this effectively cash pile of inventory sitting there to ship against. And a big chunk of that, of course, is within our FOX-P family. It’s all of the blades in the channel modules that are interchangeable between all of our FOX customers and between the FOX-1P, XP and NP systems.

Larry Chlebina

So the new FOX-NP, is it upgradable to the XP? In other words, if someone commits to buying the NP, or I don’t know, I guess a third of the cost of XP they spend two-thirds more where they – could they end up with an XP, or how would that [Multiple Speakers]?

Gayn Erickson

Yes, they could. In terms of with the customers – so we’ve worked with a number of customers on this. Obviously, the one that we are now seeing that just is placing the order eminently, but others as well that have a forecast for these. What the customer feedback was and they actually – the typical use of this is going to be either in engineering labs in support of their production.

So as they bring up the new product, they do it on one or two blades and then they move it over to production on 18 or 36 blades or some number. But also the second application was, in fact, a lead customer gave us this particular one. They’re doing – they want to do reliability calls at the wafer level.

And so let’s see here for the folks that are listening in online. Semiconductors – all semiconductor devices while they’re in the manufacturing process go through a thing that we call qualifications. And what the qualifications and reliability qualifications do is they basically verify the process to allow the devices to last for many, many, many years. And so there’s all these physics involved with how you apply voltages and temperatures to devices to stress and strain them and simulate making them older, okay?

And normally, what we talk about production burn-in, customers might do that burn-in or aging for several hours or maybe 24 hours or even 48. And what that does is, it makes the device look like maybe it’s one year old. And one of the primary reasons they’ll do that is to remove any infant failures, any device that would have failed within a year is removed from the herd due to that burn-in, okay?

There’s also an aging process related to the silicon photonics that also the device actually kind of wears in. And if it hasn’t worn out, it’s still a good device to ship to customers, okay? Now the other thing people do is, they’ll take a device and they’ll run it a thousand hours. And in a thousand hours, the device looks like it’s 20 years old. And there are standard qualifications for automotive and, in fact, most semiconductors are – have a qualification to guarantee the life of the process – the semiconductor.

And so companies run not only at the beginning of a product life, but also as a process monitor throughout its life, what they call calls, which are they take the devices and run them for a thousands hours or hundreds of hours to verify that it’s going to last the life of it.

Well, this – these customers want to use the NP systems, which will have maybe two wafers at a time or a thousand die in DiePaks and they can actually run those for a thousand hours and not tie up their production systems. In that case, they make active by multiple NPs, but they’ll all be at different stages of the life of the production qualification.

So this is where we actually not only see, there’s sort of two new things to it. One is, it’s a low-risk way to get – see the customer to begin with instead of buying a $4 million production test cell. They can come in and for maybe a $0.5 million or so, they could buy an NP system and actually be able to test one or two wafers at a time and get their feet wet, if you will.

And what we’ve been seeing in the photonics, in the 3D sensors and the automotive sensor market, there’s the 5G infrastructure. There are literally tens, if not hundred customers out there that are all vying for these new market opportunities or biosensors is another one. But they are at early stages and they see the value of a wafer level burn-in, but they don’t want to make the investment for to begin with.

So our expectation is, this will actually dramatically increase the number of customers. And as they become aware of the value of the yield build that into their process, and then we will grow with them with full XP production systems to meet their production requirements.

Larry Chlebina

Could you explain one more time about the stacked die application? I believe you said you had a couple of engagements, is that correct? Did I hear that right?

Gayn Erickson

So we – yes, so we have – okay. So specifically on this call, I just generically refer to some engagements for our FOX products for some – for production burn-in applications. I didn’t necessarily call them out specifically. In the last call, we did talk about the opportunities in stack die, in memory and heterogeneous integration, I’m not a particular fan of it, but that is the IEEE description of how people are talking about what kind of at one point in time was called multichip modules, where companies are actually taking in their stacking or otherwise integrating side by side on the substrate multiple different flavors of devices in order to come up with these systems that are going into mobile phones and Internet of Things and communication systems and automotive systems.

Well, what happens is, when you take and you take a package and you put six or seven die in it, and then you go to burn it in, it has two problems. One of them is, if the device that you’re trying to burn-in fails, you wipe out the other six devices, it’s extremely expensive. But in heterogeneous, which is a fancy term for mix and match of devices, is they’ll actually – you can’t burn them in the same.

So, for example, flash memory, you can burn-in, but you cannot exceed about 85 degrees C, or it will permanently destroy the cell. Whereas an automotive microcontroller, okay, is burnt in at a 125 C or 150 C. You literally cannot coexist a burn-in of those two applications, while powering up the devices. So customers are looking at different methodologies to actually burn-in those devices in a – prior to integrating form wafer level singulated die would be examples of that.

And so we see more and more pressure and focus on going down that path in addition to some other things that may we’ll talk to in the next call, where the – that are good for us, where that are moving away from the traditional package part towards the singulated die and the wafer level burn-in that we have uniquely with our FOX-P products.

Larry Chlebina

So did you say that, you had hope to get an order in the second-half of this year? Is that what you said, I didn’t catch that?

Gayn Erickson

So I could almost read it back to you, but I’m not going to do that. But we basically said that, we’re engaged with – here we go, I’m going to re-back to you. So with several new customer opportunities for production burn-in with our FOX products that we expect to transition to production wins in the second-half of the fiscal year, and we’ll provide more information…

Larry Chlebina

[Multiple Speakers] between this?

Gayn Erickson

Yes, not necessarily, not necessarily. We have – I don’t want to actually get into all the details about what those are. We have optical. We have some automotive. We have some die level customers in our funnel, if you will. So there’s several different customers that we’re engaged in.

And the emphasis as we talked about on kind of looking at our sales force and our channels with respect to distributors, one of the key pieces is, as we get out in front of customers right now with these products. If you back up a couple few years ago for those that have been following our sort of 40-year start-up that we did in kind of retooling the company to go after these FOX level products.

We were out trying to win customers with a roadmap of unique products that had wafer level test and burn-in. And we had these beautiful photos and renditions of the designs, but we were out trying to land orders without even having the product yet. Since then, as we have announced, we’ve had some incredible lead customers with one of the largest semiconductor companies, mobile companies, automotive suppliers in the world that have endorsed these products, not only bought them, but bought more of them, okay?

And we now go out to other customers and the sales process is completely different. It’s all about education and letting people know that these are real products and that other people have effectively broken them in and the sales cycle is much, much shorter.

So we have just in the last quarter visited two brand-new customers. And I believe, at least, one of them will actually turn into an order within the fiscal year. So these are very quick turns relative to the product lifecycle of a large production test and burn-in application.

Larry Chlebina

And the NP makes it much easier to knock them down [Multiple Speakers]

Gayn Erickson

It really does for all of us.

Larry Chlebina

It’s easy to ship. It’s easy to get its foot in the door as that is very true.

Larry Chlebina

All right. That’s all I had, Gayn. Thanks a lot.

Gayn Erickson

Thanks, Larry.

Operator

Next we have Geoffrey Scott with Scott Asset Management.

Geoffrey Scott

Good afternoon, Gayn. How are you?

Gayn Erickson

I’m good, Geoff.

Geoffrey Scott

I have to apologize in advance for harping on the OEM customer. You gave us some details on the acquisition, revenue things like that. Have you actually started talking to them about a new PO. You said that you would get a little to no revenue in fiscal 2019. You’ve got none in the first, none in the second. If they’re – if you’re going to get a little that presumes that you are in, at least, some sort of discussions about a new order?

Gayn Erickson

So Geoff, I’m going to be – I hope I’m not regularly elusive, probably be a little more elusive here. As people are connecting the dots with all this thing, we really do try not to have specific conversations related to either known customers about their business or give any indications that might crossover into their business or something.

So as people have sort of connected some of the dots here, we’re just taking a much more quiet stance on our forecasts until the news or anything comes out of those companies. So for right now, I – you’re going to be comfortable in the range forecasts that we provided does not include any revenue for OEM. And relative to sort of the visibility of the customer and where they’re going, I will say that it is cloudy or that it was in the last quarter at a minimum.

Geoffrey Scott

Okay, I appreciate that.

Gayn Erickson

Okay.

Geoffrey Scott

In your – I guess in the press release, you talked about some of the slowdown being affected by China. Is that orders by domestic Chinese companies or shipments to China from international companies that have facilities there, or is it just a generic slowdown globally given the potential of trade issues?

Gayn Erickson

Okay. So I think there’s a little bit of – and – just, there’s this feeling. You talk to customers. Everybody has got this level of angst, et cetera, that’s more of a kind of a general cloud. We definitely are engaged. I think we have – well, I should know this number. We might have 12 installations, 13 installations in China now or something.

So we actually have a lot of customers there. We do have customers in our current forecast in China. I know one of them pushed out a little bit. I didn’t personally – I don’t personally know that it is or isn’t related to this, but there just seems to be uncertainty around that right now.

Now I’ll tell you one thing, the system that we shipped – this is – I’ll just put this out there. The system that we just shipped early or shipped for communication, the customer was in a hurry to ship it before the duties were to kick in. So we actually got to pull in.

So, I just feel it. Personally, I believe this will work its way through, and it has not been I believe a very material impact to us. It’s noting by contrast the specifics we hear out of mobile or other specific customers with devices and things like that, but there’s just sort of this feeling. And I guess I feel like I need at least acknowledge that.

We did, by the way, I think it was asked once before, and I just want to volunteer this again, so that everybody hears it. Someone asked, are you being impacted by it? So we actually have not been materially impacted by it, because very little of our supply chain comes out of China.

We actually have two suppliers of our proprietary chambers. One is, in fact, in China and one of them is out of Singapore. And we’ve shifted some business around and given it towards the Singapore side of thing to avoid that whatever 25% tax would be on that subsystem.

So the tax that has been in implication versus been very small, also systems that then shipped from China into China avoid the talk tax two. So we’ve had some benefit of doing some of that, too, because our business is fairly strong in China. But generally speaking, the China tax-related duties or anything are not material or something that we’ve been spending a lot of time thinking about here.

Geoffrey Scott

Okay. So that Poland was actually a shipment to Mainland China?

Gayn Erickson

Yes.

Geoffrey Scott

Yes. Okay. Last question has to do more with where the FOX-NP fits into your kind of sales process? You used to have a FOX machine in Fremont, where you would run qual wafers for customers and show that we bought a machine to use…

Gayn Erickson

We call it an EWS…

Geoffrey Scott

Yes.

Gayn Erickson

…right, Engineering Workstation.

Geoffrey Scott

Yes. Is this going to kind of reduce the need for that? So you’ll run a very small number of wafers to get a customer convinced, it actually works and then get them to buy an NP, so that kind of the second cut is in their factory with their people and their process?

Gayn Erickson

Yes, I’ll tell you what. I believe that the NP for all intents and purposes would be the platform of choice instead of an EWS, both for our internal use for, as you said, these benchmarks, et cetera, but also for the customers. And the reason for that is the NP has a few significant advantages over the EWS.

In that, it actually has an integrated thermal control unit in it, that allows us to thermally control all of the thermals for the wafer or the DiePak, et cetera. It also has, in this case, up to two blades instead of one, which gives it a little bit more flexibility and it’s much higher power.

One of the things we’ve been seeing as a key differentiation for us is that, some of these devices people are running up to several thousand watts of power at a time. And the EWS was originally designed more for just a small engineering application or a smaller lot size or smaller number of devices, whereas the NP is exactly the same power capabilities as the XP.

So they can absolutely coexist. In fact, you can take a blade directly out of the NP and slide it into an XP. And Larry, are you still out there? You actually asked a specific question about the – about upgradability. Customers could, in fact, buy an NP with two blades. And then if they wanted to switch to an XP, they could take the two blades out and stick it into an XP, for example, and then put more blades in. The customers today are just saying, I’ll keep the NP and then I’ll buy an XP, so either way would be okay.

Geoffrey Scott

Okay. Last question. Last call, you talked about the silicon photonics market, and the need to reduce the manufacturing cost. And you said that the transceiver needs to get closer to the price point that can allow it to replace the traditional copper interconnects. And you went on to say that the FOX-XP system is the key enabler to meeting that, that lower manufacturing cost. How much lower does it cost have to get to expand that silicon photonics market exponentially we get close?

Gayn Erickson

So certainly, for my customers that are listening, they probably think that, that the primary, what I want to say, enabler of silicon photonics is not my FOX-XP, but rather their ability to actually integrate these lasers into a piece of silicon to create an entire system that kind of costs of the ever-shrinking cost of SEMA silicon, okay, that actually is the key piece of that to be fair.

However, once they put it on there, the debate is how are you going to actually burn-in the laser. And that is the key, because if you’ve got it on a piece of silicon, you – the next place you’re going to see it is in a system. And if you’re, in fact, trying to tune the lasers that are integrated on that thing with – during the manufacturing process, you need to burn it in before you’re done.

And that’s when we talked about the enabling is by able to actually burn these things in either at the wafer form or the singulated die form. It allows them to have a product that is a silicon photonics integrated chip that is fully burnt in and ready to go into a system, okay?

Now specific to your cost thing and – to sort of remind all the folks that are on the call here what we were talking about before. Silicon photonics, the primary driver or one of the big drivers, but is actually a – is a fiber optic transceiver, the Class A fiber optic communication between two devices over a small fiber link.

And what people that are familiar with it would understand is that, when you get up to fiber optic, the transmission losses and the transmission speeds. The transmission losses are much, much lower and the transmission speeds are much, much higher than trying to put an electrical current through a piece of copper or some other electrical medium.

So, being able to communicate long distances through fiber or under the ocean or between buildings, the transceiver could run 100 gigabit or 400 gigabit in fiber optic. Whereas on a LAN, it could only run maybe a 100 gigabit or 10 gigabit in a very short distance.

And so the key is, is that fiber optics have been used for, call it, longer haul applications, not one or two feet, but maybe across the building or from building to building or between cities or countries or cross the ocean. And those applications have been extremely difficult to do and they’re extremely expensive.

So this little transceiver and I’m holding my hand up and it’s like the size of a chewing gum package, if you will, like the old Wrigley’s. There are long haul transceivers that are in the 100 gigabit that are $7,000 per module. And inner city ones that might be in the thousands of dollars or inner building ones that are still $300, $400, $500, $600, $700 per module, whereas a copper one, which can’t go very far might be only in the $10s or $50 or $100 per.

So what the silicon photonics guys are out proclaiming is that, they’re able to take those long haul transceivers that are sold today for thousands of dollars. And by integrating all of those RF modules, modulators, thermals, transmission lines, all of these things into a piece of actual silicon, they can get to silicon economies of scales, where you can on a single wafer build hundreds of these devices for the cost of a wafer.

If you go through the math, you can start thinking about manufacturing costs that get down into the tens of dollars, whereas today people are selling theoretically the same thing for $7,000 and it cost them $3,000 to build it. So if they’re going to get down into a $50 or $100 module, they’re able to actually compete within the, they call it, top of rack or within the server to the processor – to the memory within the big server farms. And that’s the – I mean that’s the golden egg.

If they can actually get to the point, where they can move fiber optic down into the server racks, it’s lower power 10 to 100 times the bandwidth has all of these advantages. And if they can get to the right price point, it actually exponentially increases the market size.

So imagine, within a server, there might be 10 disk drives, and there might be 10 servers within a rack, and then there might be 10 racks within a building. And you can see, if you’re only doing building to building, it might be one port. If you do rack to rack, it’s 10. If you do within the rack to the servers, it’s a hundred. And then if it fit within the servers to the disk drives, it’s a thousand. And that’s literally why people are saying the silicon photonics is sort of this, it’s almost impossible to quench the thirst of the demand, because if people get to these price point, we could be adopting fiber optics in everything that we are using, whereas today everything is still copper or Wi-Fi.

Geoffrey Scott

Okay. I appreciate the description. I hope some of your customers are listening. Thanks. Bye.

Gayn Erickson

Thank you.

Operator

And ladies and gentlemen, that does conclude our question-and-answer session for today. I’d like to turn the floor back to management for any additional or closing remarks.

Gayn Erickson

Okay. So thank you, operator, and thank you, folks. As – again, we did mention that we’re going to be out at the SPIE show next month. If you’d like to set up an appointment for Ken and I, we’re both planning to attend that partially and/or we’re just a little drive outside of San Francisco if you’d like to come pay us a visit here. We appreciate your time, and we do look forward to talking and communicating with you at the next call. Thank you now.

Operator

Once again, ladies and gentlemen, that concludes our conference for today. Thanks for joining. You may now disconnect.