AEHR TEST SYSTEMS (AEHR) Q3 2021 Earnings Call Transcript

Transcript

Speaker 0

Good day, and welcome to the Aehr Test Systems Third Quarter Fiscal twenty twenty one Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jim Byers of MKR Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, operator. Good afternoon, and welcome to Airtest Systems' third quarter fiscal twenty twenty one financial results conference call. With me on today's call are Aehr Test Systems' President and Chief Executive Officer, Gayn Erickson and Chief Financial Officer, Ken Spank. Before I turn the call over to Gayn and Ken, I'd like to cover a few quick items. This afternoon at 04:05 p.

M. Eastern, Aehr Test issued a press release announcing its third quarter fiscal twenty twenty one results. That release is available on the company's website at air.com. 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. I'd like to remind everyone that on today's call, management will be making forward looking statements 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.

These 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 Airtest Systems undertakes no obligation to update the forward looking statements. Now with that said, I'd like to turn the conference call over to Gayn Erickson, President and Chief Executive Officer. Gayn?

Speaker 2

Thanks, Jim, and good afternoon to those joining us on today's conference call and also listening online. Ken will go over our third quarter financial results later in the call, but first, I'll spend a few minutes providing some details on the quarter and the improved business momentum that we've started to see. Then I'll discuss what we see in the near term and talk a little bit to next fiscal year. And following our remarks, we'll open up the lines for your questions. During the third quarter, we began to see signs of recovery from several customer production ramp delays and push forecasted orders that we experienced related to COVID-nineteen.

We saw a significant increase in activity with both current and new customer engagements as business conditions began to improve, resulting in improved bookings and revenue for the quarter. Our $8,000,000 in bookings generated in the third quarter is our highest bookings quarter in over a year and we're glad to have twenty twenty behind us. These bookings include two significant customer orders for our FOX XP test cells during the quarter. One of these orders came from an existing customer for a partially populated FOX XP multi wafer test and burn in system and multiple WaferPak contactors to begin volume production of their high performance silicon photonics devices. This customer is a major supplier of fiber optic transceivers in the data center interconnect market and is our fifth customer in the silicon photonics space that's using our FOX P platform for production.

They're moving to silicon photonics integration to address higher performance and lower cost needs of the market and are transitioning from our FOX NP system that they use for initial production burn and stabilization to our production XP system to meet their high volume production forecast. This FOX XP system is only partially loaded with blades and allows the customer to fill in the system by simply adding in additional blades or wafers of capacity as needed. They chose this option to align with their planned wafer capacity expansion. The other FOX XP test cell order was from a new customer to Aire who is a supplier of sensors to a major mobile device manufacturer who is currently a current customer of AireTest. This initial order totaled $4,300,000 and included a single FOX XP test system, a set of FOX DiePak carriers, and a fully automated DiePak loader unloader.

This test cell is for a test and burn in application for a critical new mobile device and includes a new class of FOX DiePak carriers and automated DiePak loaderunloader. I'll talk about this new DiePak in a few minutes. During the quarter, we began shipment against this order and expect to complete shipments in this fiscal quarter we're right in now. We continue to expect follow on orders from this customer for additional DiePaks and system capacity to address the production needs for this device. The increased business activity we saw at the start of the third quarter includes existing customers as they focus on their increasing their production capacity and particularly as the data center and five gs infrastructure related silicon photonics optical transceiver market is starting to recover.

Multiple customers have completed upgrades of their facilities to accommodate expected deliveries of our FOX systems in the near future. In addition, we're seeing new customer investigations and evaluations for wafer level burn in with multiple silicon carbide customers and over a dozen silicon photonics and transceiver laser stabilization applications. We're also seeing evaluations for both wafer level burn in and package part burn in for automotive devices. These discussions have significantly increased as potential customers believe COVID-nineteen related travel restrictions are expected to lessen substantially over the next several months. While the customer delays we've experienced have been frustrating to say the least, it's important to note that we have not lost a single deal.

We've not seen new competitive solutions introduced nor have any of our customers indicated any change to their plans to ramp their production using Air's systems and consumables. This has really been about timing and when customers resume their plans that were clearly interrupted by the COVID-nineteen pandemic impacts. Our strong bookings this quarter is evidence of the increased momentum we're starting to see with our existing as well as new customers. And let me touch on a few of the markets we're seeing this traction starting to take place. Let me start with, silicon photonics.

So we continue to hear from our customers as well as analysts and shareholders that follow the fiber optic infrastructure markets for data centers at five g that business is starting to return after a significant hit during COVID. We heard from our customers that companies like Facebook, Amazon, and Google were simply not doing their planned expansions and upgrades during COVID even with all the pressure for more data and more bandwidth. As business conditions improve, we believe we will see a strong increase in investment in the space due to pent up demand. Air's solution is unique in its ability to test and stabilize or burn an entire whole silicon or other compound semiconductor wafers below devices before they're singulated and packaged individually or integrated into a fiber optic transceiver. These transceivers are used in data centers and as data center interconnections as well as five g infrastructure connection.

Our solution has been proven to be an enabler for whole wafer processing that significantly lowers the cost of manufacturing. In the case of silicon photonics, the laser devices are bonded directly to a silicon based device that has all the logic, multiplexing, and demultiplexing, and other high speed communication subsystems all integrated into a silk a single silicon based integrated circuit. Our solution actually makes it feasible to burn in integrated silicon photonics devices while still in wafer form without adding the cost of the transceiver printed circuit board and other mechanical infrastructure of the final transceiver module, and that has both yield and significant cost savings. This becomes critical in particular at communication speeds of greater than a 100 gigabyte transceiver bandwidths. Several large players in the market are working on direct optical to optical switches, which will further simplify the deployment of greater than 100 gigabyte transceivers at the data center and data center interconnect levels.

Silicon photonics transceivers are much less expensive to build and much more scalable for quantity and capacity due to wafer level processing. Analysts see silicon photonics as a catalyst to higher growth and deployment of fiber optic communication across all data center layers as it becomes significantly more cost effective and there's enough capacity to displace copper based coaxial cables in data centers. Per Yole Research, the silicon photonics market is expected to grow at a compound annual growth rate of 42% between 2019 and 2025 to a $3,600,000,000 annual market, and we believe that the industry will transition to wafer level or singulated die for this critical manufacturing step, which is where our FOX P products stand alone is the most cost effective solution in the market. Now let me talk about silicon carbide. Our lead customer for silicon carbide continues to forecast significant additional capacity needs.

And as such, we expect them to add a significant number of our FOX XP systems over the next few years. They are a leading supplier of semiconductor devices with a significant customer base in the automotive semiconductor market and are using our FOX XP system for high volume production burn in and infant mortality screening of silicon carbide devices at wafer level for electric vehicle power modules. This customer has told us they plan to significantly increase their capital investment in the silicon carbide business this year, which most certainly would include burn in equipment that would drive FOX wafer level systems and WaferPak sales to them. Excuse me. Silicon carbide continues to be promising as a key growth driver for Air.

For those who are not familiar with the nature of silicon carbide, it's a very impressive material for high power, in particular, high voltage devices for applications such as electric and hybrid electric vehicle powertrains and electric vehicle charging infrastructure. These devices reduce power loss by as much as 78%, which has essentially changed the entire market dynamic. With this development, we see most, if not every automotive company that's working on electric vehicles moving to silicon carbide based powertrain and charging systems in the near future. The challenge with silicon carbide is that it's known to have high infant mortality rates. However, after a reliability burn in screening like that offered by Era's FOX product solutions, these defects can be completely removed to provide an extremely reliable devices for these mission critical applications.

Era is able to provide a complete solution for one of the key reliability screening tests on an entire wafer of devices, basically all of them at one time, while testing and monitoring every device for failures during the burn in process to provide critical information on those devices. This is an enormously valuable capability as it allows our customers to screen devices that would otherwise fail after they're packaged into multi die modules where the yield impact is 10x or even 100x as costly. A critical capability that only our solution can provide in the market today is the ability to test a 100% of up to 2,000 or more die on a wafer in a single insertion while providing a 100% traceability of pass fail results of each device, including exactly what time the test and burn in cycle the devices fail. Our systems are not only able to test a 100% of their devices on four, six, eight, and twelve inch wafers, but we can test and burn in 18 wafers at a time in a in a single FOX XP system, thus significantly reducing the cost of test and burn in. We are engaged with multiple new potential customers in silicon carbide.

In addition to the very large opportunity for silicon carbide with our lead customer, we're very excited to report that a new potential customer that produces silicon carbide power devices has asked us to demonstrate our full wafer level burn in solution on their silicon carbide wafers, including putting a system on their manufacturing floor to demonstrate our capabilities. This customer is currently a large player in silicon carbide right now, and we're confident that we can prove to them that our solution will catch one hundred percent of their infant mortality failures that otherwise would show up at their customer. Additionally, we expect to move to wafer level evaluations with other potential customers in the next few quarters as we're currently engaged in detailed and very promising discussions with several other major suppliers of silicon carbide. We've invested in a special clean room at our facility that houses each of our tools, including our FOX XP wafer multi wafer system, our FOX NP dual wafer system, and our FOX CP single wafer system. This allows us to run many customer wafers at the same time, making it easy to do multiple evaluations in parallel, particularly in a COVID social distancing world.

We anticipate that silicon carbide wafer level burning will become the industry standard for low cost and a 100% traceability for burn in and reliability screening. AIR's FOX XP system has a has very unique capabilities that are a great fit for silicon carbide reliability and burn in tests backed by significant IP, excuse me, patents and experience with the unique challenges of wafer level burn in test systems and contactors. This creates a barrier to entry that we believe will enable us to capture multiple key companies and significant market share in the silicon carbide space in the next year or two. Hold on for just a second. Sorry, my headset was giving and I'm not going to let it go out.

Let me continue on. The silicon carbide semiconductor device market is growing at a tremendous rate with unit growth of high power devices expected to grow at over 50% CAGR from 2019 to 2025, again per YOEL research. When we look at the total available market opportunity for silicon carbide and silicon photonics wafer level and singulated die test, we see approximately $250,000,000 of needed capacity including consumables based on total wafer starts, yields and test times. Now I've mentioned WaferPaks several times. Are our these and our DiePaks, our air proprietary full wafer and singulated die and module contactors that are consumables, if you will, and that work with our FOX family of test systems.

We're also seeing increased orders for our WaferPaks from existing customers in the silicon carbide and silicon photonics segments for their installed base of FOX Multi Wafer Test Systems. Towards the end of our fiscal third quarter and into our fourth quarter so far, we have received multiple orders for new designs and added capacity for volume production test of silicon carbide semiconductors for electric vehicles and electric vehicle chargers as well as silicon photonics devices for data center and five gs infrastructure fiber optic transceivers. We are forecasting additional orders for our WaferPak and DiePak consumables during the remainder of the current fiscal year and from our installed base of customers. As we've noted before, Aire's proprietary test and burn in solutions include these customized WaferPaks and DiePaks that are needed not only for new system orders, but also for each new design win or each new device added to production test. As we increase our installed base of FOX systems with current and new customers, particularly with the NP and XP multi wafer and singulated I module test and burn in systems, we expect our consumables business will continue to grow in absolute value and as a percentage of our total sales.

Over the long term, we expect these recurring consumable sales to account for up to half or even more of our total overall revenue. During the quarter, we successfully demonstrated and began shipments of a new solution using our standard XP high volume production system and FOX NP systems, but with a new class of DiePak that's going to be a great addition to our product family. This new DiePak is capable of handling extremely small devices and also very high power density devices with higher parallelism than parallelism than ever thought possible before. The new solution also includes a fully automated pick and place handling system that automatically loads and unloads these new die packs and transfers them to and from carts. This new class of die pack can handle devices down below less than two millimeter by less than two millimeter by less than one millimeter, which is incredible.

The size of such a device is small enough to rest on the tip of a pen or a pencil. We will send out to investors a photo of a device of this size sitting on the tip of a person's finger to show how small it is. I do wanna note for anyone that sees this, this photo is absolutely not our customer's device, and I wanna make sure that's perfectly clear, but it is of similar size of a type of device that our new DiePaks can handle. Devices this small are extremely hard to handle and particularly in any kind of parallelism. Often, a discrete device this small is handled with special handling equipment and a tester that can only test one device at a time.

This new FOX XP system and DiePak solution is capable of testing very complex die in modules in addition to them being tiny. For example, the capabilities and features that are being used today in production on these microscale type modules include the ability to individually read every device ID, read digital or analog temperature sensors, have device power supplies on every single DUT that's continuously logging, and individual programmable current drivers, which is critical for optical transmitters and receivers, as well as programmable voltage and current limits, the readback of independent photodiodes, or internal or external, which are part of our integrated into our DiePak photodiodes, and programmable current and voltage drive levels per device as well as programmable pulse widths. These are features never thought in a a burn in and test system that we have a massive parallelism on our systems. This new FOX XP system and DIPEX solution is configured with up to nine high power blades that can each test and burn in up to ten twenty four or ten twenty four devices at a time. Each device is thermally controlled via conduction for the devices making direct contact with a thermally controlled surface that provides a superior, in the case of these tiny devices, possibly the only way to effectively cool these devices compared to an air controlled chamber.

Our new DiePak autoloader can automatically pick and place tiny or large devices from industry standard JETIC trays to our dive packs, visually inspect every single device, read device barcode information if it's available, and track every single device from data from our FOX production systems to place the devices into different physical output bins. Watching the loader handle these tiny devices is really incredible and it can load and unload devices at thousands of devices per hour. We believe this solution further sets us apart from any other company in the industry. Let me talk about packaged parts for just a minute as well. Recently, we've been receiving and responding to requests for information about the planned introduction of our new packaged part burn in system, which is under development and has very high voltage test capabilities.

We continue to see indications of renewed demand for packaged part burn in applications, particularly from customers seeking high voltage capability and expect to generate additional new opportunities with this new product introduction as we head into our fiscal year calendar 2022. With our increasing customer visibility, including facility improvements that customers have made to install our tools on their test floors, we continue to expect orders from the customers that told us they would ramp in the first half of our fiscal year. We expect you know what, I apologize. I had people that had told us they would ramp actually in the second half of our fiscal year that we're in right now. When you read through that, can miss that.

We expect to end our fiscal year with a strong year over year growth in our bookings. Unfortunately, the timing of some orders were delayed causing us to come in short of our revenue expectations for this fiscal year. Importantly, we expect this positive bookings momentum will continue, which will drive revenue growth in the next fiscal year. Looking forward this quarter and into our fiscal twenty twenty two that begins June 1, we feel our outlook is very promising with forecasts from current customers to ramp in silicon carbide for electric vehicles and electric vehicle chargers, silicon photonics for data center and five gs infrastructure, two d, three d and other mobile sensors and flash memory devices. We also expect to announce new customer bookings and shipments, particularly in silicon carbide and other automotive devices during this calendar year.

For the fiscal fourth quarter ending 05/31/2021, Era expects revenue to be at least $7,000,000 a 33% sequential increase from the third quarter and to be profitable for the fiscal fourth quarter. With that, let me turn it over to Ken to review our financial results in more detail, provide an update on our guidance, and then we'll open up the line for questions. Go ahead, Ken.

Speaker 3

Thank you, Gayn, and good afternoon, everyone. As Gayn noted, during our fiscal third quarter, we began to see signs of recovery from the several customer production ramp delays and pushouts of forecasted orders that we experienced related to COVID-nineteen. We saw significant increased activity with both current and new customer engagements as business conditions began to improve, resulting in improved revenue and strong bookings of $8,000,000 for the third quarter, our highest booking quarter and over a year. These improved results, along with the growing demand for silicon carbide and silicon photonics, gives us increased optimism that our products are poised to serve larger and growing market opportunities and that we will continue to see improving financial results as we move through the remainder of this calendar year. Turning to a review of our financials.

Net sales in the third quarter were $5,300,000 up 213% from $1,700,000 in the preceding second quarter and down 14% from $6,100,000 in the third quarter of the previous year, which, as you recall, was our last reported full quarter before COVID-nineteen. The sequential increase in net sales from the preceding Q2 reflects an increase of $3,400,000 in wafer level burn in revenues and $163,000 in customer service revenues. The increase in wafer level burn in revenues is primarily due to an increase in system revenues of $2,300,000 and an increase in WaferPakDiePak revenues of $1,100,000 The decrease from Q3 last year includes a decrease in wafer level burn in revenues of 867,000 with customer service revenues remaining flat. The year over year decrease in wafer level burn in revenues was primarily due to a decrease in WaferPakDiPak revenues of $1,200,000 partially offset by an increase in system revenues of $297,000 There were no packaged parts system revenues in Q3 twenty twenty one Q2 twenty twenty one or Q3 twenty twenty. Non GAAP net loss for the third quarter was $464,000 or $02 per diluted share and includes a warranty charge of 299,000 related to a voluntary replacement of a component to improve long term reliability of our systems.

This compares to non GAAP net loss of $1,700,000 or $07 per diluted share in the preceding quarter and non GAAP net income of $452,000 or $02 per diluted share in the third quarter of the previous year. The non GAAP results exclude the impact of stock based compensation. On a GAAP basis, net loss for the third quarter was $735,000 or $03 per diluted share and includes the warranty charge. This compared to GAAP net loss of $2,000,000 or $08 per diluted share in the preceding quarter and GAAP net income of $245,000 or $01 per diluted share in the third quarter of the previous year. Gross profit in the third quarter was $1,900,000 or 36% of sales, up 1,500,000 compared to gross profit of $377,000 or 22% of sales in the preceding second quarter and down from gross profit of $3,000,000 or 49% of sales in the third quarter of the previous year.

The increase in gross margin from the preceding Q2 is primarily due to a decrease in unabsorbed overhead costs to cost of goods sold due to higher revenue levels in Q3 twenty twenty one and favorable direct material margins related to non recurring engineering revenue recognized in Q3 twenty twenty one. The decrease in gross margin from Q3 last year is primarily due to an increase in warranty cost as a percentage of sales in Q3 twenty twenty one and an increase in unabsorbed overhead cost to cost of goods sold due to lower revenue levels in Q3 twenty twenty one. The increase in warranty cost resulted in a six point percentage point decrease in gross margin from prior year. The impact of unabsorbed overhead resulted in a three percentage point decrease in gross margin from prior year. Because our manufacturing overhead costs are relatively fixed, we scale very well.

As our revenues grow, the increases flow to the bottom line and our margin percentages are favorably impacted. Our product mix also impacts our gross margin percentage. Looking at our results from Q3 last year, about half our revenue came from higher margin WaferPak DiePaks, and we recognized gross margins of 49% and were profitable on just $6,100,000 in revenues. As noted earlier, during the quarter, the company recognized a charge to warranty of $299,000 related to a voluntary replacement of a component to improve long term reliability of our systems. This had a significant impact on our gross margins in the third quarter.

Without this warranty impact, gross margins in Q3 twenty twenty one would have been above 42% of sales, much improved from the 36% we reported. With improved revenue levels and a relatively fixed labor and overhead, we expect gross margins above 45% of sales with a good mix of product and consumable sales. Operating expenses in the third quarter were $2,500,000 up $225,000 or 10% from 2,300,000 in the preceding second quarter. Expenses were down $190,000 or 7% from $2,700,000 in the third quarter of the last year. As I've noted on past calls, we have taken significant actions over the past year to control spending, reduce costs and lower our breakeven.

Starting in Q1, we implemented temporary cost reduction initiatives across the company due to the customer order push outs and delays in production ramps we experienced. These cost reductions have resulted in total cost savings of over $1,000,000 in the first nine months of fiscal twenty twenty one. With customer service activity and business improving, we eliminated the pay reductions for non officers at the end at the start of Q3. The 30% pay reductions for our executive staff remain in place. The sequential increase in operating expenses from the second quarter is primarily due to an increase in employment related expenses as a result of eliminating pay reductions for non officers.

The decrease in expenses from Q3 last year is primarily due to a decrease in SG and A of $248,000 which includes a decrease in The U. S. Of $155,000 and a decrease of $109,000 at our German and Japan subsidiaries. The decrease in The U. S.

Reflects a decrease in employment, travel and trade show expenses resulting from cost reduction measures taken in response to the COVID pandemic. The decrease in SG and A at our Japan and German subsidiaries is due to restructuring actions taken to move to a sales rep distributorship model in these regions. SG and A was $1,600,000 for the third quarter, up $142,000 from the preceding second quarter and down $248,000 from the prior year third quarter. R and D expenses were $903,000 for the third quarter, up $83,000 from the preceding quarter and up $58,000 from the prior year third quarter. Turning to the balance sheet for the third quarter.

Our cash and cash equivalents were $4,700,000 at 02/28/2021, up from $1,300,000 up from $3,400,000 at the end of the preceding quarter and included borrowings of $1,400,000 under our line of credit. Accounts receivable at quarter end was $2,700,000 an increase of $1,300,000 from the preceding quarter end related to the increase in revenue Q3 compared to Q2 and a decrease of $996,000 from the 2020. Inventories at February 28 were $8,300,000 down $718,000 from $9,100,000 at the preceding quarter end. Property and equipment was $617,000 compared to $683,000 at the preceding quarter end. Customer deposits and deferred revenue, short term and long term, $667,000 up from $75,000 at the preceding quarter end related primarily to the increase in backlog from the prior quarter.

Our current and long term debt of $1,700,000 is related to funds we received during the fourth quarter of the last fiscal year under the Paycheck Protection Program or PPP. The company applied for forgiveness of the PPP loan on 11/06/2020. While the SBA has ninety days to review and approve the application, it is our understanding that the SBA has experienced delays in their review, and this delay is not an indication of issues with the application or likelihood that the loan forgiveness would be denied. Bookings in the third quarter totaled $8,000,000 and included orders for two FOX XP test cells. Over $4,500,000 in revenues were recognized in Q3 twenty twenty one related to the $8,000,000 in bookings, showing how quickly we can turn orders to revenue.

Backlog at February 28 was $3,700,000 up $2,700,000 from the end of the preceding second quarter. Effective backlog, which includes backlog at the end of the fiscal third quarter, plus orders since the end of the third quarter is $5,300,000 Now turning to our outlook for fiscal twenty twenty one. As Gabe mentioned, with our increasing customer visibility, we continue to expect orders from the customers that projected a ramp in the latter half of our current fiscal year. Unfortunately, the timing of these orders has been delayed. And we believe this caused us to come short in our original expectations for this fiscal year.

However, we expect to end our fiscal year with strong year over year growth in bookings. And for our fiscal fourth quarter ending May 31, Air expects revenue to be at least $7,000,000 a 33% sequential increase from the third quarter and be profitable for the fourth fiscal quarter. Again, the growing demand for silicon carbide and silicon photonics gives us increased optimism that our products are poised to serve larger and growing market opportunities, which gives us confidence that we will continue to see improving financial results as we move through the remainder of the calendar year. Lastly, looking at the Investor Relations calendar, Airtest will be participating in two Investor Relations conferences in June. We will be meeting with investors virtually at the Craig Hallum Institutional Investor Conference on June 2 and also at the thirteenth Annual CEO Summit taking place on June 15.

We hope to see some of you virtually at these conferences. This concludes our prepared remarks. We're now ready to take your questions. Operator, please go ahead.

Speaker 0

Star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll take our first question from Christian Schwab of Craig Hallum Capital Group.

Speaker 4

Hey, thanks guys. Gain, at length you talked about the huge opportunities in silicon photonics and silicon carbide. Can you tell us how much revenue you would anticipate doing in those markets in fiscal year twenty twenty one? And can you give us any projections or ranges of potential outcomes of what that business could grow to in two to three years?

Speaker 2

Okay. So we historically have not been breaking down by segment, and I think maybe that's something we can look at for year end. And part of that's just sort of triangulating all the different events. Although, honestly, if we go back and look at each of the press releases, we probably could could add it up. And we're also obviously, one of the challenges we've had has been able to provide an appropriate guidance given all the other uncertainties, and our plans are not to give guidance for next year until the following earnings release and it would still be my assumption that we will tell our investors as best we can what we understand about the market.

Having said that, I do think that while we are we do expect to have a good year in silicon photonics. I think absolute, you know, revenue growth year over year from this year to next, and I think the silicon carbide is likely to be higher, meaning our growth in silicon carbide will be higher than our growth in our silicon photonics. And I think it's very likely that the silicon carbide revenues will be higher, if not substantially higher than the silicon carbide revenues. So, you know, you add up all those things and, you know, we are definitely feeling optimistic about, you know, year over year growth. But let's also be fair.

The last the first few months were you know, the first few quarters were lousy. And, you know, we are not excited about what they were. We were excited about the continued communication with the customers, the what they're telling us in terms of the value of our products, the what they're telling us about their ramps, and how we fit into that and how we are basically unique in how we fit into that. But, you know, we're on the edge of our seats like all other shareholders waiting for those orders to turn into first bookings and then into revenue, and we have the capability and capacity to to address those needs. So, I mean, I, you know, I I hope I gave it a little bit of color, but I do think we'll see year over year growth in both.

And I think that the silicon carbide will see stronger growth and be higher as a percentage of our total revenue than the silicon photonics will be. There's a lot going on in silicon carbide. And, you know, the quantities of units, unit growth, the test times, and kind of the uniqueness of what we have, I think, is going to parlay into, you significant market share in that space.

Speaker 4

Okay. Thank you. Your original guidance for this year was 25,000,000 to $28,000,000 and then we saw obviously challenges, you know, COVID nineteen related pushouts at just you know, from customers, you know, that that kinda started, you know, last quarter, and we were still quite quite optimistic for the back half of the year and and until now. So when we look at next fiscal year in your commentary, Gain, you know, that there are no lost opportunities, they've just been, you know, pushed out or delayed. You know, if we kind of have, you know, quote unquote, you know, normal conditions or normalizing conditions, if you will, is there any reason why you can't be doing 25,000,000 to $28,000,000 I know you're not giving guidance, but is there you know, what are the obstacles for you to recover that revenue plus the growth that we just talked about in photonics and silicon carbide?

It it seems to me you should be able to, you know, do $2,528,000,000 next year. It just got pushed out a year. Is that fair, or am

Speaker 0

I thinking about that wrong?

Speaker 2

Yeah. So so I maybe let me see if I can do this in in in a couple few ways. So in in general, there's no reason from a infrastructure capacity supply chain at this point that we believe we wouldn't be able to do those revenues and more. Just, you know, from our ability to supply. Let's do that.

Related to the markets themselves, I actually feel we have more market opportunities going into next year. And the only reason is we've now seen, you know, albeit only a couple more of the silicon photonics customers transition to production. But I feel like we, you know, we have now, what, five folks that are in production to address the market. The part that I and I've tried to communicate, you know, subjectively and objectively as best I can, But if you follow my transcripts over the last two or three quarters and stitch it together you know, last summer, when we saw some of the the softening of the silicon photonics forecast, we're like, it made no sense to us. You know, wait a minute.

You how is it that data centers are slowed down? I mean, everybody's on Zoom and the whole deal. And it wasn't until really the fall, I think, when I in one of my conference calls that we started to see that the silicon, the transceiver companies, my customers, were all reporting lousy quarters. And all of their sales dropped in last quarter or, you know, in the summer because the data center folks weren't actually buying and doing those upgrades. So it's like, okay.

Well, you know, if if the Amazons of the world aren't buying, then, therefore, my customers aren't getting orders. Big shocker. They're not buying more equipment. But it just didn't seem intuitive. Then it hasn't changed.

And so it's only now that we're hearing from folks that those ramps are coming back this summer or something along those lines. Now do I think they'll double count? Like, wow. They're a year behind. I don't know.

That I'm not sure that's as obvious as they'll just resume where they left off, and we'll continue to grow from there. On the silicon carbide, you know, if you just look at where it was, I don't even know, a year ago, let's say last summer, you know, this idea of the, you know, electric vehicles, electric chargers. And if you understand how these silicon are places are, like, the critical subsystem in those inverters and things that change AC electricity into DC that allow you to charge a DC battery system. That's that component. And then you, you know, you would we have been even even anticipate sort of this shift where everyone's talking about electric vehicles?

You know? Because, I mean, the General Motors announcements, etcetera, or now with the US government in the new plan, what, is it 500,000,000,000? I I I should be careful, I think towards electric vehicle charging systems. So, you know, that that transition has got everybody scrambling. And I my understanding is and we actually know of both publicly and not publicly companies that are making some massive investments to redirect capacity, fab capacity infrastructure people towards silicon carbide to go after that.

So in that sense, as we head into next year, and I know I always am a very optimistic guy, but we we weren't looking at that level of strength, you know, last summer in silicon carbide. I mean, we had just gotten our customer first customer to production. People were talking about it, but we didn't have the visibility that we had. And now we're actually talking to multiple major players and hearing about it. And so I think that there's you know, we will head into next year head you know, stronger in terms of more customers in production, some more products actually, some more product offerings even just the configuration we do for the silicon carbide than really we had before.

Yes. Than silicon

Speaker 5

just want some clarity on that. So if you could give us some clarity on the growth rate though of your kind of two d, three d sensor order that you got that kind of kicked off the quarter that everybody was excited about. Is that part of your backlog? Is there continued growth in that order book? Or was that kind of a one and done?

Speaker 2

Well okay. So we what I think I was pretty clear on, and I apologize because, you know, you get a little elusive. We're trying to be at least vague enough to protect the, you know, nondisclosures and stuff that we have. But, you know, we we started shipping that in q three. We got the order in q three.

We started shipping it, and then we believe we'll complete the shipment of it. I'm quite confident we'll complete the shipment of that initial order this quarter. And then what I specifically stated in there, and I'll just stick to that, we we do believe that there will be additional capacity of DIPACs and system level capacity for that moving forward. And the timing of that and the quantities of that, we're being a little elusive of, but I do believe there'll be more. I think I have shared with people and on these calls before that, you know, I'm always a little I'm extra cautious or nervous about this particular application because or this, you know, kind of market segment because there's all there's been so many variations in road maps and ramps and things like that that have, you know, burnt us or surprised us in the past.

So I try to be as cautious as I can about that. But based on what I've been told from them, etcetera, there will be more.

Speaker 5

Great. And thank you. You know, we've had conversations before, and or maybe it was on your conference call where you basically said it's almost impossible for you guys to stick around in the 20,000,000 to $30,000,000 revenue run rate. Like if we take the number of customers you have in production, which I'd love to hear a little clarity on how many guys are actually in production that are Tier one customers, how many Tier two customers are in production. Like if you just take those numbers and you say, gosh, a Tier one customer is kind of 5,000,000 to $10,000,000 or whatever the range is, and Tier two is this, it's almost hard for us to do 20,000,000 to $30,000,000 And yet, kind of here I come, I've got another year of 20,000,000 to $30,000,000 I'm looking at another year of 20,000,000 to $30,000,000 is there a breakout?

Or was your original read wrong? Like, give me some kind of thoughts on on how you think your real market opportunity is in the near term, medium term.

Speaker 2

I mean, I definitely I I you know what? I and, you know, I 'm trying to take it on the chin of of, you know, not predicting very well on this this environment. But, you know, this feels like we just lost a year. But, you know, this is there a breakout? I think there is.

You know, Martin, who's our VP of sales, and I spent a lot of time talking and talking about the number of customers that are in production and how this works. He and I, between the two of us, have over sixty years in this space and, you know, kinda focus on our experiences with how you get customers. And, you know, to some extent, you focus on the basics. You know, we have these great products that we've identified some really key markets where we're not only differentiated, but they need capacity. You typically start by focusing on, you know, one or two of the big players, hope you get one of the market leaders.

And then once you've proven that out, you know, the word spreads or you spread it, and you move on to additional customers, and you gain market share. There's lots of books on that that we've all read on how to kinda do market penetration, and that's how we focused. And, you know, we've been fortunate enough to the lead customers we've had across mobile, you know, silicon photonics, and now silicon carbide, you know, are key leaders. I mean, we're not talking about third tier. These are the best of the best, and they have helped us to, you know, validate our products.

They themselves are buying and will continue to buy, and that news has gotten out. And, you know, it's not just that it's the marketing fizzle. The products really do what they say they're gonna do, and it's applicable to other customers. And so, you know, the game is now get as many of those customers as you can gain the market share and then enjoy the market growth with respect along with them. And so, you know, the reality is that's where we thought we were at a year ago with the number of customer engagements.

You know, we have a funnel like every other business that talks to, you know, the customers you've just talked to and people are asking for quotes and people you know, you kinda go through the whole process. And Vernon and I were walking through that a year ago and started to realize, so even a little bit before then, and thought, how in the world are we going to, you know, manage through all these different customers? Because it's not like these aren't important customers. I mean, there's a lot of them on there that are big tier one potential customers. So at that time, we came up with the idea, and I give it to Vernon for it.

We came up with this application center where we said, let's take all of our tools. Let's invest the money. Let's buy one production tool of everything we have, put it into a clean room setting so that we can actually do multiple customers' demos at the same time. That room is has locks on it. It has limited access.

It has cameras in there, and then we can basically have a completely secure environment to protect the IP of customers, etcetera, and do these benchmarks. By the way, then COVID came. And so then we kinda twisted that into this COVID nontouch application, but quite frankly, that's not why we did it. We originally did it to try and figure out how we're get to all of these customers. But when COVID happened, like, one year ago, what we felt was all of a sudden, activity picked up.

We're like, oh, wow. This is you know, everybody's busy. Honestly, when I look back, I think it was everybody trying to keep busy on Zoom. Then about summer, they're like, the activity has dropped. They're like, I can't invest in a new tool right now because I can't bring it into the facility because I can't even get in myself.

And so it's like everything just got put on hold. Like, the whole funnel, you could just look at it. So we focused our that time, we were already saying, let's just focus our energy on our current customers. The bulk of the forecast that we communicated at that time was with current customers that knew us and already had tools, so they knew how to buy more. And we said and what we're communicating is what they're telling us.

Well, obviously, what they told us didn't happen. What they said they would buy and what they said they would ramp, and they pushed them out. But each of those customers is still planning to buy. The difference is is it probably in the last two, three months, that funnel of customers has started to kick back in again. Same people kind of right where they left off, and it's getting busy.

I was up at 6AM this morning on a conference call for an hour with another customer. We're kind of on weeklies with them right now, and it's that kind of activity that makes it encouraging. And so I do think as you kinda said it inflection or as you pop or whatever, you know, you kinda get out of this. You know, the way we're gonna grow is by growing customers who themselves are growing. And that's kind of our plan with some key hot markets that I think are going to allow us to get past this, you know, $2,030,000,000 dollar range and continue to grow.

Speaker 5

You've given kind of customer accounts some idea of funnel pipeline in the past. Can you give us how many tier one customers do you have? How many customers are in production? How many conversations do you however you wanna classify it, if you could give us some clarity, that'd be great. And then I'll Well,

Speaker 2

I'll tell you what. I don't have the numbers in front of me. And if the more clarity I have, the less I probably wanna give them to you because I don't wanna be too specific in things. But to give you a feel that I think it's fair, you know, we have several current customers that I call out of the tier one, two, three, four of them that they themselves could be buying in that, I think we said, you know, four, five, six, even $10,000,000 a year. K?

Then we have maybe a half a dozen other customers that are that are tier two or smaller right now. In terms of actually in production on our FOX tools, k, the new FOX PXP systems, we now have five silicon photonics customers that are actually shipping products to their customers off of our tools. So that's the, you know, in production. We currently, as we've said, have one lead customer in silicon carbide that's doing that. And then within the mobile sensor, we have several companies that are suppliers to a big mobile supplier.

So each of those are different companies, but, arguably, there's a collective of an awareness of our solutions by their end customer. But we have, you know, several different applications, and they're all in either production where it's a 100% or they're doing sampling. K? So I hope that kinda gives you a feel. And that's in addition to our historical installed base where we had a handful of customers that were in FOX products, including flash memory and all, that are still using our products in production.

Speaker 5

Great. And I'll make this my closing remark, which is if you're at that inflection and you're seeing this activity, it all sounds great. But we want to see activity from insiders. And this Board has been granted shares. You have been granted shares.

You said you're a big shareholder. You're a big share getter. We're big shareholders, and we've been big share buyers. And, you know, it's hard. There's been twelve months of a lack of credibility here, maybe years, in this board and this management team.

And if we don't see you guys on the tape buying stock, I just don't know how else to measure your conviction. I would encourage to once again reach into their pocket like the rest of the shareholders on this call and buy some stock. And otherwise I really I wish you the best of luck and I hope this is the year of the breakout. So thank you.

Speaker 3

Thank you. Thank you, John.

Speaker 0

Thank you. We'll take our next question from Larry Chiblina with Chiblina Capital.

Speaker 2

Hey, Gaynor. Hey, Larry.

Speaker 6

Follow-up question on the $4,300,000 order for the three d sensor. That's being done at an OSAT for the end customer. Is that correct?

Speaker 2

Think the way we described it, it is the supplier of that sensor to that to the end customer. I don't know. We got into exactly how we describe who that is.

Speaker 6

I know you were working with an OSAT as well, and you thought that would eventually maybe generate Okay.

Speaker 2

Speaker 2

And and these and the ability to actually handle all these tiny little devices and contact them, There's a whole family or there's a whole style of components that have come out, and there's lots of different names and package styles, but sort of a generic thing is called a QFN. It's a leadless component. The part has no physical pins to it. So making contact to it electrically as well as thermally, but it in a test environment requires you to have pins in your tester. Parts used to most parts have pins on them, and then you press the part against the printed circuit board.

And but as the devices have gotten smaller and smaller, they're so small, they don't even have pins on them. They have tiny little pads, and they use surface mount technology for mounting them. Contacting them electrically and handling them is really hard. And so our DiePaks have evolved for the same technical reasons that we can contact a tiny little die with electrical pads on it with no pins. We can do the same thing with individual devices or modules and have all the same thermal control and everything else, and that is completely unique.

And if you under if you I mean, we're doing I've I've personally, you know, inspected. I have access to the the nondisclosures and all to get access to these devices. You're you're under a microscope doing all this. It is it's amazing. And I alluded to this, and the IR folks will get you a photo.

But we've taken a photo as an example of a kind of device that this DiePak can handle. It is not the customer device. I wanna be really clear.

Speaker 3

Yep.

Speaker 2

But it is tiny. You drop it on the table, you can't find it.

Speaker 5

Yep. Yep. I

Speaker 6

I got I got a sense of it. Now switching to silicon carbide, you have a a potential new customer that you've been working on, and now it's evolved Yep. To an actual trial. You said on their in their facility. Is is that what you said?

Yes. Yep. You you've taken wafers from this customer in your facility, in your lab that you set up to do this work.

Speaker 2

Larry, our plan, to be more specific, our plan is that we will be taking wafers and doing it in our facility, and then it will move to their facility.

Right now, I'm personally I by the I'm full of energy. I'm not sick of work. I'm I'm fine. But just the whole COVID thing. And as a CEO, to sit here and talk about COVID once again as, like, an excuse is super frustrating.

K? But the reality is it's real. So Yep. I'll give you an example. Right now, we wanna install a system in Taiwan.

K? We are installing a system in Taiwan. To go to Taiwan, first of all, it depends on what country you're coming from. K? More restrictions on US than Japanese people.

Right? We had to get approval, like, weeks or days days or weeks ahead of time. My engineer flew in, sat in a company a a government sponsored COVID hotel. He is not allowed to step out of his room into the hallway for fourteen days, or he'll be arrested. And that's they have arrested two people so far, not my guys, to make a point out of it.

Then he's only allowed to stay in country for so many days, and then he's gotta leave. By the way, you go back to his own country, fourteen day quarantine. Yep.

Speaker 6

So since

Speaker 2

the the availability of of overhead.

Speaker 6

Since since the availability of vaccines, is that gonna be alleviated?

Speaker 2

You know what? I I I really don't personally know anything more than anyone else. I know that Okay. Vernon and I are getting our second shots next week. I view my whole staff as at different stages.

Depends on what city and countries and stuff you live in.

Speaker 3

Right.

Speaker 2

Most, if not all, of our support staff is doing it. I have not personally heard one customer say, oh, if you've got a vaccine, now I'll let you in differently.

Speaker 6

That that's why I was wondering.

Speaker 2

Okay. That yet, but I believe my personally believe is that that will help and will subside. But I think that most customers are thinking summer, not thirty days. And so, you know, until we actually see I mean, I think today, restrictions I'm a US citizen. I can't fly to Germany.

Like, it that that doesn't even matter. So you get these sort of micro restriction things that kick in. And, you know, in that environment, new customers, new evaluations are being held up. It's real.

Speaker 6

Yep. I I see that. So one one comment or question. The CP customer, where does that stand? Is that still in the pipeline?

Is it

Speaker 2

It is. It's in the pipeline. Last this two months ago, they were buying spares for it. It's being used around the clock, and we're, like, tapping our fingers on the table when they're gonna rent. My my understanding, both publicly and what I can share, they just simply put that project.

They they held off for a year because COVID they just, you know, were were just one year's gone. But they've been they're sampling to their customers and doing things, etcetera. I don't have the latest update of when they're supposed to ramp. We did, at the beginning of the year, have a CP forecast for them at the like, in May, and I think we pushed that out, you know, couple you know, several months ago. But the tool is being used around the clock.

It is happens to be at a facility that they it's an act of congress to get in, and thank heaven, the system's never broke. Mean, it's it's been fine. Everything's great. It's all good. There hasn't been any issues.

You know, things happen, but luckily, it seems we haven't had any issues. And so we're just waiting for them to buy more.

Speaker 6

Last question. I was just looking at spot memory prices today, and I was just shocked at how strong they were, especially DRAM going back up significantly. Is there a you know, does that maybe wet the appetite for somebody to expand and maybe open an opportunity for your memory project? Is that are you getting any feedback that

Speaker 2

We've seen some healthy signaling, if you in the flash space, I'll be specific. And, you know, in some of my conversations with the other flash and DRAM guys, you know, I I continue to hear, you know, new programs have been on hold. Like, they haven't really you know, they're not they're still you know, as people understand or follow this space, you know, how is it that, you know, AireTest I just I'll make sure peep I'll draw their attention to it. A lot of a lot of companies in our space have absolutely had incredibly great years. Right?

And test is that would not be how I would describe it with us. But I have a lot of friends in this market as well. None of them have been selling new tools. Everybody's new product investigations were put on hold. By the way, having been in this industry for thirty years, that's one of the nice things about some some of these weird cycles.

Customers are always trying to figure out how to buy the new tool to get the test times down or get the cost down or whatever. If they simply continue on with the current tool and buy more and more of it, they have no leverage or any way to get their cost down. So you make a lot of money in this time. So what's happened is, you know, Avantest and Teradyne and the Cohus of the world, they're just selling a lot of the same testers to the same customers. And they're getting installed.

And they ship them, and the customers sell them themselves or their on-site people install it, but nobody's buying new stuff. Well, if you happen to be Airtest, who just introduced a bunch of new products to go into these new exciting spots a year ago, guess what? You get hit. You know, we didn't have that many customers that we're able to ramp. That's reflected in the revenue that we have, and a lot of the new business just got pushed out.

Speaker 6

Got it. Okay. Hey. I'll I'll let some I don't know if anybody's left, but good luck.

Speaker 2

Thanks, Larry.

Speaker 6

Thanks. Goodbye.

Speaker 0

Thank you. And we'll take our last question from Raghu Gareem with Gareem Capital.

Speaker 7

Hi. Thank you very much. I have a general question. I understand new business difficult to get approved new tools. Understand.

The industry as a whole is scrambling to increase capacity worldwide, and they're producing at highest capacity levels, everyone. And you have legacy business yourself because you are not a new player, and you are only talking about carbide and photonics. This is new stuff. You know? Happened to your legacy business?

Where did where did you if you see your presentation yourself in the what you put in your website, See how many customers you have. Those are our legacy customers. They're not photonics. They're not everybody. Some of them are.

You have so many customers in your presentation, you see, worldwide. What are they doing? They're not ordering anything. Everybody's increasing capacity. Something is not right.

You are you are guessing wrong or some this is nobody lost one year because everybody's booming. It's you, only you thinking, unfortunately. So there is something here which I want you guys to have internally some critical assessment what is going on. And because it's been going on like this a few quarters at least, you have a certain expectation. COVID is everywhere.

It's not only for any one country. They're all supplying left hand, and nobody has capacity. Even the tool guys have no capacity for you know how much lead time each one waiting for tools? So I want you to tell anything you have because this is your best chance. The operator said this is the last question.

So you you tell really what's going on in your assessment.

Speaker 2

Let me let me me try to under describe it as I understand it. So prior to COVID, so if you were it said, you know, where is your business? What's it look like in, let's say, you know, the 2019, you know, clearly before COVID. What we had been communicating to our shareholders is we had been had made a transition fairly substantially from Package Park, Vernon, which it had been a historical business that was running, you know, 2 to $3,000,000 a quarter or so to our new wafer level products. And what I mean by that is that our new Fox family called the Fox p family is quite new.

You know, initial revenue shipments in the last eighteen months, for example, of the FOX P and the NP systems and the XP itself is only a few years old with the first customers going into production within the last eighteen months, including COVID. K? So, like, eighteen months from now, looking backwards. We had just seen in fact, I think it was in q four calendar that we were just finally banging our drum that our lead customer for the FOX XP in silicon photonics had finally gone to production. In fact, maybe Ken would look back.

I mean, maybe it was the January conference call of 2020 because that's when they had they just finally gone into production. And so what really is is when you talk about, you know, legacy products or whatever, we had made a transition as a company over to these new products with these new customers and market at that time. Our legacy business was actually quite small. It was services and support and a little bit of package part burn in business that we have seen substantially go away. Now one thing I am curious on is that we, I mean, we went for during COVID in particular, very little spending was being done and certainly no new product or new investigations were being done in the packaged part space.

And so it's just recently that we've had customers turn back on in what would be traditionally your you know, our legacy packaged part business and start to put RFQs and information out, request for capacity and proposals and all. So, you know, our legacy business, we really did see go to almost nothing, and it was only the new products that we were getting revenue on in these newer spaces. So that's a little different. I mean, again, I you know, my background is I came from Verigee that was acquired by Adoptest. You know, I had products that you know, our products had, you know, 50 or a 100 customers in production.

During this COVID, those customers continued to buy those products and have had their company, Yvonne Chesh, who bought those products, has done very well. My understanding is the new products that were coming out of those were all pretty much slowed down, and customers were not buying the new things during this last nine months. So I think that's the best I can try and explain what's different about us and say, like, an applied materials or a Teradyne or an Advan test. We really are kind of in a scenario where we were making this transition to these newer products, and we got hit.

Speaker 0

So,

Speaker 2

you know, we're just not riding a wave of a broad rising tide because of the segments that we're in. I hope that helps. Just my guess. Thank you. Okay.

You're you're welcome. Okay. And I think, operator, you would you'd suggest to do it there, and I think just time wise, we're a little over that kind of a typical one hour allotment that we do. So let me just say thank you for everybody for attending the call. As always, we can we'll make ourselves available for calls with you.

I I used to always invite people. If you're in town, swing by, but we're still kinda limiting that a little bit ourselves. But if you're a customer, you're welcome to come by. We'll figure it out. But other than that, I appreciate your time, and we will talk to you at the next call as well.

Bye bye now.

Speaker 0

This concludes today's call. Thank you for your participation. You may now disconnect.

Aehr Test Systems - Earnings Call - Q3 2021

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