Aehr Test Systems (NASDAQ:AEHR) Q1 2024 Earnings Call Transcript

Aehr Test Systems (NASDAQ:AEHR) Q1 2024 Earnings Call Transcript October 5, 2023

Aehr Test Systems misses on earnings expectations. Reported EPS is $0.18 EPS, expectations were $0.2.

Operator: Good afternoon, and welcome to the Aehr Test Systems Fiscal 2024 First Quarter Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jim Byers of MKR Investor Relations. Please go ahead.

Jim Byers: Thank you, operator. Good afternoon, and welcome to Aehr Test Systems first quarter fiscal 2024 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, Chris Siu. Before I turn the call over to Gayn and Chris, I’d like to cover a few quick items. This afternoon, right after market close, Aehr Test issued a press release announcing its fiscal 2024 first quarter financial results. That release is available on the company’s website at aehr.com. This call is also 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 could cause actual results to differ materially from 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 undertakes no obligation to update the forward-looking statements. And now I’d like to turn the conference call over to Gayn Erickson, President and CEO.

Gayn Erickson: Thanks, Jim. Good afternoon, everyone, and welcome to the first quarter fiscal 2024 earnings conference call. Thanks for joining us today. Let’s start with a quick summary of the highlights of the quarter and the continued momentum we’re experiencing in the semiconductor wafer level test and burn-in markets. Then Chris will go over the financials in more detail. And after that, we’ll open up the lines to take your questions. We finished the first quarter with solid revenue of $20.6 million and non-GAAP net income of $5.2 million, the strongest first quarter in our history, which has historically been our seasonally softest quarter. With this, we’re off to a very good start to our fiscal year, and we’re reaffirming our expectation to grow fiscal full year revenue by at least 50% to over $100 million and profit by over 90% year-over-year growth to at least $28 million.

During the quarter, we had record shipments of our FOX WaferPak Contactors in both revenue and units with revenues reaching well over 50% of total revenues for the quarter. We’re also very pleased with the continued stream of new designs for WaferPaks we’re seeing. Our new design volume has tripled over the last nine months as we’re seeing more and more electric vehicles coming online with their own specific device designs for inverters and onboard chargers. As a result, our customers are buying additional WaferPak Contactors for these new designs, highlighting the recurring revenue part of our business. As we’ve noted before, our proprietary WaferPak Contactors are needed with our FOX wafer level test and burn-in systems to contact with the individual die on the wafer and are designed specifically for a given device.

As our customers win new designs from their customers, Aehr eventually secures orders for new WaferPak to fulfill these new wins. With each new design, our customers will need enough new WaferPaks to meet the volume production capacity need for those new devices. With the increase in WaferPak designs, we’ve been adding resources in both our U.S. and Philippines operations to expand our already successful application and support team there. We’re also continuing to add capability and capacity in the Philippines to meet the support needs of our growing installed base in Asia. Another key highlight is that we’ve now received customer acceptance of both configurations of our new fully automated FOX WaferPak aligner, which allows hands-free operation of WaferPak handling and alignment and is available either as a stand-alone unit or fully integrated with our FOX-XP multi-wafer systems.

We recognize revenue for the stand-alone WaferPak aligners in the first quarter. And after the close of the quarter, we received customer acceptance and sign-off of the aligners integrated with our FOX-XP systems. The integrated aligners are integrated with FOX XP systems equipped with two key test system enhancements introduced over the last year. These FOX XPs include our new bipolar voltage channel model option for both positive and negative gate biased stress and burn-in as well as our very high voltage channel module option, the VHP channel model option, which, together with our proprietary WaferPaks and new inert gas control option for the FOX XP enable high-temperature reverse bias testing up to 2,000 volts at wafer level for silicon carbide and gallium nitride high-voltage semiconductors that are used in power converter applications such as electric vehicle traction inverters and onboard chargers.

Acceptance and production release of these FOX XPs with the integrated aligners and the associated revenue recognition provide a solid start to our second quarter revenue and pave the path for revenue recognition immediately upon all future shipments of these products to this customer and forecasted shipments to additional customers this fiscal year. So let me talk a little bit about our new customers. We’re excited to have announced last month yet another new customer in silicon carbide. This is our sixth customer for silicon carbide wafer level burn-in. This new customer is a U.S.-based multibillion-dollar semiconductor supplier that serves several markets, including automotive, community, consumer, energy, industrial and medical markets.

After conducting a detailed financial evaluation of Aehr and Aehr’s FOX family of products, including multiple on-site visits to Aehr’s application lab, this new customer purchased an initial FOX NP system, WaferPak aligner and multiple WaferPaks for engineering qualification and small lot production of their silicon carbide power devices. This system is also configured with our new bipolar voltage and very high voltage options that enable new advanced test and burn-in capabilities for silicon carbide power semiconductors. This customer has indicated that as their production capacity increases, they intend to quickly move to our FOX-XP multi-wafer testing burn-in systems for high-volume production. In addition to the automotive electric vehicle device market opportunity, this customer is also focusing on the enormous opportunity for silicon carbide power devices in industrial, solar and other power applications.

Including this newest customer, the last two announced customers have selected our systems primarily for applications other than electric vehicles, which include industrial, solar and commuter electric trains. This further extends our application space beyond the enormous opportunity we see in silicon carbide for electric vehicle traction inverters and onboard and offboard chargers. These additional applications expand our market opportunity beyond the 4.5 million 6-inch equivalent silicon carbide wafers that William Blair forecast will be needed per year by 2030 just for electric vehicles. These new applications are driving an additional 2.8 million 6-inch equivalent wafers annually by 2030 to address industrial, solar, electric trains, energy conversion and other applications.

It’s also interesting to note that these last two customers did not need to see their wafers tested on our system before they move forward to purchase from us. This need for testing before purchase was essentially a requirement with our early customer engagements, but it’s clear that many of our potential new customers have become much more comfortable moving forward with Aehr simply on our assurances that our solution will perform as committed. This allows the customers to accelerate their time to market. Having said that, we’re happy to engage with customers either way. If they want to see their wafers tested first, we’re happy to work with them. We have yet to lose a prospective customer after demonstrating our test and burn-in capabilities on their wafers.

In fact, we’ve never lost a head-to-head evaluation to a competitive product since introducing our FOX-NP and XP configured with the silicon carbide and gallium nitride test resources. So let me move on to our pipeline of prospective new customers for silicon carbide wafer level burn-in. In the last few weeks, we’ve attended two international conferences in Europe, and I personally met with more than a dozen companies in the silicon carbide market that are not currently using our solutions. We also met with all six of our current silicon carbide customers. These face-to-face meetings included multiple meetings with one of the market leaders in silicon carbide that we’ve been doing a significant automotive qualification of wafer level burn-in for well over two years.

Candidly, this is the longest and most extensive sales and benchmarking process I’ve ever experienced in my entire 30-plus year career. The good news is that we’ve made even more progress in the last few months with a very large number of wafers being run at our facility, followed by multiple meetings to review the data. Based on everything we’ve heard, our data, cost of ownership, products, including our new fully automated WaferPak Aligner, particularly in the integrated configuration, they’re all meeting their needs. We continue to feel confident that this customer will move forward with us using the FOX-XP multi-wafer solution for their high-volume needs, including initial purchase orders and system shipments this fiscal year. Our meetings also included face-to-face meetings with potential new silicon carbide companies who have now told us that they intend to place their first purchase orders with us over the next several months, including some that want us to ship systems, WaferPaks and aligners to them this fiscal year.

In the next few weeks, we’ll also be meeting with a significant number of potential new customers as well as end users of silicon carbide devices in Asia as we’re seeing increasing activities and opportunities heating up there. I can tell you, it’s a very exciting time in the silicon carbide and the electric vehicle markets right now, and we’ve never been busier. Let me add some further color on the silicon carbide market opportunity. A recent report from UBS forecast that the total silicon carbide market will be close to $8 billion in 2025 and for 30% of that total will be industrial applications. While the primary opportunity is still serving the electric vehicle automotive market, the industrial segment represents a material amount of dollars and a significant market opportunity.

The report also focuses on the progression of electric vehicle batteries from 400 volts to 800 volts, which is the level generally recognized by the industry at which silicon carbide is mandatory to get the range and recharging speed consumers are demanding. Devices used in the traction inverters for 800 volt DC battery systems actually operate up to almost 1,200 volts AC. At this voltage, the devices will experience electrical arcing when tested at 1,200 volts under normal testing environments, which creates a very real problem for conventional testers on wafer probers and probe cards. At such high voltages, the 1,200 volt bias to the device will actually create an electrical arc through the air or on a wafer even if surrounded by 100% nitrogen.

This is basically how a spark plug works. However, this spark actually damages the devices permanently. Aehr’s proprietary WaferPaks have individual chambers that encapsule each wafer and allow us to control the temperature, gas makeup and pressure within this chamber on each wafer. Our proprietary gas and pressure control option allows us to test and burn-in an entire wafer up to 2,000 volts without arcing or damaging the wafer. By contrast, other competitive systems using standard wafer progress see arcing in as little as 900 volts, which makes it impossible to do high-voltage reverse bias test and burn-in at the wafer level for devices aimed at these new 800-volt battery vehicles. Per UBS in 2023, 91% of the batteries sold in electric vehicles are forecasted to be 400 volts and only 9% are 800 volts.

But by 2026, UBS expects a percentage of 800-volt battery cars to be above 30%, which is why it appears so many silicon carbide suppliers are timing their major ramps to be in the 2025 to 2026 time frame. So in the next couple of years, we expect Aehr to benefit from both an increased number of electric vehicles being sold as well as a significant increase in silicon carbide needing our solution for those electric vehicles. We’re also in extensive engagements with multiple gallium nitride suppliers. Gallium nitride is similar to silicon carbide in that both of these semiconductor compounds are considered wide bandgap semiconductors that are able to withstand high-voltage applications more directly than silicon. Gallium nitride semiconductor material has characteristics that make it optimal for lower power converter applications such as consumer power converters, solar microinverters and industrial motor controllers as compared with silicon carbide that is optimal for higher power, higher voltage applications such as traction inverters in electric vehicles, trucks, trains and converters using charging infrastructure and storage.

One of our prospective gallium nitride customers is also a company that we’ve been doing automotive qualification work for their silicon carbide devices. They became very interested when we introduced them to the new higher voltage options, including the bipolar voltage for gate stress and the very high voltage for drain stress capability. They really love that we offer both a low-cost, small footprint FOX-NP for their engineering and new product introduction needs, but also a fully compatible FOX-XP system for high-volume production, including a hands-free integrated WaferPak aligner. Interestingly, in this case, the gallium nitride group of this company evaluated our system and has decided to move forward with us faster than the silicon carbide group that we’ve been working with for nearly three years.

A close-up of a modern semiconductor chip, intricately wired and gold plated. Editorial photo for a financial news article. 8k. –ar 16:9

Stay tuned from our announcements on this in the near future. We’re also engaged with another large gallium nitride supplier that is already a major supplier of IGBT and silicon carbide devices and has decided to move forward with an on-site evaluation. We have agreed to place a FOX-NP system on their floor for a defined period of time, and they’ve already ordered multiple WaferPaks that are not contingent on any evaluation terms for acceptance. We’re very excited about this prospect as well as the opportunity to showcase our capabilities to the GaN team with the silicon carbide team watching closely. This company, which is one of the largest automotive semiconductor suppliers in the world, could very likely be one of the largest, if not the largest gallium nitride semis supplier in the world.

The gallium nitride market is another potentially significant growth driver for our wafer level solutions, particularly for automotive and photovoltaic applications, where burn-in appears to be critical for meeting the initial quality and reliability needs of those markets. Many forecasters believe that the gallium nitride device market will be larger than silicon carbide due to its much larger applications based in terms of power charges for everyday use, data centers, solar and industrial applications. While we’re not yet certain how big this market could be for Aehr’s wafer level test and burn-in systems, we will be working with several key players in this space this year to form a better determination. While we do expect to recognize some revenue for systems, WaferPaks and aligners for gallium nitride applications this fiscal year, we continue to expect a significant majority of our revenue come from silicon carbide.

Now let me move around to silicon photonics wafer-level and singulated die/module burn-in market. We continue to be very enthusiastic about this market, which includes the current photonics transceiver market used in data and telecommunications and the upcoming application of silicon photonics integrated circuits for use in optical chip-to-chip communication, which we see as a major market opportunity. As we discussed on our previous call, we received our first order last May from a current major silicon photonics customer for a new volume production FOX-XP multi-wafer test and burn-in system for use for their very high-power silicon photonics device wafers. This system is configured to enable cost-effective production test of up to nine full wafers in parallel and up to 3,500 watts of power per wafer.

The original application for this system with silicon photonics devices for fiberoptic transceivers used in data centers and data and telecommunication networks. There’s now been discussion about using this system for multi-chip modules embedded with processors for chip-to-chip optical communication. This customer is one of the world’s largest semiconductor manufacturers, and we expect to receive orders for additional production systems as they increase production of these devices. While we believe it will likely be several years before we see significant revenue generated from this optical chip-to-chip communications market, this order from our lead silicon photonics customer and their request for an accelerated shipping date is encouraging and provide some data to suggest that this market opportunity could happen sooner.

Our FOX wafer level test and burn-in solution with our proprietary WaferPak full wafer contactors are a great fit for the silicon photonics semiconductor market. These next-generation silicon photonics-based integrated circuits can require up to 2x to 4x as much power for full wafer test burn-in and stabilization. And our FOX new production system configuration, which can be used to test and burn in these new optical I/O devices expands the market opportunity of the FOX-XP system even further. The power and functionality of lasers used to transmit data are critically important to the performance of the communication channel and Aehr Solutions not only weed out early life failures but also improve the performance of the device to what photonics industry refers to a stabilization.

During the first day or two of normal operation, the laser output characteristics change in an exponentially decaying manner and must be stabilized until the decaying stops before the final product can be tuned to meet its performance specification. Aehr can do this across an entire way for a fully integrated photonics integrated circuits with embedded or attached laser emitters. These fully integrated circuits with lasers are reportedly the highest performance and level of integration possible, which is optimal for integrating into a package along with a microprocessor, graphics processor or artificial intelligence processor for optical chip-to-chip communication. Aehr currently has six customers using our systems for production test of silicon photonics devices.

Five use our NP and XP systems for wafer level test and burn-in and one uses both NPs and XP systems for engineering and production burn-in of individual singulated die and modules using our proprietary DiePaks. We’re watching this market very closely and are working with some of the leaders in silicon photonics to ensure that we have the products and solutions available to meet their needs for this potentially significant market application. To conclude, we’re encouraged by the continued positive momentum we’re seeing for silicon carbide in electric vehicles and also very excited about the expanding growth opportunities we’re seeing in several additional markets with current and prospective customers. For the fiscal year ending May 31, 2024, we’re reiterating our previously provided guidance for total revenue to be at least $100 million, representing growth of over 50% year-over-year and GAAP net income of at least $28 million, representing earnings growth of greater than 90% year-over-year.

We look forward to updating you on our progress throughout the fiscal year. Now with that, let me turn it over to Chris before we open up the line for questions.

Chris Siu: Thank you, Gayn. Good afternoon, everyone. We’re pleased to announce another strong quarter for Aehr Test Systems after record fiscal 2023. On today’s call, I will summarize our results for the fiscal first quarter. We exceeded the consensus on both our top and bottom line. First quarter revenue was $20.6 million, up 93% from $10.7 million in Q1 of last year. Strong demand for our WaferPaks contributed to a significant year-over-year increase in revenue in the first quarter. WaferPak and DiePak consumables revenue accounted for 55% of our total revenue in the first quarter compared to just 5% of revenue in the prior year quarter. As we have noted before, customers typically purchase our FOX systems ahead of WaferPaks and subsequently stack up purchases of WaferPaks.

We’re seeing continued momentum for new WaferPak designs with existing and new customers to meet their customer and market requirements. Non-GAAP net income, which excludes the impact of stock-based compensation, was $5.2 million or $0.18 per diluted share for the first quarter. This compares to non-GAAP net income of $1.3 million or $0.05 per diluted share in the first quarter of fiscal 2023. Bookings in the first quarter were $18.4 million, up from $15.2 million in the preceding Q4 and down slightly by 4% from $19.1 million in the first quarter of fiscal 2023. Included in our Q1 bookings are announced orders for additional WaferPak contactors of $60 million from our lead silicon carbide customer. Backlog as of quarter end was $22.3 million, up 14% from a year ago, with $1.7 million bookings received primarily from a new U.S. customer that we announced previously, in the first four weeks of the second quarter of fiscal 2024, we now have an effective backlog of $24 million.

GAAP gross margin for the first quarter came in at 48.4%, up from 42% in Q1 last year. The increase in gross margin reflects a favorable product mix of higher-margin WaferPaks. Also contributing to the increase in gross margin in the first quarter was the overall higher revenue level compared to Q1 last year. Operating expenses in the first quarter were $5.9 million, up 45.8% from $4 million in Q1 last year. The year-over-year increase is primarily due to previously noted increased headcount-related expenses to support our worldwide sales and marketing efforts and our R&D programs. Our investments in sales and marketing staff continue to have a positive impact on expanding our customer engagement and marketing reach to support revenue growth.

The increase in R&D is primarily due to costs associated with development programs for augmenting features and performance of our new automated WaferPak aligner, which enable new advanced tests and burn-in capabilities for silicon carbide and gallium nitride power semiconductors on the Aehr FOX-XP wafer level test and burn-in systems. The first order for our standalone automated aligner was shipped during Q4 fiscal 2023 and was accepted by our customer in the first fiscal quarter. We continue to invest in R&D to enhance our existing market-leading products and to introduce new products to maintain our competitive advantages, and expand our applications and addressable markets. Turning to the balance sheet. We continue to generate healthy cash flow and finished the quarter with a strong cash position.

Our cash and cash equivalents increased to $51 million at the end of Q1, up 6% from our total cash, cash equivalents and investments balance of $47.9 million at the end of Q4. We generated $3.9 million in operating cash flow during the quarter, while also investing in inventory to support our growth strategy in fiscal 2024. We have zero debt and continue investing our excess cash in money market funds or short-term investments to take advantage of favorable interest rates in the current macro environment. Interest income earned in the first quarter was almost $600,000 compared to $121,000 in the first quarter last year. In Q3 of last year, we announced an ATM at the market offering of up to $25 million in shares of the company’s common stock on the open market.

We received gross proceeds of $7.3 million on the sale of 209,000 shares in fiscal 2023. We did not sell any shares during our fiscal Q1. As of the end of the first fiscal quarter of 2024, the remaining amount available under the ATM offering was $17.7 million. It is our expectation that we will sell shares against this ATM offering during this fiscal year at times and prices that are most advantageous to our shareholders and to the company. Now turning to our outlook for the current fiscal 2024 that ends on May 31, 2024. We continue to believe in the company’s growth trajectory as our differentiated products and technologies continue to attract and win new customers who design more cost-effective and more efficient wafer level test and burn-in solutions.

As Gayn mentioned, we are reaffirming our previously provided guidance for full year total revenue to be at least $100 million, representing growth of over 50% year-over-year and GAAP net income of at least $28 million, representing earnings growth of greater than 90% year-over-year. Lastly, looking at the Investor Relations calendar, our Annual Shareholders’ Meeting will be held on Monday, October 23, at the company headquarters in Fremont, California at 5 PM. If you’re interested in attending, we appreciate an RSVP if possible, so we can plan for attendance accordingly. Please feel free to contact myself or Jim Byers of MKR, our Investor Relations firm, to let us now. We will also be participating in a couple of investor conferences in the next few months.

On November 16, we’ll be participating in the Craig-Hallum Alpha Select Conference taking place in New York. And on December 12, we’ll be back in New York to participate in the 12th Annual NYC Summit. We hope to see some of you at these conferences. This concludes our prepared remarks. We’re now ready to take your questions. Operator, please go ahead.

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Christian Schwab with Craig-Hallum Capital Group. Please go ahead.

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Q&A Session

Christian Schwab: Hi, good afternoon, guys. Gayn, on the gross margin in the quarter at 48.5% with WaferPaks at greater than 50% of revenue, I would assume the gross margin would have been a little bit better than that. Is there something going on there for that?

Gayn Erickson: Yes. So if you remember, historically and actually consistently, our aligners have been amongst our lowest margin products. They are fully our IP, but we have contracted to have them completely built external to our facility here. And I wouldn’t call them pass through because it’s not that, but they tend to be on the lower end of the margin. So we had a couple of aligners, the automated aligners in there, and that kind of offset that by a couple of few points, I think. So as our business increases, and we start to see it candidly, as we see more customers wanting to actually do an integrated aligner with every system, that will have some. But generally, overall, it still sort of normalizes our systems level of margins. But I think if you went through the math, that’s where that came from.

Christian Schwab: And as far as mix on a go-forward basis, would you anticipate the remainder of the year returning back to north of 50%? Or is that going to be tremendously mix dependent quarter-to-quarter?

Chris Siu: Yes. No. So that’s right. So we’re still targeting 50% above the margin for the year, and that’s what we’re looking at.

Christian Schwab: Okay. Great. And then regarding future orders from different customers, I think you talked about meeting with your six current customers and new customers. Just as we think about backlog to support the $100 million of revenue, when should we assume potentially your third major customer coming in as well as numerous other customers? I think you said over the next few months, you anticipated that. I’m just trying to get follow-up to that.

Gayn Erickson: We’re trying to do our best to give you kind of plenty of heads up on those, and I will tell you that our ability to guess the customers is not perfect either. But just a little bit, so of our current six customers, I mean, more than half of them, certainly, our top two largest customers. We’re expecting orders for both bookings and shipments during this year. I think more than half of the six customers are all going to have bookings and revenue shift within the year and then a number of new customers as well. And we kind of alluded to, both with the GaN related and the large benchmark. I’m feeling really good. It’s kind of hard to put our finger on it. We probably shouldn’t tell you exactly when they’re going to come anyhow, but we’re certainly trying to give you enough hands.

I think everybody and we’re certainly clear here, a $24 million backlog with, what, $20 million in the bank. We’ve got a lot of turns and a lot of turns expected this year to do the $100 million, and we don’t expect to finish the year with zero backlog either. And for those that have come and seen our facility, and we’re always really pretty open about that. And if you haven’t planned it, if there’s no other excuse to come for our shareholders’ meeting, besides the glass of wine and hors d’oeuvres, you can see our manufacturing floor, but it is bellowing right now. And that is where a lot of the inventory is going, et cetera, in anticipation of this our lead times candidly continue to be world-class shorter than anybody else while we continue to increase capacity.

Christian Schwab: That’s great, Gayn. Thank you for that color. As far as the new customers then, I know you’ve talked previously about having multiple customers this year at 10%. So obviously, it probably appears we have at least two, but should we anticipate three or four? Or is it just too early to tell?