Aehr Test Systems (NASDAQ:AEHR) Q2 2023 Earnings Call Transcript

Aehr Test Systems (NASDAQ:AEHR) Q2 2023 Earnings Call Transcript January 5, 2023

Aehr Test Systems beats earnings expectations. Reported EPS is $0.16, expectations were $0.09.

Operator: Good evening, and welcome to the Aehr Test Systems’ Fiscal 2023 Second Quarter Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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’ second quarter fiscal 2023 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 Spink. Before I turn the call over to Gayn and Ken, I’d like to cover a few quick items. This afternoon right after market closed, Aehr Test issued a press release announcing its second quarter fiscal 2023 results. That release is available on the company’s website at aehr.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 today that are based on current information and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

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 Aehr Test Systems undertakes no obligation to update the forward-looking statements. And now with that, I’d like to turn the conference call over to Gayn Erickson, President and Chief Executive Officer. Gayn?

Gayn Erickson: Thanks, Jim. Good afternoon, everyone, and welcome to our second quarter of fiscal 2023 earnings conference call. Thanks for joining us today. Let’s start with a quick summary of the highlights of the quarter and the momentum we’re seeing in the semiconductor wafer level test and burn-in market and then, Ken will go over the financials in detail. After that, we’ll open up the lines to take your questions. We had a very solid second quarter reflecting strong sequential and year-over-year growth in our revenue and net income, both ahead of consensus estimates. Revenue for the quarter was $14.8 million, an increase of 39% sequentially and 54% year-over-year, and we generated non-GAAP net income of $4.5 million, slightly over 30% net profit.

Our momentum in silicon carbide wafer level test and burn-in continues to grow and we see this momentum continuing for the next several years as companies are adding significant capacity in silicon carbide semiconductors to address the incredible forecasted demand, particularly for the electric vehicle and electric vehicle charger markets. Forecasts from William Blair estimate that the silicon carbide market for devices and electric vehicles alone such as traction inverters and onboard chargers is expected to grow from a 119,000 6-inch equivalent silicon carbide wafers for electric vehicles in 2021 to more than 4.1 million 6-inch equivalent wafers in 2030. This represents a compound annual growth rate of 48.4%. This equates to almost 35 times larger in 2030 than in 2021.

In addition, 6-inch equivalent silicon carbide wafers for other markets such as solar, industrial and other electrification infrastructure are expected to grow to another 3 million wafers by 2030. This expands our silicon carbide test and burn-in market even more. We are excited to have added two new customers for silicon carbide test and burn-in during the quarter. The first is a major silicon carbide semiconductor supplier that purchased our FOX-NP dual wafer test and burn-in system used for engineering and device qualification during the quarter, and after the quarter closed, has since placed their first orders for two of our FOX-XP multi-wafer systems for volume production test and burn-in of their silicon carbide wafers, including the order we just announced today.

This company is one of the world’s largest suppliers of silicon carbide devices and serve several significant markets, including the electric vehicle industry, as well as other industrial applications. We now have two of the top four silicon carbide market participants as customers. They have indicated to us that they plan to order a significant number of FOX-XP systems for volume production of their silicon carbide devices at facilities around the world to meet the rapidly expanding forecasted market demand for silicon carbide devices for electric vehicles and other industrial markets. This new customer selected our FOX-XP multi-wafer test and burn-in system configured with our new fully Integrated and Automated WaferPak Aligner for high volume hands-free operation.

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They have told us how important automation is to them across their wafer fabrication and assembly and test and that in addition to the cost effectiveness and scalability of our system, our fully integrated FOX-XP with automated WaferPak alignment handling is key to meeting their automation needs that are critical to their scalability, as well as the quality and reliability goals of the customers and markets they serve. The FOX-XP multi-wafer level test and burn-in system can be configured with up to nine or 18 wafers depending on the customers’ specific test requirements. It provides the test electronics and the device contactor technology that enables contact to 100% devices on a single wafer and the handling and alignment equipment to provide a total turnkey single vendor solution to meet the needed critical test and stress requirements.

Our Automated WaferPak Aligner adds a number of very valuable features to the wafer-level test and burn-in process. This new FOX WaferPak Aligner is available in both standalone and integrated versions. In the standalone version, customers can align their WaferPaks offline from the FOX-XP systems using our new FOX WaferPak cards that can be docked to the Aligner. The Aligner will automatically load the WaferPaks with wafers or exchange tested wafers with untested wafers and can be used to support up to five or more fully-loaded XP systems for an extremely low-cost application with long test and burn-in times. The integrated version of our new Aligner docks directly to a FOX-XP chamber that can test and burn-in up to 18 wafers at a time. This can be preferable to customers for lower test and burn-in times or in the case where the customer wants near hands-free operation.

The new Aligner can work with all types of wafer sizes, including the high volume runners of 150 millimeter and 200 millimeter used for silicon carbide and can also test 100 millimeter silicon carbide or other wafers. It can also test 200 millimeter and 300 millimeter wafers typical of silicon photonics devices, memories and logic devices. We see automation more typically desired in 300 millimeter fabs such as silicon photonics and memory devices where automation is much more typical. The Automated Aligner also allows for unattended change or reverse from one product type to the next and the ability to run multiple different product type wafers in parallel. Adding automation through our new Aligner gives our wafer-level test and burn-in offering even greater value, as well as opens up several large incremental markets to Aehr such as high volume processors and chipsets with integrated photonics transceivers, flash and ultimately DRAM memories and also higher mix devices requiring extremely high reliability and 100% burn-in such as automotive microcontrollers and sensors.

The new second customer added this quarter is a multi-billion dollar annual revenue global manufacturer of semiconductors that serves multiple markets, including supplying devices to the automotive industry. This new customer has already has experience in power semiconductors and quickly understood the value proposition of being able to test and burn-in 100% of their devices at wafer level. In a fairly short period of time, they selected our FOX-NP dual wafer test and burn-in system for qualification of their silicon carbide devices for multiple markets, including electric vehicles. We anticipate that this customer will move to high volume production using our FOX-XP systems after their customer qualifications. Adding two new customers now provides more optimism about our ability to gain significant market share of the test and burn-in market for silicon carbide devices.

These customers expand our penetration beyond our initial lead silicon carbide wafer level burn-in customer. Regarding that lead customer, they continue to ramp their capacity and use of our FOX-XP multi-wafer test and burn-in systems and WaferPaks which is being driven by increased demand for silicon carbide, particularly for, but not limited to electric vehicles. We expect significant orders from them for the necessary WaferPak for wafer contactors to match their previously purchased FOX-XP systems and they continue to forecast orders for significant numbers of new FOX-XP systems and WaferPak contactors over the next several years to meet growing demand. In addition to the customers that have now placed initial orders with Aehr for silicon carbide wafer level test and burn-in systems, our ongoing benchmarks and evaluations with multiple prospects made great progress during the quarter.

These include significant market leaders in silicon carbide, as well as several smaller existing and up and coming suppliers. We expect several of these companies to place their initial orders with us before the end of this fiscal year ending May 31, 2023. We also continue to see very positive responses from our discussions with a number of new potential customers in silicon carbide this quarter, and have also begun detailed discussions with gallium nitride semiconductor suppliers from around the world. Silicon carbide devices and modules have key advantages for traction inverters in onboard and offboard charges for electric vehicles, as well as other high power industrial applications, while gallium nitride is generally believed to be superior for lower power applications, particularly under a 1000 watts.

Both device types are forecasted to grow significantly over the next several years and into the future. Both silicon carbide and gallium nitride semiconductors address the high voltage power semiconductor markets that are significant opportunities for our FOX wafer-level test and burn-in systems and WaferPak for wafer contactors. As we look to further penetrate these markets, we continue to add new capabilities to our wafer-level test and burn-in systems. These include the new bipolar voltage channel module and very high voltage channel module options that enable silicon carbide and gallium nitride semiconductor manufacturers more flexibility to address a wider variety of stress and burn-in conditions for their engineering qualification and production needs.

These advanced capabilities enable manufacturers to ship product with higher reliability and parametric stability necessitated — easy to say — necessitated by applications such as electric vehicle traction inverters, onboard chargers and several other industrial and power conversion markets. With these new features, test and burn-in at wafer-level ensures even better control of yield loss and improved product reliability. Many questions have come up on what does the addition of these two new silicon carbide customers mean. Both have a history in the automotive space and one is currently a leading supplier of silicon carbide devices to this market. We announced our lead customer about three years ago, right before the pandemic started. Silicon carbide’s massive ramp did not really start until the latter half of the pandemic as electric vehicles, chargers and worldwide electrification of infrastructure really began to take off.

Our lead customer did not place an order for their second system until the middle of 2021. If you aggregate the orders we’ve announced from them and the WaferPak contactors to support their orders, their choice of Aehr has meant roughly $75 million of business for Aehr already. And they’ve publicly said they have plans to expand. So, we are enjoying their success. The new customers can be equally significant. For the major supplier silicon carbide customer, we first tested their wafers on our machines at Aehr and then they purchased a FOX-NP for engineering qualifications three months ago and have since tested their wafers at their facility. Since then, they have already purchased two of our multi-wafer FOX-XPs for production test and burn-in of their devices, including the order announced today, and they have told us they’ll need a significant number of additional systems.

This happened in a fraction of the time that it took to get to this point with our initial customer. As Aehr has now validated our wafer-level solution with multiple customers and their end customers, that our solution is very effective at screening out defects to automotive qualities. We believe this new customer can be as large as our lead customer. So, while we only announce purchase orders as they come in, the fact that this customer is depending on Aehr for its production volumes going forward should give investors confidence that Aehr is right in the middle of this electric vehicles tsunami. The second new customer this last quarter is a very large player in discrete and power semiconductors today and is already qualified for automotive.

Interestingly, this company has yet to announce their silicon carbide MOSFETs that they’re already characterizing on our FOX wafer level burn-in systems. We believe that most customers of our FOX wafer level test and burn-in systems have the potential to be a significant revenue source for Aehr and this customer is no different. We’ve said in the past that we haven’t seen any real competition in terms of cost effectiveness, footprint and manufacturing capacity compared to our proprietary FOX wafer level test and burn-in systems and WaferPak for wafer contactors. We continue to engage with both current suppliers of silicon carbide devices, as well as other new entrants into this market. The industry data suggests CAGRs of close to 50% over the rest of this decade, as the electric vehicle and charging infrastructure markets develop.

Solar and wind will also be part of this growing market. So, naturally you’d expect lots of new entrants, some will succeed wildly, some may make niche inroads. We want all of them to come to Aehr for their test requirements. Our use case is compelling. Since their customers such as the automotive companies require zero failures, not one in 10,000 or one in 100,000, but no failures. So test and screening out early defects becomes very, very important to our customers and prospects. And from the level of interest we’re seeing, we believe our message is getting through. We set out to be seen as the industry standard for wafer level test and burn-in, a critical piece of the production process for several semiconductors and their target applications, including silicon carbide and silicon photonics.

With the momentum we’re seeing, we feel we have a very good chance to be recognized as that industry standard and to gain significant market share worldwide. Now let me move on to silicon photonics. We’re also seeing a strong recovery of our silicon photonics wafer level test and burn-in business after the weakness we saw during the pandemic. Halfway through this fiscal year, we’ve already shipped over $5 million in systems upgrades in WaferPaks to silicon photonics customers and that’s over 300% of last year’s fiscal year’s first half revenue for silicon photonics. This jump in revenue is also spread across multiple customers and much of it is for new product designs and qualifications that we feel will lead to production volumes. We have systems installed at over half a dozen customers testing silicon photonics devices used in 5G infrastructure, data and telecommunications transceivers and a few yet to be introduced applications that we’re very excited about.

With multiple market leaders announcing plans to integrate photonics transceivers into their microprocessors, graphics processors and chipsets, we believe silicon photonics will become a significant market for wafer level test and burn-in over the next several years. Looking ahead, we continue to be very encouraged by discussions with current and prospect customers and the continued momentum opportunities we are seeing. Europe has a large number of potential customers for power semiconductors, including both silicon carbide and gallium nitride, and the U.S. East Coast has a number of companies that are already in or getting into silicon carbide, as well as companies that are making investments in silicon photonics. And we’re also seeing — starting to see companies in Asia getting into the power semiconductor game.

The lifting of COVID-related travel restrictions in Taiwan and Japan is really helping with our new customer engagements in those regions. With the significant increase in market demand we’re seeing for our products and in our sales activities, we have been investing in building up our sales and support teams across the globe. During the quarter, we expanded our senior sales leadership with the addition of several proven executives that will manage our sales activities in Asia, Europe and the East Coast of the United States. These are experienced semiconductor capital equipment sales veterans with significant expertise in test and direct relationships with our target customers. We’re very happy with these additions and have already seen a positive impact from their efforts.

In conclusion, we continue to believe that we will receive production orders from additional silicon carbide companies beyond our current customers and begin shipping systems to meet their production capacity by the end of our current fiscal year that ends May 31, 2023. We expect a strong second half of this fiscal year and are maintaining our guidance for revenues of at least $60 million to $70 million for our current fiscal year that ends May 31, representing growth of at least 18% to 38% year-over-year and also represents revenue growth of between 35% and 75% in the second half of the fiscal year, compared to the first half of this year. Additionally, we continue to expect bookings to grow faster than revenues in fiscal 2023 as the ramp in demand for silicon carbide and electric vehicles increases and we build momentum going into fiscal 2024.

With that, let me turn it over to Ken before we open up the line for questions.

Ken Spink: Thank you, Gayn, and good afternoon, everyone. As Gayn noted, we had another solid quarter in Q2 with strong sequential and year-over-year growth in our revenue and net income. We also saw improvement in gross margin and beat analyst estimates in both the top and bottom lines. Looking at our financial results in more detail, net sales in the second quarter were $14.8 million, up 39% sequentially from $10.7 million in the first quarter and up 54% from $9.6 million in the second quarter last year. The sequential increase in net sales from Q1 includes an increase in WaferPak/DiePak revenues of $6.1 million. For the second quarter, these consumable revenues accounted for 45% or $6.6 million of our total revenue, compared to only 5% of revenue in the preceding first quarter.

The increase in revenues is primarily due to shipments of WaferPaks for our lead silicon carbide customer in Q2 related to prior quarters’ system shipments. As noted previously, customers often buy systems and then WaferPaks later after they have completed their WaferPak designs. Gross profit in the second quarter was $7.9 million or 53% of sales, up from gross profit of $4.5 million or 42% of sales in the preceding first quarter and up from gross profit of $4.5 million or 47% of sales in the second quarter of the previous year. Several factors contributed to the improvement in gross margin. The change in product mix had a favorable impact on gross margin. Consumables revenues which deliver higher gross margins accounted for 45% of total revenues compared to only 5% of revenues in the prior quarter, resulting in a 4.7 percentage point improvement in gross margin from Q1.

We also saw an improvement in unabsorbed overhead cost to cost of goods sold due to higher revenue levels in the second quarter, accounting for a 3.2 percentage point improvement in gross margin over the prior quarter. With our use of contract manufacturers, we have the ability to keep our costs relatively fixed while revenues grow, which contributes to gross margin. Gross margin also benefited from lower freight, duties and tariffs and lower warranty costs providing a 3.5 percentage point improvement in gross margin. We are definitely seeing an improvement from the challenging supply chain environment we saw over the last year — fiscal year. Freight costs have come down substantially. As noted in prior calls, due to the shortage in ocean freight capacity with shipments into the U.S., we were required to ship by air.

This is no longer the case and we are saving over $50,000 per chamber consolidating chambers on ocean shipments. We continue to minimize our use of suppliers in China and use these suppliers only when their total cost including tariffs is lower than other suppliers. Warranty costs also improved which is actually reversing some warranty reserves as both our quality continues to improve, as well as our costs associated with repair has lowered significantly using our repair center in the Philippines. Non-GAAP net income for the second quarter was $4.5 million or $0.16 per diluted share. This compares to non-GAAP net income of $1.3 million or $0.05 per diluted share in the preceding first quarter, and non-GAAP net income of $1.4 million or $0.05 per diluted share in the second quarter of fiscal 2022.

Non-GAAP net income excludes the impact of stock-based compensation. Operating expenses in the second quarter were $4.4 million, an increase of $403,000 or 10% from $4 million in the preceding first quarter and up $624,000 or 16% from $3.8 million in the second quarter of the previous year. The increase from the preceding first quarter is primarily due to an increase in SG&A of $350,000 related to cost of growing the business, including increases in headcount and corresponding recruiting fees, increases in company-wide salaries and increases in outside commissions, travel, entertainment and trade shows related to our significant increase in selling activities. We’ve invested in human capital with key additions to our sales and marketing staff to expand our customer engagement and marketing reach, customer support and manufacturing staff to support revenue growth and engineering staff for our development programs.

The increase from the second quarter last year include increases in SG&A of $386,000 related to the cost of growing the business, and R&D of $238,000 related to increased spending on development programs. During the quarter, we announced two new enhancements for our FOX-P family of wafer level test and burn-in systems. These include the bipolar voltage channel module and very high voltage channel module options, which enable new advanced test and burn-in capabilities for silicon carbide and gallium nitride power semiconductors on Aehr’s FOX-P wafer level test and burn-in systems. Our R&D program initiatives also include a new automated WaferPak Aligner which can be configured in either a standalone configuration or integrated with our FOX-XP systems.

We have taken orders for both configurations, including the recent announcement of an order from our new silicon carbide customer for a FOX-XP system, which includes the integrated configuration which provides hands-free operation of wafer handling and auto loading. 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. These R&D programs include enhancements in all our key markets, including silicon carbide and gallium nitride power semiconductors, silicon photonics and other photonics semiconductors, mobile 2D and 3D sensing devices, and memory and data storage semiconductors. Turning to the balance sheet for the second quarter.

We finished the quarter with a strong balance sheet. Our cash, cash equivalents and short-term investments were $36.6 million at November 30, up $437,000 from $36.1 million at the end of the preceding first quarter, and up $1.6 million from $35 million at the end of the second quarter of fiscal 2022. Also, we are now investing excess cash in short-term investments to take advantage of the recent increases in interest rates. Working capital at November 30 was $54.8 million. This represents an increase of $5.4 million from Q1 and $15.3 million from Q2 of the prior year. Inventories at the end of the second quarter were $18 million, an increase of $739,000 from the preceding quarter and up $4.9 million from the second quarter last year. We are increasing inventory to support our expected growth in the second half of fiscal 2023, and we continue to purchase inventory to ensure adequate supply to meet current customer and future customer market demand.

Our highly differentiated FOX family of systems allows us to purchase material that is leveraged across many customers and markets, which provides us confidence in our ability to meet the significant market opportunity. Bookings in the second quarter were $10.8 million. Backlog as of November 30 was $15.5 million, compared to $19.5 million at the end of the preceding first quarter, and $36.1 million at the end of the second quarter last year. Effective backlog, which includes backlog as of November 30 and all orders since the end of the second quarter, including the order we announced today, is $23.5 million. Now turning to our outlook for 2023 fiscal year which ends on May 31, 2023, we are confident in the company’s growth trajectory and our unique capabilities and product offerings to meet customer demands.

As such, we are reiterating our previously provided guidance for full year total revenue of at least $60 million to $70 million, representing growth of at least 18% to 38% year-over-year with strong profit margins similar to last year. We continue to expect bookings to grow faster than revenues in fiscal 2023 as the ramp in demand for silicon carbide and electric vehicles increases, and we’ve built momentum going into fiscal 2024. Lastly, looking at the Investor Relations calendar, next week we’ll be meeting with investors virtually at the 25th Annual Needham Growth Conference on Thursday, January 12. We hope to see some of you virtually at the conference. This concludes our prepared remarks. We are now ready to take your questions. Operator, please go ahead.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. The first question comes from Christian Schwab with Craig-Hallum Capital Group. Please go ahead.

Christian Schwab: Hey, congrats guys on continued strong business and new customer momentum. Gayn, it sounds like you’re updating the number of customers that you expect to be shipping to by the end of the fiscal year. Can you just clarify how many customers in total you would anticipate selling to by the end of the fiscal year?

Gayn Erickson: Additional from where we’re at right now?

Christian Schwab: Right.

Gayn Erickson: Yes, I mean, we don’t intend to try to be too vague, but getting yourself too accurate can also get you in trouble, but there’s a couple of few customers that have not bought production systems from us yet, that we believe could be taking — giving us orders and requesting deliveries even as soon as before the end of the year and we have capacity to be able to do that. So, we have enough inventory and prebuild against market forecast as well as specific customer forecast to allow us to actually ship systems before the end of May.

Christian Schwab: That’s great. I know you’ve highlighted this before, but could you just quickly remind us what your capacity is on a yearly or quarterly type of level whichever way you would like to break it down?

Gayn Erickson: Okay, that’s good point. It’s actually, as you’ve seen, it’s a combination of capacity and sort of our current reality. And I mean that as terms of just right now, what are we doing and what are we. Right now, we’re probably shipping somewhere in the 50 blades or wafers of capacity a month. So, if you think of a FOX-XP with 18 blades in it, two in a little of those or something, that’s about what we’re currently doing. We have more capacity than that, but that’s actually our build plan. That’s equal to or a little bit higher than what our current customer requests and demands are. We have the material and pipeline to be able to ship upwards of maybe five systems or 100 wafers of capacity a month by this summer and could actually ship another perhaps even 2x that or 10 systems a month in a year.

That is not what we’re currently believing our forecast is, candidly, but it’s feasible to be that. And so, it’s an interesting scenario. We’re actually using our capacity in our short lead times and our supply chain as one of our believed to be competitive advantages. We have companies in our space that have 52-week lead times, that’s not Aehr Test. So, we’ve deliberately taken the position that we are putting capacity and infrastructure and material in place to be able to go say yes to as many customers as we possibly can and that’s why we have this capacity available to us. Now, one more thing we have said in the past, we did extend our lease here and finalized that just over the last month or so. We’ve got plans that were in the works right now to do some facility upgrades and all, that’s actually going to help us with some infrastructure in terms of electrical and water to be able to do more in parallel.

That would be needed we think to be able to hit those high-end numbers by the end of next year. So, those are some investments we’ll be making over the next year-and-a-half or so. We’ll gradually do it without being disruptive. But I think we’ve told the Street that might be a $3 million to $5 million investment or so and then depreciate that over the rest of the lease.

Christian Schwab: Okay. It’s fabulous. And then on the new wafer handling technology, which really seems to be a game changer for some of your new customers. Does that come with an ASP that’s any materially different than the prior generation product?

Gayn Erickson: No, it’s pretty similar. We had said before that our automated handlers are in about 800,000 range type of thing, whereas the manual liners are significantly cheaper than that. So, if you use that kind of number, that’s probably fair. And again, you could buy one that could feed five XP chambers. If you had 10 chambers on the floor, you might need two of them and use WaferPaks and WaferPak cards moving around and there are some companies that prefer that model, that’s similar to how Packaged Part Burn-in has operated for years, or you could take an Aligner and bolt it onto the front of each of those 10 XP systems. You’d think, wow, that’s a lot more expensive. Turns out it’s still pretty negligible if you look at it over, say, 18 wafers, and for some companies that’s a big deal.

If people that know me, I am super passionate about this new Aligner. We’ve stayed steady on the course. We’ve been heads down working on this thing completely through the entire COVID pandemic and just really happy at where it’s at right now. And our plans are to be shipping that here over the next, by the end of the fiscal year to multiple customers.

Christian Schwab: Great. And then my last question and congrats on the product success during the COVID period and the recent uptick in silicon photonics, I know it’s relatively modest revenue, but materially better than it has been in the most recent time frame. But as you look at that in a multiyear time frame, could those customers be the same size as we’ve kind of mentioned as your lead silicon carbide customer at 75 million or is it materially greater or modestly less? Could you give us any color there?