Aehr Test Systems (AEHR) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Aehr Test Systems Fourth Quarter Fiscal Year 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, July 19, 2011. And I'd now like to turn the conference over to Mr. Lasse Glassen of the Financial Relations Board. Please go ahead.

Good afternoon, and thanks for joining us to discuss Aehr Test Systems results for the fiscal 2011 fourth quarter and full year. By now, you should have all received a copy of today's press release. If not, you can call my office at (213) 486-6546, and we will get one out to you right away. With us today from Aehr Test are Rhea Posedel, Chairman and Chief Executive Officer; and Gary Larson, Vice President of Finance and Chief Financial Officer. Management will review its operating performance for the quarter before opening the call to your questions. Now I'd like to turn the call over to Gary Larson. Please go ahead, Gary.

Thank you, Lasse, and thanks to everyone for joining us today. Before we begin, I'd like to make a few comments about forward-looking statements. Please be advised that during the course of our discussion today, we may make forward-looking statements that involve risks and uncertainties relating to projections regarding industry growth and customer demand for Aehr Test products, as well as projections regarding Aehr Test's future financial performance. Actual results may differ materially from projected results and should not be considered as an indication of future performance. These risks and uncertainties include, without limitation: World economic conditions; the state of the semiconductor equipment market; acceptance by customers of Aehr Test technologies; acceptance by customers of the system shipped upon receipt of a purchase order; the ability of new products to meet customers' needs or performance described; the company's ability to maintain sufficient cash to support operations, the impact of the Japanese earthquake and tsunami upon the company's operations; the company's development, manufacture and marketing of a commercially successful wafer test and burn-in system; and the potential emergence of alternative technologies, each of which could adversely affect demand for Aehr Test products in the fiscal year 2011. We refer you to our most recent 10-K, 10-Q and other reports from time to time filed with the U.S. Securities and Exchange Commission for a more detailed description of the risk facing our business and factors that could cause actual results to differ materially from projected results. The company disclaims any obligation to update information contained in any forward-looking statements to reflect events or circumstances occurring after the date of this conference call. Now I'd like to introduce our Chairman and CEO, Rhea Posedel. Rhea?

Thank you, Gary. Good afternoon, and welcome to our conference call for the fourth quarter of fiscal 2011. Net sales for the fourth quarter of fiscal 2011 were $3.7 million, slightly higher than the fourth quarter of fiscal 2010, but down 12% on a sequential quarter basis compared to net sales of $4.2 million in the previous quarter. The net loss for the quarter was $144,000, an improvement from the prior quarter's net loss of $946,000. During the fourth quarter, we benefited from an increase in ABTS system revenues. The balance of the shipments came mostly from FOX-1 WaferPak contactors and system upgrades for wafer sort testing at NOR Flash. These WaferPak shipments indicate to us that Spansion, a key customer and leading NOR flash producer, is achieving ongoing cost and throughput benefits with our FOX full wafer contact solution. We had a number of additional highlights that I'd like to bring to your attention. First, Spansion continues to invest in upgrading their FOX-1 full wafer parallel testers and buying WaferPak contactors for new and existing devices. During the fourth quarter, we announced booking over $2 million in orders for FOX-1 WaferPak contactors and services. Second, we're pleased to report that Spansion has moved all of their FOX-1 testers from TI's facility in Aizu, Japan. About half were moved to their Fab 25 facility in Austin, Texas. Most importantly, a number of FOX-1 testers have been placed at a leading Taiwanese test subcontractor. Having FOX-1s in use at a leading wafer sort test subcon could potentially help us sell FOX-1s and WaferPak contactors to other Taiwanese IC producers. Third, we are pleased to announce on June 2 that we sold our ownership in ESA, our distributor in Southeast Asia, for nearly $1.4 million in cash. Fourth, we are pleased to report that we received an evaluation PO for a new ABTS-L56i burn-in system from a leading logic and analog integrated device manufacturer. The target application is for burn-in of their high-power logic devices requiring individual temperature control per device. Even though this isn't a booking until our customer validates that the ABTS can pass their qualification process, we believe this is a major milestone. This customer has a high-interest level in the ABTS-L56i because it offers higher capacity at a lower cost per device than competitive systems. If successful with this qualification, which could take 3 to 5 months, we believe this customer has the potential to order significant quantities over a number of years. And finally, we are pleased to report that we received 2 follow-on orders for a special ABTS system that we shipped last November to a major Japanese integrated device manufacturer for production burn-in of their high-end microcontroller devices. Importantly, one of these orders was the first ABTS system for their Singapore production site. This could be another major opportunity, as we expect this site to purchase significant quantities over the next 2 to 3 years. We expect additional follow-on orders from this customer after the ABTS for Singapore site is shipped and accepted next quarter. The potential sales opportunity from these 2 customers for multiple ABTS systems this fiscal year is very exciting. In addition, we can continue to see a high interest level for ABTS products from other IC producers, looking for new equipment that has the capability to test and burn in their latest technology devices. The ABTS is a flexible platform that can be configured into various versions to address multiple market. One large burn-in market segment we are targeting with the ABTS is for test burn-in of high-power logic devices, which requires individual temperature control per device. This is a growing market because, as wafer process feature size continues to shrink, burn-in power increases. Interest also remains solid for our FOX products, from a broad range of applications, such as wafer level burn-in for automotive microcontrollers, sensors and VCSELs. We are encouraged by the fact that we are far along in the sales cycle with a couple of potential customers. We are hopeful that we will announce a new FOX-1 or FOX-15 system account later this calendar year. Looking ahead to the first quarter, we expect the company will be off to a good start in fiscal 2012. Net sales are expected to be higher on a sequential quarter basis. In addition, we expect our bottom line to improve sequentially, primarily from the gain from the sale of our ESA stock. Our strategy continues to be focused on penetrating key accounts with our family of ABTS and FOX products. We have unique technology with our FOX systems and WaferPak contactors for lowering the cost of wafer sort testing of flash wafers and wafer-level burn-in for producing Known Good Die. We also feel confident that we can continue to win additional new accounts with our new ABTS products, which address growing market segments for high-power logic burn-in and memory parallel test and burn-in. Now I'd like to turn the call over to Gary, who will discuss fourth quarter financials in more detail. Gary?

Thanks, Rhea. As Rhea mentioned, net sales were $3.7 million in the fourth quarter of fiscal 2011, up slightly compared to the fourth quarter of the last year. For fiscal 2011 full year, total net sales were $13.7 million compared to $11.7 million in the fiscal year 2010, an increase of 18%. As you may recall, in fiscal 2010, the company sold the remainder of its Spansion U.S. bankruptcy claim, which resulted in the recording of $2.7 million as revenue related to cancellation charges. Excluding the impact of the sale of the Spansion claim, fiscal 2010's product sales were $8.9 million. And compared with that, our fiscal 2011 full year product sales showed an increase of 54%. Gross profit was $1.6 million for the fourth quarter of fiscal 2011 or 43% of net sales. This compares to gross profit of $1.8 million for the fourth quarter of fiscal 2010 or 50% of net sales. Moving on to look at operating expenses. SG&A was $1.5 million in the fourth quarter, down slightly from the prior year period. Fourth quarter R&D expense was $1.2 million compared with $1.3 million in the fourth quarter of last year. R&D spending can fluctuate from quarter-to-quarter depending on the development phase of new products. Operating expenses were reduced by $677,000 and $120,000 in the fourth quarters of fiscal 2011 and fiscal 2010, respectively, related to proceeds received from the Spansion bankruptcy claim. Net loss in the fourth quarter was $144,000 or $0.02 per diluted share compared to the net loss of $819,000 or $0.09 per diluted share a year ago. Pro forma net loss in the fourth quarter of fiscal 2011 was $609,000 or $0.07 per diluted share compared to a pro forma net loss of $614,000 or $0.07 per diluted share in the same period of the prior year. In determining the pro forma or non-GAAP net loss in the fourth quarter of 2011, we have excluded the gain on the sale of the Spansion Japan bankruptcy claim of $677,000 and noncash stock compensation of $212,000. In determining a pro forma or non-GAAP net loss in the fourth quarter of 2010, we've excluded the gain on the sale of the Spansion bankruptcy claim of $120,000 and noncash stock compensation expense of $325,000. Turning to the balance sheet. Our cash and cash equivalents were $4.0 million at May 31, 2011, compared with $3.8 million at February 28, 2011. The sequential quarter increase was primarily due to the payment related to the Spansion bankruptcy claim received in the quarter, partially offset by operating losses. We continue to remain debt-free. Subsequent to the end of the quarter, we divested our remaining ownership in ESA Electronics, a Singapore private company. In early June, we sold our shares of ESA Electronics to IPCO International for SGD $1.7 million or approximately USD $1.4 million. ESA Electronics has been a sales representative of Aehr Test in Southeast Asia since 1992 and will continue as a sales representative of Aehr Test going forward. We expect to report a gain from the sale of the ESA shares of nearly USD $1 million in the first quarter of fiscal 2012. This concludes our prepared remarks. We're now ready to answer your questions. Operator, please go ahead.

[Operator Instructions] Our first question comes from the line of Geoffrey Scott with Scott Asset Management.

Can you start off with the split between the ABTS revenue and the FOX revenue?

I would say it's probably 1/3, 1/4 of ABTS and the rest of it's FOX.

1/3, 1/4 ABTS, and the rest, FOX?

Yes.

Okay. On March 31, there was a press release which talked about an order for a FOX-15 WaferPak cartridge from a leading communications equipment manufacturer.

Correct.

And the expectation that if the eval was successful that it would relate -- it would turn into a FOX-15 order. Where are you along in that process?

So we have designed and developed, and we have the first article of that WaferPak in our hands, and right now, our objective is to try and ship it this quarter or early next quarter. So we're close.

So you're going -- you'll release [ph] the cartridge to the customer?

Correct. Actually we're going to do burn-in services here and prove it out using our system.

Okay. So the FOX systems that they're going to be using is going to be in your shop?

Initially. Hopefully that could turn into an order.

And how long will it take for that decision to be made?

It could be like -- I mean, the decision process for the order could be 3 to 6 months.

So fiscal '12?

That's correct.

Okay. Is this a -- you talked about prospects for one additional either FOX-15 or FOX-1. That was including this prospective customer?

This could be one of those potential orders, but actually, it's another customer, a larger customer opportunity, that we're working with.

I mean, are we now being optimistic because there might be more than one?

It's always better to have more than one, if you say you're going to book one. As you know, you need 3 or 4 to get 1 or 2. So, yes. We are talking to more than one. We are down the sales process with more than one.

Okay. I am encouraged by the optimism on the ABTS side. Is that kind of a correct feeling I should have?

That's correct. I mean, if you look at our strategy, it's really to penetrate more major accounts. I mean, we have Spansion, we have Micronas, but we didn't have, up until this point, a major ABTS account. And last year, we sold the first one to a -- which is a special system, to a large Japanese IDM. That system has been qualified, and now their Singapore production facility has bought one, and hopefully that's going to be qualified early next quarter, so they could start to ramp with production quantities. And then we've talked -- what we're talking about is we got a $0 PO from another large IDM, who is going to evaluate the ABTS over the next 90 days, 120 days, and hopefully -- we're confident we're going to pass the qualification, that there could be future production orders for the ABTS.

The L56i, has that been shipped to anybody else?

It was shipped to ISE, the local test lab. I think we announced that probably 9 months ago or so.

I just didn't remember if it was the same model, yes.

Yes. They're using it. And we shipped a minimized -- the same chamber but without a full complement of electronics. Over time, they've added more electronics as they started to sell more qualifications. I mean, they just -- they don't do production, but they do -- but they -- device qualifications, that -- small lots that they do for major IC producers around the valley, fab-less companies. And so they're able to sell more and more of those, and they have added more capacity. So they've got the system about half full. So they like it.

Okay. The fact that Spansion has moved the machines, some of them, to Taiwan, is that as important as I think it sounds?

Well, it's -- I mean, first of all, the systems at TI, I mean, weren't really utilized, and I don't think TI was -- I mean, that's not their business. So moving them out of TI is a positive. And whether it went to Taiwan or to Austin -- but we feel that having them in Taiwan is going to help us in our selling ability to other -- the IC producers in Taiwan, because everything in Taiwan is done through subcons. So it's always a question of what other -- when we go to an IC manufacturer, what other subcon in Taiwan has one? And we couldn't say any names. But now we can give them a name of a local subcon. They can get a reference and so on. And so hopefully, that's going to help grease the skids for future orders in Taiwan. I mean, it's just a process that gets started. So we got to get them installed, up and running and qualified.

Got it. Is there enough optimism for fiscal '12 to talk about a target revenue number for the year?

Typically, we don't give a year forecast in our...

You never have, no. And I've always asked you for one.

But as I say, I think -- we will, based on -- we're starting the year with a higher backlog. We have these -- we talked about having these 2 ABTS production accounts. Hopefully booking another -- shipping another FOX system. So our goal is to grow revenues and generate cash this year.

And is $24 million possible?

Well, for a cash breakeven, it was $5 million or $5.5 million, and you're warm.

Okay. I'm warm. I want to be hot, right? I don't want to be warm, I want to be hot.

I know. So do we. But we certainly -- we feel fairly positive about the year. Our goal is to generate cash and to be profitable at the same time.

And our next question comes from the line of John Nelson with State of Wisconsin Investment Board.

Can you give me and the listeners a little bit better idea about the competitive landscape at this time for FOX and ABTS?

Okay. There are actually a number of different products, so it's not an easy question to answer. So on the FOX, we have 2 different products. We have the FOX-1, which is a single site for wafer sort test system. So in terms of what we're doing for NOR flash, I mean, we don't feel there's any other competitors that can test as many devices in parallel as our FOX-1. There's other tester companies that have a lot of capability, but they're limited to the number of devices they can test in parallel. On the FOX-15, which is a multi-site or multi-wafer-level burn-in system, it can burn in 50 wafers at one time, right now, I don't believe there's any competitive systems, at least not that we know of. So when we move into that space, well, basically it's either a question of whether we can do it and do it at a cost-effective price, but we don't usually meet up with any competitors. On the ABTS, which is the burn-in market, there are a number of competitors in that space. So there's people that very low-cost suppliers would tend to go after the high-end segment of that market, which is the individual temperature control per device, the high-power part of it. And there, there is an entrenched competitor called Micro Controls in Minneapolis. So that's a U.S. competitor. On the other applications that we're targeting with the ABTS for memory, a DRAM production burn-in and test, there are a number of Asian competitors, some in Korea and some in Taiwan and some in Japan. But we feel the ABTS, the new ABTS-N72 that we're going to be rolling out soon, has a cost advantage and a capacity advantage and a capability advantage.

Okay. And if you're comfortable, can you give a little bit of flavor for where the R&D dollars are going?

So in the past year, I would say most of the R&D dollars were invested in the ABTS-L56i. And I did forget to mention, even though there is a competitor, MCC, we feel our system offers more capability at a lower, lower price per device. So we can be competitive on the cost front. And we've also -- a lot of the dollars were invested into the memory ABTS-N72. So those 2 products. So it's mostly ABTS was the area that we are targeting with our R&D dollars, some on WaferPak contactors and some on FOX enhancements. But probably 75%, 80% of it was on the ABTS. And this year, I think there'll probably be more spend on the FOX, improving the FOX-1 and the FOX-15. So that a lot of the technology is movable from one product to the other. So what we did on the ABTS, we'll be moving over to the FOX, improving the FOX-1 with that same technology improvement.

[Operator Instructions] And gentlemen, I show no further questions in queue at this time. Please continue.

Okay, this is Rhea. I'd like to thank you for joining us this afternoon, and we look forward to next quarter's conference call. Thank you.

Bye-bye.