Ladies and gentlemen, thank you for standing by. Welcome to the Aehr Test Systems First Quarter Fiscal 2013 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Wednesday, October 10, 2012. I would now like to turn the conference over to Marilynn Meek. Please go ahead.

Good afternoon, and thanks for joining us to discuss Aehr Test Systems first quarter fiscal 2013 results. By now, you should have all received the copy of today's press release. If not, you can call my office at 212-827-3746, and we'll get one out to you right away. With us today from Aehr Test Systems are Gayn Erickson, President 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. Before turning the call over to management, I would 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 future financial performance. Actual results may differ materially from projected results and should not be considered 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 systems shipped upon receipt of a purchase order, the ability of new products to meet customer needs or performance described, the customers' ability to maintain sufficient cash to support operations, the company's marketing of a commercially successful wafer-level test and burn-in system, and the potential emergence of alternative technologies, each of which could adversely affect demand for Aehr Test products in fiscal year 2013. 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 risks 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 Gayn Erickson, Chief Executive Officer. Please go ahead, Gayn.

Thank you, Marilynn. It's always fun to follow that update Safe Harbor statement, so it's always there, so I'll try and go from here. Good afternoon, everyone, and welcome to our conference call for the first quarter of our fiscal year 2013. I want to start out saying that I am pretty pleased with our Q1 results. This quarter, we again were able to improve our top and bottom line as we execute against our plan to address new market segments and customers with our ABTS and FOX product lines. With a little over $4.8 million in revenue and a net operating loss of under $300,000, we came close to breaking even for the quarter and we are also near cash flow breakeven. We continue to focus on penetrating key production accounts with our ABTS and FOX families while improving our product and service margins. We had a number of highlights in the quarter that I want to take a few minutes to review. We announced today that we received a significant order from a leading semiconductor manufacturer for development of a next generation FOX-1 system. The new system development is expected to be complete in the calendar year 2013. This next-gen FOX system is expected to provide the customer with increased test flexibility and capacity and at a lower cost of test. It also expands the market addressed by our current FOX products which will continue to provide additional growth opportunities for us in new markets and customers. We did not disclose the amount of the PO or the name of the customer at the request of this customer, but it will show up as revenue for us over the next several quarters. Also, we booked an order from a new customer this quarter for our FOX-15 wafer-level burn-in…

Thank you, Gayn. As reported in today's press release, our net sales in the first quarter increased 3% to $4.8 million from the $4.7 million reported in the fourth fiscal quarter of last year. Gross profit was $2.5 million for the first quarter, or 51% of net sales. This compares to a gross profit of $2.2 million in the fourth quarter of fiscal 2012, or 46% of net sales. Operating expenses for the first quarter were $2.7 million, down $0.3 million from the fourth quarter of last year. SG&A was $1.8 million in the first quarter, compared to $1.9 million in the last year's fourth quarter. R&D expense was $0.9 million compared to $1.1 million in the fourth quarter of fiscal 2012. R&D spending can fluctuate from quarter-to-quarter depending on the development phase of our new product. Our net loss of $296,000 in the first quarter of fiscal 2013, or $0.3 per diluted share showed good improvement compared with the net loss of $779,000 or $0.9 per diluted share in last year's fourth quarter. Turning to the balance sheet and changes during the first quarter, our cash and cash equivalents were $1.9 million at August 31, 2012, compared with $2.1 million at May 31st, 2012. Our net cash burn, and that's our cash less our line of credit was $216,000 in the quarter. Removing the non-cash P&L expenses, depreciation and amortization and stock expense, we were able to fund operations and be nearly cash-neutral. We did use some additional cash in the quarter as we increased our inventory, which was needed to ship against our backlog and expected orders. I am also pleased to announce that in early September, we increased the limit on our line of credit from $2.0 million to $2.5 million. This concludes our prepared remarks. We are now ready to answer your questions. Operator, please go ahead.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Tom Diffely from D.A. Davidson. Please go ahead.

Yes. Good afternoon. First, Gayn, a question for you. Maybe just clarification on what you are seeing, so you said you are not seeing a slowdown at Aehr Test, per se, it's just your customers have slowed down other places and you are just going to control expenses I guess in the meantime?

Yes. So, Tom, last quarter actually on the call, we were starting. There were lot of folks like KEMET and all that were sending a flyers and we just weren't seeing it. If anything, everything was continuing to accelerate, and I just want to make sure that people understood that, and in fact that continued through the quarter. About a month ago, there were a couple of things. There were some pretty big announcements around Apple's supply chain and other things that were going on. That has caused some cautiousness within some of our customers. At the same time, other customers are continuing to barrel through it, so I just wanted to at least acknowledge that we've seen a little bit of caution in some customers. That makes me say that we're going to actually take more cautious tone right now with respect to our spend, we had planned to do some increase in expenses, including for example statement of some of the officer pay reductions that we had put in place and I am going to stay with those pay reduction in place for the time being until we can fully ensure that we are completely out of this.

Okay, but in essence it sounds like you're more of a new product story company than a capacity company, so may not see quite the impact as the rest of the industry?

You know, there is definitely some of both. Some of the new ABTS line for example, some of the new orders that we've gotten, we refer to as medium power, but the automotive, or the mobility side of it, the mobile processors, people are buying equipment for new technology nodes. And, as you know, anything that (Inaudible) anywhere near both really some of the automotive and definitely mobility and as you get closer to Apple, particularly hot, and the people are bucking any other macro level trend to get their capacity in place.

Okay. Then look at the quarter, it looks like you had a nice uptick in margins and downtick in R&D spending. In light of the new FOX-1 coming out, does R&D go back up again and are those margins sustainable margin expansion extendable going forward? Actually from an R&D perspective that's about what we are going to see. We actually saw some uptick as we were completing the development of the ABTS new electronics. As we move forward FOX development in at least the first initial phases, a lot of that is development effort that does have a lot of actual material cost, and so I think that that's a reasonable number to look at R&D going forward in the near future.

From the standpoint of the product margins, Tom, our last quarter 51%, we would see similar kinds of numbers, but it is dependent on whatever development milestones have been completed or whatever software upgrades performed, so those typically are the products that have very high margins and have a big swing on a quarterly basis.

Okay. Then when you look at to the out year between your two main product lines ABTS and FOX, where do you see more growth coming from?

Well, I think that the story that I have been really internalizing since I got here in January is that, anything related to automotive and mobility is kind of where the hot spots are. Automotive, because in general the reliability expectations are increasing from an already fairly intense level, but also as you see consumer products, if you will, being embedded into cars, very interesting to meet with a lot of these customers who quite frankly never had high reliability standards and test in place as was the case with, say, engine controllers, or things having to do with electronic control systems, brakes and other. All of a sudden you've got these devices that are going into your dashboard and your panel, and you have alike, so at the end user, Mercedes or Toyota or someone who has very high expectations, but they actually go through a middle sourced with Denso and Conti, and Bosch for example that have these extremely high reliability expectations of the systems. So, if you look at a subsystem within a dash panel, they may have an expectation that there is fewer than one part per million failure of the dash panel for some number, but it has a hundred components in it. So, the expectations of the customers are these very high reliability expectations and historically there haven't had the test infrastructure or capability to be actually test-in or test-out failures, so there's a lot of activity going on with kind of good old fashion burn and related to that side of things. The other piece is just mobility, and really I attribute this to what Apple was doing. I mean, Apple really took a kind of I believe relatively leadership role in expectations of quality and reliability, but they drove all kind of additional challenges that my previous role in ATE a lot of many was being spent because of the expectations of testing and test quality. As a result of that, the mid users of an AT&T or Verizon, I think, have now increased their expectations the quality on all of the suppliers, so there is a lot more to talk about the amount of test and the amount of reliability and that's all pretty good for test guys, so that's where the hot spots are.

Okay. So, when you look at Aehr Test next year and the growth profitability, do you think that comes from a new customer's joining up or is it just kind of increased adoption of your products in the existing customers that you have.

I think it's a little of both. I mentioned this when I first got here. I think one of the things that was really great is Aehr Test in the direst of the downturn was making investments in new products and come out with some very nice fresh products, and we won I think 14 customers ABTS system over the last several years, theoretically that's when you want to do it. You want to win those customers during the downturn. It doesn't always work that way, so a lot of this is just we are starting to see the repeat orders and trying to focus to penetrate and make sure to make those customers happy and gain more market share and more opportunities in addition to adding additional customers.

Okay. Then finally, Gary, where do you see the current breakeven level for revenues and maybe a cash flow breakeven as well.

We've spoken about this and we've talked about it on conference calls. Our P&L breakeven would probably be around the $6 million range. If you look at this quarter for example, or what have you, a little lower than that. If you look at the cash breakeven, we've typically said would be in the low $5 million range.

Okay. All right. Thanks for your time today.

Thank you. Our next question comes from the line of William (Inaudible). Please go ahead.

Good afternoon. I had a question regarding reliability trends. Is there anything happening on the regulatory front that might increase the demand for reliability?

Bill, I am not aware of anything other than, again, if you look at the EAC-100 spec for the automotive reliability standards, there's a lot of customers that have never heard of such a thing before and are asking lots of questions, so we had meetings with them, with people that are frankly are getting into or trying to address the automotive space that are having to address what does that mean. That's the specification that talks about how it's tested, what kind of tests are done for what period, what kind of components need, how many components for long et cetera. That's not a new standard, although for some of these customers it feels new. A number that's been thrown around a lot is this classic two PPM or sub-two part per million requirement of the automotive, and the yielded Densos of the world are really driving that, because they have to add all those parts up be able to come up with system that's ultimately reliable. You talk to some customers and their eyes roll back, oh my goodness how are we going to get there? And, that's a real challenge that again traditional automotive folks with traditional burn-in methods are known that there's processes, procedures to do that. So, some of my trips, I was just visiting a customer with the automotive application, but some of this is a learning process for them in new vocabulary, but I'm not aware of one. Are you?

No, but I just thought that it might come about that somebody starts telling manufactures you've got to be more reliable. Another question I had was this tester you are developing, the development contractor you just announced, I assume that there would be a product that you could market to other customers as well.

Yes. That's correct.

Then that might start in the middle of next year or late next year?

Well, I think it's a product that we expect to be primarily finished by the end of the calendar year. We're still looking at the full schedule of that, but it's probably not, this is how development revenues can show up, but product related revenues would not be for few quarter.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Gregory Wilbur from Bay Area Micro Cap Fund. Please go ahead.

All right. Thank you. So, these two FOX system that you have for increasing test flexibility and capability, but could you talk about the TAM for that product and maybe you could talk about the TAM on the various segments of your business at the present time?

Sure. So, relative to the TAM of the new product, let me talk a little bit about it and I am going to leave it open ended on the other part. We believe that TAM takes and ultimately replaces what we have with our FOX product. It's a better, strong, faster version of it that allows us to, we believe, capture additional market share because of its price point. The thing that is interesting about our FOX-1 product is that unlike our FOX-15 and our ABTS, which are primarily aimed and what I would call burn-in, whether it'd be qualification of new devices for lifetime test or for early failure rate in a production burn-in application. The FOX-1 is really more like a functional ATE system, taking the technology that we had in our burn-in systems is massive parallelism, massive number of device power supplies and the ability to test these devices very cost effectively and applying it into more of a traditional functional test environment, where you are testing one wafer at a time for example. And, I think the area not to be illusive, but if you look at low-pin count DFT, BIST mode of memory devices, logic devices, that market segment even in my previous company, we would estimate that it's in the $50 million to $100 million range and growing. What's interesting now is it's displacing what is more in the several hundreds of millions of dollars of functional test. And so, the line becomes blurred if today they are using the standard production ATE system and let's say they are buying that for $1 million and then they buy one of our products for $0.5 million. Are we displacing that or is it really through new test mode. So, we'll be continuing to evaluate that,…

Okay. Great.

Greg, one more thing too, and this was something also as I got to understand here. The size of the consumable within the burn-in is on order of maybe the of three, four, five times larger than the actual test space. So, on the burn-in side, so if you were to say it's $150 million, that might be $600 million of burn-in board, sockets and consumables purchased every single year, and that's something that we continue to watch as opportunities for us to potentially play in and add value in. As you know we have done that on the wafer level side with our proprietary WaferPak contactors. It's where we participate in the consumable on that side at the wafer level. Today, we really have very little product revenue on, what I'd call traditional burn-in boards. Okay?

Okay. That's fine. Could you give us some help on how you got to the $4.8 million as far as orders from the various sources and consumables, things like?

Yes. I prefer not to start breaking things down, not to be illusive to anyone other than to my competitor, but we had said and I think that our base level business services, support and the consumables for our WaferPak has been in the maybe $2.5 million, $3 million-type range on a quarterly basis. And without even the numbers in front of me, that team is that about [KEM]. As we come out of the downturn, it's really been to the growth of product revenue which is an area that we can scale considerably with our manufacturing infrastructure and supply chain that we have in place here. There was a distribution of what I'll call FOX-related products and also our package level products, and we continue to sell our MAX line. We talked about the ABTS, which is our latest generation of logic system, but we still have customers that buy upgrades and new systems in our MAX line which is also on our website as our standard burn-in system.

Okay. Gary, I was disappointed to not see a backlog figure in the quarter. I thought maybe you're going to help us out with a little more disclosure that would help us to monitor your progress.

We haven't made the decision yet to publish backlog on a quarterly basis, as you know it comes out in our 10-K. We just put 10-K out. What we did say last quarter was that we have the highest backlog that we've had in the over in the last three years. And, even though it's not anywhere in the published stuff, I can tell you that this quarter we did have book-to-bill a little bit higher than 1. So, we once again have a backlog that's higher than anything that we've seen in over three years, so that's good news.

All right. So, just one comment on your press release that came out. You have a little paragraph on management conference call. No telephone number.

We don't typically have the wired telephone number. That way we are familiar with who isn't ending the call and we try to maintain that, but you are right. There isn't live phone call-in number on the press release.

And, then we always have a fairly large contingent of folks that are listing in on the web as well.

Okay. That's all I have.

Thank you. Our next question comes from the line of Marty Cawthon from ChipChat Technology Group. Please go ahead.

Hello, Gayn. Hello, Gary.

How are you, Marty?

Good. In the semiconductor industry, there's of course constant change in progress. And, the big news on the iPhone 5 was support for 4G LTE, but then can also we see processors running at higher speeds and logic size, are logic trace sizes on the devices shrinking 90 nanometers, 45 nanometers and down. So, these changes in the industry must have an effect on how they are changing their test and burn-in of procedures or priorities. My question is how do you see the industry changing due to this? And, is it moving towards Aehr Test or away. What is Aehr Test doing with your product and your future products to try to move into that same space, or to service that space?

Okay. All right, Marty. Let me handle that one. It's got a little bit a technology answer to it, but it's very interesting part and it's the dynamic as it turns out you hit the right kind of on a core of one of the changes that's going on that I will jump to the punch line is actually very good for burn-in and for Aehr Test. I need sometimes to be able to do this, but let me try to simplify it. It turns out that as you get very large logic cells, large in terms of numbers of transistors, so these very high-end processors are a perfect example of it. And, as they go to lower power and then drive towards lower geometry. So, as you go below 65 nanometers for example, the burn-in characteristics of those devices changes. Okay? And, to try and simplify it, what happens is as those devices start to reach these very high temperatures that you want to run them at to actually get the early failure modes and finding and fair it out what the issues are, the devices themselves start to leak. Leak and this means they start to draw more and more current and consume more and more power. The interesting byproduct of that is, the devices heat up themselves. Now, that's not such a big challenge other than they don't all do that. So, two devices out of the same lot. One device might draw a little more power and the other one might draw a lot of power, and so as they heat themselves up at different rates, and so I alluded to this in our new product with respect the individual temperature control. What we end up having to do is supply both, the test electronic and…

Good. Okay. So, the key is, your individual temperature control is an advantage that you have over competitive offerings at present?

That's correct.

Okay. Good. Thank you very much.

Thank you. (Operator Instructions). Our next question is from the line of Jeffrey Scott from Scott Asset Management. Please go ahead.

Quick question for Gary, I think I heard you say that the gross margin went up 500 basis point that right?

Correct.

Was any of that the benefit of having sold some written…

No. It wasn't. Biggest part of that gain was related to the milestone completion with regard to the development project that we just announced.

For the new FOX-1?

Exactly.

Okay. So, you got your first initial paying on that?

Exactly. We have.

Okay. Typically, you give us a revenue forecast for the next quarter. I didn't hear one.

We always are very cautious about how we do that.

As usual.

As always and we always have a prepared remark on it, Jeff. I mean, basically, we're at a cautious optimism right now that we will be able to increase our top and bottom line again next quarter. And, as I said, we've just decided to take a more conservative stance on our expenses in inventory just to ensure that we're preserving our cash, so that we can continue on without having to, in our current plan is not having to go any additional cash to meet our operating needs. So, I know there's a lot of people that are pretty pessimistic in the semi industry right now. We're not one of them, but I want to leave you with a cautious optimism.

Okay. You announced $4.8 million of revenue. The deferred revenue went down, so shipments for the calendar quarter ending August 31st were probably in the $4.5 million range?

That's probably right. Yes.

Okay. So, does that mean that for the next quarter, we should expect something higher than $4.5 million or something higher than $4.8 million? I think that's maybe too specific. I just want to know what the base line is now.

If you're looking at shipment then that's not really what we are reporting, so the shipments would definitely be over the $4.5 million, but what Gayn was responding to I think is we're cautiously optimistic that we'll see an increase in the net sales.

Over what was reported $4.8 million?

Yes. Right.

Okay. Thank you very much.

Thank you, Jeff.

Thank you. (Operator Instructions). We have a follow-up question from the line of Gregory Wilbur from Bay Area Micro Cap Fund. Please go ahead.

Gary, you might mention on your annual meeting is going to be, so that everyone can put that on their calendar. Don't want to increase your cost next quarter, but.

Sure. Thanks, Greg. Our annual meeting is October 24th, and it's at 4 O'clock in the afternoon, and we do invite our shareholders to join us and we've had the comment in the past from some of our older shareholders. This is the only time they get to do it in from us, so there's some snacks there for you and that's the dividend.

Okay. Thank you.

Thanks for mentioning that, Greg.

Thank you. At this time, I am showing no further questions in my queue. You may continue.

All right. Well, I appreciate it and I think everyone for joining us, and we look forward to a great Annual Meeting with folks that want to join us as we said on October 24th. If you have some questions, there are links on that for people to contact for logistics and direction. Thank you very much.

Ladies and gentlemen, this does conclude our conference for today. This conference will be available for replay until October 17, 2012 at midnight. You may access the replay system at any time by dialing 303-590-3030 or 1-800-406-7325 and entering the access code of 4566493#. We thank you for your participation. At this time, you [ABRUPT END]