Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Aehr Test Systems First Quarter Fiscal 2014 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, Thursday, September 26, 2013. I would now like to turn the conference over to Scott Eckstein. Please go ahead sir.

Good afternoon, and thanks for joining us to discuss Aehr Test Systems first quarter fiscal 2014 results. By now you should have all received a 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. We 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 forward-looking statements. Factors that may cause results to differ materially from those in the forward-looking statements are discussed in our 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. Now I'd like to introduce Gayn Erickson, Chief Executive Officer. Please go ahead, Gayn.

Thank you, Scott. And good afternoon to those joining us on the conference call and also listening in to our online link on the web. Before Gary goes over the numbers in detail, I want to discuss our business activities and talk about the markets and how we’re doing on our new FOX product developments. After that we’ll open up the line for questions. As noted in today’s press release, we’re happy to announce that we exceeded our financial expectations for the quarter. As you may recall from our last conference call we anticipated revenue for the quarter to be similar to our fourth quarter with an improved bottom line. We ended up growing the top line by nearly $500,000 or 15% to $3.8 million and improved our bottom line by over $650,000. More importantly at a net loss of a $166,000, we are able to exceed cash breakeven for the quarter. As we have stated for several quarters, managing our cash continues to be a key focus for us. The increasing demand what we’re seeing for our products is reflected in our strong book-to-bill ratio for the quarter and our highest backlog in recent years. A key driver for these results include a continued positive momentum with our new ABTS or Advance Burn-In and Test System platform for packaged parts particularly in the automotive reliability and test and burn-in segments. During the quarter we also shipped a follow on FOX-1 full wafer test system against an order announced earlier in the year. We’re continuing to see strength in the automotive test and burn-in space. During the last few months we announced orders for multiple ABTS systems as well as the follow on MAX testing burn-in system. These orders included production orders for our new ABTS-P system from a leading…

Thank you, Gayn. As reported in today’s Press Release our net sales in the first quarter were $3.8 million, compared with net sales of $3.3 million in the fourth quarter of fiscal 2013. Our net loss of $166,000 in the first quarter of fiscal 2014 or $0.02 per diluted share compared with a net loss of $854,000 or $0.08 per diluted share in our previous quarter. Gross profit was $1.9 million or 52% of net sales. This compares to gross profit of $1.3 million in the fourth quarter of fiscal 2013 or 40% of net sales. Margin improvement was primarily related to our shipment of certain slower moving items against which we had previously taken inventory reserves. Operating expenses of $2.1 million for the quarter were basically flat with operating expenses for the fiscal fourth quarter of 2013. SG&A was $1.4 million, compared to $1.5 million in the fourth fiscal quarter of 2013. R&D expenses were $681,000 for the quarter, compared to $634,000 in the fiscal fourth quarter of 2013. As stated previously, R&D spending can fluctuate from quarter-to-quarter depending on the development of our new product. As Gayn noted earlier, we exceeded cash breakeven in the quarter, which occurs when our noncash expenses such as stock option expense and depreciation exceed our net loss. Turning to the balance sheet and changes during the first quarter, our cash and cash equivalents increased to $2.4 million at August 31, 2013, up from $2.3 million at May 31, 2013. Accounts receivable increased sequentially by $0.2 million. Our line of credit decreased by $154,000, which means that our net cash, which is cash less our line of credit improved by $0.3 million. We are pleased that we’ve been effective in controlling operating expenses and cash. With our improved forecast, our operating expenses are expected to increase during the upcoming quarters. We noted last quarter that we expect fiscal 2014 to be a profitable year for us. As Gayn mentioned, we now expect to be profitable for the fiscal second quarter as well as fiscal year 2014. This concludes our prepared remarks and we’re now ready to take your questions. Operator, please go ahead.

Thank you. Ladies and gentleman, we will now begin the question-and-answer session. (Operator Instructions). One moment please for our first question. And our first question comes from the line of Colin Denman with Westerly Capital Management. Please go ahead.

So far this year you guys have had a number of nice wins and when I read through the press releases, you guys have been able to negotiate terms where customers have been willing to put down, sometimes 30% on their orders and just, as recently as last year, that seemed like that would have been a much more difficult contract to negotiate. Can you discuss maybe if there is something that’s changed in your relationship with your customers where maybe they are seeing some more strategic value in your products, where you are able to negotiate as more favorable terms or kind of what’s changed in the last year in your relationships with customers?

This is Gayn. I would say actually the first thing we have done is, independent of anything else, I think it’s good hygiene and it’s a good business practice and taking down payments as well as cancellation, penalty terms or something I think make sense for our business. We weren’t doing that in the past. We initiated it with some of our key customers, then our asking customers across the board right now that as a regular rule that we want to take these down payments. And I would say that the discussion started with each of the customers, a little bit around and pushing back but we have been able to come to favorable terms in terms of pricing, in terms of slots as well as well as on their side and our side being able to get pricing and margin from down payments. So, so far we have been doing that and I do think there is a something to our strategic value certainly on some of these programs that we have been involved in like the development of the new FOX System where the customer actually put down milestone and down payments. It is really a testament to the value of those products and as I have said in the past, these customers are actually all asking to please pull in those new developments and so they are aware that we are using those down payments to help us accelerate our expenses, accelerate the deployment and purchase of the materials for those products.

And then if we look out a little bit further, and we think about what are some of the growth drivers that can really push Aehr Test kind of above this $3 million to $5 million quarterly revenue run-rate, is that a matter of selling more products to existing customers or are there potentially some new customer opportunities that could drive that or what are some of the things you think that could really break Aehr Test out of that revenue level?

Well I think there is a few different areas and we have been talking about this now for over a year. There is certainly the overall industry for tester and burn-in which we are a market leader of and have been for many-many years. We are if you will a rising tide related to kind of the necessity for quality, reliability, process strength is a good thing for our industry and with our competitiveness of our ABTS product we think that would be the more than our fair share and that really allows us to grow our base business and we are seeing that, in a kind of multiple market segments around the world. The other piece of that is, I think the move particularly automotive but we are also seeing in the mobility, where historically the semiconductor content was fairly limited in an automobile five or 10 years ago, and now as we all know, you go and you open up a door and it’s all about the experience, entertainment and the information and the GPS and if you really think about it, if you take a GPS system from Garmin and its sitting on your dashboard, and if that happens to die a couple of years later, it’s not that big a deal but you certainly won’t expect it in your three or four year old automobile. A lot of these devices were not necessarily designed to go into an automobile with an expectation of less than two parts per million failure rate and a 10 year life. And so the whole, the processes that you put it on, the design for tests that you put into those devices and actually the test both in reliability and production is drastically different and we are seeing that as a…

Great. And then just kind of following up on your discussion of how important reliability is to your customers; are you seeing your guy’s tools used more in production burn-in versus engineering tests versus how maybe the mix was in the past?

I think if you go back far enough there was more production test than engineering and over maybe a 15 year, 20 year period people were doing everything they possibly could to try and get away from the production or early failure burn-in. And so I would say that in relative terms in the last decade or so there has been less production test. There is probably still -- there is definitely more money still spent in production than in engineering and across the board. But I would say that in recent, the last couple of years we’re seeing particularly in the automotive a ship back towards a real need to consider or implement production burn-in or production test that would, for these automotive applications. We're also seeing some new opportunities where people have production tools, historical production burn-in machines that are looking to replace them and this is little bit subtle but this is one of I guess background of the us of the burn-in world. If you look at burn-in systems 10 years, 15 years ago, customers might take a device, they would put it into these chambers, they would apply an electrical power tool, maybe they would apply some clocks to the device or just send it signals. They wouldn't necessarily validate that the device was even working or actually talking back, that type of dynamic burn-in was interesting but now you are at lease certain you actually tested the part. We're working with a customer now that actually has a large fleet of those, but that's not going to hold up to the scrutiny of an automotive account life gear, DENSO's and Conti’s or in this case most people think about the ends which is the Toyota, Lexus or Mercedes where you really need to prove that those devices have been functionally tested and you are reducing the early failure rates. And as the content of the semi-conductors get higher and higher in the automotive devices, remember that when those devices fail there is a direct line back to the supplier and it's quite painful for them when they actually have failures. So they have an incentive to truly weed out those early failures before they ship into those applications.

Thank you. Our next question comes from the line of Tom Diffely with D.A. Davidson. Please go ahead.

Maybe a couple of quick questions for Gary first. Gary of you look at the gross margins in the quarter obviously a big improvement quarter-over-quarter. Is that all just mix driven or is that some cost reduction going on as well?

No I mentioned in the script that it's primarily related to slow moving material that we were able to ship and so that material had reserves on it and so we have benefited from an improved margin as a result of that.

Was that a one quarter phenomenon?

We continue to have reserves and often times we will ship those but I say at the level that we ship this last quarter that was higher than what we would normally expect.

And as you look at revenue ramping over next couple of quarters, what do you foresee for OpEx over that period of time? I am trying to get what's the leverage in the model looks like?

We are as we said in the notes we’re expecting to see operating expenses to increase. We haven't really given any number but it would be something noticeable, it wouldn't be noise level as far as the increase over the next several quarters.

And is that driven by the new product developments maybe an R&D impact?

The business is improving, we're looking at a brighter forecast right now and just overall we’re seeing expenses increasing to some extent.

If I can jump on this as well Tom, we're also modulating that along with our profitability. So we think it's a very good returns to spend those margin dollars on these R&D effort to try and pull those products in.

Sure, yes. So Gayn when we look at your two main product lines, what is your view now, just sort of build the market for both ABTS and the fox FOX and what does competition look like in those two markets?

Well, it’s actually not just two markets, so it’s a little bit harder than that. But if you were to look at the traditional burn-in space, I mean it’s pretty clear that the burn-in market is, in particularly logic and automotive, which is really where our strength and our leadership is then is growing. We’ve been trying to get our arms around how big that is. Often times we use a term that the overall market is a couple of $100 million. But on historical terms maybe almost half of that is in the DRAM space, which we don’t play in. And right now we don’t feel people are spending a lot of money in the DRAM in general. In fact I think it carries across for the overall industry where companies that might be more focused on the microprocessors or the DRAM or the traditional desktop and laptop are just not seeing the growth. And those of us focus more on mobility and automotive applications, are able to grow. Of course we’re coming from a much smaller number but nevertheless we’re actually pretty optimistic about things and there is other people kind of throwing wet blankets on their forecast.

Yes, I think Avantis kind of mentioned that the other day.

A very specific example where I think my statement holds up. So that’s the burn in. I think on our newer application and opportunities we are trying not to signal too much information about everything we’re doing against our competitors. But we’re absolutely -- some of these applications are alternatives to your traditional ATE. Some of our wafer level burn in, some of the great nice things about some of the markets we’re playing in, they’re just placing really old production package burn in systems and so from a competitive perspective nobody is being harmed. We’re not taking away and people weren’t spending money there right now so that’s actually pretty encouraging for us. And that’s actually encouraging for us. And in some cases, we’re enabling such a low cost of test that we believe there is opportunities for people that are used to more reliability type testing, they would another ways have done before and just to see yield improvements or other advantages and we’ll probably talk more about that throughout the year that, that’s a particularly beautiful scenario because this is an area where the money is not coming from your traditional ATE or even burn-in space. So we’re pretty excited about the potential of bringing such massive parallel test at such a low price point, enables some new testing and new opportunities for us.

So is there a driver there really just the industry moving towards multichip packages I want to make sure the known good guys as well tested interested understood before for [indiscernible]?

So that’s definitely one of the areas that is pretty intuitive to understand, that if you test the device in a multichip package where you might have several devices in a stack in an in-capsulated plastic or other type of package, if one of those dies, sorry about that, the devices inside dies in a normal early failure or a failure rate package burn-in, you throw away not only that one but the other two. And you can imagine that as die count increases or the complexity of TSB or increases or for heaven sakes the part that you’re testing, die has a higher failure rate in early failure rate burn, then another device in there that might be more expensive. Imagine stacking a memory on top of an expensive -- I want to avoid customer names, and expensive mobile device or processor or something. You shouldn’t want to throw away the a processor because one of your $1 chips died and so there becomes an opportunity where there it makes more sense to actually implement a wafer level test on an extended tester burn-in.

Okay, make sense. Earlier you mentioned some early work in the flash world. Does the move to 3D NAND impact you at all? The vertical NAND??

I would say not necessarily, I think all of the tests guys are interested to watch what the key issues are, what are the failure rates and failure modes. The fact that it is three dimensional allows you at a given process node to increase density on a per wafer basis. And for certain what we know is that the ever increasing density of memory is great for the test industry because although with test modes you can try and reduce the test, we know for a fact that a part today that is four orders of magnitude larger than it was 10 years ago, the test times are substantially longer. And so I think -- there’s been quotes in the industry that the cheaper you can make the memory, the more people will buy. I am a believer in that. You can certainly see that as with digital cameras and USB flash and now all the all the hoopla around the solid state drives or flash where four years ago the naysayers were saying oh, it’s never going to be substantial. And now you hear people out there forecasting very, very large sizes and of course the biggest guys are Western Digital and SDK, are making major investments in that. And even the lives of the SanDisk; who bought I think a smart modular application, there was a lot of buzz, that that has been to [indiscernible] in Santa Clara, last month. So these are all good things I think for us.

Okay and then finally earlier you talked about your largest backlog in some time. Have you quantified that lower?

We didn’t. I mean this is a historical artifact to us. We actually only state our backlog one time per year. It’s at the beginning or at our end of our fiscal year. But that was one quarter go and it’s up from there. So I will let you do the math, but so far -- we are trying to be conservative in our estimates so we don’t give out actual bookings which of course will be derived from a backlog and we try not to give forward-looking forecast either but we definitely have been giving trends in revenue.

Our next question comes from the line of William Smart with Cardinal Value. Please go ahead

Good afternoon. I am wondering if you’re seeing a geographic differentiation in the automotive market demand. You mentioned, Mercedes and Toyota. Are the Germans and Japanese at the forefront of this increased reliability trend or is there everybody getting into it?

I don’t want to say it’s a tricky question. So the fact that Toyota is in Japan and BMW and Mercedes are out at Germany, it is not necessarily have anything to do with where they store their components. The world has become a really small place to flat if you will by the guy who wrote that book then talk about it. But components are purchased all over the world and maybe more. How is Mercedes doing well relative to Toyota or relative to General Motors; I actually wouldn’t try and guess as to where that’s coming from. [indiscernible]: But those type of applications, you are just not going to build a part with any level of logic on it and have it survive. And so they’re very adamant about that. And so they are sourcing from the best suppliers in the world and if you go look at the big suppliers, we have got a big chunk of them. And so if you are doing automotive microcontrollers or logic based parts, most likely you are doing production burn today. I think that’s almost a first statement across the board and all the customers in the world, and we are a big player in that.

I guess what I was, really getting at his, the end users, sort of the American companies coming along as far as demand for reliability, or can you tell from your business.

You mean is GM asking for it more than Toyota?

Yes.

I will tell you that we certainly hear Toyota, Bosch pushing harder, but I think it’s critical across the board. I even talked about this before. We certainly, there is a company that never likes to be mentioned, but some of these leading suppliers of mobile phones are driving levels of reliability and expectation that is really unprecedented in that space. So it’s not even just the automotive which sounds more intuitive, but when your cell phone is, whatever $200 worth of material cost, you buy it for $600, $700, $800 dollars or its offset by a contract; this is not something you expect to just die. It’s not funny that my iPhone 4S dies and even though it is two years old, I am not necessarily ready to just go out and buy a new one. I’m not sure I could say that as GM. I absolutely know that, we talked to new customers, customers that were necessarily supplying into the automotive space. But there were leaders in consumer type product Those products are going into automobiles and all of a sudden they are thinking, I need to understand what the automotive specification is for reliability and usually these new terminologies and it’s driving more reliability test requirements.

Thank you. (Operator Instructions). And our next question comes from the line of Jeffrey Scott with Scott Asset Management. Please go ahead.

Couple of questions. Gary, because of the sale of the written down materials, it’s hard to work back to what is a current breakeven. I’m coming up with something on the order of $5 million a quarter. So, is that gross?

I think that’s the kind of number we’ve stated in the past. Obviously, it depends on mix from one quarter to the next but I’d say five or five plus a little bit would be the right number.

Okay. The milestone events for the new FOX, how much of that was recognized in this quarter?

At risk of pushing back, not wanting to give you information then turning around and then giving it to you, I’m going to do that this time. We actually did not have one this quarter.

Okay. If and when you do receive cash as a milestone event, do you include that in revenue or is that a reduction in R&D expenses?

We include that in revenue and then the associated costs that supported that particular milestone would be written off as cost of sales against better revenue.

Okay. Is that project basically on schedule?

Yes.

The ABTS-P, what needs to be done in order to get a shippable product?

So, it’s a settle spend on this thing. At the ABTS-Pi, we introduced and shipped last year. We had our first shipments in last October-November to some really key customers which was the first entry of the P that has the iSocket capability or the individual temperature control capability. That machine had 256 channels. It could supply 400 amps to our burn-in for high power mobile applications processors to a product. It was still shipping it, taking orders, have a backlog. We’ve introduced a version of it, called the P without iSocket capability that is really aimed at the automotive and low power application. So it effectively has more capacity or higher production. It’s really aimed at production burn-in and adds high voltage option which is actually pretty interesting because in automotive we used to historically think about maybe 60 volts or 50 volts because you go through the map of a 12 volt power supply, when you actually turn the part on, your car over, it spikes and then it can double and so you might [indiscernible] these devices. But when you look at electric automobile or these hybrids, they can be over a 200 volts. And so it is different high voltage requirement and so the ABTS-P not only adds the high voltage requirement of the traditional, as we think of automobiles but also battery operated electric vehicles, European bus standards and also these new electric and hybrid automobiles which is just super and exciting for us. Rhea and I sit around and talk a lot. Rhea is our chairman and founder and one of our favorite topics is to talk about what’s going on with the electric vehicles and on one hand we know you have got this great touch screen and it has the effect of almost an iPad on the dashboard of this Tesla automobile and boy, what a challenge it is build that reliability. But Rhea was pointing out that here in Silicon Valley, Google is developing or has developed a fully autonomous car. The car is capable of driving itself around and right near us, it regularly is on the freeway and if you haven’t seen it before, it’s kind of interesting because passenger in the driver seat, not hands on the wheel and his car is driving him around all the time and it’s some of the early testing of this and there’s rumors around [indiscernible] that could bring that to market. What we could only imagine that the reliability and quality requirements of an electric automobile or any automobile that’s driving you around without a driver in attendance and so there is some really interesting things going on there.

It sounds like there is not much risk attached to shipping in 2014 for it then?

No, it’s actually a very straightforward project for us. We took multiple system orders for engineering and production systems without even shipping the first one.

Okay. Reading the press release I was intrigued by the quote working with potential customers in the definition of new product in our FOX product line. This would be outside of the normal customer base for FOXs?

It does include that, that’s right, and it includes some discussion -- I will restate it. Yes, in fact actually all the customers working right now are outside of that.

So these would be new FOX customers?

That’s right.

In order to get to a profitable fiscal 2014, I’m assuming that you do not need a substantial new FOX customer to get there, is that correct?

That’s correct.

So this would be incremental to your kind of core basic break even objective?

That’s correct and with the FOX customers we’re currently working with.

Okay. The Chinese Foundry is a new customer. Are you expecting follow on orders from that?

We know that this is actually an HTOL or reliability application. Historically customers will take maybe a few of those. Right now, we are just happy to have won that. That was actually a competitive deal that other suppliers were vying for and we’re really pleased to have won that and feel that’s nice endorsement for us. Their follow on systems, that be great but I probably don’t expect any in near term.

Thank you. Our next question comes from the line of Marty Cawthon with ChipChat. Please go head.

My question is, it looks like a very good opportunity and it has on every quarterly call coming up. My question is, why -- how does Aehr Test have an advantage over larger test manufacturers? Can they not see the opportunity or do they not have the skills to design these machines? Could you just tell me how Aehr Test, a relatively small company can be very innovative in this space with what seems to be not much competition from much larger firms?

Let me try and do that. I think there is maybe two areas of it. From a production burn-in and the automotive burn-in space, we are the leader or one of two top guys anyhow, depending on what particular segment in logic and these types of applications. We have been doing it for long time, 35 years and we have developed an architecture of hardware and software that is very competitive. And in fact during the downturn we have lost a lot of competitors. There have been a lot of competitors that have gone away. So it is a relatively smaller market. We are the big dog in it if you will. So as the industry has shifted and there is an opportunity with these new automotive devices et cetera, it’s coming back to us if you will and it’s playing to our strength. And as people know, I came from the semiconductor AT industry and very familiar with all the top guys and none of them have anything like this. They don’t have a platform, or an architecture, a software or hardware to go after this application. And historically, it probably wasn’t that large for them to really be that distracted by it. So now the opportunity, as this grows, it’s really an area where we can maintain our market share and grow with that industry and that’s a positive. Do I think they’re going to rush out and go build their tester to compete with me? They would have a heck of time trying to build one to be cost competitive with us. We have many years head start and I’m very comfortable with where we’re at. On the FOX area, where there is a wafer level burn-in, we have been working on this for a long time.…

That sounds good. And looking out, you don’t like forward looking statements but how do you feel now say compared to when you started there at Aehr Test, what was it? A year and a half ago now?

You actually are breaking up but that sounds like I am making that up. But I did hear what you said. So it’s just how do I Gayn feel? I came to Aehr Test little over 18 months ago and how do I feel about our prospects? I actually feel very good about them. If you recall and they are in the historical notes when I got here, we kind of anticipated as an industry that the rising tide of just generally burn-in was going to rise higher than actually did. And with that, our expectation was to make the strategic investments in this space I have talked about. That’s one of the reasons that I came, if not the reason I came to the company. Unfortunately, that business didn’t come back as strong but we have hunkered down and made the investments and are working with key customers to still get these products out. And now as we’re getting within a stone’s throw of them, I’m feeling quite good about it. And it’s great to actually be able to return to profitability and communicate that to our shareholders and to our employees and to our customers because I think we provide a very valuable, we serve a very valuable lead in this space and our customers are rewarding us for that. So I’m pretty darn optimistic right now. Thank you.

Thank you. There are no further questions at this time. I would like to hand the call over to management for closing remarks.

Okay, well I really appreciate everybody for joining us obviously on the call and on line. And as always I invite anyone who is interested to set an appointment and Gary and I would love to either sit down with you, give you a tour around here or take a call. And we appreciate it, and we look forward to next quarter call. Thank you.

Ladies and gentlemen, this concludes the Aehr Test System’s first quarter fiscal 2014 earnings conference call. If you would like to listen to a replay of today's conference please dial 303-590-3030 or 1-800-406-7325 with the access code 4640889. We thank you for your participation. And at this time, you may now disconnect.