Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Aehr Test Systems Second 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, January 9, 2014. I would now like to turn the conference over to Marilynn Meek. Please go ahead ma’am.

Good afternoon, and thanks for joining us to discuss Aehr Test Systems second 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 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’d 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 the 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 Marilynn and good afternoon and Happy New Year to those joining us on the conference call and also listening in to the online link on the web. We’re pleased to report Aehr Test return to profitability even as we continue to invest heavily in our R&D programs to get the new FOX wafer level test and burn-in products to market this year. We ended the quarter with revenue just under $5 million, up from approximately $3.8 million in the previous quarter with a profit of $137,000. Gary will cover the numbers in more detail in a few minutes but I want to discuss our business in our markets as well as bring you up-to-date on how our new products are coming along. Let me start by talking a little about the new orders we just announced coming out of Europe. We’ve been seeing a pick-up in business out of our European customers. This includes increasing activities in automotive as well as an opportunity where we’re seeing new applications for our products for high reliability commercial devices. We received a multi-system order for our ABTS automated burn-in and test system for IC reliability characterization and test for multiple target devices aimed at commercial, industrial and consumer application. It is great to see opportunities accelerate in Europe as this has been a very quite region for us for several years. We continue to see the automotive market drive production burn-in capacity. We announced a key lien in the automotive production burn-in space with a leading manufacturer of logic ICs for automotive, embedded processing, DSP and analog applications in July of last year. We shipped the first from that multisystem production order during our fiscal Q2. This system is our new ABTS-P production test and burn-in system that has up to…

Thank you, Gayn. As reported in today’s press release, our net sales in the second quarter were approximately $5 million, up 32% compared with net sales of $3.8 million in the first quarter of fiscal 2014. Our net profit of $137,000 in the second quarter of fiscal 2014, or $0.01 per diluted share compared with a net loss of $166,000 or $0.02 per diluted share in our previous quarter. Our non-GAAP income this quarter was $384,000 or $0.03 per diluted share, compared with non-GAAP loss of $23,000 or $0.00 per diluted share in the preceding quarter. The only item that is different between GAAP and non-GAAP is our stock option expense here, which was little less than $250,000 this quarter. Gross profit was $2.5 million or 50% of net sales. This compares to gross profit of $1.9 million in the first quarter of fiscal 2014 or 52% of net sales. In recent quarters, we’ve shipped systems that included previously written down material. As we complete the shipment of such systems during Q3, we expect our gross margins to decrease somewhat quarter-on-quarter. Operating expenses of $2.3 million for the quarter were up slightly compared to operating expenses of $2.1 million for the previous quarter. SG&A was $1.5 million compared to $1.4 million in the first quarter of 2014. R&D expenses were $798,000 for the quarter, compared to $681,000 in the fiscal first quarter of 2014. As noted in an earlier call, we are transferring some R&D expenses into cost of goods sold as we complete milestones related to our next generation FOX system development. This transfers out of R&D expenses with $301,000 in the second fiscal quarter of fiscal 2014 and a $127,000 in the preceding quarter. R&D spending is expected to increase during the next quarter. As mentioned earlier, we’ve…

Thank you. (Operator Instructions) Our first question comes from the line of Colin Denman with Westerly Capital Management. Please go ahead.

Hi, Gayn and Gary. Thank you very much for taking my question.

Sure, Colin. How are you?

I’m doing well.

Good.

So, I was hoping you guys could maybe go into a little bit more detail on opportunity for the new FOX products. Are these new features that your existing customers are asking for, or are these things that you were pushing to kind of address new customer opportunities? Can you just help us understand maybe the extent of the number of customers that you are in discussions with, or kind of how to think about the opportunity for the new products?

Yeah. So, let me go ahead and take that. So, I think related to the question of existing versus new, it’s a little of both. We even stated existing FOX customers where we see opportunities for our FOX products in both our existing FOX customers as well as in our existing ABTS customers. And for those online that aren’t that familiar, the ABTS product addresses devices in a more traditional package part burn-in, which is the market that we’ve been a leader in for several decades. On the new opportunities related to wafer level burn in, are being presented in some spaces like automotive on some discrete memories, embedded memories where for different reasons as I mentioned before such as stacking of those devices. There are cost advantages and manufacturing advantages to do the extended test and burn in at an earlier stage before they were actually packaged off. So in this case, there are opportunities for customers that are correct customers of package part where they see reasons to move burn in of some of their types of devices to wafer level, but we also have opportunities in what I will say newer customers from a historical perspective. Why I say that is, if you actually look at Aehr Test history I think we’ve sold systems to garner every company in the world over some period of time, particularly we had -- about within a decade ago we had a large portion of our business in the memory package burn in where today our primary package burn in is not in memory but is in actually logic and automotive devices. So in terms of new customers in some cases it's relatively new customers. We are talking to customers that we've actually sold systems to in the past.

Okay. Thanks. And then just a question on your visibility with some of those customers providing down payments and kind of extending in the Summit more of this development partnerships for some of these new products, can you talk about maybe how your visibility has changed kind of over the next -- over the last six months, kind of how far it extends and what gives you the confidence that you are going to be able to remain profitable, et cetera?

Okay. Well, I think I hear two things here in the visibility and sort of confidence in the near term. We engage with a small handful of customers on the definitions of some of the new product. Some of them at the request of the customer coming to us and because they knew us that say, can you make these types of products and these kind of enhancement. As we are now really in the trough of the development of those new products, the definition is squared up and we are in full execution mode if you will. So we have been going out and talking to, if you will a second wave and additional customers that we believe are great targets for this kind of application. So, for example on the FOX-1, customers that are doing low-pin count DFT/test modes, we offer a unique difference by contrast to standard ATE in our ability to do massive parallel testing at a very low cost. So in this case, we have more visibility of those customers because we've been going out over the last couple quarters and talking to them. And obviously as the product becomes complete here in the factory and we can show it to customers, there's a wave of customers that are more interested in looking at the product once it's available versus as we've stated, we have a contract for example with customer to develop the machine where they’ve given us some specific NRE dollars to ensure that the system can be configured in their specific configuration. On relative to the visibility of moving forward, we maintain a very strong backlog and that gives us the confidence in looking at our forecast moving forward to be able to know we have the revenue and the margins to be able to maintain our spending yet still forecast the profitability for the second half and the whole year.

Okay. That’s all the questions for me. Thank you very much.

Thanks, Colin.

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

Yeah. Good afternoon. It sounds like things are starting to heat up here, both on the burn in side as well as some of the new opportunities on FOX. So my question goes back to the competition and what do you think the competitive response is going to be from both the other ATE players and maybe some new players who are looking at this growing opportunity over time?

I think that’s a very good question. And I think for again, people that aren’t aware, some of the opportunities that we’re addressing with our new FOX products are very unique. They are not products offerings available from competitors to be able to do the parallelism that we offer in multi-way for test and burn in and that IP and that technology has been developed here in Aehr Test really over the last decade and a little with the whole awful of patterns and domain knowledge related to the whole test cell of being able to handle and test. In this case, 15 wafers in parallel which is what we offer today and we’re extending the capability of that in our next-generation system. So in this case, how will other people react? I can tell you that from my experience from in the ATEs industry that Aehr Test has a very unique hardware and software architecture that we are leveraging from our vast experience in burn in and applying it with the technology of contacting the wafers that today does not exist in the ATE suppliers. And so, as we address that, we think we have a real competitive advantage to offer our customers and maintain that competitive advantage for some time. So related to the FOX-1 product, we have some examples that are similar to what I just stated. And there’s other examples where quite frankly, we’re a less expensive way of testing those devices than some of the other ATE suppliers. And so we are using again our hardware and software architecture to deliver a much lower cost effective solution for these DFT low pin count, DFT and BIST type applications that we’re seeing more and more of across-the-board in the semiconductor industry.

Okay. So first time, are these unique applications, it sounds like the traditional ATE guys don’t have a similar solution, would it take years for them to develop one from scratch?

I would think that that’s a fair estimate. And to be fair, I think there is some examples historically where they are not necessarily motivated to go off and build the machine that obsolete themselves. And we look at this as an enormous opportunity for us with none of the downside that they might experience.

Yeah. It sounds good. Do you guys disclose the backlog number, if you can give any information either qualitatively or quantitatively on what the backlogs done recently?

You know what, we’ve discussed that. As we’ve talked in the past, we've been avoiding talking about bookings. I think I just stated and I will just repeat it, we still have a strong backlog. Let’s see, how Marilynn want to refer to that.

We publicly disclosed the backlog as of May 30th at end of our fiscal year, but generally we don’t report numbers by that term.

Okay. And then also Gary when you look at the OpEx going forward, sounds like it’s going to creep up a bit here both in R&D. And were the changes going back to full pay that was already in effect or that is going into effect going forward, so expecting more of an increase on the next quarter?

That’s going into effect currently, so we didn’t see any of the pay increases in Q2 but we did see the return to work in Q2.

Okay. All right. And then, what can you give us as far as just share count going forward like your mini offering but is there someway to quantify what the diluted share counts going to do?

I wouldn't think that the numbers would change dramatically at this point. One of the reasons, that many shares were exercised by stock options. We did have a number of options that were expiring and so that was why we saw a little burst of shares. So, I wouldn’t expect many additional shares to be added and then the diluted shares would obviously just depend on whatever the stock price is, so you might see some fluctuation there. But let say what we’re looking at right now is probably fairly consistent with what you will see in the next few quarters.

Okay. And then finally, when you look at the testers you sold five years ago, the big slug of [Knorr] testers, is there any kind of a refresh cycle or obsolescence with the installed base or is it just on the spares and service side?

I’m not sure I totally understood that. Let me take a stab at it. We’re not anticipating that the FOX-1s, for example or FOX-15 that we have installed would be displaced by our next-generation systems instead they would be augmented. We’re looking at core level of compatibility to allow them to sit on the same floor as each other. As much one of the byproducts of having products that last for such a long time and is liable there, they don’t tend to wear out and go away that often, a great thing for our customers and just part of our life. We do have support and service contracts on those systems and anticipate doing that for several years.

Okay. That’s exactly the question. Thanks.

Okay. And let me just add one more thing. As we noted and I explained in my comments, we actually have seen WaferPaks sales uptick on both the FOX and FOX-15 products in the last quarter. So let’s say, a consumable element that is great because it provides us with revenue and margin to be able to continue to support those systems so.

All right. Sounds good. Thanks for your time today.

Thank you.

Thank you

Thank you. Our next question comes from the line of Jeffrey Scott with Scott Asset Management. Please go ahead.

Good afternoon.

Hi, Jeff.

Hello, Jeff.

It’s lot better to see the net income line without those for entities around them.

I agree.

Gary, quick question, equity went up by $800,000 from during the last three months and you said about $300,000 of it was the exercised options, $137,000 net income, what was the rest?

The stock option compensation expense would be and I’m -- one of the contributions that we make to our retirement funds is in shares of stock. So that would have been another item, I think that’s probably the majority of the things.

Okay. Thank you. Towards the backlog statement, last quarter you said that the backlog was up from year-end. Would that be the same case for November 30th over August 30th?

You are always trying to -- I don’t know how many ways that I always said, I’m not going to answer. Now, instead of answering something for you Jeff here, so I can give that to you.

I agree.

I will tell you what we are still up from our end of year backlog.

Still up from the end of year?

Yeah.

Okay. In the press release today, the ABTS to Europe, I was trying to parse to sense that when you talked about a new customer order, was that a new customer or new order or both?

Both.

So it was a new customer.

Yes. That’s right.

Could you -- had they had some Aehr equipments from years ago or was it entirely new?

No. They don’t use. They do not.

Okay.

They are brand new.

Can you take us through the competitive element of that sale and what they were looking for that you had that nobody else had?

Yeah. With the exception I was trying to tip my hand everything around at my competitors as you always know. But no actually the features of the ABTS which I think we’re seeing across the board that made it compelling are it’s -- the systems we design them to be cost effective enough for volume production but also scalable enough for being low volume reliability. So in this particular case, the customer bought several systems that were not full. But they were pre-wired and pre-configured to be able to add what we call blades to them and test electronics going forward very easily. They like that feature. They allow them to actually get several chambers but also have them in this case partially populated but upgradeability very easily and that was totally the case. Our ABTS system are actually very advanced for larger customers. So they have a greater flexibility with configurations up to 256 or 320 IO. We have more power supplies per BIB than anybody else. We have unlike other people, we actually are test electronics tend to be very dedicated for the burn-in boards. So we may have one or two burn-in boards per what classically is referred to as a zone, which means that if we have a system that has say 72 burn-in boards in it, you can actually be running 36 different types of devices with two BIBs per device. That’s a big deal because you have a lot more flexibility and a lot more volume than traditional. And by contrast to our older systems that might be four or eight times more zones than we had in the past. So those are some of the features that make it very flexible and its one of the reasons I think we've been winning more than our fair share.

Quick follow up to that, how long was the sales cycle for this and did the order come as a surprise or were you recently counting on it?

No, it wasn’t a surprise to us that -- actually the sales cycle, if you really, I think we put some quotes on, I think even more than a year ago. So -- and we've been working through the terms and conditions and negotiation and details like that through this so. No, it wasn’t Bloomberg.

Okay. Gary, you normally split out the FOX revenue for us?

Not that I normally do. I don’t think we have normally done that. Sometimes I would give you a hint as to what the service support and accessories might be. And I’ll tell you when I do that instead. I think our services are port and WaferPaks for example were over $2 million in that quarter.

Including WaferPaks.

Including WaferPaks and the rest was systems and accessories and we have not been breaking up FOX-1.

You said the FOX revenue included one machine?

In terms of shipment yes that is correct.

Shipment and revenue right.

That’s right.

Yeah. So one machine was FOX.

Yeah. And in particular why I wouldn’t want to break up the revenue for FOX.

Yeah. Okay. Did you receive any milestone receipts for the FOX development product?

We had one milestone during the quarter.

Was it any material cash amount?

Most of the milestones are similar amount. So its not -- its not dramatically different from earlier milestone.

That we’re talking low six figure kind of thing?

Low six figure, yes.

Yeah.

Okay. The timing for the new FOX development machine, you're still trying to get it out by middle of calendar 2014. Are you still reasonably on schedule for that?

Yes. And we’re trying to pull that thing in as quickly as we can. We actually had during the last quarter maybe in couple of quarters, we’ve been -- there was some enhancement and request made to the system and a couple of modifications by early customer that I think actually impacted the schedule little bit. On one hand I'm not excited about that and on the other hand we think it will be better for them and it’s more competitive for the market but we’re still on track for shipping over the next couple of quarters here.

And you don’t see any major engineering issues that would be difficult to overcome?

No, no.

Okay. On December 19, Texas Instruments announced they have purchased some 300,000 square foot facility in Chengdu, China, which will be their seventh assembly and test facility worldwide. Do you have any idea how that might affect you since Texas Instruments is one of your over tempting customers every year? Is that going to be incremental revenue opportunity for you or will it more likely just replace machines that would've gone elsewhere in the world?

I don’t know the answer to that. That’s a good question. Certainly will be asking them when I go talk to them next, tell you when I’m done but I mean TI as I read as well I mean they are a great company. I think they have been doing really well. They, like other companies in the automotive space, I think have been seeing this, what seems to be across the board uptick in, all things semiconductor. I'm actually not personally clear exactly what that facility is or if it’s a broad-based facility like the one they have done in the Philippines for all their products. But I can tell you that when my customers are doing well and adding capacity, that would seem to be good for all of us.

Okay. I will drop off and let some body else on. Congratulations again.

Thanks Jeff.

Thanks Jeff.

(Operator Instructions) And our next question comes from the line of Marty Cawthon with ChipChat Technology group. Please go ahead.

Hello Gayn. Hello, Gary.

How are you, Marty?

Good. my question is about the technological progress that you see in the testing area and as a background often we hear about progress in CPU capacity and people refer to Moore’s Law in that a CPU will double its capacity every 18 months. So my question is, I'd like to hear some discussion about how the progress is going in the test area in general for the industry and in specifically from their test systems.

Okay Marty. And Marty your phone was breaking up but I definitely caught it all, just as an awareness. So, oh he is dangerously throwing out these very open-ended questions to a guy as passionate about the test industry as me. But let me maybe, hum a couple of bars. If we are looking for all their broad trends or their Moore's law equivalent things that you can look at the test and see where there is. I can probably make the following, a couple of statement and be representative of the broader industry I believe. And that is -- I think that there is a couple of areas where there's a lot of change and a lot of growth and opportunities within the semiconductor test space. One of them we are not in and that is high-end SOC, the integration of a lot of components coming together into a single integrated circuit, which is driving a lot of the revenue in the semiconductor space where the likes of Verigy’s who was acquired by Advantest, Advantest, Teradyne, LTX-Credence and they have high-end platforms that are testing one, two, three, four devices in parallel, never three maybe four or eight devices in parallel. Very complex new products are driving lot of technology and drives a lot of the revenue in the semiconductor space. That’s not a space that we are in. What we have is really kind of two broader areas and that is we are in the reliability testing where people are using design for test, low pin count test methodologies are able to exercise the cores of the devices to be able to test them over some extended period of time to prove out the reliability and the quality during process monitoring development and early device production, or in…

Good. Okay. Thank you for your comment.

Thank you, Marty.

All right Marty.

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

All right. Well, thank you very much folks. We’re happy to have been able to announce some positive earnings for our shareholders and at the same time make in the key investments we think are necessary moving forward. And we look forward to our next earnings conference call. As always, we offer any one the invitation if they like to stop by and visit us here in the Bay Area. We love to give you a tour of some of the new products that we’re working on. Thank you.

Ladies and gentlemen, this concludes the Aehr Test Systems second 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 1800-406-7325 with the access code of 465-6941. We thank you for your participation and at this time, you may now disconnect.