Good day, and welcome to the Aehr Test Systems' Third Quarter Fiscal 2015 Financial Results Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Jim Byers with MKR Group. Please go ahead sir.

Thank you, operator. Good afternoon and thank you for joining us today to discuss Aehr Test Systems' fiscal 2015 third quarter financial results. By now you should have received a copy of today's press release. If not, you may call the office of MKR Group Investor Relations for Aehr Test at area code 323-468-2300 and we will 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 the Company's 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 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. With that, I'd like to introduce Gayn Erickson, Chief Executive Officer.

Thank you, Jim and good afternoon to those joining us on the conference call and also listening in online. Gary will go over our third quarter financial results in a few minutes, but first I’d like to spend a few minutes myself discussing our overall business and products highlights including our continued progress with the development and introduction of our FOX products, then we’ll open up the lines for questions. Starting with our base business, as we had forecasted on our last quarterly conference call, we experienced a soft third quarter which reflects a drop in our base ABTS packaged part burn-in business and softness in our FOX wafer level business as customers absorb capacity that they put in place over the last year. However, as we discussed last quarter, there are significant positive trends driving growth in the packaged part test and burn-in business. The semi conductor content in automobiles for safety, infotainment, mission-critical components continues to grow and is driving the need for extended test and burn-in to remove early failures as required by the automotive market. Aehr test’s ABTS platform is very well positioned to take advantage of a new wave of additional test and burn-in capacity that will be needed for this emerging market and we are in discussions with several potential customers in this space. Our install base of ABTS packaged part systems is at or near maximum utilization. We have inventory for ABTS systems that allow us to ship on short lead times as customer orders pick up again. With the high utilization rates these customers are ready [ph] we expect them to come in with short lead time expectations when they do order. For example, in late February we announced $2 million in Follow-on orders for an ABTS system and a package of…

Thank you, Gayn. As we reported in today’s press release, our net sales in the third quarter of fiscal 2015 were approximately $2 million, compared to $2.6 million in the preceding quarter and $5.6 million in the third quarter of the previous year. Non-GAAP net loss for the third quarter of fiscal 2015 was $1.5 million or $0.12 per diluted share, compared to a non-GAAP net loss of $1.8 or $0.16 per diluted share in the preceding quarter, and non-GAAP net income of $447,000 or $0.04 per diluted share in the third quarter of the previous year. On a GAAP basis, net loss for the third quarter was $1.7 million or $0.14 per diluted share. This compares to a GAAP net loss of $2.1 or $0.18 per diluted share in the prior quarter and GAAP net income of $212,000 or $0.02 per diluted share in the third quarter of the previous year. Gross profit in the third quarter was $852,000 or 42% of net sales. This compares to gross profit of $694,000 million or 27% of net sales in the preceding quarter and gross profit of $22.9 million or 51% of net sales in the third quarter of the previous year. The increase in the third quarter compared with the preceding quarter is primarily the result of a change in mix, products with higher gross margins and provisions for inventory reserves recorded in the preceding quarter which did not recur in the third quarter. Operating expenses were $2.6 million compared to $2.8 million in the preceding quarter and $2.6 million in the third quarter of the previous year. SG&A was $1.6 million compared to $1.7 million in both the preceding quarter and the prior year third quarter. The decrease was primarily due to lower employee -- employment related expenses. R&D…

Thank you. [Operator Instructions] Your first question will come from William Smart with Cardinal Value.

Well good afternoon. As you mentioned that [Indiscernible] your system is being evaluated by a company, my question is, are you likely to have other situations like that number one? And number two, what is the range and issues that a company is evaluating your system is likely to take. Is it one machine or three machine -- any idea?

Okay, so hi Bill this Gayn. You are coming in a little rough on the call here, but the second question was how many systems or what does it take in order to do an evaluation that was one of them, correct.

How many systems are you liable to be selling to this customer?

I see. And what was your first question?

Are you likely to be trialling [ph] your system with other manufacturers?

Okay, all right I got it. Let me try, it’s Gayn. So thanks, Bill. So I’ll start with now second question but your first question first which was around trials with other customers. I would believe it’s very typical for a customer that would be using the tool like this in a volume production application to go through a trial and evaluation period, very typical of the semiconductor ATE space in general. And so, we've obviously announced the first one on this new FOX-XP platform and as we’ve talked in the past we are engaged with other customers as well. And as we finalized details in evaluation, scheduled with them we either make announcement or certainly cover them in our conference call script here. We're really – I want to really emphasize the importance of in the last year and a half we spend a lot of time validating the configuration, the performance, the specifications that we are in development on in the XP against multiple customer applications, and what we are looking for is for customers one at a time to step up, raise their hand and make some level of commitment and skin in the game to help us with the evaluation, because in order to really do this, it takes the customer to open up their test programs, their wafers and actually get directly involved with their IP to validate. So, we're super excited about that with this first of what we hope to your many FOX-XP customers. Related to how many systems, I actually thought I misinterpreted. In an evaluation, you could really do a lot with both engineering and small configured system. In fact we've made some provisions with respect to the XP that will allow us to do evaluations very efficiently or cost effectively, which is an important aspect of our product rollout. And so depending on where they are at in a stage, we can do this without a significant amount of investment on our part -- in time and energy and applications and IP. Related to these volume applications and we deliberately did not imply what that customer is. They've been very sensitive to ensuring that we're not using their name or telling the world what it is, what the device is, but we'll talk to the generic kind of broader sensors and flash memories and microcontrollers. Any customer that's doing a system like this we would expect to actually have multiple systems on their floor over time. And keep in mind that each system will be testing many something 15, 25 wafers at a time in parallel, so these are very large installations that we would see over time. So -- and investment in a system like and a customer like this will turn into certainly significant relative to our current revenue levels – revenues for each customer.

Okay. Thank you. One other question, did anything as interest for that of the burn-in conference last week?

That tell you open-ended that -- I think Bill, we actually made an announcement about our burn-in test, actually I think it’s call burn-in and test strategies conference that I had a chance to listen in on and certainly there was good attendance and activity there that's [ph] going to talk about all of our leads. But one thing that I particularly enjoyed, I said in on number of papers that we’re talking about sensors. And they're such a broad – there's so much kind of exciting stuff going on with respect to the test requirements of all kinds of different sensors in automotive, in industrial, in mobile and obviously at some point people talk about the internet of things that I think are just right for opportunity for us. A lot of the people were talking about the need to move some package to wafer level because of the size of those devices, which I think is just more things that can move in our direction that I thought I was actually personally very encouraged by it.

Okay, thank you.

Thanks, Bill.

Thanks, Bill.

Moving on, we'll hear from Tom Diffely with D.A. Davidson.

Yes. Good afternoon. First Gayn, I wanted to get back to the comment you made during the prepared remarks, you referenced February order that you said you could in the quarter. I just want to confirm, that’s turned for the May quarters, isn't that?

Actually I apologize -- we get our fiscal and calendar quarters is often confusing I think, as our fiscal quarter, in that case fiscal Q3 ends in February, right.

Right.

So we actually received that order in February and shipped it in February.

You did, okay. So that was in result sense, okay.

And this is not a necessarily an encouragement to all of our customers that are listening to wait to the last minute for shipments, but as we said, we do have inventory of a number of different configurations that will allow us to that. Some of which quite frankly was built up in anticipation of some customers that have pushed out their orders as we talk more about last quarter. So as those customers pull back in we're ready enabled to ship again those.

Okay. So the large portion of your inventory in finished goods at this point?

A good chunk of it, I will tell you. One of thing that we do for the folks that haven't had a chance to come out and take a look at our floor, one of things I think we do a very good job at is kind of configured to order. So we have our proprietary test chambers which are one of the key differentiators from us and our competitors because of the power and capability. Our ABTS chambers, we will buy against a forecast and then we will take specific boards and we can configure that against an order at the last second. So, we actually have systems that are fully configured and then we have material that can be configured within a short period of time for many of the customer configurations that are forecasted.

Okay. And then I want to focus on the XP, two questions there. The first one is as regards to lead times ultimately on that tool, what you think they're going to be and what is the long lead time component internal? And then the second question is just on your capacity, what would be your capacity at current state and then what kind of potential CapEx needs do you have to increase capacity over time?

Let's see here. I think I'm comfortable sharing all of those things, because it just competitiveness. So one of things that I am personally excited about with the XP is that I think we have shared this is our previous quarter is if he understand part of both are development and our manufacturing model is based upon kind of a mix-and-match strategy, right. So the XP as people made, we're in development, we've already have orders where the backlog full we call it FOX-1P. FOX-1P is collection of electronics boards and software that are configured in a large test head and can test a massive single wafer, okay. Those exact same boards are then put into our actually ABTS chamber along with our FOX-15 Wafer pack subsystem to create our XP. So these key subsystems we can keep in pieces, so for example, I could build inventory for either FOX-1Ps or XPs and then configure that towards the end of the cycle. So, when you ask me about lead times we are really talking about subsystems and so we expect to be able to be able to quote typical lead times in maybe 12 to 16 weeks for FOX-XP systems once we get to a release and we're trying [indiscernible] where we can always ship maybe one sooner and if somebody wants to place multiple system orders we actually have the capacity and/or can at now from a physical capacity perspective one of the great things I think about this business model is its scalability. One of the challenges obviously we’re in right now is that with these extremely low orders in revenue level, there's not – it’s kind of nowhere to hide, right. But with the exact same crew and infrastructure we can ship 10x our current revenue level. We're probably out hiring perhaps a person in manufacturing, mean, it’s a very, it’s a very scalable. However, we also need all those people around to be able to ship anything, okay. So, we been out of this building, I think we were shipping $10 million, $11 million a quarter certainly right off of this line in 7 years, 5 years ago. And with the infrastructure and the requirements of these new devices that would be a very straightforward thing without any CapEx purchases at all.

Okay. That's very encouraging and so, I seem at this point you are satisfied with the balance sheet and the needs you’ll have for the year?

Well, I think if Gary pointed out I think satisfied would be over stated, and I guess there are no challenges. I think one of the challenges we’re absolutely in. I mean, we’re a very global company and we're able to get a lot done with the R&D budget that we are running. Cash has always been something that we're very focused on. And as we said we've got policies with our customers with respect to down payments that help us to be able to fund growth, large POs can be met with cash down payments that will allow us to be able ramp without going out and having to raise lot of money or anything. It’s a constant question and we think that between those customer down payments and our line of credit that gives us some leeway and we've talked in the past that we have additional lines potentially available to us as needed, so that something that we feel comfortable that we can meet our growth requirements through multiple means.

Okay. Well, great. I look forward to the progress over the next few quarters.

Thank you.

Thanks, Tom.

[Operator Instructions] Next we'll hear from Jeffrey Scott with Scott Asset Management.

Good afternoon.

Hi, Jeff.

Okay. Let's start with the FOX 1P, as background you've acknowledged an order for one deployment machine and at least two productions orders, there might be more. What percentage of the selling price of the development machine, had you already received as of February 28, 2015?

Well, let me make sure. Let me make sure I get the question right. Let me maybe restate it. We have acknowledged that as part of the initial order from at lease one of the key customers they had financial milestones and revenue milestones and then it also had engineering and production orders in that?

Correct.

That we'd hope you understand it.

Correct.

Are you saying, what percentage of the total order have we already booked in revenue milestones?

No. What percentage of the development machine, have you already received in cash as of February 28, 2015?

I think actually Gary; I think did [ph]. We have already reported. I don't we've broken out all of the details but we've reported milestones that were development related milestones. I think maybe four, five different milestones over the last couple years and quarters. And we have a milestone that includes the shipment of the first engineering system that we would score revenue upon acceptance of that system and that is its own discrete line item and we haven't scored any revenue against that line item.

Or received any money for it.

Correct.

I want to get away from the accounting terminology of acceptance and recognizing revenue. What I'm getting at is, when you ship that very first engineering system to them, have they not already paid you a vast majority of the selling price in cash?

No.

They have not?

They have not, that’s correct.

Okay. The increase in deferred revenue from $920,000 in the quarter, was that coming from one customer for the FOX-1P, the vast majority other anyway?

Jeff, this is Gary. No, that was related to the FOX-1P, it is related to an annual service contract which we booked.

So somebody gave you a $1 million a year, $1 million for an advanced service contract?

Correct.

Okay. And presumably that would be in that $2 million order that you press released back in early February?

That's correct.

Okay. You talked about in the call on January 8. You talked about prospect for second and third customers to the FOX-1P. Where do we stand?

And we also talked about XP customers as well, correct.

I was going to get to XP next, but...

So, Jeff we were still engaged with I think we've said more than one customer on the FOX-1P and we talked about the same thing on the XP. We're trying to avoid getting too detailed along those lines and as I've also stated in the past one of the challenges that quite frankly we've been successful now with at least one lead customer on each platform is getting customers both emotionally and technical resources but financially committed to those products prior to their introduction. I believe – I have stated before and I continue to believe that certainly as you walk into our building right now and you look at a FOX-1P and we've got multiple systems here and see it at it stage and development, it’s much easier to actually sell in market that and get a customer commitments to that. So, we're not here to introduce any other key customer commitments or orders, but it's been a long time coming and getting the FOX-1P. We're actually seeing the XP kind of go neck and neck within on the some of the pieces, because as we already said the engineering system is the same between the two. And we're seeing progress here right now that feels like we're kind of finally over the hump to get us to shipments and revenue recognition and be able to do multiple benchmarks with customers.

Okay. In prior calls you said, one of the reason that there was a slowdown in the 1P was because you were trying your best to make it – make sure that it was configured to be attracted to more than just the one development customer?

Exactly, as well as within that one customer in a particular the lead customer I just alluded to on our prepared remarks. When we started down the path that was really aimed at one device or one family type and then we did some significant modifications that added well over a year of additional development into it to expand it to I think we already said to microcontrollers and some other applications. And just recently, we've had some conversations that there's even another entire family that's been targeted for the device. These are all great things, as we all know. But they don't pay the bills yet until we start shipping.

Correct. Okay. The release of the engineering machine has been delayed again. Correct?

The shipment of the first system as we said last time and as we said before, we won't trying to be cute [ph] with our quarters but in January 7, these quarters seem to be getting closer and closer together on these calls, I say only somewhat joking here. But in January 7, we believe that we at a point we could ship the system by the end of the calendar quarter. You can go through the map and realize that what met was by March. And at this point we're very close and we're just making a statement in the ground that during this fiscal quarter which includes March, April, May that we expect to ship that system.

Okay. You are five days away from missing what was the January prognosis, right?

That's correct.

Let's go on to the XP. Back in January 8 you talked about multiple flash memory manufacturers. You were talking them about engaging in onsite evaluation. Is onsite on your site or on their site?

In each of the customer engagements we've talked about that will be a little of both. My recommendation the way I've done and this is right way of doing this. As you want to start those evaluation here to a certain stage and then they of course what to see those systems on their floor ultimately. So they – I believe any of them would all be start here and there.

So, the one that has started it would be done at your location?

Yes. That's correct. The first milestone, certainly.

What are they?

They are been done here actually, present tense.

What is your specific first milestone that you reference that you'd completed?

You know what I’ve actually rather not go down that path for more competitive reasons. We had identified a list of milestones with the key customer including achieving the first one which are we’re making real progress. There is I think we specifically talked about what did we say, certainly related to the wafer pack and key pieces along the way. It would be totally reasonable to understand that in order to successfully go through a roll out you are talking about testing their devices most likely in a packaged part first then testing them at a wafer level with one of our wafer packs, going through thermal characterization proving that while you can actually test these complex devices with our XP system and then ultimately it would be you know a high volume run and make sure working.

And you’re still comfortable with the six month total evaluation period for that initial potential customer?

I think what I said before is that would be a typical evaluation period and just depending on this customers milestones overtime we could see a varying schedule and I actually would rather not go into that detail at this point, that’s not to change anything. Different customers have a different milestone that include acceleration or schedules that some of which are not even related to us.

Okay, and how far along are you on a second evaluation?

Far. Far along.

You are far along the way?

Yes

Okay. My first reaction was you are far from getting effect under valuation, but I think your answer is the opposite of that.

That’s right.

Okay, you are reasonably close to getting your second evaluation?

Let me try that again, I’m sorry. You are talking about the second evaluation or the milestone of the first one?

No the second essential evaluation.

Yes, okay Gary was looking at me as I realized what I was saying. I mean we are very clear. I’m very far along in the second milestone and the first system and I actually don’t want to forecast you know where we think we are with respect to commercial agreements on a second engagement evaluation.

Okay. Now a generic question, if a device manufacturer announces to the market place that it is in production with a new device, would that typically mean that they have all of their testing protocols already in place?

Yeah I mean have they already picked their platform and their test strategy of choice at that point is what you are saying?

Yeah

I would say that it’s typically true, yes. Now having – I mean your typical cut over’s in from a production ATE’s perspective, we usually refer to as either commercial or technical disconnects. A technical disconnect is I want to do something that I can’t do today. Easiest is hey the path goes faster and I need a faster tool, okay. We actually have a technical disconnect opportunity here and that is if a customer wants to do wafer level, burn-in and cycling they can’t do it on the tool set that they have. They just cannot get their cost effectively at all, okay. And so they would need to switch over to be able to do that and so the question is, would they do that at the initial stages of production or along the way either one. A commercial disconnect might simply be I’m putting the new fab in and I need to buy all new equipment. I -- our target would infact be to look for the technical disconnect so that we don’t necessarily have to time it for the same time as the fab, but as you know atleast in the target markets that we are talking about there is continuous incremental capacity coming online you know over the next decade.

Okay. In your presentations you have said that there are for all purposes only six global manufacturers of SSDs in your target market.

Well of flash memory for SSDs. I think there’s actually a lot more SSD manufacturers out there.

For the Nand Flash?

Yes.

You’ve said that there are six. This morning there was a joint press conference Micron and Intel saying that they were going to market with their next generation 3D device there. Does that mean that you are not included in their plans?

Did they mention that in that call Jeff, I’m kidding with you, I’m not? I haven’t had a chance to listen to that conference call yet and I actually don’t talk specifically about different customers.

But you just said that by the time they announce their commercialisation that their test protocols have already been decided.

I would tell you from experience that if any customers in production they are already testing those devices absolutely. And I will list you know – so that’s all I can say. We don’t need to, I don’t believe that we need to intercept with a next generation device per se, nor even with a next generation fab that’s going in place to be successful with this product.

Okay.

You know what; I am very encouraged by all the investments in the technology that’s going into SSDs though. On one hand that was a very positive announcement and the other one of course you know down the street from us here is SanDisk had an awful announcement today so as they pre-announce their numbers. So you know – you certainly some of the people have that know me have heard this before, you know in the Gold [ph] rush days are the 49ers there was all discussion about who were the folks that actually did the best? Levis was one of the ones that did really well. The people selling blue jeans and tools did fantastic. The way we look at this is that we have a tool that can really differentiate the flash manufacturers by improving their yield, lowering their cost and differentiating themselves against their competitors and you know our goal is to try and partner with those customers and then win with them. And I personally have a lot of passion with respect to the flash memory space and I think that the FOX-XP is an exceptional tool aimed directly at that space.

I don’t disagree. All I’m saying is it appears to this morning’s announcement that at least two of the players are proceeding because we are too late, is that an incorrect characterization?

I wouldn’t say it that way, no. I don’t think that we are too late to this market.

Does this morning’s announcement make it harder?

I wouldn’t interpret that at all no.

Okay, I drop off and let somebody else on. Thanks.

Thanks, Jeff.

From ChipChat we’ll go to Marty Cawthon.

Hello, Gayn, hello Gary.

Hi, Marty.

Hi Marty.

Hi, I have a general question about the market opportunity in automotive. My understanding is that chips has to buy Aehr Test machine for the automotive market or primarily micro controllers. And micro controllers are used in many products copy machine, micro wave ovens, industrial machine and they must all be tested because no manufacturer wants the customer to receive a product that’s adorned [ph] with their brand name on it. And that includes automotive. So my question is by emphasising the automotive opportunity for Aehr Test, how is the testing of micro controllers for automotive a different for a better opportunity in the testing of micro controllers for the many other markets that exist?

Okay, all right thanks Marty. That one I can handle easily and very straightforward. And unfortunately one of the statements you made is nobody wants their toaster to die either so to speak. But the reality is and within the test community within published papers that are out there so I’m not disclosing anything based upon on non-disclosures. It’s widely known that consumer micro controllers are tested with a very short test times on great platforms from companies like Teradyne or Advantest where a typical test time might be you know 5 seconds or 10 seconds or 15 seconds or so on a platform. Those devices have a high degree of quality relative to their target application. They may only have 50 or a 100 parts per million of failures and when it fails it doesn’t actually cause much of a problem, okay. And in fact they have designed the devices, their target applications such a way that if that thing actually has a failure it may still be fine, okay. The key ends up being there are types of applications where those reliability rates are not good enough and we talk a lot about automotives, it’s actually more intuitive to imagine a something that goes up into a satellite or on an aircraft. You know that failure no matter how slim it is its catastrophic if there’s a problem, right. And you can’t go up in service of that satellite, okay. The automotive guys have gotten with typical numbers of two part per million failure rates and there are people like Toyota that are widely known for their dual PPM targets that create a requirement for a completely different process and test strategy, because if you look at the processes that people build these state of the art micro…

Okay, if I could ask just a brief follow on and that is the market for automotive -- every year there has been more chips going into each model of your car. And so, because there is more chips being used and more devices being used that would lead to a bigger market for the testing of the product. But also is the automotive company in addition to that have they tightened up their demand for quality say in the past 10 years?

Well I didn’t…

Okay, that is…

Have they tightened it up, is that what you are asking?

Yes.

Oh, I’m sorry, yeah Marty I did understand. I would say well – I would say there is two groups out there, right. There are a handful of clear market leaders in the industry folks like NXP, free scales with NXP just purchased, Renesas that are the largest automotive micro controller manufacturers. They have very robust processes, I know this first hand and some of those as you know are customers of ours and they are very well known for having these very robust test processes. I would not suggest that they have had to increase their quality in recent years, these guys know what they are doing and they are very good at it, okay. One of the things that is new is that you know when you those companies traditionally have supplied the control systems that are in the engines for example, okay. And that’s what they are known for. In automotive semi conductor device ten years ago had more to do with control systems in some of the limited sensors. Automotive today, when you walk and you go by any car, the thing that’s most obvious is the dash board, the electronics. Those companies by the way were not automotive companies before. You know this is nVidia, Qualcomm, Broadcom you know folks that were consumer electronics based that all of a sudden are in these cars they have not been supplying to the automotive guys, those guys absolutely are changing the way that they build and test in order to get build in quality processes and not this new emerging space we’ve talked about that’s going to drive additional test capacity.

Okay, that specifically answers my curiosity. Thank you.

Thanks Marty.

And at this time there are no other questions.

I think that’s it then. All right. Folks, I just wanted to thank everyone for calling in. I, we really appreciate that the good questions. Jeff as always, you ask the very detailed questions and I want to tell you I appreciate I think all the shareholders do as well. As always we’re really excited about what we are doing here. If you haven’t had a chance to come visit us, we’d love for you to come buy and take a look. I think it helps to internalize where we are and to see where the systems are that are sitting out on our floor [ph] and we look forward to our next call in the quarter. Thank you very much.