Good day, and welcome to the Aehr Test Systems First Quarter Fiscal 2020 Financial Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jim Byers of MKR Investor Relations. Please go ahead, sir.

Thank you, Operator. Good afternoon and welcome to Aehr Test Systems First Quarter Fiscal 2020 Financial Results Conference Call. With me on today's call are Aehr Test Systems' President and Chief Executive Officer, Gayn Erickson; and Chief Financial Officer, Ken Spink. Before I turn the call over to Gayn and Ken, I'd like to cover a few quick items. This afternoon, Aehr Test issued a press release announcing its first quarter fiscal 2020 results. That release is available on the company's website at aehr.com. This call is being broadcast live over the Internet for all interested parties, and the webcast will be archived in the Investor Relations page of Aehr Test's website. I'd like to remind everyone that on today's call, management 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. Those factors that may cause results to differ materially from those in the forward-looking statements are discussed in the company's 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. And now, I'd like to turn the conference call over to Gayn Erickson, President and Chief Executive Officer.

Thanks, Jim, and good afternoon to those joining us on today's conference call and also listening online. Ken will go over the first quarter financial results later in the call, but first, I'll spend a few minutes discussing our business and product highlights, including our continued progress with our FOX-P platform for wafer level and singulated die and module test and burn-in . Then we'll open up the lines for your questions. While our revenue in the fiscal first quarter was lower on a sequential basis, it was in line with the expectations that we discussed on last quarter's call for a slower first quarter. We continue to expect to see a pickup in momentum in the remaining quarters of this fiscal year and are seeing continued growth in customer engagements worldwide, particularly for high-growth applications that include photonics, silicon carbide, automotive and memory. This includes several new customer opportunities on our -- in our existing markets as well as customer engagement opportunities to penetrate new markets. We're excited to have announced last week an initial order from a new customer for our FOX-XP system, to enable high-volume wafer level production test and burn-in of the customers' line of silicon carbide devices. This new customer is a Fortune 500 supplier of semiconductor devices with a significant customer base in the automotive semiconductor market, and selected the FOX-XP for its unique high-voltage and high-power capabilities. The order which totaled over $3 million includes a FOX-XP system configured to test 100% of the devices on 18 silicon carbide wafers in parallel and multiple WaferPak contactors. It's our understanding that the higher defect density inherent in today's silicon carbide devices presents an additional test and burn-in challenge to achieve the initial quality and long-term reliability needed by many industries, and in particular, the…

Thank you, Gayn. Net sales in the first quarter were $5.5 million, down 24% from $7.2 million in the preceding fourth quarter and up 17% from $4.7 million in the first quarter of the previous year. The sequential decrease from the preceding quarter reflects a decrease of $1.7 million in wafer level burn-in revenues. Non-GAAP net loss for the first quarter was $214,000 or $0.01 per diluted share compared to non-GAAP net income of $428,000 or $0.02 per diluted share in the preceding quarter, and a non-GAAP net loss of $1.3 million or $0.06 per diluted share in the first quarter of the previous year. The non-GAAP results exclude the impact of stock-based compensation expense and restructuring charges. On a GAAP basis, net loss for the first quarter was $413,000 or $0.02 per diluted share. This compares to GAAP net income of $110,000 or $0.00 per diluted share in the preceding quarter, which includes the impact of $118,000 in restructuring charges related to our workforce reduction we announced in Q3 of last year, and a GAAP net loss of $1.5 million or $0.07 per diluted share in the first quarter of the previous year. Gross profit in the first quarter was $2.3 million or 41% of sales compared to gross profit of $3.4 million or 47% of sales in the preceding fourth quarter and gross profit of $1.6 million or 33% of sales in the first quarter of the previous year. The decrease in gross margin from the preceding quarter is primarily due to higher unabsorbed overhead costs to cost of sales resulting from lower revenue in the quarter and a change in product mix. The higher unabsorbed overhead costs resulted in a 6.1 percentage point decrease in our gross margin percentage in Q1 '20 compared to the preceding Q4,…

[Operator Instructions]. And we will take our first question from Tom Diffely at D.A. Davidson.

First thing is Gayn, a quick question about the photonics business. Obviously, a lot of excitement over that over the next few years. But I'm curious, in your mind what has changed with your outlook today versus where it was a year ago, when we were also pretty excited about the upcoming quarters?

Maybe there is even two questions, they are just generically photonics and then also why does this feel different than last year, I'll try and capture both of those. And in this case, there is a lot of tie between them because of what we've really seen in photonics. So you heard a lot of things related to the silicon photonics for the folks that are on the line that aren't really familiar with what that is. Fiber-optic transceivers have been around for a while, and they have been claimed to be the greatest thing that's ever going to happen to the Internet. And in fact, back in 2000, there were lots of high flyers going on because fiber was going to go everywhere and be in everybody's homes. But in reality, the cost of the transceiver was so expensive to be able to actually take electrical energy and turn it into photonics energy and transmit it down the line that the cost is never really been there. I mean, a 100-gig transmission line transceiver might be $700 or $800, and you need one of those at each end. So obviously -- people aren't putting $1,000 or $2,000 nodes in their homes. So long ago, there has been this discussion that said, is there any way that you could do to these discrete system-level transceivers. What happened in the semiconductor market where everything was fully integrated into a piece of silicon and then you could start and then you could start scaling it and have silicon scale. The concept of silicon photonics is just that, if you actually look at a transceiver, which is maybe the size of your figure outstretched, that entire surface is just covered with RF and microwave and optical transmitters and receivers and lasers and digital…

So in the year-ago period this market, the photonics market just wasn't mature enough?

You know, that's my understanding. I mean, for a certain of you the customers we have right now, they weren't even sampling at that time. There were customers that were that in fact had talked about some ramps that didn't actually happen. And we believe at this point if there is more data just to support the pull-through and that end. And we're absolutely, testing multiple different customers' devices and they are functioning. We have lots more information than that but we are not going to get into it. But it's definitely different. So I think -- this feels like 2020 is really going to be a year where silicon photonics is going to ramp. And there will be multiple vendors out there supplying into that space. And it's a mad dash as I understand it where many of them talk as if there is so limited supply, they will absolutely be able to sell everything they can build and so that's a great place to be.

Yes, okay. And then just quickly moving on to the silicon carbide market. All of producers there are doubling or quadrupling their capacities over the next couple of years. I'm curious, are you serving that broad market of silicon carbide chips or are you in a small subsegment of that?

Okay, so you're stating about a broader market. What are you talking about? I mean, are you saying the automotive space or the power...

Just focus on the -- yes, the EV side of that market or the high-speed part of the market exactly. Are you a subsegment or just -- are you broad-based silicon carbide chip testing?

Well, right now what we'll talk about is the devices that we have seen in the -- some of the initial customer engagements have been power semiconductors being used in automotive, EV, and other subsystems. They have some very unique properties for being able to do extremely high-speed, high-power, high-current switching. And that's one of their critical features that are being enabled. So when you say high-speed, a high-speed switch means one thing. There's also -- this is in a gallium arsenide RF transmitter that we're looking at here. But the automotive applications for silicon carbide, which kind of makes sense for us because of the reliability of applications would appear to be where there's a real hotspot for us. What's interesting about these devices -- so again, here's another one we're kind of teeing it up. Silicon carbide is another type of material that you can build semiconductor devices out of. But by contrast to traditional silicon, the silicon carbide structure will allow you to have a very high voltage without the device breaking down. Typical CMOS infrastructure processors, 4, 5, 6 volts. And if you go beyond that, it will completely fail. So whereas semiconductors are now widely in multiple called solid state switching applications because of their long-term reliability, they're only useful in low-voltage applications. So as people went to the electric vehicles, the value of a solid-state switch in an electric power system is similar, except where they need to do something that is really high voltage, hundreds or thousands or 1,000-plus volts. And how are we going able to deal with it? Well, silicon carbide can address that. The fundamental thing that's interesting, and there's a lot of white papers and a lot of discussion if you go to these conferences that are going on…

And then just a model question for Ken. Right now we're roughly at breakeven level. What kind of margins are you expecting on the incremental revenue as we move from the profitability?

So I'm going to just kind of reiterate what we talked about last time. We finished our Q4, for example, a little over 46%, a little under 47% on a gross margin standpoint. And we expect our FY '20 gross margins to be pretty consistent with that. And that's going to tie in with an increase in revenues. And also as Gayn talked about, our contactor business unit, our WaferPak, DiePak sales that really helps us in terms of profitability and margin. So I would dial in, from a modeling standpoint in the, like I said, between 46%, 47% gross margin for the year.

[Operator Instructions]. We'll take our next question from Geoffrey Scott at Scott Asset Management.

Quick question on the ABTS. I thought you had hired somebody to kind of renew efforts in that market. Did that not happen?

Now you're just being mean to that guy that we did hire. No, we did. We absolutely have brought on a -- an excellent new director for that product line. He has been out calling the world, talking to most or many of our install base, gathering both information and opportunities for us to apply technologies both in the packaged part and potentially even proliferation of some our FOX products. We're not giving up here. He's a great guy. But it is actually interesting that the bulk of our energy and the customer engagements are really around more of our conductive. So we keep diving into these things. So our packaged part burn-in is a traditional burn-in market, takes devices that are packaged after they are singulated from a wafer and put in to, say, a plastic package. They are very inexpensive, including our own thermal chambers that blow a calibrated precise amount of air at a certain temperature over the devices while they are being tested. And that is convection, sort of the traditional convection of it is you're just blowing air over your food, if you will, okay? Convection in air is actually not that good of a thermal medium, but it is very inexpensive to do. But it's not as accurate as what's called a conduction or as effective. Conduction is when you touch something with a thermal plate or something and the transfer of heat energy or pulling out of heat when you are touching something is orders of magnitude more. It's the reason that we can stand outside in 50 degree air and survive. But if you jump in water at 50 degrees, you don't last very long. The water is so much better at pulling the heat out. So our FOX products are actually…

Okay. You did not change your forecast for the year of $27 million to $31 million, and you didn't narrow it in any way. With 3 months down the road, so let me ask this question. Are you more confident of hitting that number than you were 3 months ago or less confident or equally confident?

Much more confident.

Okay.

We had a lot of discussion about whether -- what we should say on this call and where we're at. What -- let me leave you with this. We're absolutely confident in that number. I'm feeling very optimistic about the year. Given our backlog, in order to do that we're going to need more orders to actually do that. And we talked to some of the things that we're expecting this quarter. As those orders come in, we will certainly make those announcements. And with that strength in the backlog, et cetera, everybody will have as much confidence as I do right now that we're going to have a good year.

Okay. All right. Next question, the sales process for that silicon carbide customer, a couple of minutes ago you went through the problems that it solved. How did that relationship start? And how long did it take from kind of the initial contact until the purchase order?

Okay. So as I understand it, and I did talk to them, my understanding of the story was, is the customer had a very unique or a very difficult problem in that they were putting these devices that were singulated and bare die into their end modules. And those modules were very expensive in kind of an automotive-type space. And those devices were seeing failures consistent with other customers' silicon carbide-type devices, and so they did burn-in those modules. They had done some research, I believe, on the Internet and may have picked it up out of one of our trade shows but had gotten wind that we made something that could do wafer-level testing burn-in, and they were out trying to see if there was anything that could possibly work. We got a phone call, they came in. They actually saw one of the systems being built for somebody and were sort of shaking their head like, "I don't understand. What do you mean can test 18 wafers at a time? I just wanted to test 1 wafer at the time." And we showed them a solution. We showed them the WaferPak contactors. When they described their device, it was actually fairly straightforward for us to do. And they were kind of I guess not convinced that it was even possible because no one's ever -- there's nothing like this out there. So we made a deal with them and said, "Listen, you buy a contactor, a WaferPak, and if it works, you buy it. And if it doesn't, we'll eat it. And then, if it works, give us a forecast and you can buy a system. We're that confident." They actually placed an order within a week or 2. We built up the WaferPak, showed them their wafers being tested. They went back and correlated. And immediately they said, "Well, can you give a couple of more?" And then went through their internal process and placed the order. And I think the whole thing started about 6 months ago, and it took us, I think, three months, maybe four months to get the definition design and actually show them their wafer testing on our machine. We have had engagements and discussions with other customers, including some that have already reacted to our press release. I'm hoping these will go even faster than that.

Okay. Was it the high power which -- really was what they were looking for?

You know what, it was a combination of our high-voltage capabilities of the system, but mostly our ability to be able to give them 100% discernability of every single device on the wafer. We give them a bitmap that will tell them with 100% certainty that the device was burnt-in properly and whether or not it failed before, during or after burn-in. And that was -- that is a real key.

What would that customer have done without the XP?

They would have continued to burn-in their modules and had a very -- a massive yield loss related cost due to throwing away end products.

Okay. Thank you for that context. In the last call, you talked some length about the 5G rollout. How big of an impact do you think that will be on Aehr Test?

I don't know yet. I mean we -- obviously, 5G is a big sexy term that people use the semiconductor space, and it's build -- it's going to -- the electronics build-out is measured in the trillions of dollars, right? I mean, it's enormous. What we right now see the areas of particular interest is in the fiber-optic transceiver side that we're seeing in the photonics space as well as in the silicon photonics transceiver side in particular. There are also devices that have been out there publicly. I'm not going to talk about any of my customers so I'll talk genetically, where companies are actually, unlike the standard TOSA-based fiber-optic transceivers that snap into the back of a server, that all-in-one silicon photonics chips that actually allow you to put a single chip on to a subsystem like, say, a disk drive and talk directly to another subsystems. And some of those folks have referred to that as 5G infrastructure-capable-type applications. Then you get into how many devices are impacted by 5G? A whole lot of them. I mean. There's memory applications. There's processor applications. There's just so many things. The mobile side of things are -- as mobile phones are driven and some of the features that are in there. The sensors, someone might call that 5G. I think that's a rising tide that's impacting a lot. But really, I'd say our most pure play right now would be in the photonics transceiver side of that particular market today.

Okay. Last question, the OEM chamber business, you didn't mention. Is it still not going to happen for fiscal 2020?

We are currently not expecting any revenue in that in our current forecast range that we have said. And so any business related to revenue in that would be upside to our current forecast. We believe that, that is still a potential active ongoing application, and we're ready and able to ship volume to that for those that are listening in online that are involved in those programs.

[Operator Instructions]. We will now take our next question from Charlie Doe [ph] as a Private Investor.

So quick question about revenue that would be breakeven for fiscal 2020. So what's your current expectation given the reduction of operating expenses?

So we weren't trying to be too cutesy on the way we forecasted our guidance for the year. But if you simply just read into the words, we gave a guidance of -- $27 million to $31 million, right? $27 million to $31 million and profitability so you can certainly read into that, that at the low end we're still going to be profitable, and by that math, at the high-end we should be more than just profitable, okay? So I think that's a reasonable way of looking at it. If would you look at it in annual basis, take $27 million divided by $4 million -- even a little less -- a little less than $27 million. And we normally think about breakeven on a quarterly basis. As you realize, the fun of our life is we have to live by quarters.

Right. So in terms of the consumables, are you expecting that as a relationship to the FOX-P revenue that they'll go from current neighborhood of -- I'm estimating 20% to as high as 30% or as high as 35% per year?

Okay. So it's not like I always seem to answer them indirectly, but in general...

The report is in our SEC filings.

And Ken's pointing out we do actually report that so you can go get the real numbers on here. But the consumable business -- I want to remind people there's 2 pieces of this. When you buy a system, conceptually every time you buy a machine, you will buy the mating set of contactors that will allow you to take the electronics and touch your devices on wafer or the die itself. So that contactor, we call a WaferPak when it touches an entire wafer or a DiePak when it's touching an individual singulated die or module, right? Now let's say you go buy one of our FOX-XPs that can [touch] either a 9-site configuration or 18 sites, you would normally buy 9 or 18 WaferPaks with that. A lot of times what we're seeing with the customers is they buy the systems upfront and then they buy a few WaferPaks and then they build into it. But conceptually, within some period of time, for a every system that we ship, you would get a full set of these WaferPaks with it, all right? So now a year later, I have a handful of systems that are out there, and the next year, I sell another handful. On the new ones, they will buy a new set. But on the ones that are installed at some turn rate, they will buy replacement contactors, not because they wore out but because for every new design they actually need a new set of contactors from us. So there's two things going on. There's actually a consumable business that gets sold along with every new system. And so as long as our system business is growing so will our consumable business. However, as the install base grows, you get this exponential advantage that 4, 5 years from now I have 5 years with the testers out there. And if somebody says, if we have a turn rate of maybe 50% or even 30%, that means 1/3 of every blade or tester that's out there will need another DiePak or WaferPak. At some point, you actually sell more in revenue in your WaferPak and DiePak business than you do with your systems business. So it really is about 1/3 of our business today, which is a combination of the ones we sell with the new products and the new systems but also with the install base that we're just selling the consumable, which is one of the things that makes this business not only more sustainable but more interesting over time and we become a lot more stable to our customers. And we're absolutely going to be growing both the number -- the total dollars of our consumable business, but the dollars as a percent of overall.

And we'll take our next question from Tom Diffely once again at D.A. Davidson.

Yes, just a quick follow-up. If you see a large ramp in the photonics business over the next, you call, a few quarters, where are you from a factory capacity point of view? I know you're doing some cost reduction programs. Just curious how much. You'll double, triple the capacity versus the current level of business?

So from infrastructure, for those who haven't come and visited us, and we do open ourselves up for investors with an appointment to come in and we'll give you some tours and things. We have substantially more infrastructure capacity than is reflected in our forecasts. So we do final assembly and test of our systems and our WaferPaks and DiePaks here. The major subsystems, we purchase through contract manufacturers that are designed specifically to our requirements. And so a lot of the people and infrastructure isn't in this building for doing that. An example of that is our thermal chambers that we use for both our ABTS and FOX-XP systems. We contract manufacture with 2 suppliers. Both of them design it -- are designed only for our needs. They do not sell this chamber to anybody else. You can't actually tell them apart. We've done a really good job of getting the paint and everything else solved. One of them happens to be out of Shanghai and one is out of Singapore. And those suppliers each have incremental types of capacity. One can do 2 to 4 systems a month, and the other one has given us -- has shown us the capability and capacity to do 10 chambers per week. We are not forecasting anywhere near that type of capacity. And we have probably 15 stalls here that could be building systems in parallel, which would allow us to build 15 to 30 XP systems a month, if we needed to, out of this building. And again, those are at an ASP of $2 million a piece, so you can see we're not even coming close to tapping into it. The actual thing that right now just limits our ability to quickly ramp is inventory, forecasted inventory, and ensuring that we have the components and the things on order to be able to meet an incremental ramp. We do buy some inventory of our NP and XP materials that allows us to meet some of the short-term needs. Outside of that, the customers need to place orders and then we can make provisions to ship a fairly substantial quantity certainly inside six months.

Okay. So no necessarily long lead time items that you need to stock up ahead of a ramp?

Yes. I mean honestly some of our lead time items are six months for certain components and four months. And that sort of seems like a long lead time sometimes, but that's not necessarily ridiculously long. And so we do try and keep inventory and forecast and those things on hand so that we can meet capacity requirements from our customers. We have had recent customers come and talk to us. In fact, we have a number of customers forecasting systems for us. And we are just making sure that how do we go through the allocation process and who gets the systems first and how fast can we get them. And we are reacting to it, but I think right now we're in control in our ability to ramp. But I also just don't want to go out and buy all of the inventory on the com in anticipation of this. But we do have a highly leveraged infrastructure, meaning the XPs and the NPs and the CPs all use similar material of some of the most critical stuff and allows us to build to configuration or build-to-order but also buy things long term on forecast. So I think we have a really good business model to be able to address customer needs.

It appears there are no further questions at this time. I'd like to turn the conference back to management for any additional or closing remarks.

Okay, that sounds good. Well, hey, I really appreciate everybody for joining us on this call. As always, we do appreciate the questions and they give us a chance to add some color behind it. We do have our Annual Shareholders Meeting coming up in October. You can check out our website or talk to our MKR folks if you like an invitation. It is open to everybody. And you can have an opportunity to have a glass of wine with us and take a look at our systems on the floor, if you like, if you want to join us this year. And with that, we'll leave it at that, and we'll talk to you at the Annual Shareholders Meeting. Bye now.

This now concludes today's call. Thank you for your participation. You may now disconnect.