Greetings. Welcome to the Aehr Test Systems Third Quarter Fiscal 2024 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Jim Byers at MKR Investor Relations. You may begin.

Thank you, operator. Good afternoon and welcome to Aehr Test Systems' third quarter fiscal 2024 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, Chris Siu. Before I turn the call over to Gayn and Chris, I'd like to cover a few quick items. This afternoon, right after the market closed Aehr Test issued a press release announcing its fiscal 2024 third quarter financial 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 on the investor relations page of the company's website. I'd like to remind everyone that on today's call management will be making forward-looking statements 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. These factors 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 CEO.

Thanks Jim. Good afternoon everyone and welcome to our third quarter fiscal 2024 earnings call. Thanks for joining us today. I'll start with a quick summary of the quarter and spend some time to address what we're seeing across key markets here as addressing for our semiconductor wafer level test and burn-in systems. We've actually had a lot of questions in the last couple of weeks and also feedback coming in. So our plan is to take some time to cover all of the markets that we're addressing and then we'll open it up for questions. As we discussed in our second quarter earnings call, we had seen several pushouts of forecasted orders by current and new customers that impacted our fiscal year revenues. We believe that this was due to two key factors. There is clearly softness in the overall semiconductor capital spending, particularly in automotive applications, is related to a glut in inventory driving down near-term orders to these companies that has caused them to push out capital spending and drive cost reductions. Multiple companies, including the companies we had expected orders from have publicly discussed inventory-related headwinds in their public earnings calls and press releases. In addition, we've seen specific shifts in order timing of our equipment used for wafer level test and burn-in of silicon carbide power semiconductors used in electric vehicles. In just the last two weeks of the quarter, we saw delays in orders for silicon carbide systems with customer requested shift dates within the quarter, as well as a last minute push out by a customer of a system in our backlog. And that effect of this was a significant shift in revenues out of the third and fourth quarters. Until this time, we had been hearing from those customers that their silicon…

Thank you, Gayn. Good afternoon, everyone. The company recognized solid bookings in the third quarter of fiscal 2024. Bookings totaled $24.5 million compared to just $2.2 million in the second quarter of fiscal 2024. Our backlog as of quarter end was $20 million. We expect to recognize revenue from the majority of these orders for systems, wafer packs, aligners, and services in the last quarter of fiscal 2024, which ends on May 31, 2024. Looking at our financial results for the third quarter, total revenue was $7.6 million, down 56% from $17.2 million in Q3 last year. As we noted in our earnings pre-announcement last month, the decrease in revenue was due to the timing of some significant customer orders. In just the last two weeks of the third quarter, we saw delays in a couple of customer orders that had planned shipments in the quarter, as well as a last-minute push-out by a customer of a system in a backlog from the fiscal third quarter to the current fiscal fourth quarter. Wafer pack revenues were $4.8 million and accounted for 63% of our total revenue in the third quarter, which is higher than 37% of total revenue in the prior year Q3. Customers typically buy wafer packs from us subsequent to purchasing their new FOX systems. Additionally, customers also buy wafer packs from us as they change their chip design for smaller and more efficient devices for their OEM customers. We're seeing continued momentum for new wafer pack designs from both our existing and new customers as they look to meet their end customer and market requirements. GAAP gross margin for the third quarter came in at 41.7%, down from 51.6% in Q3 last year. The decrease in gross margin is primarily due to lower revenue resulting in a…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Christian Schwab with Craig Hallam. Please proceed.

Hey guys. Thank you for all the details gained on other target market opportunities. I just had a few questions regarding the silicon carbide electric vehicle opportunity. As you're looking into calendar 2025, or I guess next fiscal year 2025, I guess it wasn't necessarily clear to me. Do you guys have any idea of -- are you expecting to see material revenue again next year from your historically largest customer? And how do you see the different customers? I know you kind of put in the press release different time frames. I was just wondering if you could just make that a little bit more clear.

I mean, at this point normally we're not really talking about next year, we'll do that in the next call, but let me just still give you some insights, because we do -- we certainly have visibility. A lot of it was candidly some of the same numbers just pushed out in time. So at the same time as I say well they're familiar to me we need to at least put the caveat, but they pushed them out before, so I'm not I'm not foreboding anything. I'm just way more gun-shy now of believing everything the customers tell me if you will. But right now, yes, we do believe that next year we'll be getting material revenues from our -- actually I believe all of our customers are expected to be taking revenue next year, including our largest historical one. We believe we'll be adding some of the key customers, candidly some that we thought we were going to be closing by now, that we still have optimism and based upon our current assessment of their needs, our competitiveness, the lack of a competitor for that specific application, we think we can win them. And obviously, as you win them, you can have more visibility as to really what's going on. I think the other piece of this is that, candidly our trip across several countries in Asia, and probably the most notable would be in China, was really, I guess, encouraging. If you spent your whole life living in the United States listening to the news on electric vehicles, I mean, candidly, it's not -- I think we're all reading it, it's very different. And I saw a segment the other day, CNBC reporter was falling around [indiscernible] and she was making comments about what she felt and…

Great. And then on a follow-up on China, would you anticipate seeing measurable revenue from that marketplace in the next fiscal year then?

I think there's a very real chance of that and that would be our hope if not expectation. The lawyers always tell me to be careful about expectations at this point. But yes, I mean, we went there and personally sat down with almost a dozen companies and kind of got a first-hand feel and view. And they're very aware of silicon carbide, of what the quality is, what the issues with there are with respect to the manufacturing material defects, why you need to burn-in, and how long you need to do it for, what are the burn-in requirements. I candidly found them to be quite knowledgeable, and this may come across a little boisterous but that candidly I think the smarter people are with silicon carbide the better we look, because they really understand what it is we're doing and that's what I felt when I was in Korea, Japan and China. So to some extent they have learned this enough and then they are now be much more clear about why they need wafer level burn-in and what they're looking for. And that bodes well because I believe -- I truly believe we have the best solution on the market.

And then my last question Gayn, just to follow up on the China market. Is that something that you would address with the direct sales force or would you partner with somebody local for distribution?

Yes, a little both. And we've already done that. I mean, I think we have a dozen customers in China. Most people don't remember that. But if you go back and look, we had a bunch of ABTS systems that were sold all over China which has a FOX system. So we have local Aehr employees there, both sales, applications, and infrastructure. But in China, it's pretty typical that you also use reps that have close relationships with sort of different geographies, and we have that as well. So they would get a specific commission on a sale. And that's, I think, almost everything we've sold in China has had some of that. Not all of it, but most of it. So it's a little both. But we're also looking at upping our presence pretty significantly, including dropping in a demo center, some local infrastructure, and some other things to give us more girth, specifically at the request of about a half a dozen companies.

Okay great. No other questions, Thank you.

Okay.

The next question comes from Jed Dorsheimer with William Blair. Please proceed.

Hey guys, just a few questions. I guess first one, the FOX-NP new customer, you described as a semiconductor -- global semiconductor manufacturer. Is that also a Tier 1 automotive customer? I'm just wondering if some categorize it as both.

So I'm going to try throughout today and in each call try and get more and more vague only because we've been getting feedback from customers to be particularly vague. Now this particular customer wasn't one of those. But I'll answer that question, it's not a Tier 1. Their entire business is semiconductors.

And what would you expect the timing to be in terms of conversion from an NP to an XP with that customer?

I actually -- I want to hold back on that a little bit with respect to what their timing is because my understanding is, that's part of their secret sauce etc. But if I told you over the next couple of years, it's pretty generic, I realize, but they -- we know that they have made some substantial purchases for front end equipment and other things as well. And the NP is just their engineering bring up tool. And that has no intention of being able to address their production. So whether it be next year or the following year, you can leave it at that for now. Maybe I'll give you more visibility next time, okay?

Okay. And then, it's helpful on your excitement over the China market. I'm just curious, are you going to outline how you intend to address the dilemma, which has kind of caught most tool companies off guard where local subsidies require re-engineering of tooling to a local supply chain?

Yes. I mean, I think what I want to say is, we're not ignoring that and we're not believing that we have all the answers. We have some specific legal IP security and contractual things that we're going to use. I'd love to tell you something besides to slow it down, but we've also have -- there's reason to believe that it's not that easy to directly knock off our system without actually violating our IP or to get close enough to do it. We also have a lot of software and a lot of other things. I don't think it's that easy to just simply do it and then if you did you would have some other issues. So we're conscious of it. I don't want to be and we're specifically doing things and we're not going to publicly announce all the things that we're doing as part of the reason to keep it secure.

Got it. And that non-silicon carbide, Gayn. For silicon carbide, the inherent defect density of the material combined with a shift to modules kind of created this perfect opportunity for wafer level burn-in. If you look at the silicon market where you have a homogeneous material structure and chipset, is it to open up memory and to some extent silicon photonics, is this or largely memory in silicon, is this really just a function of moving to modules or chiplets that kind of triggers that? Could you help articulate what you think will be the gating factor there?

Okay, so if you want to step back and just say, okay, what are the really big things driving our market? Okay, first of all, the market is growing from $600 billion to $1 trillion. Semiconductors, many of them are not actually getting more reliable. Things like very low geometry processes, the processors that we're talking about, AI processors, CPUs, they're all burnt in today. That's nothing new. They're just burnt in in a package form in normal. But then people are actually putting them into -- and by the way, in some cases, they weren't burning them in. Then they're putting them into applications where they were. There are processor companies that ship devices to a consumer application that don't burn them in, but always burn them in into automotive. Well, there's more and more automotive and other things that matter to the reliability. And then the last thing which really drives wafer level would be you're putting into multi-chip modules, right? So specifically on memory, you're like, wait a minute, which ones does it matter? Memory has long required a burn-in process. Every DRAM is burnt in and all of the NAND devices that are going to end up going into a solid state disk drive have a cycling and burn-in measured in fractions of days, many hours. So that burn-in, if you're looking for opportunities, you look for the devices that then themselves need burn-in, right? Silicon photonics, every single device is burnt-in. Doesn't matter where it needs to be burnt-in. Then you're looking for maybe discontinuities where large volumes are going to a new application where it matters. And if you look back, it's been 20 years now, but everything that drove the test business in the early 2000s was consumer. Consumer, consumer, consumer. I remember…

So, Gayn, sorry, the move to multi-chip modules from an economic perspective is the driver then in terms of...

It's the catalyst that makes them relook at their test strategy and say, I'm going to need to do more wafer level, correct.

Got it. And the reason they're not doing that with your system today is they're selling for a price where they can eat the yield loss or…

That's a good question, but it's not crazy. Sorry, [indiscernible] you're crazy, Jed. But if you're able to get 97% margin and you eat 50% yield loss, who cares, I guess? I'm not implying I know that answer and if I did, I'm not telling it. But that would be logical. But as things become more important, or you don't have capacity, or that money matters, yes, you would drive it. And so I think that's what makes sense, why we're feeling these sort of tops down initiatives for shifting things towards wafer level.

Got it. That's helpful. I'll jump back in the queue. Thank you.

Okay. Thanks, Jed.

Thank you. [Operator Instructions] Up next we have Larry Chlebina with Chlebina Capital. Please proceed.

Hi, Gayn. How you doing? Corning's CEO on his last quarter earnings report, he was really optimistic on what he called the second optical network that's going to be deployed hooking up GPUs and AI data centers. And since you were pushed to ship your optical IO production system to get it out as soon as possible, do you have a sense of when this may show up in the marketplace?

Yes. And I -- okay. So it's one of the most -- I feel like it's one of the most tightly guarded secrets, okay? And I don't believe that we're even being told everything correctly. That sounds probably, you don't want to hear that, but I think we -- I know more than I can say and I still do we have everything. What I have mentioned I think you've heard me in the past and what I sort of struggled with is, if you go out and you look at someone like a [YOL] (ph) who's really smart and understands this optical space very well, okay. And they look at the optical IO, they're like, well, I'm not sure how big that market's going to be, et cetera, et cetera. It's like, oh, what does NVIDIA or AMD tell you? Oh, they won't tell me anything. Like, you got your own figure, right? Of course they're not telling us. The reality in my mind is what AMD, Intel, NVIDIA, pick your other processor [indiscernible], what their plans are, that's what's going to drive it. And those are very closed environments. They are not -- I don't believe for a minute that NVIDIA and AMD are talking together about how they can get their processors to talk to each other, okay? So you kind of have to watch on the edges. You watch where the investments are made, you watch what's going on, you see the technology, you watch patents, you watch tech. But my belief is, and I kind of shared this even about a year ago, it feels like we're a couple years out to volume production, and the question is, how big is it and could it be much sooner than that? You know, we're enabling that with our solutions and capabilities and there was a big pull for it. And keep in mind, we also have the same capability on our NP systems installed at customers. So you don't have to see all of the front edge of this simply with new systems, but we would see it with wafer packs. So there's a lot of design activities that are going on right now that seem pretty interesting to me, but I'm a believer. It makes sense, it is a critical bandwidth, it's going to be a pinch point, I think it's going to be a differentiator with all the AI guys and it also may have the byproduct of then expanding the need for more optical even within the data centers.

He seemed to think it was pretty imminent, whether it was late this year, next year, or I don't know if...

I hope he's right and we'll be ready for it.

Okay. Hey, over the last year, there's been tens of billions of dollars worth of memory fabs announced by every memory manufacturer in the globe, should you be engaged with them by now or if they're going to realize the benefits of your automated XP to reduce the size of their clean rooms and equipment costs. I mean [Multiple Speakers]

[Multiple Speakers] not with all of them. I'd love to be with all of them. I do think there's a little bit of a spread between the NAND and the DRAM guys timing. Just in terms of just where the DFT needs to be for DRAM to be able to actually do wafer level burn-in. But I think within -- again, I've been in a hard position as a CEO to be saying this, but personally, I would believe that people will have implemented DFT and low-pin count test modes in DRAM similar to what we did in NAND 15 years ago before the end of the decade. And when that does, you want to be there and ready for it. So we've been doing things in the background to do that. Be ready for it.

It seems like you should have some eval tools at these guys so they can lay out their fabs and realize the benefits of what you can bring to them. Like you said with significantly smaller clean rooms and less equipment costs. So you can get to a record destination as soon as possible.

Agreed.

Of the seven current silicon carbide customers that you said you have, that’s a correct statement, right? You have seven?

Yes. Seven -- we officially called -- yes, that's correct.

Okay. How many of those have bought the XP, the production system?

Wow, maybe half of them. I have to think real fast on that.

Well, half is three and a half. Is that three or four?

I'll tell you what, let me do the background real quick. We've announced them one at a time. I'll just do them -- I think it's three XP's and four NP type customers. It might be four to go one more. Go ahead.

That's all I have…

And all of the NP customers still have given us plans and paths to the -- all the NP customers all plan to do XP. I don't know if they'll ever buy another NP, they'll only do XP's next.

Right, that makes sense. So the long lead item customer that's been running around the block for a couple of years, what do you think is the holdup? Is it because they don't have a large demand for modules yet, full modules, just their big customer or the big businesses in the -- what their packaged [Multiple Speakers]

I think we have a pretty good idea and I cannot be able to answer it directly. So, I think if you look at the -- if you look at sort of what happened just in the shift of the EV from everyone and their brother is going to be driving an EV in four years to now, oh my gosh, is it going to deploy as fast or whatever. That shift over the last six months I think has really caught a lot of people off guard and made them sort of just look back and assess it and make sure this thing isn't going to go off a cliff. In reality, I think there's some things where the people that were strong will ultimately be stronger. My guess is, some of the smaller players that thought this will be fun to dabble in, aren't going to, right? I mean, like, you don't want it to be more fortified. That gives the larger players, which this customer would be one of them, more confidence in their plans going forward. I think there's been things in the OEM space with respect to what kind of commitments need to be made in order to secure fab capacity that is being played out right now. And I think there have been some market shifts in the industry that can shift around seemingly with no particular impact, but may have impacted us. I know they'll have. And so -- but [Multiple Speakers] Go ahead.

Do you think it might have anything to do with waiting for 200 millimeter then going full throttle with your fully automated systems?

I mean, each of the customers we talked to want to ensure that we could do both 6-inch and 8-inch or 200 millimeter. So in that sense maybe but nobody is saying, oh, your system only needs to do 200 millimeter.

So they want have to buy multiple wafer packs?

Yes. We've got some tricks around that as well, but there may be some of that Larry and it may be that okay why don't we start the line on the 200 millimeter line instead of -- there's always -- there's always process things. I think I can think of some customers where that's the case. But like I said, it's actually interesting. We're -- I'm engaged with a customer right now, I want fully automation 200 millimetres, [indiscernible]. Yes, the first wafer is going to be 6 inch, they are like, okay. Well, it's an end effector on our automation. It's no big deal. So, I don't know if that clean, sorry.

Well, I'm thinking, So they don't have to buy a bunch of 6-inch wafer packs, or just go with 8-inch and move forward. Anyway, getting back to memory, did you say -- did you give a timeline on when you thought you were going to penetrate one of them in terms of a eval tool or…

In our prepared remarks I said something in effect this year we are hoping to have a on wafer benchmark process going. That's what we said.

I mean I'm assuming they would want to have an evaluation tool at their disposal. You would have to supply a tech person, but isn't that the way that kind of a business would have to go? [Multiple Speakers]

I don't want to share all the way we would have structured the conversations with the -- more than one memory customer just for maybe obvious reasons, because people have slightly different variations of what their expectations are. But candidly and publicly, we're in. I think it's a matter of partnering with those customers, taking and working with them on their key testability and DFT modes and how they go about their cycling burn-in test, DFT, BIS, low pin on test modes, all things that I spent my whole career at prior to this. Those key differentiations as a vendor you want to say yes to, how can I help? The critical aspects are the low cost contactor, the full automation and alignment, high performance, high parallelism, very small footprint on wafer starts per month. So those are critical aspects that we have key differentiation on. And then working with those customers on their specific and unique test requirements for their particular devices, it would be part of the process.

Yes. That's why you got to get in there before those fabs or fab designs are locked down so that they can design the fab around your equipment with the smaller clean rooms and whatever, right?

Yeah. I mean yes and no. I mean, again, I don't give. So traditionally, burn-in is considered a backend -- backend of test. All of test is considered backend in semiconductors, but burn-in is often done. So you can ship your wafers to your backend facility before singulation as well. So, again, I don't -- if I see a fab is built and they haven't put my tool in there, I don't -- I'm not saying, oh gosh, I've missed it. That's just not true.

Okay. I was thinking the sorting on -- especially flash, the sorting is still in the back -- in the fab, right?

Most of the time, yes.

Yeah, okay. All right, that's all I had. Thank you.

Thank you.

Thank you.

[Operator Instructions] So, no one further in queue. I'd like to turn it back to management for any closing remarks.

All right, well then we certainly covered enough of the topics and the questions, hopefully it answered all the people that it sent in. As always, we appreciate your time on Aehr, and we'll look forward to either seeing you at one of the investor conferences or on our next call. That will be Q4 and fiscal year 2024 and it'll be somewhere mid-July or so. At that point we'll also be giving guidance for our fiscal 2025. As always, if you happen to be anywhere near the Bay Area in Silicon Valley look us up. We'd be happy to do a meet and greet and give you a tour of our manufacturing floor. It's quite impressive. Thank you, everybody, and have a nice day.

Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.