Aehr Test Systems Q3 FY2024 Earnings Call

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. 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 we address our semiconductor wafer level test and burn-in systems. We've actually received 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 this was due to two key factors. There is clearly softness in the overall semiconductor capital spending, particularly in automotive applications, related to a glut in inventory driving down near-term orders for these companies that has caused them to push out capital spending and drive cost reductions. Multiple companies, including the ones we expected orders from, have publicly discussed inventory-related headwinds in their 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. The 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 carbide-based capital investments were not being impacted. It's now clear that the recent overall softness in semiconductors and the impact of shifts in electric vehicle introductions and ramps are impacting our bookings and revenue forecasts more than we understood only two months ago at our last earnings call. We now expect this to last for another quarter or two before orders resume. Based on the latest roll-up of direct forecasts from over a dozen silicon carbide companies, last month we revised our guidance for our fiscal 2024 year-end ending May 31, 2024, to be greater than $65 million in total revenue and net income of at least $11 million, which we're reiterating today. We still expect to finish this year with annual revenues that are near or above our full year record. Our discussions with customers indicate that the key markets Aehr is addressing for semiconductor wafer level test and burn-in have significant growth opportunities that will expand this year and throughout this decade, and we're seeing increased customer engagement in each of these markets. We've also seen a recent strengthening in the silicon carbide market for electric vehicles outside the US in what appears to be a shift in market share of electric vehicle suppliers. This clearly includes Asia, where we recently had an extensive and very productive visit with a significant number of silicon carbide suppliers and electric vehicle suppliers. On today's call, I will discuss each of the major market segments Aehr is addressing for wafer level burn-in of semiconductors, which includes silicon carbide, gallium nitride, silicon photonics, and memory semiconductors, as well as tee-up an opportunity we hope to discuss in the coming months. According to market forecasts, including the Semiconductor Industry Association, the semiconductor industry is expected to grow from $600 billion in 2022 to over $1 trillion around 2030. This acceleration is coming from mega market drivers, including artificial intelligence, green energy and decarbonization, and IoT-based digital transformation. Increased reliability concerns about semiconductors in a growing number of mission-critical applications, as well as more multi-chip modules or heterogeneous integration, with multiple devices being assembled together in a single package, are driving the need for wafer level burn-in. At semiconductor industry conferences around the world, we've seen an increased focus on moving test and burn-in to wafer level before these devices are put into multi-chip packages or modules. These favorable macro trends are driving the business that drives Aehr Test and include the following. Silicon carbide power devices going into high density modules for power conversion in electric vehicles. Gallium nitride power semiconductors going into automotive, solar, and other industrial applications, where reliability and safety are critically important. Silicon photonics, where photonics integrated circuits are being put into transceivers for data center infrastructure and optical chip-to-chip communication of CPU, GPU, and AI processors to address the insatiable data storage and bandwidth needs of these applications. And memory devices, whether stacked die for solid state disk drives used in enterprise and data storage or with AI processors, again, to address the ever-increasing need for memory density and bandwidth of these applications. Now let me touch on each of these briefly starting with the silicon carbide market. While we remain cautious looking ahead to the next quarter or two, we're seeing signs of improvement in the silicon carbide market. Last week, we announced an order from a new customer for our FOX-P solution for engineering qualifications while at production of the silicon carbide power devices. This customer is a multi-billion dollar per year global semiconductor company with locations across Europe, Asia, and the Americas and has a wide range of automotive products and is entering the silicon carbide market to address several applications that include automotive, industrial, and electrification infrastructure. This customer sees the enormous opportunity for silicon carbide power devices and has told us they plan to transition to our FOX-XP multi-wafer test and burn-in systems as they ramp to high volume production. This is the third straight customer in a row for silicon carbide for us that is primarily focused on applications other than EVs. These additional applications expand our market opportunity beyond the 4.5 million 6-inch equivalent silicon carbide wafers that William Blair forecasts will be needed per year by 2030 just for electric vehicles. These new applications are driving an additional 2.8 million 6-inch equivalent wafers annually by 2030 to address industrial, solar, electric trains, energy conversion, and other applications. Interestingly, this is also the third customer in a row that did not need to see their wafers tested on our system before they moved forward to purchase from us. I've mentioned this before, but the need for testing before purchase was essentially a requirement with our early customer engagements, and it's clear that many of our potential new customers have become much more comfortable moving forward with Aehr simply on our assurances that our solution will perform as committed. This allows the customers to accelerate their time to market. Of course, we're still happy to engage with customers that want to see their wafers tested first. We still have yet to lose a prospective customer after demonstrating our test and burn-in capabilities on their wafer and have never lost a head-to-head evaluation to a competitive product since introducing our FOX-NP and XP configured with the silicon carbide and gallium nitride test resources. While we are seeing the impact of a slower adoption of battery electric vehicles than most imagined a year ago, our initial wins and ongoing qualifications at multiple device manufacturers drive our optimism from a longer-term perspective. So far we have secured a total of seven silicon carbide customers that have ordered our FOX-P family of systems and proprietary wafer pack for wafer contactors. We're engaged with well over a dozen additional silicon carbide players in evaluations of our systems and our wafer benchmarks where we build a FOX wafer contactor for them and test their devices at Aehr Test to demonstrate the feasibility and correlation of results to meet their reliability requirements. We're focused on the qualification process with as many new customers as possible, as again, once we've demonstrated our FOX wafer level test and burn-in solution using their own wafers, we've not lost a potential customer yet. Our benchmarks with multiple silicon carbide suppliers continue to progress this quarter. This includes on wafer benchmarks that we've been working on for multiple years. We believe and understand now that some of the market share shifts in both total market and specific end customers have impacted and delayed new customer decision timelines. We still believe that their silicon carbide module and die sales plans will drive the need for known good die and wafer level burn-in, and that we will win more than our fair share of these opportunities. In addition to our customer-related travel to Europe and across the U.S., we most recently had extensive visits with a significant number of Asian silicon carbide suppliers and the electric vehicle suppliers themselves. The tone and demand for EVs is much stronger outside the US, particularly in China and South Korea. Clearly, we also heard that there's a real need for quality, low-cost, high-volume automated solution for wafer level burn-in of silicon carbide devices, particularly in the automotive segment. Based on what we saw, the electric vehicle suppliers in China have a very strong focus on silicon carbide, to the point of actively marketing silicon carbide power conversion as a differentiating feature. We personally visited several EV suppliers, which were mostly located in malls or retail shopping areas like we see Tesla here in the US. Three of them positioned their silicon carbide-based EVs as superior, almost apologizing that this particular version is only IGBT, but next year's model is silicon carbide-based. They had no idea who we were or that we have any involvement in silicon carbide. Another notable point is that we heard from both the EV suppliers and the power semiconductor suppliers that all the Asian electric vehicle suppliers appear to be driving to build module-based silicon carbide for the power inverters in their cars rather than discreet devices like what Tesla has done. They also have high expectations for delivering quality. We even heard that they're driving to supply silicon carbide and wafer level burn-in to local suppliers because they believe they can achieve higher quality known good die than they can from suppliers outside of Asia. Driving wafer level burn-in of devices before they're put into modules is critically important to them to remove infant mortality, which bodes well for our solutions. A report last year by UBS forecasted that in 2023, 91% of the batteries sold in electric vehicles would be 400 volts and only 9% would be 800 volts. But by 2026, UBS expects the percentage of 800 volts batteries to exceed 30%. The report also focused on the progression of electric vehicle batteries from 400 to 800 volts, which is generally recognized by the industry where the silicon carbide is mandatory to get the range and recharging speed consumers are demanding. This is why it appears that many silicon carbide suppliers are timing their major ramps for the 2025 and 2026 timeframe. So in the next couple of years, we expect Aehr to benefit from both an increased number of electric vehicles being sold, as well as a significant increase in the need for silicon carbide solutions for those electric vehicles. The electric vehicle market in Asia, particularly China and South Korea, is very robust, supported by public and consumer sentiment, and they have incredible cars being built for electric vehicles. I now fully understand why Tesla stated that their key competition is from Asia and why both US and European auto suppliers are particularly worried. Based on the feedback we received from potential customers in Asia, we believe that Aehr's proprietary wafer level burn-in systems based on our patented proprietary wafer pack contactors have a key value proposition, and we see a high degree of interest in our solutions. We already have personnel and infrastructure across Asia, including China. We have shipped and supported our package part burn-in systems into China for many years and have also shipped our FOX wafer level test and burn-in systems into China a few years ago. Based on customer commitments, we're discussing expanding our presence in China in terms of support infrastructure and resources. We have also implemented additional measures to ensure the protection of our IP and patents that we feel will help secure our proprietary capabilities and allow us to grow and maintain market share over time. We look forward to providing updates on our plans over the next few months. Now, let me discuss our progress with test and burn-in gallium nitride power semiconductors. We continue to be encouraged by this market and believe it will be significant in terms of market size for semiconductors. In addition to its wide adoption in consumer devices such as cell phones, tablets, and laptop computers, gallium nitride is being targeted for use in solar data centers and automobiles, whether electric or traditional gasoline automobiles. The critical reliability needs of these target markets appear to be increasingly driving production burn-in requirements. Aehr's FOX-P multi-wafer system can deliver both the power and high voltage required to perform massive parallel testing per die and multiple wafer testing of gallium nitride devices for a very cost-effective solution. During the quarter, we announced our first order for our FOX wafer level test and burn-in system to be used for gallium nitride devices. We have a second potential FOX system customer that has been purchasing our wafer pack contactors for their onsite evaluation, which we believe is progressing very well. As I've noted before, we're working with several of the GaN suppliers, including the two market leaders, which positions us at the forefront of this market that we believe is another potential significant growth driver for our wafer level solutions. The test requirements for GaN for full wafer are actually quite different from silicon carbide in terms of technical implementation. However, our FOX platform has been capable of testing these devices with the functionality and flexibility of our unique FOX blade architecture, which allows us to configure the test blade for specific applications with the same infrastructure. This has impressed these customers, as they did not fully understand the implications of testing an entire wafer at very high voltage and the resulting impact on the test schematic due to the leakage of their devices. We were able to address this with our channel modules and proprietary custom wafer packs to tackle the test challenge, and both Aehr and our customers are happy with the flexibility of our systems to do this. We've been informed that burn-in will be necessary for GaN going into mission-critical applications such as automotive, solar, and some industrial applications, and the duration of burn-in time is still being finalized. This is good news for us, and we feel we're well-positioned to capitalize on this opportunity with our solutions in these lead customers. We're also witnessing additional new small and large players engaging with us for GaN. We have seen consolidation within the industry, with smaller key gallium nitride players being acquired by larger suppliers. So all potential customers are believed to have real potential in the future. Turning to silicon photonics, which are silicon-based semiconductors with integrated photon or light-based transmission of signals within and into and out of the silicon via laser photonic emitters and photonic receivers. We're very excited to have shipped during the quarter and ahead of schedule the first order from a major silicon photonics customer for a new high power configuration of our FOX-XP system for volume production wafer level burn-in and stabilization of next generation silicon photonics integrated circuits. This new high power configuration expands the market opportunities of the FOX-XP system and is configured to enable cost-effective volume production testing of wafers of next-generation photonic integrated circuits, which are targeted for use in the new optical IO or co-packaged optics market for chip-to-chip communication. As we discussed before, companies such as AMD, NVIDIA, Intel, TSMC, and Global Foundries have all announced plans for silicon photonics integrated circuits and integration of these in packages with other devices, such as CPUs, GPUs, and AI processors. Our FOX wafer level test and burn-in solution with a proprietary wafer pack for wafer contactors is a great fit for the silicon photonics market. These next-generation silicon photonics based integrated circuits can require up to two to four times as much power for full wafer test, burn-in, and stabilization. Our new FOX production system configuration, which can be used to test and burn-in these new optical IO devices, expands the market opportunity of the FOX-XP system even further. Additionally, the power and functionality of lasers used to transmit data are critically important to the performance of the communication channel, and Aehr's solutions not only identify early life failures but also improve the performance of the device through what the photonics industry refers to as stabilization. During the first days of normal operation, the laser output characteristics change in an exponentially decaying manner and must be stabilized until the decaying stops before the final product can be tuned to meet its performance specifications. Aehr can do this across an entire wafer of fully integrated photonic integrated circuits with embedded or attached laser emitters. Aehr currently has six customers using our systems for production tests of their silicon photonics devices, five using our NP and XP systems for wafer level test and burn-in and one using both systems for engineering production burn-in of individual simulated die and modules using our proprietary die packs. While the timing of these devices and volume ramps are not publicly clear, we remain very enthusiastic about the silicon photonics market and are watching this market closely. We continue to work with some of the leaders in silicon photonics to ensure that we have the products and solutions available to meet their needs for this potentially significant market application. Now on to memory. According to the average of multiple market forecasters in 2024, memory semiconductors will make up over 50% of the total semiconductor wafers shipped in the whole world. This is approximately half NAND flash memory and half DRAM. We are making continued progress in our ongoing discussions with multiple memory suppliers. We see the memory market as a significant opportunity for us to deliver wafer level burn-in solutions to help memory suppliers meet their reliability and quality needs, particularly with stacked die applications. During the next year, we're driving for our first on-wafer benchmark in partnership with a leading NAND supplier using our proprietary wafer packs and FOX wafer level test and burn-in system with our new fully automated wafer pack aligner. We see an initial opportunity for testing NAND for solid state disk drives using enterprise and data storage where Aehr can deliver compelling cost effectiveness and also weed out infant mortality issues before multiple die are packaged together. Longer term, we believe DRAM will be a critical target market for our systems, particularly as the percentage of DRAM going into multi-chip modules such as GPUs, CPUs, and AI processors increases. Now I want to spend a minute on the overall artificial intelligence semiconductor market. I've already discussed how we're working with silicon photonics suppliers for their plans to integrate silicon photonics as optical communication transceivers in devices including AI processors. We also see co-packaged memory in AI processors as a key driver for wafer level burn-in of DRAM for these devices. We also see significant opportunity for the AI processors themselves. Our new high-power FOX system that we discussed for optical IO semiconductor burn-in, the FOX-XP multi-wafer production system we began shipping last month, is the world's highest power per wafer system on the market, handling up to nine wafers at a time, also unprecedented in the industry. This system is capable of testing full 300-millimeter wafers of processors with up to several thousand watts of power and over 2,000 amps of current on each of nine wafers in parallel. By moving the burn-in from package module or final system form, as is done today, to wafer level, our customers can achieve enormous savings related to yield loss of modules with up to hundreds of other devices or chiplets in the same module. At the case-to-system level, the cost of the whip inventory and yield loss of infrastructure of the system surrounding these modules or chips complicates things. The wafer level burn-in challenges we are addressing include putting extremely high currents on the wafer without damaging the wafer or the contactor, thermal management of the high-power devices with very high leakage currents associated with the high burn-in temperatures we can apply, and automating the handling of these very expensive wafers built on the most state-of-the-art logic process geometries in the world. Stay tuned to hear more about this exciting new application for our products over the next several months. And lastly, I want to discuss our wafer packs, which are basically the consumable that accompanies and is required with all of our FOX wafer level test and burn-in systems. We continue to be very pleased with the continued stream of new designs for wafer packs. Our new design volume has almost doubled this year compared to last year as we're seeing more and more designs spending silicon carbide, GaN, silicon photonics, and other applications. As a result, our customers are buying additional wafer pack contactors for these new designs, highlighting the recurring revenue part of our business. As we've noted before, our proprietary wafer pack contactors are needed with our FOX wafer level test and burn-in systems to make contact with the individual die on the wafer and are designed specifically for a given device. As our customers win new designs from their customers, Aehr eventually secures orders for new wafer packs to fulfill these new wins. With each new design, our customers will need sufficient new wafer packs to meet the volume production capacity needed for those new devices. Our wafer packs will make up greater than 50% of our total revenues this fiscal year, which is fantastic and underscores the business model that allows us to grow both from added capacity from our FOX systems but also with wafer packs to serve an ever-increasing install base. To conclude, as we head toward the start of fiscal 2025 on June 1st, we're very encouraged and optimistic about our increase in engagements and the long-term growth opportunities of all these markets, and are excited to continue on our path of becoming the world standard for wafer level test and burn-in for the semiconductor industry. And with that, let me turn it over to Chris before we open up the line for questions.

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 higher overhead absorption rate and lower manufacturing efficiencies. Operating expenses in the third quarter were $5.2 million, up slightly from $5.1 million in Q3 last year. The year-over-year increase is primarily due to higher R&D expenses, which were partially offset by lower SG&A expenses. The increase in R&D in Q3 from the same period last year was primarily due to costs associated with our continuing efforts to augment the features and performance of our automated wafer pack aligner and higher personnel expenses. We have hired R&D talent in both hardware and software and have invested in R&D programs to enhance our existing market-leading products and meet our competitive advantages. At the end of Q3, we announced we shipped the first order from a major silicon photonics customer for a high power configuration of our FOX-XP system for volume production wafer level burn-in and stabilization of next generation silicon photonics integrated circuits. Non-GAAP net loss, which excludes the impact of stock-based compensation, was $900,000 or $0.03 per diluted share for the third quarter. This is down from non-GAAP net income of $4.7 million, or $0.16 per diluted share in the third quarter of fiscal 2023. We expect to return to profitability in our fourth quarter of fiscal 2024. Moving to the balance sheet, we continue to maintain a healthy balance sheet. Our cash and cash equivalents were $47.6 million at the end of Q3, down from $50.5 million at the end of Q2. With a solid balance sheet, we can continue to invest in scaling our business and entering into new markets and supporting new opportunities. We used $2.8 million in operating cash flows during the quarter to procure inventory components permanently to support our operations. We have zero debt and continue investing our excess cash in money market funds. Interest income earned during this higher interest rate environment was $584,000 in the third quarter compared to $374,000 in the third quarter last year. As of the end of the third fiscal quarter of 2024, the remaining amount available under the previously announced $25 million ATM offering was $17.7 million. We did not sell any shares during the last three fiscal quarters. It remains our plan to only sell shares against this ATM offering at times and prices that are most advantageous to our shareholders and to the company. Now turning to our outlook for the current fiscal year that ends on May 31, 2024. As we noted in our earnings pre-announcement, our third quarter results reflect delays in wafer level burn-in system orders for silicon carbide semiconductor devices used in electric vehicles. Due to this, we had revised our guidance for our fiscal full year ending May 31, 2024, to be greater than $65 million in total revenue and net income of at least $11 million, which we are affirming today. As I mentioned before, we ended the third quarter with $20 million in backlog and we expect to recognize the majority of that backlog as revenue in the fourth quarter. Lastly, looking at the investor relations calendar, Aehr Test will participate in three investor conferences over the next few months. We will be meeting with investors at the Craig Hallam Institutional Investor Conference taking place in Minneapolis on May 29th. And we will be presenting and meeting with investors at the William Blair 44th Annual Growth Conference taking place in Chicago on June 5th. We will also be meeting with investors at the CO Summit in San Francisco on July 10. We hope to see some of you at these conferences. This concludes our prepared remarks. We're now ready to take your questions. Operator, please go ahead.

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

Thank you for the insights on other target market opportunities. I have a few questions about the silicon carbide electric vehicle opportunity. As we look towards 2025, I would like to know if you expect to generate significant revenue next year from your historically largest customer. Additionally, how do you view the various customers? I noticed the press release mentioned different time frames, and I would appreciate some clarification on that.

At this point, we're not really discussing next year in detail; we will do that in the next call. However, I can provide some insights since we have visibility. Much of what we're seeing are similar numbers just delayed. I need to add a caveat since these numbers have been pushed back before, so I’m cautious about fully trusting what the customers tell me. Currently, we believe that next year will see significant revenues from all our customers, including our largest historical client. We expect to add some key customers that we initially thought we would have closed by now, and based on our current assessment of their needs and our competitiveness, as well as the lack of a competitor for that specific application, we feel optimistic about our chances. Winning these accounts will provide more clarity on the situation. Additionally, our recent visit to several countries in Asia, particularly China, was encouraging. Experiencing the electric vehicle market there feels drastically different than the narrative we see in the U.S. For example, in Shanghai, it seems like over 50% of the cars are EVs. The positive atmosphere there contrasts with the more cautious attitude in the U.S., which appears to be influenced by political factors. While we discussed other markets, specifically regarding silicon carbide EVs, I see many fabs being built and we have some insights from OEMs about preferred vendors, which boosts our confidence in our partnership decisions. Although there's a current reluctance to engage with silicon carbide and EVs, I still believe it will be a strong business opportunity moving forward, alongside other ventures. By the way, when I mention 2025, I'm referring to the fiscal year, so I'm talking about the 2025-2026 model years. The landscape for EVs has changed, but it’s clear that many are ramping up for high volume production of new models by next summer.

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 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 as a little boisterous, but I think the smarter people are with silicon carbide, the better we look because they really understand what it is we're doing. I felt that when I was in Korea, Japan, and China.

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 of 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 of 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 half a dozen companies.

Hey guys, I have a few questions. First, regarding the FOX-NP new customer, you mentioned it as a global semiconductor manufacturer. Is it also considered a Tier 1 automotive customer? I'm curious if some would categorize it as both.

So I'm going to try throughout today and in each call to 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 want to hold back on the timing a bit because that's part of their secret sauce. However, I can say that over the next couple of years it's pretty generic, but they have made some substantial purchases for front end equipment and other items. The NP is just their engineering bring-up tool and is not intended for production. So whether it happens next year or the following year, you can leave it at that for now. I may provide more visibility next time.

Okay. And then, it's helpful 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 also 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 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 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?

If we take a step back to examine the key factors driving our market, we see significant growth from $600 billion to $1 trillion. In the semiconductor sector, many products aren't becoming more reliable. For instance, low geometry processors, including those used for AI and CPUs, are being burnt in, but in a packaged form. Some manufacturers previously didn't burn these processors in before putting them into applications. However, in automotive applications, burning in is essential to ensure reliability. The increasing demand in automotive and other critical applications heightens this need. Additionally, wafer-level applications are expanding, especially in multi-chip modules. Memory devices have typically required a burn-in process, with every DRAM undergoing this. NAND devices destined for solid-state drives also undergo a burn-in measured in hours. Therefore, when searching for opportunities, focus on devices that necessitate burn-in. Silicon photonics devices, for example, require burn-in regardless of the application. It's also important to identify areas where large volumes are transitioning to new applications that require burn-in. Looking back, it’s been two decades since consumer demand dominated the test business, but now it’s applications in data, AI, processing, and automotive that are driving test needs, shifting the focus away from consumer-driven requirements. So for memories, it's the data centers. Memories are stacking together and then they're putting them together. I definitely remember and can talk to in great detail about how many die are being stacked into an SSD and where do you want to burn them in? You should burn them in before you put them into that application. And then now what we're seeing with the likes of the A100, B200 type things, these modules packaging that actually puts a processor, a big stack of DRAM, a chipset on there, future would be an optical IO chipset or something along those lines, those devices often need to be burnt in. Are you going to burn them in at the module level? The answer is yes. Why? Because it's the only place to do it. Well, that's ridiculously expensive. So there are initiatives to say how do we burn those devices in at the die level. And I can tell you sort of just front and center of my whole career at this thing. When you start with, I need to do it, there are testability, DFT, and other things that you can do to implement it. We believe we have a solution that can partner with them to actually implement wafer level burn-in. The applications that will be driving our business today are very different than I think they will be in a couple of years. I still think silicon carbide is going to be a really good business for us, but it won't be the only one.

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, 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 top-down initiatives for shifting things toward wafer level.

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, I believe it's one of the most closely guarded secrets. I don't think we’re being given the complete picture. You might not want to hear this, but I know there is more going on than I can disclose, and I still wonder if we know everything. In the past, I’ve mentioned my concerns; for instance, when analyzing someone like YOL, who is quite knowledgeable in the optical space, and they look at optical IO, they express uncertainty about the market's potential. What insights do NVIDIA or AMD provide? They are not sharing any information. They keep their figures to themselves. In my view, what AMD, Intel, or NVIDIA plan will ultimately shape this market; these environments are quite closed off. I don't believe NVIDIA and AMD are discussing how to facilitate communication between their processors. One needs to observe the trends, such as investment patterns and emerging technologies, as well as patent activity. My conviction, which I mentioned around a year ago, is that we are a couple of years away from significant production. The key questions are how large the market will be and whether we might see developments sooner. Our solutions are enabling progress, and there’s considerable demand for this technology. Additionally, our existing NP systems at customer sites also have this capability. So, it's not just the latest systems that will showcase this; we should see it with wafer packs too. There's a lot of intriguing design work happening right now, and I believe in its potential. It makes sense as a critical bandwidth that will become a pivotal factor, especially for AI companies, and it may also increase the requirement for more optical technology in 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 have 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...

Not with all of them. I would like to be involved with all of them. I do think there is some difference between the timing of the NAND and DRAM manufacturers regarding where the Design for Test (DFT) needs to be for DRAM to actually perform wafer level burn-in. However, I believe that companies will implement DFT and low-pin count test modes in DRAM, similar to what we achieved in NAND 15 years ago, before the decade ends. When that occurs, it's important to be prepared. So, we have been taking steps in the background to get ready.

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. Yes, that's a correct statement. We have seven customers.

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

I'll tell you what, let me do the background real quick. We've announced them one at a time. 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…

All NP customers have provided us with plans and intentions to transition to XP. I'm unsure if they will purchase any more NP products, as their focus will likely be on acquiring XPs moving forward.

That makes sense. Regarding the long-lead customer that has been in the process for a couple of years, what do you believe is causing the delay? Is it due to insufficient demand for full modules or just from their major customer or the larger companies in what they are packaging?

I think we have a pretty good idea, and I cannot be able to answer it directly. So, I think if you look at 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 caught a lot of people off guard and made them 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 would be fun to dabble in aren't going to, right? I mean, 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. I think there have 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 know there will be some impacts.

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 to have to buy multiple wafer packs?

Yes, we have some strategies in place for that. There might be scenarios where we consider starting with the 200 millimeter line. There are always processes to consider. I can think of some customers who fit this description. Currently, I'm involved with a customer looking to fully automate their 200 millimeter processes. Yes, the first wafer will be 6 inches, and their reaction was, okay, that's manageable since it's just an end effector in our automation. So I'm not sure if that explanation is clear.

Well, I'm thinking they don't have to buy a bunch of 6-inch wafer packs, or they can just use 8-inch and move forward. Anyway, getting back to memory, did you provide a timeline on when you expect to penetrate one of them in terms of an evaluation tool or…

In our prepared remarks, I said something to the effect that this year we are hoping to have an 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?

I don't want to share all the ways we would have structured the conversations with 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 tests, 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. Those are critical aspects that we have key differentiation on.

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?

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

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

I'll tell you what, let me do the background real quick. We've announced them one at a time. I think it's three XP's and four NP type customers. That's all I have. All of the NP customers have shared their plans and intentions, and they all intend to proceed with XP. I’m not sure if they will purchase any more NP systems; it seems they will only be pursuing XP moving forward. Okay. So, regarding the long-lead item customer that has been in the pipeline for a couple of years, what do you think is causing the delay? Is it because they don't have significant demand for full modules yet, just for their larger customers or the major businesses in their packaged segment?

Thank you. At this time, we will be closing the conference, and you may disconnect your lines. Thank you for your participation.