Earnings Call Transcript - AEHR Q3 2022

Operator, Operator

Good day, and welcome to the Aehr Test Systems Third Quarter Fiscal 2022 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.

Jim Byers, MKR Investor Relations

Thank you, operator. Good afternoon, and welcome to Aehr Test Systems' third quarter fiscal 2022 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 Ken and Gayn, I'd like to cover a few quick items this afternoon. Right after market close, Aehr Test issued a press release announcing its third quarter fiscal 2022 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 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 with that said, I'd like to turn the call over to Gayn Erickson, President and CEO.

Gayn Erickson, CEO

Thanks, Jim. Good afternoon, everyone, and thanks for joining us for our third quarter fiscal ‘22 earnings conference call. Let's start with a quick summary of the highlights of the quarter and the momentum we're experiencing in the semiconductor wafer level test and burn-in markets, then Ken will go over the financials in detail. Then we'll open up the lines to take your questions. For the third quarter, revenue was $15.3 million, our highest quarterly revenue on record. This is a sequential increase of 59% over the second quarter and up 190% year-over-year. We also generated non-GAAP net income of $4.1 million and ended the quarter with a strong $26.9 million in backlog. Our effective backlog, which includes all orders announced since the end of the quarter, is over $30 million. We continue to see very strong interest and demand for wafer level test and burn-in of silicon carbide devices and enormous growth potential for Aehr's unique solutions to test and burn-in devices to support the worldwide electrification movement and electric vehicles, power conversion, and power generation and storage infrastructure. During the quarter, four additional companies provided detailed wafer layouts to Aehr for their silicon carbide wafers as part of their evaluation of using Aehr's FOX-XP systems and wafer pack contactors for wafer level burn-in of their devices to meet the electric vehicle market and electrification infrastructure markets. We have provided those customers with the data confirming that we believe we can test their wafers and provide their proposals and lead times to meet their needs. This includes another major supplier of silicon carbide devices, who has committed to an on-wafer benchmark and asked us to put a system on their test floor to demonstrate their capabilities. This is now the second of the top four silicon carbide customers and that's beyond our current lead silicon carbide customer to engage with us in what we call on-wafer benchmarking of their actual wafers. We have now made several proposals to customers to place orders to lock in lead times of our FOX systems and wafer packs. In just the last few weeks, we met with multiple companies in both the U.S. and Europe face-to-face and are very encouraged by the positive feedback we received about their forecasts for wafer level burn-in needs and our expectations for winning this capacity with those prospective customers. This included very productive meetings with a major supplier of silicon carbide that is already currently doing on-wafer benchmarking and burn-in optimization investigations with our FOX system and wafer packs today. It's apparent that wafer level burn-in will become the standard for silicon carbide devices. Based on customer feedback, we continue to believe that Aehr is unique in our ability to meet the cost and volume production needs of this market. Last quarter, we said that we believe we'll add several new customers that will be ramping into production by the end of our fiscal '23, which ends May 31, 2023. I'm often asked by investors about whether I'm more or less confident about our forecast than last time. The answer is yes, I'm feeling more confident, actually, even much more confident that we will add new customers that will be ramping into production by next May. We continue to work closely with our lead silicon carbide test and burn-in customer. Earlier this month, we announced follow-on orders from them for additional wafer pack contactors that reflect multiple new silicon carbide device designs they're building to be qualified by their customers, along with several silicon carbide devices now qualified and ramping into volume production to meet demand for electric vehicles. This customer continues to forecast the need for additional capacity to meet their goal of achieving a major market share of the silicon carbide market. We continue to expect significant additional system and wafer pack purchases from them over the next several years and through the end of the decade. The silicon carbide semiconductor test and burn-in market is being driven substantially by anticipated growth in electric vehicles. The combination of the industry moving to multi-die modules and the cost implication of burn-in in a package part versus at wafer or die level is a significant opportunity for Aehr. We believe that Aehr can achieve a significant, perhaps dominant share of the silicon carbide wafer level burn-in market. Forecasts estimate that the silicon carbide market for devices in electric vehicles such as traction inverters, onboard chargers, and offboard charging stations is expected to grow from fewer than 150,000 6-inch equivalent wafers of capacity built in 2021 to more than 4 million wafers built in 2030 to meet the more than 30 million electric vehicles anticipated to be built per year by then. This projected demand for just electric vehicle-related silicon carbide wafers represents at least a $1 billion market opportunity for our wafer level test and burn-in systems and consumables over the next eight years. In our recent customer visits, we're now seeing demand surface for the wafer level burn-in of silicon carbide devices beyond electric vehicles. We believe it's likely to become a significant market opportunity for Aehr Test as well. Moving to some other markets, we're also seeing or recovering and strengthening the silicon photonics test and burn-in market, reflecting the post-COVID recovery driving devices to meet 5G and data center infrastructure build-up. Several customers addressing the silicon photonics market have forecast additional FOX system and WaferPaK or DiePak contactor capacity needs from us over the next 12 months. In addition to the silicon carbide and silicon photonics markets, there are strong drivers for our business. During the quarter, we received an initial order from a current FOX-XP customer for our proprietary DiePak carriers for a new optical sensor device. As a result, we're taking a $1 million one-time charge in fiscal Q3 for excess and obsolete material related to these products, primarily ABTS configurations and packaged part burn-in products. We are turning our focus to full attention and doubling down our efforts in the near-term to fully capitalize on this substantial opportunity for our FOX full wafer test and burn-in systems and consumables. This includes several new R&D enhancements to our FOX P family of products that include FOX test system hardware and software features to expand the application space of our systems and enhancements to our WaferPaks to address higher power and higher voltage applications. We plan to be publicly announcing these new enhancements over the next couple of quarters. So I've had lots of questions about how our supply chain is holding up. Aehr has the manufacturing infrastructure and supply chain in place to ramp to significantly higher revenue levels. For example, this year, we'll ship three times what we did last year, and we're just getting started. We are aggressively purchasing components that began last February for systems and WaferPaks, particularly for the enormous opportunity we see for silicon carbide that is gaining momentum. There are many integrated circuits used in our system that currently have greater than 12-month lead times. Our aggressive purchasing of IC components is really paying off. We have seen modules being designed right now with as many as 32 silicon carbide die in them. It's very clear that screening out the failures of the die before they're put into the module is the only way to go. Lastly, I'm excited to announce the appointment of Adil Engineer as Chief Operating Officer at Aehr Test. Adil has built a career in operations and supply chain and has been in the semiconductor and medical equipment field for over 20 years. In his role as COO, Adil will focus on continuing to ramp our supply chain manufacturing to meet anticipated demand. We are very excited about the unprecedented inbound interest and expanding growth opportunities we're seeing with a significant number of new potential customers that are evaluating the unique capabilities and cost-effectiveness of our FOX-P multi-wafer test and burn-in systems for their test and burn-in needs. We remain focused on serving the several large market opportunities we see ahead and are confident in our growth forecasts. For the fiscal year ending May 31 of 2022, Aehr is reiterating its previously provided guidance for full-year total revenue of at least $50 million and to be profitable consistent with our operating model. Given our revenue in fiscal Q3 of 15.3 million reported just today totaling over $30.5 million for the first three quarters, that equates to fiscal Q4 revenue of at least 19.5 million, which would provide another solid record revenue quarter for Aehr Test. With that, let me turn it over to Ken to review our financial results and guidance in more detail and we'll open up the lines for questions.

Ken Spink, CFO

Good afternoon, everyone. As Gayn noted, we had a strong financial performance in Q3, which included our highest quarterly revenue on record, solid non-GAAP net income, and a healthy backlog of $26.9 million at quarter end. Looking at our financial results, net sales in the third quarter were $15.3 million, which is up 59% sequentially from $9.6 million in the preceding second quarter and up 190% from $5.3 million in the third quarter of the previous year. The increase in net sales includes an increase in system revenues of $3.4 million and WaferPak and DiePak revenues of $2.3 million. Customer service revenues were down $82,000. Non-GAAP net income for the third quarter was $4.1 million or $0.14 per diluted share, which excludes the impact of $880,000 in stock-based compensation and a $1 million one-time charge for excess and obsolete inventory. This compares to non-GAAP net income of $1.5 million or $0.05 per diluted share in the preceding second quarter. The increase in stock-based compensation compared to prior year is primarily due to stock awards of $270,000 accrued in Q3 '22 related to exceeding stretch goals for fiscal 2022 key business objectives and revenue targets. Excess and obsolete inventory reserves of $1 million were taken in Q3 '22 primarily related to package part burn-in product inventory. We are very happy with our inventory levels to support the significant opportunity we see in wafer level tests with our FOX family of products and consumables. On a GAAP basis, net income for the third quarter was $2.2 million or $0.08 per diluted share, and compares to GAAP net income of $717,000 or $0.03 per diluted share in the preceding second quarter. Gross profit in the third quarter was $6.4 million, or 42% of sales. The $1 million charge for excess and obsolete inventory taken in Q3 had a seven percentage point impact on our gross margin. Excluding this charge, gross margin for the third quarter was 49%, up compared to gross profit of $4.5 million or 47% of sales in the preceding second quarter. Operating expenses in the third quarter were $4.1 million, an increase of $339,000 or 9% from $3.8 million in the preceding second quarter. The increase from the prior year Q3 is primarily due to the elimination of cost reduction initiatives put in place during fiscal 2021. We're also seeing some recovery and strengthening in the silicon photonics test and burn-in market. We continue to invest in R&D to enhance our existing market-leading products and introduce new products to maintain our competitive advantages. Our cash and cash equivalents were $32 million at February 28, down $3 million from $35 million at the end of the preceding quarter. Accounts receivable at quarter end was $8.5 million, up from $7.4 million at the preceding quarter end, due to the impact of higher revenue levels. Bookings in the third quarter were $6 million, and our year-to-date bookings totaled over $59 million. Now turning to our outlook for fiscal 2022, we are reiterating our previously provided guidance for full-year total revenue of at least $50 million, which would represent revenue of 3 times that of last fiscal year and be our highest annual revenue on record.

Christian Schwab, Analyst

Thank you, guys. Congratulations on another solid quarter and thank you for the continued clarity not only on the projected total addressable market over the next few years, but an update on the customers. But my question comes from what you said in your prepared comments, Gayn, as well as in the press release. I'm trying to understand where your conviction comes from. Maybe it comes from the dialogue with the next four customers that you've talked to other than on the fact that wafer level burn-in will become the standard for silicon carbide devices is a pretty big statement.

Gayn Erickson, CEO

Thanks, Christian. I actually heard a few things in that question regarding where my conviction comes from. Our orders were not setting records for the quarter. So how where's the strength and confidence coming from. It's a combination of several things, but it is from direct conversation with customers, seeing their forecasts, their tensions related to the capacity that they're going to be bringing on, and then, talking to them personally. It's clear within the industry that silicon carbide has this extrinsic failure rate, which is the infant mortality. Through burn-in, you can remove the failures and hit the needs of the end market. It is widely understood across various companies that burn-in will continue to be necessary, and having conversations directly, customers are now very clear about these requirements. They do not want to get this into a car because of the failure implications of having that inverter fail with silicon carbide. I've heard multiple specific statements with some real data behind that burn-in is not going away, and I believe we can help. And I personally think this is one of the most exciting times of my career.

Christian Schwab, Analyst

Great. I appreciate that, Gayn. And then just a quick follow-up on that then, as you have these dialogues with your customers and the concern is about being in a position to ramp material amounts of product or systems for them quickly. Has the conversation about payment terms changed in any way?

Gayn Erickson, CEO

I can answer that honestly. But I have to remind people that we have on these calls, not only investors, we have key customers, potential competitors, and others too. We have stated very publicly with people, we have agreements with our large customers today. If you look at our key customers, like Intel, Apple, and others, we have had and continue to have down payment requirements from them, and we have agreed to do the same with other customers. It hasn't been that big of a deal. Now that we have cash in the bank, people are less worried about giving us down payments. But that hasn't been an issue so far.

Tom Diffely, Analyst

Good afternoon. I would like to talk a little bit about the sales cycle. When you look at the four new customers that gave you wafer layouts, where is this in the sales cycle, and how long would you expect it to take to get to orders after this?

Gayn Erickson, CEO

It's a very valid question. If you look at what we had been touting a couple of years ago, we have demonstrated our ability to test an entire wafer of silicon carbide devices and be able to tell them with 100% confidence about the device. That led to them ordering one. As we've gone around to other customers, particularly during COVID, we initiated marketing efforts saying, send us your wafer, we'll do a benchmark for you. I think we're going to see more customers placing orders and driving commitments from them as they look to ramp production to meet the EV needs. I think next quarter will provide guidance for the year, and we hope to have nailed down some agreements with customers.

Dylan Patel, Analyst

I wanted to focus on one of your comments specifically on automotive customers. Do you think that these automotive customers could start demanding wafer-level burn-in and then drive sales of your product?

Gayn Erickson, CEO

I hope so. There does appear to be some reasons to consider the LiDAR to do burn-in. While the jury is still out in my mind, we do have some visibility and discussion around that. We are working on some potential opportunities there but would not count on that being a major driver for our business right now.

Ken Spink, CFO

As Gayn mentioned, we are anticipating a solid growth trajectory, and we would like to ensure we are well-positioned to meet customer requirements. Looking at our financials, we also had a significant increase in expenses due to that strong performance, but it's part of our plan to continue investing in R&D to support sustained growth.

Gayn Erickson, CEO

Thank you, everybody. This is great because we did have some feedback from folks to try and be concise in our prepared remarks. We are excited about Q4 and looking forward to seeing some of you at the conferences.

Operator, Operator

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