Good day, ladies and gentlemen and welcome to the Aehr Test Systems’ Second Quarter Fiscal 2016 Financial Results Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Mr. Jim Byers, MKR Group. Please go ahead, sir.

Thank you, operator. Good afternoon and thank you for joining us today to discuss Aehr Test Systems’ second quarter fiscal 2016 financial results. By now you should have received a copy of today’s press release. If not, you may call the office of MKR Group, Investor Relations for Aehr Test, at 323-468-2300 and we will get you a copy right away. With us today from Aehr Test Systems are Gayn Erickson, President and Chief Executive Officer and Ken Spink, Chief Financial Officer. Management will review the company’s operating performance for the second quarter before opening the call to your questions. Before turning the call over to management, I would like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are based on current information and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Factors that may cause to differ materially from those in forward-looking statements are discussed in our most recent periodic and current reports filed with the SEC. These forward-looking statements, including guidance provided during today’s call are only valid as of this date and Aehr Test Systems undertakes no obligation to update the forward-looking statements. Now with that said, I would like to introduce Gayn Erickson, Chief Executive Officer.

Thank you, Jim and good afternoon to those joining us on the conference call and also listening in online. Ken will go over the second quarter financial results later, but I will first spend a few minutes discussing our overall business and product highlights, including our continued progress with the development and introduction of our new FOX-P platform for our next generation of wafer level test and burn-in products. After that, we will open up the lines for your questions. Second quarter revenue was $4.6 million with a non-GAAP net loss of $794,000 or $0.06 per diluted share and a GAAP net loss of $1.0 million or $0.08 per diluted share. The non-GAAP results exclude the impact of stock-based compensation expense. For the six months of the fiscal year, revenue was $11.3 million, which was up 82% from the same period last year. We made significant progress during the quarter on the rollout of our next generation FOX-P platform of wafer level test and burn-in products. We expect to complete the final payment milestone with our lead customer for our new FOX-1P single wafer test and burn-in system and shift this initial system to their facility this quarter for final acceptance and production release. Both the initial FOX-1P system and multiple additional FOX-1P systems already in backlog are undergoing final manufacturing in systems level test and diagnostics at the factory. We are working with the customer on the timing of shipping the additional production systems and we are ready to ship these within weeks after the initial system delivery. During the quarter, we announced receiving the first order for our new FOX-XP wafer level test and burn-in system. This order includes multiple FOX-XP WaferPak contactors and application development services. The system will be used for reliability and qualification test of…

Thank you, Gayn. As we reported in today’s press release net sales in the second quarter were $4.6 million compared to $6.6 million in the preceding quarter and $2.6 million in the second quarter of the previous year. The results for this quarter were negatively impacted by the delay in the shipment of the FOX-1P systems to the second half of this fiscal year. Non-GAAP net loss for the second quarter were $794,000 or $0.06 per diluted share compared to non-GAAP net income of $613,000 or $0.04 per diluted share in the preceding quarter and a non-GAAP net loss of $1.8 million or $0.16 per diluted share in the second quarter of the previous year. The non-GAAP results exclude the impact of stock based compensation expense. On a GAAP basis, net loss for the second quarter was $1 million or $0.08 per diluted share, this compares to GAAP net income of $294,000 or $0.02 per diluted share in the preceding quarter and a GAAP net loss of $2.1 million or $0.18 per diluted share in the second quarter of the previous year. Gross profit in the second quarter was $1.7 million or 37% of net sales. This compares to gross profit of $3.4 million or 51% of net sales in the preceding quarter and gross profit of $694,000 or 27% of net sales in the second quarter of the previous year. The sequential decrease in gross margin includes an increase in direct materials as a percent of sales as the first quarter recognized a benefit related to the sale of systems which included previously reserved materials. In addition Q2 ’16 recognized a lower direct material margin due to a change in product mix and expediting fees paid to vendors. The reduction in gross margin was also due to higher unallocated…

Thank you. [Operator Instructions] And your first question will come from Geoffrey Scott with Scott Asset Management.

Good afternoon.

Hi Geoff.

Boy, I am trying to figure out how I feel about this quarter, half of me says little disappointment, half of me says really exciting. Let’s go back to the FOX-15 that’s been in production for three months, what are you hearing about its attainment of the goals that the customer expected?

We are – I think we are tracking very well. I will tell you that the customer has been very thorough and rigorous in their release process that was not a big surprise. We had a couple of issues that we ran across while we are doing it having to do with – in many ways having specifically to do with the devices themselves where some of the requirement and test requirements were slightly different than were originally documented to us. This actually led the customer to make some change orders and have provided us additional purchase orders, specifically to make changes to the WaferPaks. So I think we have had that some post mortems with the customer as a bad description of it, but to just make sure we understand and improve it for our system installations going forward, I think we are well aligned with the customer. And currently my snapshot right now is I am pretty pleased with how that’s all gone. It’s definitely taking us longer than we both had hoped, but we are being very thorough and extremely responsive to the customer and basically making them happy with whatever is needed to make that thing successful.

Okay. Is that customer a different customer than was the announcement for the first order of the FOX-XP engineering system or the second expected lead customer?

I am not breaking now all those details, I hate to be elusive. I will leave it at least at this, it is not - certainly is not the same application. So each of those are three distinctly different applications with different opportunities and different devices and at least more than one customers, how is that Geoff?

That’s okay. Is there any kind of common ground in terms of the three different applications?

Yes. I mean I think there is and in fact the success of our first FOX-15 is notable and helps us to build more confidence in some of these FOX-XP applications, that goes somewhat with the device in terms of it being full wafer contact. And I don’t really want to get into the devices. It’s in particular probably very, very sensitive. They are all sensors, I will give you that. And one other thing that certainly was in common is they are all using our new FOX-XP or our FOX-P WaferPak aligner. And that’s pretty encouraging. So, if you understand about our roadmap, this – our FOX-XP and our FOX-15 multi-wafer system is an entire turnkey solution from Aehr Test that includes the test system which is the hardware and the software. And one of the critical aspects of it is our proprietary WaferPak full wafer contactor that is loaded in an offline stage that we call a WaferPak aligner and that is either manually moved between the aligner and the chamber, which is how we do it with the FOX-15 or the XP and with our new WaferPak handler can be moved completely automated without any user intervention. Our customers really liked that idea. I alluded to it in our call related to lower test times and lower overhead, but there is also some very high volume applications, where the customers do not want to have any one touching their wafers and these are completely just wafer cassettes are [popped] [ph] in and out with no manual intervention whatsoever.

Okay. Originally, the XP was being developed for the NAND Flash business. Is this an extension of the possible market for it?

It is.

Okay. What do you…

We alluded to it, I think last time that in addition to the opportunities that we see in the NAND space, we believe that the sensor area is a unique space that has some real – some reasons that are driving it towards wafer level, not only in the quality, and if you understand about how the device physics of the devices are, they actually need an extended level of burn-in, but the quantity that’s involved is significant and the devices are so small that you cannot handle them with normal manufacturing processes in a package part, which drives an opportunity that when they need burn-in, the only place you maybe able to do it is at wafer level.

Okay. How are you doing on the NAND Flash side?

We are still engaged and we are talking to several customers. One of the areas of the NAND space that we have been kind of keeping a close eye on is that there is some opportunities in it to both have either market expansion or contraction related to customers that are asking us to do more what I’d call traditional test, which is an area that we really have tried to keep – our XP system in particular was aimed and directed mostly at the burn-in side of things where there is the longer test times and it’s the area that we are particularly good at. I think as customers want us to do more test, it’s probably an area that we have less direct skill and knowledge in, but it’s also an area that’s significantly more expensive and drive more new requirements. So, we are still getting our arms around that, but we still believe that NAND is an opportunity for us going forward, probably more focused towards the longer test times associated with burn-in than certainly test.

Okay. The announcement on October 7 about the first order for the FOX-XP, you talked about processing wafers in the next couple of months today, does that mean that you are going to be taking your customers wafers and processing them at your facility?

That is the case, yes.

And you will be using the engineering system that you will be sending to them?

We will be using the engineering system that they purchase. That’s correct.

Okay.

Actually, one of the things I would like to clarify because I have gotten this question before and I would like to just make sure people hear it. Interestingly, the primary evaluation that’s going on with the new FOX-XP is of the devices. And what amount of burn-in is required and what the burn-in recipe will be in terms of time, performance and if you understood the electrical and other characteristics of the device, but I am not going to get into it here. They are trying to determine the performance levels of these devices and the amount of wafer level burn-in that would be required. So, the evaluation is more about of the devices than it is about the FOX-XP. That’s why we have the confidence at least it’s our belief that at the end of this evaluation, it will lead to production system orders that we will be shipping towards the end of this year and volume shipments in 2017.

Okay. Thanks for the clarification. That’s perfect. Another quick question, the FOX-1P, you talked now about a total of three systems going out, does that I think last call we were talking about only one additional system, so the original order and one more, did you get one further order in this quarter?

We did not. And we are confusing we might have been elusive only trying to talk about all the numbers for the customer. I apologize. We had an original system order that was part of the original NRE program for them and then they followed up with a multi-system production, multi-production system orders. I don’t think we have really given the numbers, but it’s actually higher than the number you said. So, if you were to come to our manufacturing floor, you would see a whole floor full of them. Well, that’s overstated. Several of them okay being elusive again and I am getting the eye from Ken, because he will point out that’s where a lot of our inventory is sitting that is driving our inventory dollars up, but the manufacturing folks have these beautiful test heads that are all shining and look identical to each other and so this is why it’s contracting the time between the shipment of the first system and the other ones, because they are all identical.

Okay. I don’t know if you had a chance to listen to the Cypress flash expansion presentation at Needham this morning.

I did not.

In one of the – in the Q&A session, they were asked specifically about their cash needs going forward and how that fit in with stock buybacks and things like that and there was a reference to $80 million to $90 million of continuing capital expenditure for 2016 and a specific highlight on the back-end and specifically the test facilities that had higher ROIs. So, if you have a chance to listen to it, it’s about maybe minute 16:30 into the presentation.

You are leading the witness there, Geoffrey, but let me just point out to the folks that are listening, the expansion has been notably one of our largest customers for multiple years. And as such as a historically good customer with a great installed base, I agree with you, I better take a listen to that. That sounds fantastic.

Well, they pointed out to the public that their test facilities had very high ROIs, so that has to be partly due to what they purchased from you all.

I would take that as a compliment.

So would I. I will pass it off to somebody else. Thanks.

Thanks, Geoff.

And moving on, we will hear from Larry [indiscernible].

Hi. I have a question. You mentioned that you have some upgrades or additional features on your 1P and XP and that is in fact increasing the TAM on both? Does that mean I was a little confused, we just brought up I was thinking the initial application was in a static memory device. Does that mean that you are also being able to add these sensors and expand the TAM through applications or is it just because it does more within a set group of applications?

I am not sure I understood the difference here, but let me just state. So, one of our key strategies in introducing this new FOX-P family is to create a platform that creates application space to be able to test a wider and as wide as possible array of devices. And what that allows us to do is within one system hardware and software platform whether it be in a single wafer application with lots of resources, which is what the FOX-1P does or in a multi-wafer application with a fewer number of resources per wafer which is like the XP. We think that it allows us to capture some of these key market opportunities going forward. And I have talked I think in the past on these calls about something actually that we used to describe at one of my previous companies which we refer to as market waves. And what these are is, just think of these opportunities that are coming along that have the significant potential device revenue. And you want to be positioned to capture as many of those waves as possible with a kind of a broader platform. It’s not only a fantastic idea for our company our size, keep in mind we are very small in terms of headcount and resources. So we can leverage that development effort across a wider array, but if you are going to capture multiple device opportunities you wouldn’t have the time to develop two or three or four different solutions to go after it. So I would tell you that even as we conceive the idea with the FOX-1P in this case in the FOX-XP, what we have did is over time with additional customer inputs we have added those enhancements to allow us to test different flavors…

Very good. I like your analogy. I guess on a follow-up on the TAM that you have expressed in the past for both the 1P and the XP, could you update us on what the TAM would be with these enhancements with the multi-language capability?

Yes, fair enough, in fact we did some – we had some conversations about this recently. We are not updating any of these specifically. What I have said is that we had been estimating that the sensors part of the market was I think at one point we are talking maybe $40 million, $50 million opportunity on an annual basis. We are now stating we believe that it is that and then some. And I am – we have some specific proprietary information related to what those could be and I don’t want to get too public about it because – but we are at least optimistic and certainly over time we would expect those to grow. So I think we are betting on the right course if you will or getting in front of the right waves and I think sensors is one of those big ones.

One final question, is it fair to say that the design of both the 1P and the XP at this point is locked down, these enhancements are pretty well locked you are just finalizing them and then so that automatically you can get the system out the door and start the sales ramp?

I would say that is true of the 1P and in this case one other particular configurations of the XP. But we continue to have customer inputs and things that we may reserve the right to make enhancements, particularly on the XP. And when I say that I am thinking of some of the hardware things that we could potentially do and we will give you more updates on that. For certain, software is never done. We will always be making enhancements. There is actually a lot of capability in the physical hardware of our FOX-P family. Many of those features have not even been unlocked yet. So, we kind of design things in having there is lots of features that are not in the first 1P that we are shipping that could be ordered and purchased at a later date and upgraded in the field. But – so it’s a little of both, but for the most part, yes, we have got to become physically look at the boards and the channel modules as we call it in the hardware and the software, we are pretty much converged on what those are for those first shipments.

And then one last one for Ken, cash levels, are you open to juggle maybe get the receivables down, the inventories down as you start shipping and turning the cashes, do you expect the cash burn to slowdown as we hopefully get some orders?

Well. We are comfortable in our cash position. There is – we do have the ability of drawing on the line if we – notice in the past we have the $2 million available line. We have a history in our business model of collecting deposits in our booking that I think Gayn alluded to our upcoming quarters we are planning on a significant amount of bookings flowing through the company. And just for an example as I indicated in the prior quarter we have about $3.4 million of deposits which represented 50% deposits on these systems. And in the current quarter we had 30% deposits on our systems that we sold. So again we do have a history of getting those deposits. We are planning on turning that backlog into cash. And we actually in terms of accounts receivable we do expect to get the cash in from AR. So I think all of those factors will leave us in a comfortable position with our cash.

Very good. Thanks a lot guys.

You’re welcome.

From QVT Financial, we will hear from Dominik Schmidt.

Hi, Dominic. Dominic you are on mute. We may need to come back to him.

And we will take a follow-up from Geoffrey Scott with Scott Asset Management.

The number of sensor customers, so we were talking about the NAND flash there were six potential customers and one of the benefits is expanding that number of different customers so that the base of that was so concentrated. How many sensor customers are on your kind of prospect roll, are we talking 5 or 10 or 20 or…

That’s actually a really good question, Geoff. I mean, we are talking with I would say a handful, not just one or two what I consider key folks in that space. But honestly the whole thing and I know Internet of Things is already used a lot, but this idea of how many different companies are investing in different types of sensors whether it be industrial, automotive, mobile, wearables, whatever it’s even hard to get your arms around, it’s interesting by contrast to what I will call traditional semiconductor manufacturers where there is more consolidation and it’s easy to name who the top ten are. I am learning about new customer companies in sensors and I have been in this industry 25 plus years. I think no offense to them I think we heard of them before. They really didn’t in the past have a significant semiconductor test capacity requirement. So, being in the semiconductor test space all my life, I hadn’t really heard them before. And so there seems to be a lot of them out there. And it’s an area that we might need to think about even investing these to get our arms around better marketing and understanding where those customers are. So far, our hands are pretty full with the engagements that we are in. I mean one of the challenges is just we still have limited resources and you can only spread yourselves so thin on these opportunities.

But it’s more than a handful would be people that you would like to talk to?

I would say that is absolutely fair.

Okay.

There is definitely – Geoff as you point out, I mean, there is only so many NAND guys in the world. There is a lot more sensor folks that are out there. And what’s also interesting is that our solution with our WaferPak contactors is very well suited for these sensors. In terms of parallelism, contact, the ability to do such high power and so many devices in parallel, it’s just exceptionally well-suited for it, which is good.

All these companies that are kind of new to the sensor production business, will they end up operating their own test facility? So, will they subcontract that out to people in Taiwan or elsewhere?

Yes, most of the conversations we have had so far would be more IDM focused, so less use of CMs. But I think if like most of the test space industry as it evolves their CMs are used more and more. I think remember it in general and I was a part of this the whole transition from IDM to outsource manufacturing, there is a little bit of a chicken and an egg. You don’t go to CMs until they have equipment already. And in these spaces where this is new, there just isn’t a lot – these are new applications and certainly Aehr Test introducing a massively parallel wafer level burn-in system, they are not sitting out there in CMs. So, historically speaking, you would think that the IDMs would start first, they would hold it dear to their heart as competitive differentiation and then over the years, think of a decade or so, it would start to shift towards CMs. That would be a fair assessment.

Historically, you have talked about the difference in dollars between the order for 1P and an order for an XP and it was kind of 10x the difference, is that still going to hold?

So, let me give specific – so, in general, I think its yes, but let me give a little bit more specifics. So, we have talked about the range of the FOX-1P systems on a per test head basis, they range from $400,000 on the low end to $1 million, $1.5 million on the high end on a per head basis. And our initial production systems per test head are on the lower end of that. On the FOX-XP on a per chamber basis, a typical ASP of a chamber might be $1 million on the low end to $2 million, $2.5 million on the high end. Then that comes with a complement of our proprietary WaferPaks that you need to use with the FOX-XP, whereas with the 1P, it uses third-party probe card. So, an XP not only has the system, but has this complement of consumables that you purchase from Aehr Test. And then for every chamber or certain number of chambers, you would have a shared aligner. Sometimes, that aligner might feed two or three chambers, for example. So, there are some variables there. The piece that makes it, again, if you have a vision of what’s going on, then we put this new WaferPak aligner that’s here in the factory between one of those aligners and one or more chambers to make what we call a FOX-XP test cell. That test cell could have three chambers, three sets of WaferPaks, a handler and an aligner. And in that case, the numbers that we talked about all add up. So, it’s a pretty significant test cell.

Okay, I appreciate it, Gayn. Thanks.

You are welcome, Geoff.

[Operator Instructions] And we will try Dominik Schmidt with QVT Financial.

Alright, thank you.

Again, thanks for the call. This has been actually mostly good news I think. I wanted to get some more color on the gross margin. What can you tell us about the direction of the gross margin given the type of equipment that you are now shipping? Is there a direction in a lower margin sense, because you are adding more kind of complicated hardware?

So, Dominic, this is Ken. I think I will touch on this a little bit and kind of tie it in with what my comment was last quarter. Our typical margins that we try to get are between 40% and 48% and there is really several factors that are involved in that. The range is really a factor of product mix, manufacturing efficiencies so that when we actually ramp, we will gain those efficiencies. And you take a look at our growth pattern and as Gayn indicated that we are planning on growing latter part of this calendar year and the first part of 2017. So, what I think we would expect to see is the margins in the higher end of that 40% to 48% range as we get better utilization and as we increased our capacity.

Just maybe one other comment, I am sorry, Dominik.

Yes.

Just one other comment in general is I’d say that kind of in large swaps our FOX systems margins tend to be stronger than our ABTS systems margins, which are stronger than our WaferPak contactors, for example. And so as your mix would shift for example last quarter, we had no FOX system shipments, we had ABTS and WaferPaks. And then if we had quarters with all FOX system shipments, you would see shifts in the margins.

Yes, that’s what I wanted to know. So, FOX has the strongest margins. Even though you have maybe some like the aligner and other things, you still have a stronger margin there relative to [indiscernible].

Yes, that’s fair. I think that’s still fair. I mean, aligners potentially are more like a system level margin or even or less, but those would be typically shipped along with a system which would have little higher margins. Okay.

Thanks.

You are welcome.

[Operator Instructions] And seeing no other questions, I would like to turn the conference back over to management for any additional or concluding remarks.

Okay. Well, we really appreciate it folks. And as I said before, we certainly appreciate the patience of both our customers and our shareholders. We are excited about the investments that we are making. And as always, we invite you to give us a call if you would like further information or stop by and visit us here in Fremont, California. And we look forward to talking to you next time. Thank you.