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

Thank you, operator. Good afternoon and welcome to Aehr Test Systems' fiscal 2020 second quarter financial results conference call. With me on today's call are Aehr Test Systems' President and Chief Executive Officer, Gayn Erickson; and Chief Financial Officer, Ken Spink. Before I turn the call over to Gayn and Ken, I'd like to cover a few quick items. This afternoon Aehr Test issued a press release announcing its second quarter fiscal 2020 results. That release is available on the company's website at aehr.com. This call is being broadcast live over the Internet for all interested parties and the webcast will be archived 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 valid only as of this date and Aehr Test Systems undertakes no obligation to update forward-looking statements. And now with that, I'd like to turn the call over to Gayn Erickson, President and Chief Executive Officer.

Thanks, Jim, and good afternoon to those joining us on today's conference call and also listening in online. Ken will go over the second quarter financial results later in the call, but first, I'll spend a few minutes discussing our business and product highlights, including our continued progress with our wafer level and singulated die test and burn-in solutions. We'll then open up the lines for your questions. We had a solid fiscal second quarter with a net revenue of $6.9 million, which is up 24% sequentially from Q1 and up 16% over last year's Q2, and we returned to profitability in Q2 with GAAP net income of $251,000 and non-GAAP net income of $456,000 and improved gross margins. We're pleased to note that these results exceed analyst expectations for Aehr on both the top and bottom lines for the quarter. We also generated strong bookings in the quarter of nearly $10 million. We expect to see continued momentum in the remaining quarters of this fiscal year and are seeing growth in customer engagements worldwide, particularly for high-growth applications that include silicon carbide, photonics, automotive, and memory devices. During the quarter, we successfully completed a new and unique production application for wafer level test and burn-in of silicon carbide devices and received and shipped our first order from a new customer for this solution. This customer is a leading supplier of automotive semiconductor devices and selected the FOX-XP for its unique capability to provide high voltage and high temperatures to the entire wafer. We're also currently engaged with numerous additional potential customers in this market. Silicon carbide is a new emerging market for our FOX-P family of products as our wafer level test and burn-in systems are cost-effective solutions for improving the reliability of silicon carbide-based power devices used in…

Thank you, Gayn. As Gayn noted, our financial performance for the second quarter included solid revenue and bookings, strong gross margins and a return to profitability. Net sales in the second quarter were $6.9 million, up 24% sequentially from $5.5 million in the preceding first quarter, and up 16% from $5.9 million in the second quarter of the previous year. The sequential increase from Q1 included an increase in wafer level burn-in revenues of $1.5 million, primarily due to increased WaferPak and DiePak revenues. The increase from Q2 last year includes an increase in wafer level burn-in revenues of $2.2 million also primarily due to increased WaferPak and DiePak revenues, partially offset by a decrease in packaged part revenue of $758,000 and customer service revenues of $455,000. Non-GAAP net income for the second quarter was $456,000 or $0.02 per diluted share, compared to a non-GAAP net loss of $214,000 or $0.01 per diluted share in the preceding quarter and a non-GAAP net loss of $405,000 or $0.02 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 income for the second quarter was $251,000 or $0.01 per diluted share. This compares to a GAAP net loss of $413,000 or $0.02 per diluted share in the preceding quarter and a GAAP net loss of $629,000 or $0.03 per diluted share in the second quarter of the previous year. Gross profit in the second quarter increased to $3.2 million or 47% of sales, up from gross profit of $2.3 million or 41% of sales in the preceding first quarter and gross profit of $2.4 million or 41% of sales in the second quarter of the previous year. The sequential and year-over-year increase in gross margin is…

Thank you, sir. [Operator Instructions] We'll take our first question from Christian Schwab with Craig-Hallum. Please go ahead, sir.

Hi, guys. This is Tyler on for Christian. Thanks for letting us ask a few questions.

Hi, Tyler.

First, a similar question – hi guys. I think a similar type of question I've asked in the past, could you help bridge the gap between these current revenue levels and the expected strength in back half, what that incremental growth is particularly coming from maybe rank or just broken down by customer or end market type?

Well, normally, as it is, we've been relatively conservative on detailing our forecast in general, but I think that as we look at our second half, the expectation is that it would be of similar type of mix of markets, particularly from a revenue perspective, I don't think we'll see any significant revenue in a new market segment, if you will. So, the customers that were anticipating – that have ordered, that will be shipping against backlog and the new orders that will be getting including orders that will come in time to ship are within, as I said, the primary market segments we talked about. I think silicon photonics, it will be largest. Silicon carbide is in there. Some automotive applications and some of the 3D sensor, particular mobile sensor applications will see bookings and revenue in our fiscal second half to fill out our range of forecast. And just a little bit of color behind the range of $27 million to $31 million, one of the challenges for our business always is the customers range of forecast in a system that comes in, in May 31 versus June 4 it can have an impact on us. We're seeing positive feedback from customers, bookings and revenue forecast from pretty much all of our customer base and just depending on how those things play out is where we think we're going to come in, but I think we're still feeling really good about our range and choose not to tighten it up at this point, but we'll see as we continue to go through the second half as to where we come in. Okay?

That's perfect. Thank you. And then maybe for Gayn, a little bit more of a modeling question, maybe a couple of parts here, so on gross margins, I don't believe I heard you reiterate your previous guidance was for [46% – 40%] for the full-year, I guess is there a chance that could be a little bit better now? And then also with the WaferPak and DiePak products being 44% of revenue this quarter, is that maybe a little bit high as far as the immediate run rate? And how might that kind of affect margins in the back half of the new year.

So, I'm going to look at Ken a little bit across here, but I think our margins, you would probably anticipate to be somewhat similar, although, I think actually this quarter maybe even stronger on some of the mix of some of the WaferPaks and DiePaks, but honestly next quarter too is full with particularly some of the DiePak revenues that we will see. Generally speaking, we spent a lot more time trying to clarify our model a couple of years ago, particularly because our packaged part business, which quite frankly there are more competitors and alternatives out there has lower incremental margin rates, 40% or so, let's say, whereas our wafer-level products and contactors are in the higher incremental margins, maybe 60%. Given the fact that our packaged part business is very low or nascent right now with the dominant being wafer-level products and contactors, there's just not as much variation in our mix even between customers and different products, because the FOX products in the contactors have about similar kind of margins.

Great for the details, I very much appreciate it. That's all from me, guys. Thanks.

Thanks, Tyler.

Thanks, Tyler.

Thank you. We will now take our next question from Larry Chlebina with Chlebina Capital.

Hi, Larry.

Hi, guys. On your recent presentation, you said you had 12 new customer applications for your FOX-P line of solutions in the pipeline, is that like the largest pipeline that you've had in a good while? Or is that – could you maybe give some sense of how big of a pipeline is that relative to past history?

Okay. So, let me clarify what 12 new lots are, because I'm not sure the way you described it. So, that's really 12 new customer engagements over, call it several applications, which many of those I would consider relatively new, but they would be silicon photonics, silicon carbide, gallium nitride type, the high-voltage stuff as well as automotive and 3D sensing, those we might argue are older applications or current applications. We are also engaged with some memory folks that we would consider now a relatively new application or a renewed application, because historically we have had – and that covered installed base of memory customers, but haven't had a lot of engagements with that in the last couple of years. And then I think we kind of said at least or over 12 – I'm talking, Vernon, our VP of Sales and I think we've got a brand-new customer in tomorrow. I heard of another one brand-new yesterday. It's actually pretty exciting because, the reality is, having spent my entire career in the semiconductor market, there really are not hundreds and hundreds of customers out there and very often 10 or 20 make all the world of difference. So, to actually be engaged with that many companies is really a good thing. And certainly, in my ten years that I've been here, that is definitely more than we have been engaged with in that entire time. I think you'd have to go back a number of years that we might have been involved in 12 new customer applications all at the same time. We actually spent a lot of time here and have made a lot of process changes. It's something you don't hear me talk a lot about, but we're doing a lot of things internally in terms…

Your consumables were a little over $3 million last quarter. Is that – did I hear that that's probable – a probable good run rate going forward mainly for this quarter or…?

That's – so Larry, yes, we have a little bit right around $3 million this quarter, and that's pretty high. It's higher than we've historically had, as we talked about it was previously 30%, and then …

We may have a [indiscernible].

So, we could have some good ones. Yes. So, Larry, I'm not sure I'm ready to call 44% like a baseline or a base, but I will tell you, it is growing, the base is growing.

Or is it going to make sense as your revenue goes up, so that at least $3 million, yes, that's really the question.

You know what? Right now, we have a very strong forecast of systems and contactors and we are still absorbing one of the things that's subtle – and I – I think we've talked about it before, but I just want people to understand. So, remember that we sell these systems and the customer buys a system when they have to ship more products than they shipped the quarter before. So, they buy another machine and then every quarter that machine can ship more and more. When they buy that machine from us, they also buy a set of contactors either WaferPaks or DiePaks that allow us to make contact to their specific and unique device design. Next year, if they're still shipping exactly that same device and in no more quantity, they would be fine, but what happens is, they may not – they may change the design of the device, which is very typical. And so even though they have a tool from us, a year from now or two years from now, they need to buy another set of contactors. So, for every year, we sell X number of systems, we sell that same X number of sets of contactors, but then we also sell a certain number of contactors for the installed base, and so just by the model each year, the contactor business will rise even to a point, let's say, there was some horrific year and you sold no systems, we're likely to sell a whole lot of contactors in the same year, because the consumables historically like the probe card market, companies aren't necessarily growing, they're still changing their designs. And so, it creates some stability for us. But like we said, we'll stick to our guns. I would see that number continually to rise and we absolutely could get to a point where there is sort of a baseline of 50% of our business or even more being with contactors.

Okay. A little bit ago you announced the sale of or a deal with the NP machines for a data center application. When do you expect your sales actually start booking?

Yes, so what we – the way we described it, we were always somewhat elusive on purpose for the customer's request. We refer to it as a FOX-P system, which has everybody guessing, is it an XP or CP or an NP, but nevertheless, that system – I'm sorry, I'm going to correct that, that's not true. So, let me try to – we did announce a datacenter application, which was on a FOX-CP, which is a single wafer system, production system. We refer to it as related to a new device that we're being very allusive on, that is in a massively high-volume data center application. That customer is using that first tool that we ship. They're going through qualification and process qualification and anticipation, maybe production ramp from them over as we have stated the next several years. So, we are – for lots of reasons we're trying to be elusive. It's not a significant part of our near-term forecast. Let me leave it at that, but we do anticipate that should be a very good business for us as we head into next year and the following year.

I'm sorry, near-term for fiscal year 2020?

Yes, like in the next six months, I think I'm okay saying that, I'm just trying to be – there is some reasons and some day when the dust settles and everyone understands what it is, they'll know why we were asked to be and why we've been so selectively secretive about this.

Okay, one last one. On the memory application, do you have any comments about where that stands? You have just one potential customer in that area or do you have…?

There are – I'm going to – there are several potential customers we are talking to, call it more than one to several customers in that – there's not a bunch of them, but you could imagine several, how's that. There is a real market need out there and the memory, wafer level burn-in market that as you guys that have followed us know, we had discussed as a potential new concept would appear to actually be having real traction in terms of its value and its ability for customers to actually move packaged burn-in to wafer level as a value-added step or at least as an alternative and better step to doing it in the package level. We see there is some things going on technically and commercially in that area, where people that did actually buy some multi-position probers that are very expensive and very large in the past are looking for different alternatives going forward. And right now, we see that as something that is very intriguing and interesting and I'll – as we get closer, I will give you more details on where we stand on that, but it is our belief that our FOX-XP products are applicable and can be leveraged to be able to go after that space with some enhancements as opposed to complete. We don't need an entirely new product or product family to go after it. And we are engaged with some customers and some of those early conversations right now.

Alright. That's all from me. Thanks, guys.

Thanks, Larry.

Thanks Larry.

Thank you. We will now take our next question from Tom Diffely with DA Davidson.

Hi, Tom.

Yes. Good afternoon. Couple of questions on the cash flow, maybe for Ken. So, obviously nice to hear about the Silicon Valley Bank piece, but if we think about revenues doubling over the next few quarters, how does – or the dynamics or the pieces of cash flow, do you pre-build some of these systems? Are you still getting deposits? We have…

So, yes. So, Tom, we do – our traditional is 30% down payment and that's with all customers, so we can model that into our cash flow. And I think we've talked about our margin structure from a direct materials and an overhead and cost structure. So, and then the last piece is inventory and we've built up inventory, I don't know if we talked about it. We have both in our demo that we have now and if you do, we built up inventory for the quick churns. So, we wouldn't necessarily need to be adding a significant amount of inventory and consuming cash to build that inventory to meet some of our short-term needs.

Okay. So, with the Silicon Valley Bank piece, you're comfortable over the next year that you can handle a pretty healthy ramp?

Correct. I do. And hey, Ken, let me just – you had mentioned something in your pre – in your script, you referred to the Silicon Valley Bank $4 million as a way to help us fund some growth going forward. I think I want to be careful and so it's nice to have a line of credit. It gives us a little flexibility in terms of some of the simple cash flow in the quarters and things like that, but it is not at all our intent nor is it a line of credit intended to be tapped in to go off and do R&D spend and other things. It does make it easier for us to manage through accounts receivable as an example, very specifically, but as we stated before, the terms and conditions we have with all of our large customers is that there is a 30% down payment necessary with all of that. That does help us substantially through anything. So, even in a fairly substantial ramp, we can ramp into it without having to tap into any significant cash flow issues.

Okay, great. And then if you look at the projected increase in operating expenses, is that your peer R&D to create new products? Or is that more engineers to engage with customers to do more customer engagements with the current product set?

You know, if there is a little bit of some of the cost of board with some pay raises, we've actually done some – we've done some hiring in several different areas from our customer facing team to some manufacturing and some quality rules, some R&D things. So, it's spread a little bit, but there's also definitely an element that we've got some enhancement products that we're doing on the FOX products and probably some of the package part burn-in side. That we're seeing some incremental spend, and these are all pretty small numbers. I mean, we're a small company, but these are all pretty small numbers that we're talking about, but they add up, but we'll continue to look – some of the ads we're doing in sales and marketing come through reps, so they don't come in direct expense, they would come through commission structures and SG&A, as we go – under with new sales. So, we're trying to do more of that where possible.

And Tom, if I may add too, so if you take a look at our run rate, so, you'll see over the last several quarters, our actual R&D spend had decreased at about $100,000 per quarter rate, where we went down to – I think $800,000 this quarter. So, a lot of it too is just building back up to where we were.

That's right.

Okay. And finally, what are the current lead times for the different types of things you look at, like kind of a large system versus some of the WaferPak sets? And then are you pre-building some of that at this point ahead of an you know, actual order?

So, generally speaking, what we try and refer to is our lead times, so like our NP systems are typically maybe 12-week or 16-week lead times and XP system might be a little longer than that. We try and have our WaferPaks be closer in the 8-week to 12-week timeline, so that we can do them quicker and we do have programs in place with expedite fees for some people, onesie, twosies, we can do them quicker than that. Having said all of the above, we do pre-build things against forecast and it is not atypical for customers to place orders and get inside of lead times, I just hate to always sign ourselves up to that. The other thing is, we do have in our demo center, we have a customer that came and said, I need something right away. It's like, well, we'll be happy to sell you one out of the demo center for a premium or for this. We're not actually taking a discount on it, because some people – it's interesting – it's actually fun right now, because the silicon carbide, silicon photonics – there's a lot of people out there scrambling for market share and for market lead. And they'll be waiting and they get an order and then they are in a big hurry to get capacity. So, we've been trying to make sure that we have inventory on hand to be able to meet that. The nice thing about the FOX product family, remember that the FOX-XP, NP, and CP, think of them as in closures or they're the boxes, if you will, that the blades go into. The blade, which holds the wafer – WaferPak or DiePak for singulated die is the same blade and they're just interchangeable between a single blade that sits on a prober with the CP, two blades for engineering and new product introduction with the NP and either 9 or 18 blades on the high-volume XP. And then within that, there are channel modules that are mixed and matched. So, between one customer to the other, there are very often just slight variations. And this allows us to buy inventory as a pool and then be able to do a quick configured order, which allows us to have better and better lead times.

Okay. So, do you envision a day where you were essentially breakeven on just a recurring revenue stream?

That would be certainly our goal, such that on a bad quarter or a bad year, we’re not losing any money. That would be at a minimum, that should be our goal as we always live. There's always going to be cycles in this thing. We believe that as we increase the number of markets and customers, we think we can get to a point where we are. It is interesting, we're really at a point where as we add, if we go add $3 million, $4 million, $5 million with the revenue in a quarter, we really barely add any expenses at all. The problem is if we drop $2 million, $3 million, $4 million, we also can't cut very much. And so, I think we're at a good point right now and with these products, majority completed and shifting from sort of an R&D focused to a sales focus, this is a good place to be.

Alright. Thanks for your time today.

Thank you. [Operator Instructions]

And operator, I know that Jeff who is one of our regular calling guys had sent a message in just recently saying he was not – he was on a plane and not to be shocked. So, I don't think he's missed a conference call in eight or so. So, he won't be calling in today.

Okay, great. I show that there are no further questions, and I would like to turn the conference back over to management for any additional or closing remarks.

Alright. Well, thank you very much everyone. We appreciate it. And as always, we invite anyone who happens to be anywhere in the Silicon Valley, if they want to make an appointment with us. We'll be happy to show you around and show you some of the exciting products and things that we're working on right here. And we look forward to our next call with everyone. Take care, bye-bye.

Thank you. That does conclude today’s conference. Thank you all for your participation. You may now disconnect.