Aehr Test Systems

Please stand by, we're about to begin. Good day and welcome to the Air 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 Air Test Systems Fiscal 2020 Second Quarter Financial Results Conference Call. With me on today's call are Hehr 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, Hehr Test issued a press release announcing its second quarter fiscal 2020 results. That release is available on the company's website at hehr.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 Hehr Test Systems undertakes no obligation to update the forward-looking statements. And now with that, I'd like to turn the call over to Gayn Erickson, President and Chief Executive Officer.

Gayn Erickson Thank you, 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 simulated dye test and burning 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 gap net income of $251,000 and non-gap net income of $456,000 and improved gross margins. We're pleased to note that these results exceed analysts' expectations for error 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 electronic vehicles and other power conversion applications. It is our understanding that the higher defect density inherent in today's silicon carbide devices will drive the demand for additional test and burn-in to achieve the initial quality and long-term reliability needed by many industries, and in particular, the automotive market. The silicon carbide power device market and the need for reliability test solutions are expected to grow significantly over the next decade. According to research reported by High Tech News in July last year, the major factors driving the growth in the global silicon carbide power semi-market include the rise in demand of power electronics modules across various industry verticals, the increase in installation of solar panels for electricity generation, and the surge in demand of electric vehicles, plug-in vehicles and hybrid electric vehicles. The key advantage of silicon carbide-based over silicon-based semiconductors is silicon carbide-based power devices in particular provide significant reductions in power loss in high voltage power systems. This leads to extended battery lives and range for electric vehicles, for example, which is a huge deal. We also continue to see a significant silicon photonics market growth opportunity. Silicon Photonics is the name referring to photonics devices such as lasers and optical receivers that are fully integrated into or onto a complex semiconductor made of silicon. Today, the majority of fiber optic transceivers which transmit and receive a fiber optic transmission between two points are made up of many different devices on a complex module. Each fiber optic transceiver module includes discrete lasers, receivers, modulators, demodulators, Waveguide, switches, filters, digital logic amplifiers, basically everything needed to make up a single transceiver. These transceivers can cost several hundreds of dollars for data center applications and several thousands of dollars for telecom or data center to data center applications. I've heard that over half of the cost of a data center farm is in the communication infrastructure, not the service of the data storage. And today, most of that is still in copper with LAN type wiring. The big deal with silicon photonics devices is that they're much less expensive to build and are much more scalable in terms of manufacturability and yield. A key is the integration of the optical components directly onto a silicon device that has all the modulators, switches, and logic on a single piece of silicon. This allows companies to build hundreds of transceivers on a single wafer and get the scale we've all come to know about semiconductors that will allow most Major cost reduction and scalability of cost and capacity over time. What AIR brings is the ability to test in burn-in or stabilize the optical subsystems while directly in wafer form. We're able to stabilize and test all the devices in parallel on up to nine or 18 wafers at a time in a single system. For the first time, silicon photonics devices can displace traditional copper-based networks because of a competitive cost and capacity availability. This makes the silicon photonics market very cost and demand elastic with a demand for low cost fiber optic transceivers far outstripping the available capacity available. This is great for our customers that are now moving into production with their silicon photonics devices with all of them rushing to add capacity. We're pleased to report that three of our silicon photonics customers have now moved from engineering testing to high volume production testing burn-in of their devices during the quarter using our FOXP systems. One of these customers is utilizing both the FOXXP system and a set of custom dye pack carriers for the singulated dye test of critical silicon photonics laser module. AIR is the only company available able to provide both these unique solutions for wafer level and Singulated Dye production test and burn-in on the same platform. We also received follow-on orders totaling over $6 million during the quarter from one of our lead customers for a Fox XP multi-wafer test and burn-in system and multiple wafer pack contactors to provide additional high-volume test capacity for this customer's increasing silicon photonics device production requirements. This customer continues to look to AIR to support their high-volume production ramp and wafer-level burning capacity and forecast significant growth in shipments for silicon photonics devices that we expect will drive the need for additional production test and burning capacity for multiple years into the future. In addition, we're currently engaged with several additional potential customers in the silicon photonics market to utilize our wafer-level burning solutions for their engineering and production needs. AirTest is benefiting from the broad adoption of photonics in the data, telecom and sensing markets as our existing customers expand their product portfolios and manufacturing as well as new customers entering this high demand rapidly growing segment. Some of the key drivers of this market include data centers where companies are moving many new products into production for rapid deployment, 5G bandwidth requirements which are driving new innovations in silicon photonics from leading network suppliers and startups alike, and the implementation of 3D capabilities and sensors which is driving continued market expansion into new products in mobile phones, tablets, and other markets, particularly where security is critical. Market research company Yol Development predicts silicon photonics technology will grow from being used in just a few percent of the total optical transceiver market in 2016 to over a third of the market in 2025, with market value for transceivers of almost $4 billion in 2025. and according to market research engine, Silicon Photonics for data center and high performance computing is projected to grow at a compound rate of approximately 27% from 2017 to 2024. The lasers used in Silicon Photonics transceivers require a stabilization process where we apply precise calibrated current through every laser device at elevated temperatures to ring out process variations and to stabilize the output power of each device. This process takes many hours to even days to do and is needed on 100% of the devices. AIR has been doing this for years, starting with our previous generation of wafer-level burn-in systems, but our new FOX XP system provides the mass production and high power requirements these new devices require. As a result of the high growth of silicon photonics, the need for 100% stabilization in burn-in and the unique value that AIR brings by being able to cost effectively stabilize and test these devices while in wafer or singulated dye form before putting them into modules. We believe this market will be a significant growth driver for AIR over the next several years at a minimum. AIR is uniquely positioned with our value proposition of being able to test, stabilize and detect infant mortalities of these devices at either wafer level or singulated dye at a cost point that gives AIR a significant advantage. We believe our FOXP systems are the only way to cost-effectively scale to meet the demands of these devices that are used in 5G infrastructure build-out, 2D and 3D sensors, and enterprise and data center server and storage applications. Turning to our mobile photonics sensors business, while this business has been somewhat quiet the last couple of years, we're expecting orders for additional dye packs from our lead customer and their subcontractors and possibly additional test capacity for an exciting new device coming out this summer. Our Fox XP test and burn-in systems continue to be an important and critical part of this customer's manufacturing quality process on all their devices of this type. These systems use our proprietary dye packs that allow up to 256, 512 or 1024 devices to be tested in parallel per test blade and nine high-power test blades per system. Each blade can test up to 2,000 watts of devices and use our proprietary thermal chucks to heat and cool the devices conductively by direct contact with the device rather than convection chambers which use air blowing over the devices. Each blade can be configured with up to 2,048 individual power supplies and digital channels, which is critical to test these highly complex devices. Our Fox XP can read and write to every device individually, record device IDs, Device Temperatures and Device Status, while also burning in critical logic and optical subsystems, all in parallel with as many as thousands of devices at a time. Customers use our FOX systems when they must have 100% certainty of burn-in and to address critical thermal control of their devices. As we've talked about on past calls, our customers move to high volume production tests, I'm sorry, as our customers move to high volume production tests on our FOXP systems, We see their ramps driving significant incremental capacity of both our systems and also our proprietary wafer pack contactors and dye pack carriers. As we grow our installed base, we believe we'll reach a point in the next few years where our wafer pack and dye pack contactors exceed over half of our annual revenue. To illustrate this trend, revenue from our wafer pack and dye packs accounted for 44% of total revenues in this fiscal Q2 more than double compared to only 16% of total revenues in last year's Q2. And there continues to be pent-up demand for our consumables, wafer packs, and dye packs, as some of our customers have not yet reached all of the contactors to fully utilize the infrastructure of air test systems they have purchased to date. Turning to our package part and OEM chamber business, as we've noted before, the low-level business in our package part business has been expected and was already built into our financial forecast. However, we are starting to see some forecasts for renewed market demand for package part burning systems, particularly in automotive applications. While our largest package part burning customers are still not fully utilizing the installed base of our systems, they and other customers are asking us about our high voltage capability and adding this capability to our package part systems. We see the new need for high voltage capabilities in both wafer level and package parts as a new high growth opportunity for air test. We feel good about our progress midway through our fiscal year and remain very optimistic about growth and sales of systems and consumables to our installed base of customers, as well as the expansion of sales to new customers with our family of FOXP solutions. Looking ahead, we expect to see continued positive momentum to generate significant year over year revenue growth in fiscal 2020 and to be profitable for the fiscal year. And with that, let me turn it over to Ken, and then we'll open up the line for questions.