Aehr Test Systems

Good day and welcome to the Heir Test Systems third quarter fiscal 2020 financial results call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Jim Byers of MKR Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to Heir Test Systems fiscal 2020 third quarter financial results conference call. With me on today's call are Heir 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, Air Test issued a press release announcing its third quarter fiscal 2020 results. That release is available on the company's website at air.com. This call is being broadcast live over the internet for all interested parties, and the webcast will be archived in 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. Those 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 Ehr Test Systems undertakes no obligation to update the forward-looking statements. And now with that, I'd like to turn the conference call over to Gayn Erickson, President and CEO.

Gayn Erickson Thanks, Jim. Good afternoon to those joining us on today's conference call and also listening online. Ken, our CFO, will go over our third 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 dive test and burn-in solutions. And then we'll open up the lines for your questions. Before I discuss our performance and financial results for the third quarter, I'd like to say a few words about the impact of the coronavirus and our response to this global pandemic. First, I'd like to express our heartfelt concern to all those who've been impacted. and to everyone listening today, I hope that all of you and your family and friends are staying safe and healthy. As the COVID-19 pandemic continues to unfold, our foremost concern at Airtest is to ensure the health and safety of our employees, their families and our worldwide community. As of today, I feel fortunate to report that none of Airtest direct employees or their immediate families have contracted the virus. On March 19, 2020, the Executive Department of the State of California issued an executive order ordering individuals in the State of California to stay home or at their place of residence except as needed to maintain continuity of operations of the federal critical infrastructure sectors. AIR is a global supplier to critical infrastructure, specifically companies in the IT, communications, and manufacturing sectors that require semiconductor components. As such, we're taking extraordinary measures to maintain continuity of our operations and to continue to safely operate with full capacity available in manufacturing and across the company to support the vital needs of our critical infrastructure customers while complying with the local and state mandated shelter in place directives. Wherever possible, our employees continue to work from their residences using the best possible remote communication and collaboration tools available. as well as securely accessing remote operation of our tools at our facilities and also at our customer sites. While working remotely, our R&D and applications teams continue to be highly effective in advancing our, easy for me to say, our ongoing product enhancement programs and customer applications to meet critical releases in customer product roadmaps. In addition, through direct and indirect representatives, AIR also has engineers and infrastructure around the world to support our customers and meet our contracts, response times, and critical parts lead times for our installed base of AIR Test products. Personally, I feel very fortunate that AIR Test is in the position to currently not have any employees yet directly impacted by this pandemic, and that we have the capability, capacity, and government support to be productive, effective, and Abel to meet all customer needs at this time. We're also in the position where our customers are open for business, which I realize is simply not the case with so many businesses around the world. Let me turn to our business highlights. We're pleased with our results for the fiscal third quarter, which include continued profitability and strong gross margins. Profitability for the quarter exceeded our historical business model reflecting higher than average consumables as a percent of total revenue for the third quarter. Despite the current challenging global environment, we remain engaged with a large number of potential new customers. We continue to see a substantial number of customer evaluations of our FOX NP, XP, and CP products to address their production needs and test in Vernon on a number of applications. We think this is a combination of so many of our customers' engineering teams having more time or more focus to work on improvements to the production processes so that they come out of this environment stronger than they came into it. And or because so many of our applications are related to the global infrastructure of IT and communications that are clearly more important than ever before and are being stretched to their limits. We have several customers that are saying that they're trying to actually pull in plans for new programs and new products as a result of the new demands on the worldwide communication infrastructure. We're currently working with more than a dozen new customers for production wafer or die-level testing Vernon. That includes silicon photonics devices for 5G and data storage farms, power silicon carbide devices for automotive, sensors for mobile and automotive applications, and memory devices for data storage and computing. Our sales, marketing, and applications teams remain very busy supporting these sales efforts. using online conferences, videos, and other collaboration tools. During the quarter, we shipped an additional Fox XP multi-wafer test and burn-in system to meet the production ramp of a leading supplier of silicon photonics devices. This customer continues to look to AIR to support their high volume production ramp and wafer level burn-in capacity and to forecast significant growth in shipments for silicon photonics devices. that we expect to drive the need for additional production tests and burning capacity for multiple years into the future. As we talked about on past calls, 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. When they buy a FOXX PRMP system from us, they also buy a set of either wafer pack or dye pack contactors. that allow us to make contact to their specific and unique device design. These consumables are needed with each new device they introduce or with each device shrink or new design. During the quarter, we received orders totaling more than $2.9 million from our installed base of Fox Test and Vernon System customers for our wafer pack and dye pack consumables, including orders from a single customer of approximately $2.3 million for dye packs for test and mobile sensors. Other device applications for these orders include production tests of silicon carbide devices, flash memories, and silicon photonics devices. Shipments of our consumables for our Fox systems accounted for 51% of our total revenue for the third quarter. As I've noted before, the consumable business continues long after a system is installed, and that as we grow our installed base, we believe we can reach a point where our wafer pack and dive pack compactors exceed over half of our annual revenue. providing stable baseline for our test. Over time, we feel that the percent of our business made up of consumables will grow, although it will still vary as a percent of total from quarter to quarter. Turning to our package part and OEM chamber business, as I noted on our last call, the low-level business we've experienced in our package part business has been expected and was already built into our financial forecast. We've started to see some forecasts for renewed market demand for package part burn-in systems from customers who are asking us about our high-voltage capability and adding this capability to our package part systems. We see the need for high-voltage capabilities in both wafer-level and package part now as a new high-growth opportunity for air tests. These changes in our customer long-term forecast for our package part burn-in systems reflect a move towards higher voltages and other requirements for smartphone devices and automobiles particularly with electric and hybrid automobiles and autonomous vehicle sensors. As a result, we've seen a drop-off in demand of our older package system configurations, and we're currently evaluating these markets. Now, turning to our guidance for fiscal year 2020. Currently, all of our customers have their wafer fabrication facilities open to support the critical infrastructure around the globe in information technology, Communications, and Critical Manufacturing Sectors. And AIR is able to ship orders for systems, wafer packs, dye packs, and parts needed to support these customers with little to no limitations or delays. However, due to the uncertainty of the full impact of the COVID-19 pandemic on our customers, we simply cannot predict how this will impact our business in the near term. and we are taking the conservative stance to withdraw our previously provided guidance for fiscal 2020 year that ends this May 31st. Looking ahead, we remain optimistic about the significant market opportunities in front of us and about our customers and our unique capabilities to serve their test needs this year and beyond. As we continue to focus on our selling resources and processes, we've continued to make some structural changes in a few areas of our company that we began last fiscal year to both position us for success in addressing our new market opportunities as well as improve our efficiency. This month we completed closure of our Japanese subsidiary and the transition away from direct sales in Europe moving to sales representatives in both Europe and Japan. I'm pleased to note that with these changes, we've already seen far better sales coverage of Europe, while at the same time reducing our fixed costs in both Europe and Japan by approximately $120,000 per quarter, beginning at the start of our fiscal 2021 year, which will start this June 1st. As a result of these changes, we'll be taking some one-time charges associated with these closures and layoffs of employees in those offices in our fiscal fourth quarter. Lastly, I'm pleased to announce that we recently hired a new VP of Operations, Michael Brannan. Michael comes to us with extensive background in the semiconductor test industry and particularly the printed circuit board and assembly and probe card industries, where our traditional manufacturing spend is over 75% of total today. Michael is replacing David Fucci, who served as our VP of Operations for the last six years and is retiring at the end of May. We wish David well and thank him for his contributions during a pivotal time in AIRS history. David's retirement has been in the works for some time, and we began looking for his replacement several quarters ago, well before the coronavirus outbreak. We're excited to have Michael on board to lead our team in manufacturing operations, supply chain quality, and inventory management. To conclude, we had three solid quarters before the world got hit by COVID-19. We increased revenue by 34% year-over-year and, most importantly, turned a $5 million loss into a profit, and we expect to get back on track once this crisis is over. The fundamentals for air tests remain strong long-term, and we believe that we will emerge from this difficult period even stronger than we went in, with an even larger number of customers committed to using our Fox systems to meet their production tests and burning needs. With that, let me turn it over to Ken before we open up the lines for questions.