Aehr Test Systems

Good day and welcome to the HEIR Test Systems Fiscal 2020 Fourth Quarter and Full Year 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 the MKR Group. Please go ahead, sir. Thank you, operator.

Good afternoon and welcome to HEIR Test Systems Fiscal 2020 Fourth Quarter and Full Year Financial Results Conference Call. With me on today's call are Hehr Test Systems President and CEO Gayn Erickson and Chief Financial Officer Ken Spang. 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 fiscal 2020 fourth quarter and full year 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 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. These factors that may cause results that 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. Now, with that said, I'd like to turn the call over to Gayn Erickson, President and Chief Executive Officer. Gayn?

Thanks, Jim. and good afternoon to those joining us on today's conference call and also listening online. Then I'll go over our fourth quarter and full year 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 diet testing burning solutions. And then we'll open it up for your questions. This past fiscal year, we've made substantial progress with our new Fox products that strengthened our customer base, expanded our markets, and enhanced our operations and sales capabilities to capitalize on the significant market opportunities we see at home. While we were on track to meet our expected guidance for fiscal 2020, due to the challenging global environment and uncertainty around the COVID pandemic, we experienced push-outs of customer-forecasted orders in our second fiscal half for our Fox 2 systems and consumables in data center and some 5G end-use applications for silicon photonics transceivers. These customers have indicated the push-outs are temporary and that they'll require the additional system capacity and consumables in the current fiscal 2021 year. We'll cover the details supporting our optimism, but want to quickly state that we are reinstating guidance and expect FY21 full-year revenue to be between $25 and $28 million, up 12% to 26%, and to be profitable for the year. With the increase in number of customers in production using our systems, the new market opportunities we added with new customers this year, our move to our higher margin clock systems and consumables, and the completion of our previously announced restructuring and sales enhancements this past year, going forward, we are well positioned to address our new market opportunities and are now profitable at a much lower revenue level. Let me walk you through some of the key business highlights for this last quarter and for the last fiscal year as we outlined in our earnings release. First highlight, we closed a new order with a major new customer in Silicon Photonics. During the quarter, we closed an initial order with a new customer that is a major global leader of communication transceivers for data centers, telecom, and 5G infrastructure for our Fox full wafer level test and burden system for production stabilization and test of their Silicon Photonics devices. This new customer is deploying our FOX NP system for initial production burning and stabilization of our high performance silicon photonics devices and is forecasted to then transition to our FOX XP wafer level testing burning systems during this fiscal year 2021 to meet their volume production forecast. We categorize this customer as a tier one customer, which we define as a customer with the resources and market size to be able to purchase six to $10 million per year or more of our systems and consumables. The next highlight is we closed an initial order with the world's largest OSAT. During the quarter, we closed an initial order with the world's largest outsourced semiconductor assembly and test supplier to use the FOXP family of products, including air wafer packs and dye packs for production tests, burning, and reliability screening in devices with full wafer simulated dye and module. They have already added our system to their list of tools and capabilities in their marketing with sales material to their customers, and we have begun some cross-marketing and sales activities with them. Stay tuned for more updates and announcements. Next, AIR added a key new market with the addition of wafer-level burning of silicon carbide devices. This year, we successfully took the initial order for and installed our first production capacity for silicon carbide devices. including into the list of markets such as silicon photonics, 2D and 3D sensors, automotive lasers used in photonics devices, and have shown the value and feasibility of using our Fox solutions to address these market needs. The initial system order was for a Fox multi-wafer system with proprietary wafer packs configured to test 18 wafers in parallel at up to 1,000 watts of power per wafer. and the customer is using it for 100% production burn-in and infant mortality screening of silicon carbide devices at wafer level. This new silicon carbide application with a Fortune 500 market leader in silicon carbide and power models adds a significant new Tier 1 customer of our Fox XP system and wafer packs for whole wafer burn-in and infant mortality screening of silicon carbide devices. Since our initial installation in January, we've received multiple follow-on orders for additional wafer packs from this customer, including multiple new designs that now have a significant number of different devices that have been released into production. This customer is forecasting additional capacity needs for our Fox XP systems during this fiscal year and for years into the future. The silicon-carbide semiconductor device market is growing at a tremendous rate. with a unit growth of high power devices of over 50% CAGR per year of research from 2019 to 2025. Silicon carbide is a very impressive material for high power and particularly high voltage devices for applications such as the needs of electric and hybrid electric vehicle power trains, electric vehicle charging infrastructure, IT data center power supplies, and renewable energy power conversions such as wind, solar, as well as power storage. These devices have shown reduction in power losses as much as 78%, and many articles have been written about the first mainstream use of silicon carbide power devices that were in the Tesla Model 3, which enabled much longer driving range per charge. This has basically changed the market with most, if not every, hybrid electric vehicle automotive company moving to silicon carbide-based powertrain and charging systems. The challenge is the reliability of silicon carbide is known to have high infant mortality rates, but after a reliability burn-in screening, these defects can be completely removed to provide extremely reliable devices for these mission-critical applications. AIR is able to provide a complete solution for one of the key reliability screening tests on an entire wafer of devices all at one time. while testing and monitoring every device for failures during the burn-in process to provide critical information on devices so they're not later packaged into multi-die modules where the yield impact is 10x or 100 times as costly. The old research is forecast of over 600 million yielded power MOSFET 20 amp equivalent devices shipping per year by 2025 equates to over a half a million wafer starts per year. which creates an enormous opportunity for our wafer-level and simulated dye systems given the long durations required to burn in the devices and to remove the defective parts. Burn-in times can be as long as days per wafer, so even at our industry-leading 18 wafer-per-system capacity Fox XP, that's a significant number of systems. The next highlight is pretty important. In fiscal 20, we saw the industry adopt production wafer-level burn-in. We made significant progress with our new FOX products for Wafer and Seaglade, Digest, and Vernon during the fiscal year with two Tier 1 customers added and five customers transitioning to production with 100% stabilization or infant mortality screening with our FOX systems. We saw our silicon photonics customers move to production for the first time in just this last fiscal 2020. During the fiscal year, we saw our lead customers for silicon photonics move to full volume production. We expect them to purchase additional systems this fiscal year and into the future as they continue to maintain or grow their market share and add additional silicon photonics devices to the mix. We also moved three additional silicon photonics customers to production with our Fox Systems in fiscal 2020. all three of these customers are expected to ramp production during this fiscal 21 as well, adding capacity in both systems and consumables. And near the fiscal year end, we announced yet another new Silicon Photonics customer that is deploying our Fox NP system for initial production, burn-in, and stabilization of our high-performance Silicon Photonics devices and is forecasted to then transition to our Fox XP multi-waker systems during the fiscal 2021 to meet the volume production forecast. Silicon Photonics devices are highly integrated silicon-based semiconductors that have embedded or integrated the non-silicon-based laser transmitters and receivers to enable a smaller, lower cost, higher reliable alternative to traditional fiber optic transceivers. Historically, fiber optic transceivers are made up of many different logic ICs, multiplexers, DMUXs, external discrete lasers and receivers into a mechanical package that is used in data center and telecommution systems. Health and Communication Infrastructure. Basically, this has been the high-speed transmission lines for long-haul and data center-to-data center backplane of the Internet. However, these fiber optic transceivers have been extremely difficult and expensive to build. This has been seen as a limiter to the adoption of fiber optic transmission of data and to the maximum data rates and transmission in the data centers that store the world's data. The old research has stated that market leaders like Intel, Cisco, Luxterra, Products, InFi, and Acacia are setting the standards for 100, 200, 400, and even 800 gigabyte transceiver standards based on transceivers with fully integrated silicon photonics devices, while many other companies are also jumping into this exploding market. One of the key claims of these transceivers are their lower manufacturing cost and the ability to scale manufacturing Due to the full wafer-level integration of these devices, which brings the scale of semiconductor manufacturing to fiber optic communication for the first time in history. Where AIR fits in is that these devices all need to have their photonics transmitters stabilized under high power and temperature, and also customers use our systems to screen for infant mortality of these devices to ensure high energy quality and long-term reliability. This is a manufacturing step down on 100% of the value. and in the case of silicon photonics, we provide a much more cost-effective and scalable solution for this step than doing this equivalent stabilization and screening after the dye are put into the final PCB substrate and package. The silicon photonics market is growing at a CAGR of 42% between 2019 and 2025 to a $3.6 billion annual market and we believe that the entire industry will transition to wafer-level or simulated dye for this critical manufacturing step. which is where our FOXP products stand alone as the most cost-effective solution for this and a portfolio of patents and IP in this area. We estimate that the market opportunity for wafer stabilization and reliability screening equipment and contactors for silicon photonics is approximately $150 million by 2025 with well over 300 wafers of test capacity required by that time. Our Fox XP production system is the only multi-wafer system available to test and burn in these high-power silicon photonics wafers in a single insertion. And we can test up to nine 2,000-watt wafers in parallel on a single system. So the total capacity needed by 2025 is about 35 of our nine wafer Fox XP systems to put this into perspective. Today, air has shipped about 50 wafers of capacity into this application. Interestingly, while fiscal 20 was the first year to see volume production soak in photonics with wafer-level burn-in, FY20 also saw a second half push-outs in silicon photonics ramps. We experienced push-outs from customer forecasting orders in our second fiscal half of fiscal 20 for our FOX systems and consumables in data center and some 5G end-use applications for silicon photonics transceivers. These customers, as I said before, have indicated the push-outs are temporary, and the required additional system for consumables in the current fiscal 2021 year. Our next highlight is shipments of consumables were a significant percentage of revenue this year. Shipments of our proprietary wafer pack contactors and die pack carrier consumables for our box systems accounting for 48% of total revenue in fiscal 20. In fiscal Q4, which we just ended, our consumable revenue was 79% of revenue. as anticipated customer orders for systems did not materialize, but cost their demand for the consumables for the install-based systems held steady. As we stated in the past, historically, consumables can often soften any weakness in systems as customers contemplate new capacity but maintain, and in some cases actually increase the need for new wafer pack compactors and die pack carriers to get new designs or devices out to market. In the semiconductor test industry, This is just over $9 billion total last year in 2019. It is made up of $3.7 billion in test systems, another $3.7 billion in consumables, such as probe cards for contacting wafers and sockets and prep boards for contacting package parts. And then another $1.7 billion is semiconductor device handling equipment in wafer and package form. With Air's Fox product line, we play actually in all three segments. Our Fox systems serve the test systems market. Our wafer packs and dye packs serve the contractor consumables market. And our liners and the Fox systems themselves that have the integrated thermal capabilities of a wafer prober are turnkey solutions for handling devices. So the consumable business as a whole is approximately the same size and often higher than the systems business in down years in the overall semiconductor test business. Again, both about $3.7 billion. But for reliability and burn-in space, which we primarily play in, the consumables can be two to four times the annual sale of systems, as the systems typically are used for longer periods of time with annual needs for new contactors and consumables. This is why we're confident that our consumer business is likely to exceed our overall systems business over time, even though both will grow in absolute dollars. Our next highlight is that AIR is currently engaged with over a dozen new potential customers. We're currently working with well over a dozen additional Tier 1 and Tier 2 customers that are considering using our products for high market growth applications including silicon photonics, silicon carbide, automotive, and memory devices production burning. While Tier 1 customers are seen as those with the opportunity to drive $6 to $10 million or more in systems and consumables per year, are two customers that have the market share and application to drive one to three million per year or more. Several of these companies are expected to place their orders this year with ransom to production later in the fiscal year and or the following fiscal year. We see an increasing awareness and adoption rate that we believe could drive the majority of the market for silicon carbide as well as silicon photonics to move to wafer level or simulated dye burning within the next few years. Our final highlight is in fiscal 20 we completed our planned restructuring and shift to higher margin products. AIR completed our previously announced restructuring and also moved to much higher margin box systems and consumables during the fiscal year. We started this before the pandemic outbreak and completed it during the last few months. As part of the previously announced and planned restructuring, we completed the close of our Japan subsidiary and also transitioned are European sales to third-party sales representatives late in the fiscal year. We also added key marketing directors and made some additional structural changes to our sales force. We believe these enhancements have already and will continue to both improve our efficiency and materially increase our sales activity and bookings going forward and increase our penetration of key customers in our target markets. We believe these changes position us for success with sales of our current products as well as additional new products planned for introduction this year. We also have shifted to higher margin, highly differentiated systems and consumables. As I noted in the last call, we've started to see some forecasts for renewed market demand for Package Part burning systems, particularly from customers who are asking us about our high voltage capability and adding this capability to our Package Part systems. These changes in long-term forecasts reflect the move toward higher voltages and other requirements for devices and automobiles, particularly with electric and hybrid automobiles and autonomous vehicle sensors. We expect to see a resurgence of packaged part burn-in systems orders from some specific ABTS system customers and to generate additional new opportunities with our planned introduction this fiscal year of a new Package Part Burning System product that adds very high voltage test capabilities. We see the need for high voltage capabilities in both wafer level and package part as a new high growth opportunity for air test and expect to see sales from current customers resume and also add several new customers that include both tier one and tier two level customers for package part burning. At the same time, and as discussed last year, We had seen a significant drop-off in our packaged part product business as several of our customers have shifted their businesses for entirely closed product lines that were driving the need for testing Vernon using the high power and high pin count capabilities of our ABTS family products. In one specific case, a customer that had been buying multiple systems per year has all but shuttered a line of products and we feel they are unlikely to take additional capacity of that particular configuration of systems that we had several systems of inventory left on hand when they dropped their forecast to zero. Interestingly, this and several other customers have at the same time shifted their focus to other product lines, particularly for automotive and other new applications that are expected to drive new needs in the future. I've mentioned this specifically last quarter and noted that as a result, we were going to do a deep dive in our inventory for all the products and configurations. We decided it was prudent and appropriate to write down the inventory that we simply do not see a likelihood of selling in the foreseeable future, which resulted in a one-time charge this quarter of $1.6 million of inventory. This leaves us with significant inventory of systems and material that is in our near-term forecast, particularly in our Fox products, which also allows us to make short lead time shipments as well as meeting significant revenue forecasts without taking on additional inventory expenditures. Last year we reported on the shipment of our new FOX CP test and burn-in system to a major new Tier 1 customer for a very high volume application for the enterprise and data center market with a planned build out of this production ramp over the next several years. The Fox CP is our low-cost single wafer compact testing reliability verification solution for logic memory and photonic devices. And their solution is comprised of a test system integrated with a wafer probe configured with a high-powered thermal chuck that allows up to two kilowatts of testing or burning in of full wafers. This customer has indicated they plan to begin their production ramp within our current fiscal year. And so we expect to begin additional shipments of test cells to them in the second half of this fiscal year. We're very excited about this application, which is expected to drive very high volumes of devices that we believe will drive test system sales for several years. Let me try and wrap this up. We added two key Tier 1 customers this past year. We now have five significantly large Tier 1 customers. Again, applications and market sizes that can drive $6 to $10 million or more a year. On our Fox wafer level, it's regulated by test systems and consumables. We also have another seven Tier 2 customers that are each capable of FOX product sales typically between $1 to $3 million and sometimes more. In addition, five of our customers moved to production during the year using our FOX products for 100% stabilization and burn-in and infant mortality. And we will be growing the list of both Tier 1 and Tier 2 customers this year in both wafer levels, singulated dyes, but also some packaged part markets until we can significantly grow these and new customers in the markets we're already serving. Additionally, we will be adding new markets and enhancements to address some significantly large new markets later this fiscal year. We're also seeing renewed activity and interest of our Fox systems and consumables for several new applications in the 2D and 3D sensor markets, particularly for mobile devices. These sensors are becoming ubiquitous in smartphones, tablets, and are forecasted to be adopted in laptops and computers as well. The level of security associated with facial recognition far exceeds fingerprint-based biometrics and certainly greater than traditional keyboard entry passwords. These new opportunities in 2D and 3D sensing are opportunities that could add significant upside to our currently forecasted revenue for this year and next, but are not built into our current guidance. Although COVID-19 has created challenges such as international travel, some small impacts on our supply chain, and created caution and or delays with some customer production ramps, we believe that there is no long-term negative impact to air, the demand for our products, or for the attractiveness of the key markets that we serve. We absolutely believe that we'll come out of this stronger than we went into this worldwide pandemic with more production customers, more applications, and higher margins with higher value products. Our key customers' products are being used to build out new data centers, improve data rates and increase storage in data centers, build out the 5G infrastructure, enable the newest sensors and technology in smartphones and tablets, enable the widespread adoption of electric and hybrid electric vehicles and charging stations, and address the unstoppable demand for memory and data storage in computing data centers, mobile devices and hundreds of applications that are keeping the world connected. As we move into fiscal 2021, we remain optimistic about growth in systems and consumables within our installed base of customers, as well as expanding the number of customers with our family of FoxP solutions. We expect significant growth in both our top and bottom lines moving forward, with much lower fixed operating expenses and significantly higher margin products and services. With that, let me turn it over to Ken before we open up the line for questions.