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spk01: Hello and welcome to the Air Test System's fiscal 2023 third quarter financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw from the question queue, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Jim Byers of MKR Investor Relations. Please go ahead.
spk08: Thank you, Operator. Good afternoon and welcome to Airtest Systems' third quarter fiscal 2023 financial results conference call. With me on today's call are Airtest Systems President and Chief Executive Officer, Gane Erickson, and Chief Financial Officer, Ken Spink. Before I turn the call over to Gain and Ken, I'd like to cover a few quick items. This afternoon, right after market closed, Airtest issued a press release announcing its third quarter fiscal 2023 results. That release is available on the company's website at air.com. This call is also 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 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 Airtest Systems undertakes no obligation to update the forward-looking statements. And now with that, I'd like to turn the call over to Gane Erickson, President and CEO.
spk03: Thanks, Jim. Good afternoon, everyone, and welcome to our third quarter fiscal 23 earnings call. Appreciate you guys joining us today. Let's start with a quick summary of the highlights of the quarter and the continued momentum we're seeing in the semiconductor wafer-level test and burn-in market. Then Ken will go over the financials in more detail. Then after that, we'll open up the lines to take your questions. AIR had another great quarter in Q3 with revenue and net income ahead of consensus estimates. We finished the quarter with record bookings for a single quarter of $33.3 million and a strong backlog of $31.6 million at the end of the quarter. Our effective backlog, which includes all orders received since the end of the quarter or since March 1st, the beginning of the fourth quarter, are $41 million. Our total bookings for the fiscal year to date is already $72.5 million. Let me start with the increasing momentum we're seeing in wafer-level test and burn-in for silicon carbide. Companies are adding significant capacity in silicon carbide semiconductors to address the incredible forecasted demand, particularly for the electric vehicle and electric vehicle charger markets. The silicon carbide market for electric vehicles and its supporting infrastructure requirements are growing at a tremendous rate. Forecasts from William Blair estimate that the silicon carbide market for devices and electric vehicles alone, such as traction inverters and onboard chargers, is expected to grow from 119,000 six-inch equivalent silicon carbide wafers for EVs in 2021 to more than 4.1 million six-inch equivalent wafers in 2030, representing a compound annual growth rate of 48.4%. This equates to almost 35 times larger in 2030 than in 2021. Also, six-inch equivalent silicon carbide wafers for other markets such as solar, industrial, and other electrification infrastructure are expected to grow to at least another 3 million wafers by 2030. This expands our silicon carbide test and burn-in market even more. During the quarter, our second major silicon carbide semiconductor customer moved from an initial Fox NP dual wafer test and burn-in system of ours used for engineering and device qualification to purchasing their first Fox XP systems to be used for production test and burn-in of their silicon carbide wafers. Last week, we announced a follow-on order from this customer for production quantities of our wafer-packed full wafer contactors, which will begin shipping this quarter to be used with these systems in production. We believe this customer, who serves several significant markets, including the electric vehicle industry as well as other industrial applications, will purchase a large number of our Fox XP systems to meet their publicly announced significant increase in plant capacity and revenue growth over the next several years and through the end of the decade. These systems include our new very high voltage channel module option, enabling high temperature reverse bias, or HTRB as it's known in the industry, testing of silicon carbide devices using our proprietary wafer pack contactors. which include patented anti-arking capability that is necessary to avoid high-voltage electrical arcing between devices or between devices in the streets on the wafer. This solves a key challenge with high-voltage wafer-level test and burn-in. These systems were also purchased with our new fully integrated and automated wafer pack aligners, which will begin shipping this fiscal quarter we're in right now. As I've noted before, adding automation to our FOX production systems through our new aligner gives our wafer-level test and burn-in offering even greater value and opens up several large incremental markets to air, such as high-volume processors and chipsets with integrated photonics transceivers, high-volume memory devices, and also high-volume, high-mix devices requiring extremely high reliability and 100% burn-in, such as automotive microcontrollers and sensors. We have the new automated wafer pack aligners here at our facility in Fremont going through customer benchmarks and completing system integration with our fully integrated Fox XP multi-wafer test and burn-in system so customers can come in and see the aligners in action. We also had several potential new customers come in to see the automated wafer pack aligners in operation. Our lead silicon carbide customer continued to ramp up their production and their use of our Fox XP production systems and wafer pack contactors. During the quarter, we received a $25 million order for a significant number of additional Fox XP wafer-level test and burn-in systems scheduled to ship over the next six to seven months to meet their increased capacity needs for producing silicon carbide devices for electric vehicles, chargers, and electrification infrastructure. Earlier this month, we also announced a $6.7 million follow-on order for wafer packs from them, representing about half of the total wafer pack for wafer contactors needed for these Fox XP systems. Each of these Fox XP systems has the capacity to test and burn in 18 full wafers of devices at a time. Now let me tell you about our benchmarks and engagements with prospective new customers. We also continue to make great progress with our previously announced benchmarks and engagements. We continue to work closely with one of the largest silicon carbide players in the world on a large wafer level benchmark and qualification. We're excited that this qualification continues towards success as the company finishes their internal processes to complete the qualification. As with our other large silicon carbide customers, we expect the silicon carbide supplier to require significant capacity of wafer-level test and burn-in systems to meet the fast-growing demand for silicon carbide devices and electric vehicles over the next decade. We understand that this has taken a long time but we're confident that this will result in success for both them and Airtest in using the Fox wafer-level systems and wafer packs for their volume production. We also had a very productive quarter in terms of new customer engagement, which has continued into this quarter and even multiple new potential customers visiting Airtest just this week. With essentially all COVID-related restrictions behind us throughout the world, our customer-facing meetings and our progress on new customer opportunities has grown substantially. Since last quarter's conference call, three additional companies currently making silicon carbide devices decided to move forward with full wafer-level evaluations and are directly to purchase our systems. We're seeing companies shift from long-term road maps to near-term execution of their product and production plans for silicon carbide devices and are internalizing the critical need for long wafer-level test and burn-in times. As such, some companies that we had only met with briefly in the past are coming to us with their wafer designs and asking for quick feasibility studies, quotations, and lead times. It's unbelievably exciting time in the silicon carbide industry and the markets that silicon carbide semiconductors are serving. In addition to our momentum in silicon carbide, we're now engaged with several gallium nitride semiconductor suppliers ranging from radio frequency or RF devices to power devices. Since our last call, we also received a firm commitment from a very large multinational semiconductor supplier to move forward with a full wafer level evaluation of gallium nitride devices. This evaluation includes our new high voltage option for doing the critical HTRB stress needed for gallium nitride MOSFETs and amplifiers. We believe gallium nitride will be a significant market driven by some very high volume applications such as RF amplifiers, consumer electronic power converters and chargers, solar power inverters, and charger and converter applications in both standard and electric vehicles. Feedback from companies has been that several of these applications will require production burn-in to meet the application's critical quality and reliability needs. With our proven Fox XP wafer-level burn-in solution and its cost-effective ability to test thousands of devices in parallel and up to nine wafers at a time with the high voltage capability option, we believe we are well-positioned to capitalize on this opportunity and believe gallium nitride can expand our total addressable market in a meaningful way. In just the last two months, I've personally met with over a dozen companies across Europe the US and Asia, and demand is extremely strong across the world. We've had questions about China since COVID restrictions have, quote, eased. From our perspective, the customer pull has been much greater for our solution outside of China so far. Having said that, we've recently seen activity pick up at several of the larger silicon carbide suppliers and electric vehicle producing companies in China. It's becoming clearer to them that wafer-level burn-in is critically important to remove the infant mortality or early failures of silicon carbide devices before they're put into modules and for certain before installing them into an inverter or drive unit or, heaven forbid, the electric vehicle itself. Each individual silicon carbide MOSFET, which acts as an electrical switch, has a failure rate of typically as much as 1% or more during the stress test burn-in conditions that correlate to the actual use and conditions and time that these devices are expected to endure or the life of the electric vehicle. This is referred to in the auto industry as the mission profile. This profile is equivalent to several hundred thousand driving miles and the time the electric vehicle would be running to drive that far, including idle time, etc., Semiconductor suppliers in critical applications such as silicon carbide MOSFETs that are used in the drive unit inverter of electric vehicles must not only prove to the auto suppliers, or OEMs as they're called, that their devices will last for the life of the mission profile, but they must also show how they will ensure production test screening to remove devices that will or are likely to fail. This is where production burning comes in. Our solutions can apply industry standard and or customers custom stress conditions such as high and low negative voltages at elevated temperatures to induce failures on weak devices without damaging good devices. We do this on every device, up to thousands of devices on a time on every wafer with 100% traceability. We then test up to 18 wafers at a time in a single pass on a single Fox XP system. This parallelism is literally unprecedented. No company has ever done this before Airtest, nor is anyone else doing this today. We have a significant number of patents that protect key technical features and functionality of this solution, and we believe any other company that tries to build something like our solution or any company using such a solution would be violating our intellectual property and patents. We maintain our patents across the world, including major semiconductor and automotive supplier hubs, such as the United States, Germany, Italy, Korea, Japan, Singapore, and even China. Our wafer parallelism and price point leads to an unprecedentedly low test cost for a whole wafer test and burn-in. At capital depreciation rates of less than $5 per hour per wafer, on a full wafer of silicon carbide MOSFETs to be used in electric vehicle inverters or chargers, our customers can cost-effectively apply a burn-in stress condition to weed out early life failures and to stabilize the threshold voltages of these devices for use in power modules for up to 24 hours or more without driving up their costs of the devices. And the yield improvement of removing the failure before they are put into the power modules actually lowers their overall manufacturing costs. Our FOX wafer level test and burn-in solution with our proprietary wafer pack full wafer contactors are a fantastic fit for the silicon photonic semiconductor market. And we're hearing this directly from customers and potential customers. Now let me move on to silicon photonic semiconductor burn-in and stabilization. As a reminder or to clarify those not familiar with silicon photonics, This is what the industry calls the devices where both electrical semiconductor integrated circuits are combined with photonics or light-based transmitters and receivers. The classic initial device was a device that integrated an optical transceiver with an integrated circuit into a fiber optic transceiver component. This technology was heralded as a way to massively increase the manufacturing capacity and to significantly lower the cost of fiber optic communication transmission in data centers and server farms. This was considered a major breakthrough and was key to long-term data bandwidths and to lower power data centers and has really only been proven over the last several years. The pandemic actually slowed down or even stopped the initial production ramps of customers of these devices, but is now picking back up as a viable and lower cost alternative to the higher cost discrete transceivers built over the last 20 years. We continue to be very enthusiastic about this market, especially as it looks to expand beyond just being used for fiber optic transceivers to becoming an embedded market that integrates the fiber optic technology into other devices such as chipsets and processors themselves. Multiple market leaders, including companies like Intel, AMD, Nvidia, and others, have publicly discussed their investments to integrate silicon photonics transceivers into their microprocessors, graphics processors, and chipsets. While we believe this transition is still several years out, we also believe it represents an enormous opportunity for Airtest with our unique position of having a proven and cost-effective multi-wafer solution for testing and burning in and stabilizing silicon photonics devices at a massive scale while still in the wafer form. We are currently today testing 150 millimeter, 200 millimeter, as well as 300 millimeter photonics-based wafers with our current Fox wafer-level tested burn-in systems at customers today. We also have provided customers with our Fox NP and XP systems using our dye packs for testing singulated dye and photonics modules. We're beginning to see the front end of this opportunity with the strong recovery of silicon photonics from the weakness we saw during the pandemic. AIR currently has systems installed at over a half a dozen customers for 100% test and burn-in of silicon photonics devices used in 5G infrastructure, data and telecommunication transceivers, and a few additional applications yet to be introduced. As the market expands, we believe there'll be more business for both engineering and characterization qualification of devices up front, as well as for production wafer-level test and burn-in. Over the next several years, we believe silicon photonics will become a significant market for wafer-level test and burn-in and could become as large or larger than silicon carbide later in the decade. To conclude, we're very encouraged by the continued positive momentum and expanding growth opportunities we see with our current and prospective customers and continue to be very confident in the guidance we've shared for revenue of at least $60 to $70 million for our current fiscal year that ends May 31st. which represents growth of at least 18 to 30% year over year and revenue growth of between 35 and 75% in the second half of this fiscal year compared to the first half of the year. We also remain confident that our bookings will grow faster than revenue this fiscal year as the rampant demand for silicon carbide and electric vehicle increases, setting us up for strong momentum heading into our fiscal 22 that begins in June. Lastly, before I turn the call over to our CFO, Ken, I want to announce that after 15 years with Airtest, Ken has indicated his intention to retire from the company after finishing this fiscal year and after the fiscal year reporting period. Ken has been our CFO and VP of Finance since 2015 and has been an amazing contributor and a great partner to me during a key phase in AIR's development and growth. Ken and I have discussed this and we feel this is actually a pretty good time for this. and it's a great time for a new CFO to come on board to help AIR with the tremendous growth opportunity and plans ahead of us. AIR has engaged a professional recruiting firm, and Ken is already providing help to the board and me to find an exceptional finance executive and will provide assistance and support when a candidate is identified. We're very confident that this change, when it happens, will be a seamless transition. With that, let me turn it over to you, Ken, and then we'll open it up for questions.
spk05: Thank you, Gain, and good afternoon, everyone. As Gain noted, we had another solid quarter in Q3 with strong sequential and year-over-year growth in our revenue and net income, beating analyst estimates in both the top and bottom lines. We also reported record quarterly bookings and a strong backlog. In addition, with over 9 million already in bookings in the first month of the quarter, we now have an effective backlog of 41 million. Looking at our financial results in more detail, Net sales in the third quarter were $17.2 million, up 16% sequentially from $14.8 million in the second quarter, and up 13% from $15.3 million in the third quarter last year. The sequential increase in net sales from Q2 includes an increase in systems revenue of $2.5 million and customer service revenues of $278,000. This was partially offset by a decrease in wafer pack and die pack revenues of $308,000. These consumables revenues accounted for 37% of our total revenue compared to 45% of revenue in the preceding second quarter. Customers typically purchase our Fox systems and wafer packs at separate times and also stagger their delivery. Still, our contactor revenue grows both with increased installations of our systems and also with the increase with the installed base. Customers purchase new contactors with new wafer or device designs. not just with new system capacity put in place. Gross profit in the third quarter was 8.9 million, or 51.6% of sales, down 1.8 percentage points from gross profit of 7.9 million, or 53.4% of sales in the preceding second quarter, and up from gross profit of 6.4 million, or 41.9% of sales in the third quarter of the previous year. Last year's fiscal third quarter Gross profit includes the impact of a $1 million adjustment for excess and obsolete inventory related to legacy products. Excluding the impact of this adjustment, gross margin in the third quarter last year was 48.6%. The variance in gross margin from prior quarter included a negative impact of 1.4 percentage points due to product mix shift and another negative 1.2 percentage points due to the last quarter's favorable freight and tariff costs, warranty provision, and inventory reserves. This was partially offset by a 0.8 percentage point benefit due to a decrease in overhead costs to cost of goods sold resulting from higher revenue levels in the quarter and an increase in capitalization of costs to inventory. With a relatively fixed manufacturing overhead, benefits gross margin are recognized while revenues grow. Non-GRAP net income in the third quarter was 4.7 million or 16 cents per diluted share which was a strong 27.5% of revenues. This compares to non-GAAP net income of 4.5 million or 16 cents per diluted share in the preceding second quarter and non-GAAP net income of 3.1 million or 11 cents per diluted share in the third quarter of fiscal 2022. Non-GAAP net income excludes the impact of stock-based compensation. Operating expenses in the third quarter were 5.1 million an increase of $656,000, or 15%, from $4.4 million in the preceding second quarter, and up $941,000, or 23%, from $4.1 million in the third quarter of the previous year. The increase from the preceding second quarter includes increases in SG&A of $375,000, primarily due to employment-related expenses, and an increase in R&D of $281,000 related to increased spending on development programs. The increase to SG&A includes increases in headcount, salaries, recruiting fees, and also commissions, bonuses, and profit sharing based on increased bookings, revenues, and profits. During the quarter, the company increased its worldwide sales and marketing efforts with the addition of three senior sales executives. We are already seeing positive impacts of those additions and are very excited to have these sales professionals already making an impact. The increase in R&D is primarily due to cost associated with development programs for our new automated wafer pack aligner and our very high voltage channel module and bipolar voltage channel module. Our new very high voltage channel module option enables high temperature reverse bias testing of silicon carbide devices using our proprietary wafer pack contactors, which include patented anti-arking capabilities that is necessary to avoid high voltage electrical arcing between devices, or between devices in the streets on the wafer that can be under 200 microns in distance. This solves a key challenge with high voltage wafer level test and burn. We continue to invest in R&D to enhance our existing market leading products and to introduce new products to maintain our competitive advantages and to expand our applications in addressable markets. These R&D programs include enhancements that we believe increase our competitive advantage in all our key target markets including silicon carbide and gallium nitride power semiconductors, silicon photonics and other photonics semiconductors, mobile 2D and 3D sensing devices, and memory and data storage semiconductors. Turning to the balance sheet for the third quarter, we finished the quarter with a very strong balance sheet. Our cash, cash equivalents, and short-term investments were $42.8 million at February 28th. up $6.2 million from $36.6 million at the end of the preceding second quarter, and up $10.7 million from $32 million at the end of the third quarter of fiscal 2022. We continue to invest excess cash in short-term investments to take advantage of increases in interest rates. Interest income in the third quarter was $374,000, up from just $1,000 in the third quarter last year. As noted in a prior 8 filing, We were not impacted by the closure of Silicon Valley Bank. We hold over 39 million of our cash, cash equivalents, and short-term investments at Morgan Stanley, a highly regarded banking institution, and only maintain our operating accounts at SBB. The SBB closure did not impact our customers, employees, or vendors, and we continue to operate without any interruptions or impact to our operations. During the quarter, we announced an at-the-market offering of up to 25 million in shares of the company's common stock, on the open market. As of quarter end, the company has received gross proceeds of $7.3 million on the sale of 208,917 shares and an average price of $34.78 per share. $17.7 million remains available under the ATM. Under the terms of the ATM Equity Distribution Agreement, the company may not sell shares during the company's closed trading windows when it is deemed the company may be in possession of material nonpublic information. Also, the company only plans on selling shares against the ATM during open trading windows and when it believes it would provide the best source of capital with minimum dilution to existing shareholders. Working capital at February 28th was 67.2 million. This represents an increase of 12.4 million from Q2 and an increase of 18.2 million from Q3 of the prior year. Inventories at the end of the third quarter were 21.6 million, an increase of 3.6 million from the preceding quarter, and up $6.5 million from the third quarter of fiscal 2022. We are increasing inventory to support our backlog and our near-term revenue projections, and to ensure adequate supply to meet current customer and future market demands. Our highly differentiated Fox family of systems allows us to purchase material that is leveraged across many customers and markets. This provides us confidence in our ability to meet the significant market opportunities without having to purchase unique material that is only sellable to one customer or one market. During the quarter, we renewed our lease for our corporate offices and manufacturing facilities. The amendment extends the term of the lease for a period of 86 calendar months commencing on August 1st, 2023, and includes an option for the company to further extend the lease for one additional period of five years after the expiration date. With this renewal, the company recorded operating lease right of use assets of $5.7 million with corresponding short and long-term operating lease liabilities. We finished the quarter with record bookings for a single quarter of $33.3 million. Backlog as of February 28th was $31.6 million compared to $15.5 million at the end of the preceding second quarter and $26.9 million at the end of the third quarter last year. Our effective backlog, which includes all orders since the end of the third quarter, is $41 million. Total bookings for the fiscal year to date, including the over $9 million received in March, is $72.5 million, exceeding our total bookings of $62.2 million for the full prior fiscal year. Now, turning to our outlook for 2023 fiscal year, which ends on May 31, 2023, we are confident in the company's growth trajectory and our unique capabilities and product offerings to meet customer demands. As such, we're reiterating our previously provided guidance for full-year total revenue of at least $60 to $70 million, representing growth of at least 18% to 38% year-over-year, with strong profit margins similar to last year. We continue to expect bookings to grow faster than revenues in fiscal 2023 as the ramp in demand for silicon carbide and electric vehicles increases, and we build momentum going into fiscal 2024. We expect to provide guidance for fiscal 2024 during our July earnings call. Lastly, looking at the investor relations calendar, Airtest will participate in three investor conferences over the next few months. We'll be meeting with investors virtually at the Oppenheimer Emerging Growth Conference on May 11th, in person at the Craig Hallam Institutional Investor Conference taking place in Minneapolis on May 31st, and we will be presenting and meeting with investors in person on June 6th at the William Blair Growth Conference taking place in Chicago. We hope to see some of you at these conferences. Before I turn it over to the operator for questions, I'd like to add to Gaines' earlier comments regarding my pending retirement. With the market opportunities increase in customers and customer engagements and the expected growth for Airtest moving forward, this is an excellent time and opportunity for a new CFO to build their team and take the company to the next level. I've greatly valued the last 15 years with Airtest, and I appreciate the opportunities it's presented. As Gane noted, I'll stay on as CFO until a suitable replacement can be found, and I will also ensure that a clean and successful transition takes place before I leave. I know that my wife, who retired a couple years ago, actually, is excited for that to happen as soon as possible so we can move on to the next chapter in our lives. This concludes our prepared remarks. Now we're ready to take your questions. Operator, please go ahead.
spk01: Thank you very much. We will now begin the question and answer session. To ask a question, you may press star and one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star and two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Christian Schwab with Craig Hallam Capital Group, Please go ahead.
spk02: Hey, guys. Thanks for taking my questions. Ken, congratulations on retiring. Well-deserved opportunity to go spend free time with the people you love. Good for you. So I just have a few quick questions. Thank you for all the clarity that you gave, Gabe. Just as far as it relates to the third customer, the third potential large customer, would you expect production orders in your next fiscal year from them?
spk03: We've actually announced a total of four customers in silicon carbide so far. We expect production orders from all of them during the next fiscal year.
spk02: Perfect. That answers the question. Thank you. And then on silicon photonics, you know, and the six different customers, you know, when would you anticipate the first meaningful orders from that new area? Is that something that could happen as soon as next fiscal year, or is that two to three years out?
spk03: So, I mean, we think that based on some of the customer forecasts that we're seeing, that we're actually going to see just a rising tide of the previous, just the transceiver business. I mean, candidly, we're seeing the same forecast they told us back in 2019, that they plan to buy in 20 and didn't when COVID happened. So, you know, we think there'll be a rising tide of that. I think maybe more importantly what you're trying to get to is when is that next big wave? We've already seen some purchases and are doing some, you know, early qualification work on some of those new types of products. And we think that that can continue on next year as well. I think the over-under is really when do we start to see the front end of any meaningful production. And right now we're still kind of assuming it's going to be out. know a couple few years but um it could turn quickly um and there's been some news and you know out there in the on the internet and some of the company making announcements etc so uh we're really close to it we're you know we have the products i mean we can based on what customers are telling us we can test those devices in each of the different wafer forms or even singulated die with what we have today And with the new automated aligner, we can even do it with more automation and hands-free, et cetera. So I think we're really well positioned, and what we're doing is we're just focusing to be that engineering tool to begin with and be the plan of record, if you will, when they go to production. And then as we get a little closer, we'll see. But I don't know. I probably wouldn't put a lot of revenue expectations for next year, but there certainly will be some. Okay?
spk02: Great. And then the expansion of opportunity to domestic Chinese providers of silicon carbide, is that something where you would expect substantial shipments to occur maybe next fiscal year, or is that something where negotiations and get-to-know-you has just started?
spk03: We'll see. I mean, for clarity, we currently believe that there's a pretty reasonable or significant, I use that word a lot, but we're getting a lot of purchases, we think, for our systems, for companies that serve the China market that are not in China. So we already are doing that today. We know that that's going to grow. I think there's not all Silicon Valley Carbide for China is going to be built in China, for example, okay? We are also talking to suppliers in China as well as OEMs in China. So we're kind of making our way up the food chain, if you will, with several conversations with tier ones and OEMs, which, you know, as people that are close to this realize that is a completely new thing. You know, prior to COVID, none of the automotive guys realized you know, talk to the semiconductor guys, right? They all worked with tier ones and then the tier ones bought from the semiconductor guys. But with all the craziness that went on with supply chain, automotive guys should realize they need to go directly to and talk to the semiconductor guys. Well, we're taking a step further. They're talking to us. So there's another way of creating clarity around what we offer. the traceability, the confidence in our solution, et cetera. And so I think we have, you know, several oars in the water in China. Having said that, you know, we're very confident in next year and how things are going, and candidly, without China being a significant portion of it. I would say that would be upside to our plans.
spk02: Great. So I just want to be clear, Gain, when you talked about China, silicon carbide, you were talking about the six, I think I wrote six, customers. That is Chinese domestic producers more than likely for Chinese domestic demand. Is that correct?
spk03: It's my belief. By the way, I'm not sure I've ever said six. When I talk about six, it was silicon photonics type people that we're currently in. But If there's six big players in China that are saying they're going to be in silicon carbide, I believe you. It is my belief that those companies are most likely targeting the Chinese domestic to them markets. But having said that, a lot of Chinese automotive suppliers today are buying silicon carbide from the companies outside of China. And so we think that we can play in China both with non-domestic suppliers but also domestic suppliers over time. Domestic to China, if you will, right?
spk02: Correct, correct. Great. Thank you for that. Just one last quick question. As far as backlog is concerned, would you expect kind of similar – You know, trajectory is last year where we did have a very strong, you know, February quarter of backlog. We've worked through some of that and then, you know, entered the next, you know, fiscal year with a very strong idea of what the year will look like. You know, are we going to enter that, do you believe, with a really strong backlog number too early to tell? Yeah, I mean, we...
spk03: We haven't been doing a lot. We really don't give quarterly guidance, but then if you give annual guidance on top of three quarters, it's pretty clear what the quarter is, I realize, but that's still revenue focused. The reality is that I see things picking up. There's not a dwell. There seems to be a lot of people accelerating their plans right now. We're putting out a lot of quotes. There's a lot of people asking for lead times on top of each other. And I believe we'll go into next year with a lot more visibility than even last year. Having said that, it will be distributed across a much larger number of customers, which I guess there's some averaging going on in terms of, you know, it's not all or nothing with one or two customers, but we also think that the large customers are going to continue to buy. So I don't know how many different ways I can describe our optimism, but, you know, AIR is, I mean, people are really recognizing the value that we add. and are seeking us out in addition to us knocking on all the right doors. And I'm super enthusiastic about heading into next year.
spk02: Fabulous. No other questions. Thanks, Gabe.
spk03: Okay. Thanks, Christian.
spk01: The next question comes from Jed Dorsheimer with William Blair. Please go ahead.
spk04: Hey. Thanks for taking my question, Eric. Ken, I'll echo the congrats.
spk05: Thanks, Jeff.
spk04: So I guess first question, game, or maybe, Ken, maybe you want to take either one. But the guide, and kind of reiterating the numbers, suggests a pretty wide variance at this stage in the game, 17 to 27 million. And I know that there were two tools with the that you weren't sure whether or not you get the rep rec to fall into the quarter. But I'm wondering, is that the only thing that's sort of kind of the difference of that $10 million, or is there something else that you could probably provide a bit more color on?
spk03: That's a big chunk. And for folks that are there, Airtest, along with most, I think, all capital equipment companies have revenue recognition policies related to when you can score revenue. And that is different than when you get paid, by the way. Our policy, I think, is very conservative. If we have a new product, particularly to a new customer, but if we have a brand new product that has never been proven or installed and accepted by the customer, we simply don't take revenue for it until that milestone. Even though we know it's working here, it's been completely proven out, et cetera, but until the customer actually signs off on it, we won't score revenue recognition. And we gave that as a pretty big heads-up going in. That's why there's a lot more detail than normal, and candidly, we'll probably be pulling back on detail related to things. It's just to make sure that our shareholders understand that that we've got some pretty large revenue number things that are shipping during the quarter, but may or may not score revenue. And, you know, you have a several multimillion-dollar tool that, you know, misses by a few days, and it's pretty easy. What I want to make sure that – and I'll be explicit, even though it's just being implied – We're just talking about whether it comes in in Q4 or Q1. So that's the bulk of it. We also have a lot of new wafer pack designs. These are new customer wafers. Folks, I think we have almost 20, right now, 20 designs of wafer packs that are in process. Those designs are all like the timing of when those first ones ship, et cetera. It's not so much revenue recognition, just with the timing. But those all are expected to then go into volume production as well into next year. So there's some of that too that adds up. I mean, we're not trying to be coy. I'll tell you, we've fretted over how do we re-describe where we're at. But that's a realistic range of where we think we're still at. And again, we have not lost any deals. We've not identified any new competitors that are threatening or more threatening to us. Our momentum has picked up in terms of customer enthusiasm, but as a public company, you still have this quarterly milestone thing. How do you describe it? Comfortable with the numbers. There's some variation in there. you know, probably going to come down in the last week or two for us to know exactly where it ends up. And if not, it'll have probably already scored by the time we have our earnings call, what, in July. So we'll see how it goes. Sorry about that. Got it.
spk04: No, the color is helpful, so thank you. I guess if you could just help me reconcile just two moving parts. Inventory, not surprisingly, ticked up, you know, as you talked about in terms of ramping some of these products. But Customer deposits dropped off on the balance sheet. I was wondering if you could just provide a bit more color there. Is that a timing issue, or how should we read those two vectors, if you will?
spk03: Yeah, that's a good observation and good sleuthing. So we actually have – taken with some specific terms and conditions with customers. There are circumstances where we do not take down payments. It's a pretty good threshold contractually for them to actually do that. I have also at times on a brand new product with a new customer waived the down payment to begin with because it's a little odd to tell them we guarantee it's going to work and then at the same time be holding their money. And candidly, people are pushing back harder and harder on some of those deposits. I think a lot of it is that they can earn a lot more money on that, too. But there's a little bit of examples where some of the backlog is not all at a deposit, and that's what you're seeing.
spk04: Got it. And then last question for me. Just as we run through, I guess, the announced but not named customers, which I think memory serves there's four of them at this point but the the second one that you uh that you've talked about that i think previously have said uh has not publicly announced their intention into silicon carbide as a major semiconductor provider um they they have at this point put out an announcement in uh silicon carbide i just want to make sure that that is is correct i
spk03: I believe they have not. They have still not said they're in it. I should go look again. But at least about a week ago, they still hadn't. So still quiet. Pretty interesting. Yep.
spk04: All right. I'll take it offline. But thank you.
spk03: Okay. Okay.
spk04: Thanks, guys. Thanks, Jed.
spk01: The next question is from Dylan Patel with Semi Analysis. Please go ahead.
spk07: Hey, James, great quote. I wanted to ask about the aligner, because I'm having trouble with the new automated aligner. How does that impact revenue? How does that impact the growth over time? Right now, you have the manual aligner, and I think when I visited a month ago, you folks told me it's more like three sort of Fox systems, the XP systems can get configured or treated by one aligner, but the automated aligner is a one-to-one, and How should I think about, you know, what is the penetration of that automated aligner that you're going to sell and develop versus, you know, the manual aligners over time? Is everything going to go automated or – yeah.
spk03: All right. So for clarity, yeah, we actually make, today we make and sell two types of aligners. We actually have an automated aligner for years installed in multiple customers. And we also have what we call a manual aligner. The automated aligner allows you to walk up with a wafer pack and a foop of wafers or cassette of wafers. And then it will automatically take a wafer, put it into a wafer pack, and then present that wafer pack in a patch form, we call it. So it's actually now this cartridge that you can place into our system, up to 18 of them, for example. That's an automated aligner. We also make a manual aligner, which is a really cool tool that we had internally developed. that customers came and said, we want them. And they allow you to do a very quick alignment process. It's still sort of a proprietary sequence, but a user can be trained to do that. And it's great for engineering, but people actually use it for production as well. It is something that has the interaction of the operator. It follows a certain sequence, but you can very repeatedly and consistently do that for both engineering and production. It's manual, tends to be more operator intervention. Automated, you just push a button. We have developed a new automated aligner. It's really considered our fourth generation. We've been working on it now solidly for over three years. And it's the one we said that we begin shipments on this fiscal quarter. We've already taken multiple customer orders for it. Interestingly, the way we designed it, and for those people, at least in our company, know this is one of my passionate babies, if you will. It's very, then I'm going to say how well thought out it is. But anyhow, the team really did a good job of thinking through all of our learnings over this. And we know, I think, more about wafer-level burning than anyone else in the world. And one of the subtle things is that, or not so subtle, it can be in what we call a standalone mode where you can have feed it cassettes of wafers and it'll automatically align wafers and then put them into a cart. And so you can load up a cart with 18 wafers and that cart then can be moved over to one of our systems. You open the door and you put 18 wafers in, close the door and hit go. So it's more automated than our current one, which only does one wafer pack at a time. This can actually move the wafer packs around and load up a cart. But in that case, it's offline and you can share it amongst multiple Fox XP systems. That exact same aligner can also dock to an XP. And instead of a cart in back, it has an XP in back. And it'll open and close each of the blades and allow you to have a continuous flow of 18 wafers at a time in this very small footprint. Now, some companies feel passionate that that's the only way to go. And some companies think, nope, I want them offline. And candidly, we don't argue with them. Whichever way you want is fine with us. But if you feel you need automation, we got you covered. If you feel, I like to do it manual, I want it to feed, there's different reasons people do it, we have that covered as well. And in fact, we've taken orders for both. And you can interchange them. If you wanted to, you could take an automated aligner that's in a standalone, and we can adapt it probably in a day or so and move it and have an XP dock up to it. So it's really well thought out. It's one product that'll work across multiple customers. It'll work across 100 millimeter wafers for RF GaN devices and those types. 150-millimeter-type devices from GaN and silicon carbide, 200-millimeter GaN silicon carbide and silicon photonics-type devices, 300-millimeter silicon photonics memory devices, large-scale microcontrollers and other processors. So it's a very flexible system that we're really proud of. So I hope that helps.
spk05: So, hey, to add to that, Gane, the topic of RevRec – Yes, absolutely. We do have the automated aligners that we have not recognized revenue yet because they have not been accepted at the customer. So those fall into the same criteria that you had talked about earlier in our RevRec policy. Thank you, Ken.
spk03: And by the way, just one more thing. And a customer that places an order for an integrated system with both the XP and the aligner, If we ship the XP ahead of time and then upgrade it, we still don't recognize the XP revenue. Okay? Because we have a continuation of that until those aligners are accepted. And that's, right now, kind of, that's what's got a lot of this stuff related to. Well, when's the revenue gonna happen? Is it gonna be Q4 or Q1? Okay? Sorry, go ahead.
spk07: should I think about this as a way to increase tool utilization from the companies that kind of like it a lot, or more so is it, but while it does increase the Fox XP utilization, there's also, they're paying a bit more for the one-to-one with the aligners that are automated and mated directly to the XP. How should I think about that for you and your revenue going forward, right? Because it isn't a cheap thing, right? It is an increased cost and revenue per sort of XP that you deploy.
spk03: You know, it has some efficiencies, advantages by being integrated that offset the fact that you would have one of them per system versus maybe one per three or four. It allows, and I actually am choosing not to go into all those competitive reasons, candidly. But there are absolutely advantages to being integrated, by contrast to, well, doesn't it drive some of the ASP up? There's also companies that are passionate about not wanting to have any manual operations in their factory and not having wafer packs moving around, and other people that are passionate that that is the best way to do it. And so we just offer that to them. I would tell you that you could make the argument that they're similar in cost of test, and one just has the advantage of automation, the other one has an advantage of potentially some flexibility on test times and fungibility of tools across the floor.
spk07: One last little comment I wanted to hone in on, and thank you for the answer, is You mentioned GAN a couple of times. You haven't talked about GAN too much in the past. Are you thinking that the burn-in times are going to be long for GAN? The customers that are doing silicon carbide, some of them are, or at least the major companies are doing GAN as well. Do you think that they would use a lot of burn-in there as well for these sorts of applications? Could you talk about that a bit more?
spk03: I think that's what's shifted. If you would look at the breadcrumbs of the last couple of quarters, I think maybe two quarters ago I mentioned GAN for the first time. Maybe last quarter I said, hey, we're starting to talk to some people about it. We now have people specifically describing requirements for production burn-in and test times that are significant that make it an attractive market for us. That includes, it seems more obvious for the automotive guys, but there's actually other applications as well that would require production burn-in. The way to interpret that is these devices have an infant mortality rate that exceeds the application's need. By the way, one of the things we brought up is there are devices that have been shipping in the industry for decades that still have production burn-in. Even though they have high infant mortality rates, by using a production burn-in, you can weed out those devices and ship it into the application. An example of that would be DRAM. So DRAM, one of the most commoditized products that has been around since 1980, if you will, and Airtest was one of the market leaders in what put us on the map was building production DRAM burning systems. They're still being burnt in. So it doesn't always go away. And what we're seeing is silicon carbide, silicon photonics, these compound semiconductors are kind of a hotspot, both in terms of applicability for new applications driving things like electric vehicles or fiber optic communications, but also need this infant mortality rate and seem very susceptible to the desire for wafer-level burn-in because the devices are going to be put in multi-chip modules with other devices. So GAN devices specifically are being put into automotive applications. There are people for power. We've even seen RF people talk to us about wanting a production burn-in. So it's the first time we're getting that message out, and we now have engagements with several of them. One of them has already given us drawings to move forward with a wafer-level burn-in application for a long test time burn-in application they need. Anything else, you good? Sorry. I think we lost Dylan.
spk01: I think we did. The next question comes from Matt Winthrop with Equitable Research. Dylan, if you would like to rejoin the queue, you may press star then one.
spk06: I just wanted to once again congratulate you on all the effort and thank you, my friend, because I have so many happy and successful clients based on the due diligence I did and the tenacity and go-gettership that you have led this company. And I'm just so tickled pink that you're doing great. Keep up the good work. And your PR guys, by the way, Jim Beyer, I think, don't get enough congratulations, but they've been diligent on this too. So I just wanted to thank you.
spk03: And you know what? If you walk around this building, there's a lot of happy, proud people here because you It's funny. We all believed it. Everybody's been working their butt off. If we build it, they'll come. And we all just believed in our hearts that this would play out. And for heaven's sake, sometimes it works out. And we're seeing it's not just silicon. I think silicon carbide will go down as the one thing that was sort of the one that really pushed the industry over to widely adopt wafer-level burn-in technology. But then we're already seeing people saying, well, if you use it for that, can I use it for this as well? So it's been a long time coming, and we have a long way to go. It's really exciting. Good work.
spk06: And you've also changed forever conversation at Thanksgiving dinner to, you know, difference between silicon carbide and GAN and stuff. But anyway, go back to work. Keep on plugging. Thank you. Oh, thank you. That's it, huh?
spk00: Okay. Appreciate it.
spk01: At this time, there are no further questions in the queue, and I'd like to turn back to management for closing remarks.
spk03: All right. Well, I really appreciate, folks, everyone's time here, and we're really excited to be serving our customers. We'll just, as we have always offered, if you folks happen to be in town here in the Bay Area in Fremont, California, manufacturing floor is just a buzzin'. We'd love to host you and answer any questions for you and we look forward to seeing many of you at some of the conferences that are coming up. And then if not, we'll have a chance to talk to you at our next call as we talk about our next fiscal year. Thank you very much. Bye-bye.
spk01: The conference has now concluded. Thank you for participating in today's presentation. You may now disconnect.
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