Jim Byers - IR, MKR Group Gayn Erickson - President and CEO Kenneth Spink - VP of Finance and CFO.

Tyler Burmeister - Craig-Hallum Capital Tom Diffely - D.A. Davidson Geoffrey Scott - Scott Asset Management Marty Cawthon - ChipChat.

Good day and welcome to the Aehr Test Systems’ Second Quarter Fiscal 2018 Financial Results Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Jim Byers of MKR Group. Please go ahead, sir..

Thank you, operator. Good afternoon everyone, and thank you for joining us today to discuss Aehr Test Systems’ Second quarter fiscal 2018 financial results. By now, you should have received a copy of today’s press release.

If not, you may call the office of MKR Group Investor Relations for Aehr Test at area code 323-468-2300 and we will get a copy out to you right away. With us today from Aehr Test Systems are Gayn Erickson, President and Chief Executive Officer; and Ken Spink, Chief Financial Officer.

Management will review the company’s operating performance for the fiscal second quarter before opening the call to your questions. Before turning the call over to management, I would like to make a few comments about forward-looking statements.

The company 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.

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 Aehr Test Systems undertakes no obligation to update the forward-looking statements. With that, I would like to introduce Gayn Erickson, Chief Executive Officer..

Thanks, Jim, and good afternoon to those joining today's conference call and also listening in online.

Ken will go over our second quarter financial results and guidance later in the call, but first I'll spend a few minutes discussing our business and product highlights, including our continued progress with our new XP platform for our next-generation of wafer level and Singulated Die and Module Test and Burn-in products.

We'll then open up the lines for your questions. We finished the second quarter with a net revenue of $7.9 million, an 88% increase over the same quarter a year ago. And revenue for the first half of fiscal 2018 was $14.9 million, up 56% from the same period last year.

We generated non-GAAP net income of $424,000, which excludes our noncash related stock-based compensation expenses and GAAP net income of $60,000 in the second quarter. Today, we announced an initial order from a new customer of over $2 million for our FOX-XP Test and Burn-in Solution.

In addition to this, we announced last month a follow-on order from one of our lead customers for additional FOX-XP capacity.

With our fiscal second quarter ending backlog of $12.2 million plus these additional announced orders, we feel we're in a very good position to hit our forecast and speed expectations as we finished out the second half of our fiscal year.

We continue to see good momentum in the first year of availability of both our FOX-1P and XP systems and we generating increased interest in multiple new opportunities both within our initial lead customers as well as with multiple new customers.

As I noted earlier, today we announced a new customer for the FOX-XP Test and Burn-in system, this initial order is from an industry leader in the photonics market space and includes a FOX-XP system and a set of custom DiePak carriers that enable burn-in and aging of integrated lasers and special circuitry on silicon photonics devices.

We're excited about this announcement for a couple of reasons. This initial new customer not only further expands our FOX-XP customer base, it also represents an additional application for our FOX-XP Test cell with a singulated bare die test configuration.

This true singulated bare die application not only allows for aging, reliability testing and burn-in of the devices, but also for functional testing in a separate automated test equipment test system before and after the burn-in step in the same DiePak tiles.

This unique capability is particularly important to our customers as it enables a single contact insertion rather than three, shortening cycle times and reducing wear and tear on the device pads on the bare die integrated circuit itself.

The FOX-XP system enables a significantly lower overall cost of test due to the system’s unique capability approving device quality and removing infant mortalities before a device is assembled into the end product.

The challenges of this application include handling high power density and designing custom DiePak carrier fixtures to ensure the required electrical contacts for burn-in and optical access for test.

In addition the application requires individual constant current supplies to power the modules and identify individual module characteristics or failures carriers during burn-in and test.

The FOX-XP system is capable of burn-in and test of thousands of laser simultaneously to enable very high production throughput, while ensuring 100% validation and assurance of the burn-in and test results.

The customer will utilize Aehr Test FOX-XP system and it's DiePak carriers as an integral part of its final test and reliability process for their singulated bare die. The DiePak carriers include features to integrate the solution into their test processes more efficiently reducing cost and improving quality.

We believe this is the first production test application of its kind, the DiePak tile concept can extend our application space for singulated die test and burn-in beyond silicon photonics devices to singulated bare die test of other devices where safety, security or consumer confidence is critical.

In mid-December we announced a follow-on order from one of our initial lead FOX-XP customers for additional test capacity for wafer level testing, aging and burn-in of their silicon photonics devices.

This order is for a new FOX-XP system to be added to their existing test cell utilizing their existing WaferPak aligner and previously ordered WaferPak contactors. For this application we're testing all of the die on a wafer in a single touchdown.

This requires that we have a large number of contacts can deliver a significant amount of power to the wafer and maintain a constant uniform temperature across the entire 300-milimeter wafer to keep the individual die from going into thermal runaway.

Our wafer pack contactor can be aligned to their wafer very precisely with Aehr Test proprietary automated WaferPak aligner with the alignment being done to precision of less than plus or minus 5 microns.

This lead customer was our first for our full production FOX-XP system, and we're happy to see them continue to commit to Aehr Test for their test and burn-in requirements at the wafer level. We believe they will continue to be a great customer for Aehr for years to come.

During the quarter, we also received follow on orders from our initial lead FOX-XP customer subcontractor, including an additional small system configuration for engineering work, multiple DiePak carriers for their next generation devices, and multiple FOX DiePak loader unloaders to increase their current production capacity.

The DiePak carriers are for our new programs where they purchase some initial DiePak carriers for qualification of the new devices prior to releasing the devices to production.

These new orders build on an existing device test and burn-in implementation at this customer that is now in volume production and expands our production presence for multiple generations of devices. We expect follow on orders for DiePak carriers for these devices as they move to high volume production.

We're also actively engaged with several additional potential new customers and opportunities related to our FOX-XP and FOX-1P wafer level and singulated die and module test and burn-in systems.

We're seeing good traction with these potential new customers that have similar needs and applications as our lead customers as well as additional new applications. We are encouraged to see these potential customers engage with us as they define their manufacturing and test plans.

In all these engagements, Aehr Test appears to be a strong candidate to provide their burn-in and test solutions.

The added visibility we’re gaining on our solutions as well as capacity needs for both this calendar year and 2019 and beyond adds to our confidence that we can continue to add new customers and applications to our FOX-P family of products going forward.

The unique ability of the FOX-XP system and its proprietary wafer pack and die pack contactors, to weed out infant mortality defects in optical transmitters, transceivers and sensors has made it ideally suited for mass production testing of devices such as silicon photonics, VCSELs or vertical cavity surface emitting lasers and LEDs in wafer, singulated die and module forms.

We believe this is the front end of a wave of opportunity for Aehr Test created by the need for semiconductors, modules and systems that must operate over long periods of time for applications where security, safety and customer and consumer confidence are absolutely critical.

We see increasing market applications for this such as autonomous driving applications, collision avoidance, and mobile and other applications where biometrics technology enables identification based on physical or behavioral traits.

Turning to packaged part burn-in and test systems business, we're pleased with the ramp of our OEM customer for our ABTS thermal chambers for use with their own electronics and software for a custom test application.

This has been a very good partnership program that enables us to generate incremental revenue and leverage our significant capacity to build our proprietary high performance and high power thermal chambers for applications and customers outside of our traditional customer base.

We began volume shipments of the production chambers to them this quarter and we continue to believe this project will drive significant revenue over the next two fiscal years. At the same time, we believe there maybe additional new opportunities beyond this new customer for this interesting and new business model for Aehr Test.

Our base level business which includes our ABTS packaged part test and burning systems and our WaferPak contactors for our installed base of FOX systems continues at a healthy run rate.

Most recently, we announced during the quarter an order for an ABTS system from a new customer in China, representing Aehr Test 10th ABTS customer in China and reflecting our continued expansion and success in the growing China market.

In the coming calendar year, we see additional new ABTS customer opportunities and our FOX customers continue to forecast the need for additional WaferPak contactors.

With the market opportunities we see ahead for our FOX-XP products and base business and our strong backlog of orders, we continue to maintain our confidence in our forecast for this fiscal year of revenue growth of at least 50% year-over-year and profitability for the year.

With nearly $15 million in revenue on the books and a healthy quarter-end backlog of $12.2 million for the first fiscal half, plus the addition of our more recently announced orders. We believe we are well positioned to achieve this expectation. Let me turn the call over to Ken and then we'll open up for questions..

Great, thank you Gayn. Total revenue in the second quarter was $7.9 million, a 14% increase sequentially from $7 million in the preceding quarter and an 88% increase year-over-year from $4.2 million in the prior year Q2.

The increase from the prior year quarter includes a $3.2 million increase in wafer level burn-in revenue and an $863,000 increase in revenue from package part system and ABTS OEM chamber revenues.

Non-GAAP net income for the second quarter was $424,000 or $0.02 per diluted share compared to a non-GAAP net income of $226,000 or $0.01 per diluted share in the preceding quarter and a non-GAAP net loss of $1.2 million or $0.08 per diluted share in the second quarter of the previous year.

The non-GAAP results exclude the impact of stock-based compensation expense. During Q2 2018 an increase in stock compensation expense of $142,000 was recognized related to the employee stock purchase plan due to employees increasing their elections during the purchase period.

We do not anticipate the Q3 2018 and Q4 2018 will recognize such a significant impact as the SPP two year look back window period expires. On a GAAP basis, net income for the second quarter was $60,000 or $0.00 per diluted share.

This compares to a GAAP net income of $10,000 or $0.00 per diluted share in the preceding quarter and a GAAP net loss of $1.5 million or $0.09 per diluted share in the second quarter of the previous year. Gross profit in the second quarter was $3.1 million or 40% of sales, up from gross profit of $2.9 million or 42% of sales in the preceding quarter.

And gross profit of $1.5 million or 35% of sales in the second quarter of the prior year. The sequential decrease in gross margin percentage from Q1 is due to product mix. Wafer level burn-in revenues accounted for 49% of revenues in Q2 ‘18 compared to 59% of revenues and Q1 ‘18.

The increase in gross margin from the year-ago quarter reflects the impact of higher unabsorbed overhead cost related to lower revenue levels in Q2 last year. Operating expenses in the second quarter were $2.9 million compared to $2.7 million of both the preceding quarter and the prior year second quarter.

Operating expenses for the first half of fiscal 2018 were $5.7 million compared to $5.5 million in the first half of fiscal 2017. The increases in operating expenses are due to employment related expenses including the increase in stock-based compensation and non-cash item and R&D project materials.

R&D expenses were $1.1 million for the second quarter compared to $955,000 in the preceding quarter and $1 million in the previous year quarter. As stated previously, R&D spending can fluctuate quarter-to-quarter depending upon the development of our new products.

SG&A was $1.9 million compared to $1.8 million in the preceding quarter and $1.7 million in the prior year second quarter. Turning to the balance sheet and changes in the second quarter.

Our cash, cash equivalents and short-term investments were $15.9 million at November 30, 2017 a $1.9 million increase from $14 million at the end of the preceding quarter. Accounts receivable at quarter end was $3.5 million compared to $5.3 million at the preceding quarter end.

The decrease is due to collection of aged accounts receivable outstanding at Q1 ‘18. Inventories at November 30th were $8.2 million compared to $9 million at the preceding quarter end. Property and equipment was $1.2 million compared to $1.1 million in the preceding quarter.

Customer deposits and deferred revenue short-term was $3.1 million compared to $3 million at the preceding quarter end. Backlog at November 30, 2017 was $12.2 million compared to $15.2 million at the end of the previous quarter and $6.7 million end of the second quarter of the previous year.

The company is adding resources to support its recent growth and to better address our global market. These additional resources include operations management, a Director of Asian sales and a Corporate Controller. We expect an impact to our operating expenses moving forward of approximately $100,000 per quarter from the additional headcount.

Turning to our outlook for fiscal 2018; for our fiscal year 2018 ending May 31st, we are reiterating our previous guidance of full year total revenue growth to exceed 50% over fiscal 2017 and to be profitable for the year.

Lastly, on the Investor Relations front, later this month Aehr Test will be exhibiting at the SPI Photonics West Conference taking place in San Francisco January 30th through February 2nd. We welcome any attending investors to stop by our booth. This concludes our prepared remarks. We are now ready to take your questions. Operator, please go ahead..

Yes sir. Thank you. [Operator Instructions] First question comes from Christian Schwab with Craig-Hallum Capital. .

Hi, this is Tyler on for Christian. Congrats on a really solid quarter guys and thanks for letting me ask a few questions.

So first, your lead customer for your FOX-XP, can you provide any outlook update there? Are we still expecting further capacity adds and any very rough timeline for any additional adds that you could go?.

Yes, we try not to get too detail, I know there have been some questions related to we do lead customer and numbers of customers, et cetera and maybe just as a reminder, we actually started with our very first customer we would refer to as our lead customer bought the first XP system. Our second customer led out and brought a production machine.

Then, our initial lead customers' production tools came through their subcontractor, which you could determine is actually our third customer, that's where we came up with the fourth customer in this last one just as a clarity. The lead customer itself not only has potential for purchasing themselves but also through their subcontractors.

And we do believe that we will continue to get incremental revenue from the subcontractor that is in if we were one of the lead applications. We are working on additional opportunities within the lead customer that could come through either their purchases or through the same or different in many cases, more likely different subcontractors.

So I think we're off to a great start in relationship with them. They are -- we have got a very good maybe intimate relationship with them and the engineering teams that are defining the new products. And as such I think we got pretty nice visibility that actually goes out over a significant period of time on new program.

So rather than get specific forecast on an application, we definitely do believe that we'll continue to get both FOX-XP and potentially other products with them over the coming years..

Okay. Thanks for that. And how about on the second lead customer for your FOX-XP? Last quarter they had the $900,000 already you said that wasn't all of it and then during this quarter another order was announced..

Yes, so fair enough, Tyler. So -- and I'm guessing there will be other people with the same question. So that customer led with the initial FOX-XP test cell. I think it was like a $4.7 million test cell including a large configured FOX-XP system, a large contingent of WaferPaks plus the initial aligner.

They -- it wasn't very long afterwards that we started to talk that we anticipated that they were going to need to add capacity as well as [technical difficulty] we announced the initial order of that call it reconfiguration and capacity shift last quarter.

And that included capabilities to increase the parallelism and power and some other specific technical capabilities on a per wafer basis.

What we just saw was this announcement just the last month here in December was effectively a follow on to that as they kind of completed that initial upgrade in their capacity reconfiguration, which included a new chamber and boards and all to create kind of the final overall test cell, which would made up of a couple of systems with a very high power configured WaferPak and wafer and blades as well as the aligner and WaferPaks.

Now relative to their capacity forecast, we do believe that they will continue to incrementally buy capacity forecast, we don't have a ton of visibility on that right now, but there are this and other programs involved with them that we are optimistic that they are very committed to the wafer level test and burn-in.

Because of the yield advantages and the cost advantages in some case maybe even enabling them to do some of the things with their roadmap. They would not have been able to do if they had to do this burn-in in a module form later on.

So I think it’s actually a really exciting, they are very committed to us, we’re heavily engaged with them on current and future products in there and have a lot of visibility. So actually I am really excited about that customer..

Okay, that’s great. Thank you for that.

So this new customer announced today, can you maybe compare the magnitude of that opportunity that you guys see compared to these two lead customers you currently have?.

Yes, you know what, I think in general certainly even the initial order is quite a bit smaller than the original test cells, there's a couple reasons for that. It’s a smaller configured machine to begin with along with a smaller contingent of these DiePaks.

Unlike the aligner that we OEM directly to the customers and supply under our name and the autoloader that we basically buy and turnkey and basically sell it to the customers as a turnkey solution with a customized one with our DiePaks.

This has a new type of DiePak pick and place handler which is an optical version, in this case the customer is buying it directly without it kind of passing through us with the markup, some customers prefer us to own the whole solution, in this case they -- because of their relationship with that that vendor they are owning it.

So that's why it seems maybe different than the first two applications. I believe going forward there will be cases where the customers may want us to actually buy and turnkey even the optical aligner, but that's part of the reason it’s smaller.

Related to their capacity going forward, we have only been given a certain amount of visibility of what it looks like, but this the end use market for what’s going on with all the silicon photonics and different applications is pretty exciting and there is a lot of investments that are being made there.

So -- and we’re actually talking to a number of customers about either singulated die module or full wafer level testing.

So it's a great customer [technical difficulty] is very interesting with the bare die applications, so we have got some additional value in what we are providing and we would certainly expect them to continue to buy more moving forward..

Okay, thank you, that’s great. And then my last question, there is multiple opportunities here that you guys have and that are coming forward.

So could you maybe rank or give the top three opportunities that you guys are most excited about or have the biggest potential magnitude if it’s either your current FOX-XP customers, potential new customers that you're working with, OEM the chamber OEM opportunity, your future OEM opportunities.

Or could you kind of rank what might be the biggest advantage going forward?.

That’s a good question. I certainly believe some of our wafer level and singulated die level opportunities probably have the highest revenue potentials to them. We have seen the singulated die or module form there some applications and programs that could run a close second to it.

From the OEM program, there is a potential for some really high volumes although certainly the ASPs of just an OEM chamber are significantly less. I think we have publicly talk kind of a range of -- without telling what our prices are chambers out in the market could be 75k to 150k or something so pick some range in there.

So they are just -- these are $1 million chambers, so you still need a lot of them to ship $7 million. But we've already taken I think we've publically reported over $3.5 million worth of order so far. And so the quantities are there and we believe there is more behind it.

Now that's -- because it's an OEM project what it is the customer was looking for a high powered thermal chamber there really isn't anything out there on the market, we build our own proprietary, it's built to our specifications and we have two subcontractors that we use for assurance of supply and capacity.

And I think one of the critical reasons they chose us is not only the how great our chamber is with some very unique capabilities, but we can ship more chambers than anybody else worldwide. And so, they give us some real opportunity to ship them without a significant amount of manufacturing overhead or other bolt-on.

So even at the lower margins that they are, it's good business for us. So, I think again I think the wafer level products and the FOX products are probably where the most revenue opportunities are.

Our ABTS base level business is good business and our OEM business is kind of incremental business to us, but probably the priorities would be on our FOX products. And I won’t make -- you won’t make me pick which of my customers is my favorite. .

All right. Thank you for that. That's all for me..

Thanks, Tyler. .

Next question comes from Tom Diffely with D.A. Davidson..

Yes, good afternoon. So, I was hoping to dig into the photonics side of your business. Several years ago we talked about semiconductor world and how need to do all the testing, but obviously photonics has become a big piece of the story.

And I'm curious what type of photonics are you testing is it the laser diodes, are they light emitting diodes, are they VCSELs or all three? And what is about your system that enables you to be so efficient at testing on the photonic side?.

Okay. So, today we're actually all three of those, pure silicon photonics. So there are big VCSEL lasers and LEDs. So we have production wafer level and die level solutions that are in production data they are doing those. So, a few things that are unique about them -- about what the solution.

So, first of all I usually will discussion with people if you are in this reliability testing business that we're in. So all semiconductor devices today are tested good from bad.

They’ll have some level of screen that will make sure that they were built to a certain specification and they are levels of goodness, they go this fast or go this accurate and that ATE space is about a $3 billion annual market for just the text equipment, and another couple of billion dollars in handling equipment and another close to that in contactors and all.

So that total space is $5 billion or something along that, if I did that math right, I apologize. Then there are certain types of devices that have both an element where the instant mortality rate is higher than the application requires.

Where the devices themselves will have some failure rate pick a number, a half a percent or a percent or 500 parts per million whatever the number is. And -- but in the application that's not good enough.

So although it was just tested good and it works what people will do is they are used equipment like Aehr Test System, package part burn-in systems and they’ll take the device and they’ll run it on a test system and will exercise it at elevated temperatures and voltages and stress test it and we’ll do that for ours let’s say.

And then if the part is still working at the end of that because we've effectively aged it and now looks like it’s one year old because of this accelerated test and burn-in then it in fact will not fail at the same rate, it will last for years without failing.

And so certain critical applications like automotive applications, historically controller systems things you put in satellites those were important.

What's happened is that the industry there have been new types of devices or new types of applications or in some cases old devices used in new applications that take a part that inherently isn't necessarily ultimately that long-term reliable.

But it has unique capabilities that are very good for a specific application that needs the reliability VCSELs is one of the ones as an example of that. VCSELs have been around for a very long time. You could use VCSELs or little LEDs in optical mice, they use in the computer.

Okay, so your mouse blinks every once in a while or maybe it were to die, this isn’t a catastrophic problem for you. Now, you put that same laser of VCSELs in a forward-looking radar system on an autonomous vehicle and you expect it to not miss the carpooling in front of them big different.

Or you put in an application where it's doing some sort of biometric read and you're expecting it to actually get the right answer. If it doesn't operate as you expect, it's a big problem. Maybe not necessarily for safety, but for security what if it happens to be how you access your ability to pay for things or just consumer confidence.

So there the applications that are in, there has been a number of devices in the optical space and the optical transceiver in long haul communications or silicon photonics in the fiber optics where they're critically important to ensure there is a certain level of liability that inherently need some level of hours of burn-in and test to ensure to read out the infant mortalities.

If you don't do it at the wafer level, you do it somewhere else, you put it in the system. Well, a transceiver device in a fiber optic back plain of a server farm, a high-speed one is $700. Well, if you happen to burn it in and some percentage have been fall out that's a very, very expensive place to actually do it.

So the value proposition of the FOX-XP is let us burn it in for you at the wafer level or singulated die. And there are some reasons why you might want to do one or the other and both customers are right. And what we do is we can read out the infant mortality before it gets placed on the final assembled module.

And so the cost of test it's a huge advantage to be able to move it there, but nobody could ever do that. It was just there was no way to do that. Because you couldn't get the contactor to touch enough die. You couldn't get that many tester resources in a format to be able to test enough die to make it worthwhile.

Keep in mind that the functional test of a VCSEL or a silicon photonics device is testing one device at a time. Now you do that for 10 hours and you might actually and these devices have thousands of devices on a wafer it would take hundreds of thousands of hours to test a wafers it's just totally impractical.

We test them all at the same time, and so if you had a one hour burning you're done in one hour. So there is a huge advantage to be able to move it up and we have test system resources in the electronics.

The ability for it to actually make contact with the wafer with our WaferPaks and our DiePaks and a turnkey solution with a WaferPak aligner or a DiePak autoloader or a DiePak optical pick and place machine to actually make it production worthy and not have to have any manual involvement. And that just didn't exist before.

And so you go and you talk to these people and they get it immediately. So it's kind of a real sweet spot there with respect to this, but those aren’t the only applications we see, but those are certainly the first lead customers..

So when you look at that, on a go forward basis. And it sounds like we're just at the beginning of some of these massive long-term trends.

Do you think photonics is the key application going forward or do you think it's going to be a combination of traditional electronics as well?.

I think there will be more. I actually think it's just in some cases, it's where it's the most acute, people that have followed us and watched our story over the last several years was only a couple years ago, we were working on a proprietary new product for an application that really didn't exists.

We were working with customers and we couldn’t tell anyone who they were on devices that nobody would ever heard because they didn't exists before. And I think in some cases when you're in sort of this startup mode, I know we're a public company. It needs something that's specifically and critically important to get people over the hump.

And that's really what we saw.

But now that customers come in and they can see the tools and they know they're in production and they're like, wow can you use it for flash memory, can you use it for microcontrollers, can you use it for my other types of LED devices, can you use it for small consumer electronics devices or internet of things and obviously things like forward-looking radar, or single chip radar systems or something we're talking.

So it has a tendency to spread out. For certain there are much bigger markets than the photonics markets and -- but for now we’re getting kind of these critical cutting-edge applications in many cases where there is obviously more sampling going on than a production -- 100% production.

And there is some different methodologies, but we do believe that this is a good market and it's on a very edge and it will grow. We think that will grow within our customers and get additional customers.

And then we do believe there is new applications that are applicable where people need the critical safety, reliability, consumer confidence and want to move that part from a traditional package part or stacked device back to the wafer level..

Okay.

So the multiple additional customers that you alluded to today are those mainly in the photonics space or as you mentioned are these some of the new other application starting to come in?.

I would say they are more in the photonics space, but not all..

Okay.

And then you also talking about the DiePak been able to singulate the die, put them in your tester and then move them straight in that DiePak to, was it a third party tester then to do some testing?.

It's a pretty awesome application. In this case it’s a third-party -- it is currently a third-party and or a custom or custom-built type system. It’s an area that we are actually quite interested in. Let me just leave it at that.

I think there's an opportunity for us overtime and I think customers would see value in us expanding into the functional test side of things. It’d be an interesting way to get there to lead with the unique contactor as the methodology to get there.

But in some cases the test systems aren’t that much more complicated than what we're doing; they’re just lower parallelism and more of them..

Okay.

And then when you look at the marketplace, are there third-party substitutes for your DiePak or you are the only game in town for that?.

Currently we are so force on that and it is part of our IP is part of the test cell. .

Okay. Then finally, I think somewhere you referred to obviously….

Finally you know what just Tom for a moment because I know I have customers listening as well as we have shared with our customers pretty much every single subsystem in our DiePaks and WaferPaks we have multiple sources work, it's a critical aspect both for assurances supply, for capacity and for our ability to get very cost effective solutions.

I think our customers it's important for them to understand that yes it's unique what we are doing and no one else is doing it, but they don't they want to know that it's cheaper or as cheap as anyone else could build something like this, so that they are not encouraged to go to another company..

Okay. And then finally when you look at the -- you said multiple engagement customers like the FOX-XP and the one.

Why are people still looking at the one first when the XP is out there and have so much more flexibility?.

Well I figured somebody would notice, because we haven't talked a whole lot about the 1P in the last few quarters. But you know what recently we have had some additional conversations with folks where one of the primary reasons is if you have lower test times where your indexing time for example is much faster on an online prober.

So you take a wafer and you put it in your wafer prober and the wafer prober can step from wafer to wafer in say a minute or step between one set of die to the next if you don't do one all the die at the same time, I think can do it in less than a second.

What we do with our FOX-XP is that probing is done off-line and so when test times are say in hour or more you don't want a $200,000, $300,000 wafer prober sitting there doing nothing while the tester is testing your wafer.

So what we’ll do is we take effectively that prober in our WaferPak aligner and it constantly repacking WaferPaks and the pit WaferPak cartridge is really what it's called that holds the wafer inside of it is slid into one of our blades in our multi-blade chamber with the XP.

And then will sit there and test 18 wafers at a time for 18 hours or eight hours or one hour. And then you take them out and you can exchange them quickly within a few minutes and do the probing and the exchange of the wafer offline.

So there is a cost effective transition between a FOX-1P and an XP that we have always touted with customers and it’s just a natural progression. So you'll hear me say the FOX-P family it includes an engineering system that’s a single blade that can sit on a desktop that can test on die packs or wafer packs or singulated die.

It has a single wafer system that sits on a prober and it has a multi-wafer system like our FOX-XP but they're all exactly the same blade and blade hardware and software and capability, which is a huge advantage to these customers. I hope that helps..

Yes, no absolutely I appreciate all your time today. .

Thanks, Tom. .

Next question comes from Geoffrey Scott with Scott Asset Management. .

Good afternoon, well done. .

Thanks, Scott. .

Couple of questions. The second lead customer, they bought a production test cell, then there was an order for the $900,000 upgrade. And then the latest announcement was another system.

Was the latest order a result of the successful upgrade?.

Well, I would tell you, it's a result of their confidence in a successful upgrade. We have not shifted the upgrade yet. So it is part of the overall plan, I guess, I should be careful with that since we're halfway through the quarter but it's now out there. Yes, no our plan was to ship I think we said within six months or something along those lines.

And this package system you could think of as additional part of that upgrade. To take one chamber turn it into two with more capacity in each.

Does that make sense?.

Yes, it does. The system that was shipped to the subcontractor of your lead customer that we talked about in last quarter's call was partially populated. Has anything happened to solely populated that and if not what needs to be decided in order to fully populate that..

Yes and I guess at some point well if they were to fully upgrade it certainly be material enough we would announce it. So we haven't done that yet or certainly haven't got any order for it. That system was easy shipped clean customers already using it, it's great.

It’s beautiful single blade or couple blade I think whatever it was system that has seven open lonely slots waiting for an upgrade. So the reality is they could simply buy one blade at a time and we can upgrade it and it the system is down for half a day kind of thing. So it's really easy to do that.

We love those, they're sitting there and they just cry for fill me up. So the only reason they would do that is if they needed additional capacity for engineering or production and that very well may happen or another system from them..

Would that be additional capacity for the same device or would it be a new device that they would use the new blades for?.

Could be all of the above. It would certainly depend upon their capacity and we get really careful when we get around that..

Okay.

How much was the OEM revenue this quarter?.

We haven't broken that out.

I think you've talked about FOX versus ABTS entirely right, Ken?.

Yes, we actually referred to it Geoff as our wafer level burn-in versus our packaged part and OEM. And the reason we don't want to actually break out the OEM separately. So we include that in our ABTS revenue.

And our ABTS revenue for the -- or excuse me packaged parts was $3.1 million of the $7.9 million, which actually going back… sorry?.

Was the increase from last quarter due to the OEM revenue?.

It's mostly due to non-OEM I'll give you that. We actually just started -- we really just started the shipments of the production order. So that's fair..

And by the way I just thought we may have to think about our wafer level product to have any revenue different, because now it includes the singulated dye and modules but any how it's really the FOX and ABTS..

Okay. And is there any interest in your FOX product in Mainland China. The last disclosure was your 10th customer for ABTS in China.

Is the FOX product of any interest over there?.

Yes. You don’t usually get short answers from me I realize. No, we actually do have may call at least one customer for now that has expressed their real interest in our FOX products. And it absolutely is applicable over there.

There is nothing there is not like some key differentiation in technology or capability, our China customers are fantastic actually. So I think they'd make a great home for FOX products. .

And these would be Chinese customers as opposed to Chinese locations for other international customers?.

Could be either, for certain we have a native Chinese customer that’s interested in FOX upstate that as well. .

Would an export license be problematic or not?.

No..

Absolutely not. Okay, thanks very much, appreciate it..

You’re welcome..

[Operator Instructions] We next go to Marco Gomez [ph] with Pipeline Data. .

Hey, nice progress guys..

Thank you..

And good afternoon. I was wondering if you could kindly provide the backlog figure for Q2 of last year, so we can calculate and compare..

Okay, I think we have mentioned that on the call. The backlog figure from last year's Q2 was $1.7 million..

Actually the bookings number of Q2 last year or the backlog number for Q1 of last year?.

I don't know if I have that handy, but I don’t know if we gave it. One of the things we just did Mark, is we are trying to get more and more visibility this is actually the first year we started giving backlog on a quarterly basis, we only did at the beginning of the fiscal year. So -- but that’s okay, I do have the data here at my fingertips.

And did you indicate you wanted the Q1 ‘17 backlog or what exactly the number where you looking for. Q1 2017 backlog was $10.4 million..

Great. And on a go forward basis, how should we be thinking about your incremental gross margin, I know they are fluctuating a little bit based on mix shift. But based on what you're seeing the trends how you expect the FOX-XP line to become a larger part of the business.

How should we be looking at incremental gross margin going forward?.

Really the product mix has a huge impact on the gross margins, you have seen historically, we have been about 40% gross margin to 45% and when we have revenue very low revenue basis we could potentially get down to 35%.

So from an incremental standpoint from a mix and we generally like to say between 40% and 50%, but as Gayn indicated and just kind of sharing our upcoming quarter that we have here, part of our revenue mix we have a high concentration of backlog in the OEM space in this ABTS OEM chamber.

And this ABTS OEM chamber has a very low margin relative to what we’ll say our FOX products or for example even more so when you take a look at our DiePak or WaferPak products those are very custom products. And so those have from a relative standpoint the highest margin.

So from an incremental standpoint you can expect us to be 40% to 50% with growth in the wafer level burn-in areas we’ll move more towards that 50% ultimate contribution margin. .

Great, thank you very much. .

Next question comes from Marty Cawthon with ChipChat..

Hello, Gayn, hello Ken. .

Hey, Marty. .

Well people often say happy new year at this time in a year, but you two have delivered on some happiness here in 2018, so thank you. My question is about chip scale packages, I saw the term on a PDF of some slides that you had on your website and I am interested in just a bit of general discussion about chip scale packages and FOX-XP applications.

For instance chip scale packages are they new, what sort of applications are they used on? What sort of growth do you think might occur, how well does FOX-XP test them? And if somebody wanted to test them, but not use FOX-XP how would they test and burn-in the chip scale packages?.

That’s good, those are some good questions. Alright Marty, well let me -- and it’s probably a topic I can talk for a long time line. So let me try and see if I can net out a few salient points here. So for clarity, people will do chip scale packaging, and basically the concept around that is you take an entire wafer would say 1000 die on it.

Typically there is thousands of die on chip scale packages. And rather than singulating the individual die and then encapsulating them in some sort of a plastic or ceramic package with wire bonds out to electrical leads.

They will actually take the devices and they will not only test them in the form of the whole wafer, but they will put the leads or the bumps directly on the wafer. So when they're done singulating the die the device is a functional final device. And there is two reasons for doing this.

One of them is it's actually cheaper than if you were to put a package and do the wire bonding and everything else. But the other one particularly as you go to really small devices they get really hard to handle. And to put all those bumps on and everything else. And so there is reasons you want to do it for small die and the chip scale.

What's interesting with our FOX-XP and people that have been following have paid attention to this, we originally just referred to as a wafer level burn-in or test and burn-in system. But then we just snuck in all of a sudden we're doing these modules and dies, it's actually quite flexible.

The system just with the contactor whether it would be a wafer pack or die pack can be modified to take advantage of the electrical architecture and the thermal capability of each of the blades to manage the devices with a direct contact with a thermal plate. So it's really good at wafers.

If you did a chip scale package, where it's still a wafer, it would be good at that, but it's also good at if you want to singulate them. So in a chip scale packaged customer, there is two reasons they would want to consider the XP. One is I might be able to test or could test the entire wafer.

So all the devices in one insertion just like it's a wafer because it looks like a wafer except where it's got bumps on it instead of pads. Or there are modules that are a built in a wafer form and they look like a wafer as well. And so we can test the entire panel of modules that look like wafer level or chip scale packaging.

If the customer wants to go to chip scale or to singulated die we have the ability to contact these tiny little die in our die pack contactor. So someone who is a chip scale guy would have -- there is goodness in the FOX-XP platform.

So then the question is which devices do I care about reliability and burn-in of the test times that really makes the FOX-XP worthwhile. And I think we have an idea of some of those, but certainly not all of them. We tend to look in certain spots.

Anything having to do with automotive and automotive ADAS the advanced driver assistance systems, forward looking radar, autonomous vehicles. Even now the dashboards where people have a higher level of expectation of what the reliability is. Those are all good places to look.

What's interesting is what's happened in the mobile space where you remember when a phone used to be free, wasn’t that longer ago and they were throw away. And now they are not anymore and the capability and the technology that are in there, it's not cheap.

If you have a reliability hit independent of the consumer implications, if you have some failure mode within a mobile device. And so it's a very interesting space where all of the mobile suppliers are way more interested in reliability than they certainly were 15 years ago.

And so those are other areas to look for devices that because their end used application reliability consumer confidence are so much more important those would be places to look for them.

Does that helps?.

Yes, very good. Thank you. .

Next question comes from George Marinna [ph], Private Investor. .

Hi, thanks for taking my call.

I'm relatively new to your story and going back over the last couple of conference calls there was talk about with these new vertical markets how the addressable markets expanding for you guys and also there were some talk a quarter or two back about some flash or non-flash customers where there could be some very significant $10 plus million kind of orders out there.

But I guess one was -- but due to Aehr's size and capacity maybe some of these weren't realized. But what I'm trying to get a handle on is looking out longer term like three to five year time horizons of what a success looks like.

What -- is there any way you can give me some guidance and that guidance but some visibility into what success would look like a few years from now if you hit your strides?.

Always the dangerous thing here, but let me share with something I think if you dig somewhere you can find me saying this publically on one of these calls, so I'll just stick to that.

Someone asked me on one of the calls, Gayn, are these the kind of products that can get you to $40 million, $50 million business and up from there and I answer is absolutely..

When you say business, are you talking about one customer or the aggregate market of that?.

No, in that specific question it was related to us as a company when we were $10 million, $15 million revenue company.

So, now obviously there are we all have aspirations for higher than that and the one thing that is really I guess important to understand is the space that we plan in terms of the test business is a fairly substantial total available market.

And customers regularly look for where do they move their test seconds or hours and where do they do their test insertions. And something that's kind of interesting is many of the new applications we've been looking at is not directly displacing a functional test system somewhere else.

They are adding a reliability step because they can as oppose to doing a gross reliability test of a system or system level test somewhere in an automotive application or a mobile application. So we're not actually taking dollars away from the $3 billion, $4 billion market, the ATE market as we have been doing our growth.

But we do believe that as we move forward there will be more opportunities for us to actually take some of those dollars that are already being spent and more traditional applications where were just simply lower cost of test.

But some markets that we have looked at when we look at the silicon photonics and the sensors and the automotive space we think they can be a $200 million a year market fairly straight forward. We looked at the flash memory market application, which we still believe there is a good bit for our products.

That was I think even substantially higher than that based upon our estimates of a couple of years ago for example and we've data now to support that that is the market would grow into that size.

So these are hundreds of millions of dollar type total available markets that we probably would be addressing not tens of billions of dollars, but there are certainly significant amount of growth opportunity that we can look at.

Now, one thing I just want to add to it that's clearly part of our value is actually the turnkey that includes the consumable contractor. And so a lot of times there are tester companies and then there is probe card companies and then of the two shell mix.

In our application what’s interesting is that in many cases certainly in the initial test cell half of a dollar value is in the consumable part. And so each time a device is modified for a new design, the customers would buy a new WaferPaks or DiePaks even with their installed base.

So something that we do see that's part of our growth opportunity is if you project out three, four years or so and you have a substantial number of customers with some significant number of installed base of systems, we would -- you could see the revenue from our contractor business exceeding the test system business.

And why that it becomes important obviously it's good on these calls because of financials and their good margins and all. It's actually if you look at the capacity we have the ability within our supply chain to build 100 WaferPaks or DiePaks a month for example. And ASPs of WaferPaks and DiePaks will range from say $60,000 to $150,000 a piece or so.

So it can be fairly substantial number. And part of our expectations are to be able to supply all of those customers that will need some percentage of their installed base have new contractors every year..

Yes, I seem to recall something about the sort of the razor blades could as much as 10x with the racer cost overtime it's a significant opportunity….

Yes, I wouldn't use that number for some reason that seems little hard to me, by quantity sure, but by dollars no, but I mean could it be two or three times as much, yes..

Yes, it mixed up quantity versus dollar, okay.

Now is it true that you have capacity between your in house capacity and then through all your other ways of doing things that you could do $100 million of revenue, yes?.

Yes, we could. .

So why you have that capacity, if the goal is only say $50 million net few years, what you have all these -- is all the excess capacities very not in house or….

Yes, so a good chunk of what we do is most of our subsystems if not all of our subsystems are all supplied to us through subcontractors in most cases at least two, right. And they often have way more capacity than we ever tap into for example.

And so it's a critical aspect is to have the flexibility that we could go in order 20 or [technical difficulty] from someone and then go to zero for a quarter and that's not unique to us by the way. If you look at the ATE suppliers it's actually not that expensive to have a substantial amount of capacity available.

Now -- but it's not free to have zero, so what our shareholders have endeared with us a couple years ago is we have the exact same -- I mean, we might we might spend a $100,000 more a quarter on $1 million in manufacturing overhead and infrastructure to build our systems, which is $100,000 more and $8 million a quarter than it was at $2 million.

So we have the other problem, we had the capability in house to do a $10 million, $12 million and we are doing $2 million which read between a line you lose money at that. So that’s not the right answer. So we do need to get a critical mass to be able to supply to customers.

Now interestingly on the chambers, so is one of the settle things and we’ve shared this with people and particular if you come to our facility we’ll show you. So we have a chamber that's very unique, it’s our ABTS chamber, advance burn-in and test system chamber, we designed and worked on the same chamber on the market.

We have two suppliers that build it for us, it is our spec they are not chamber suppliers these are people that are subcontractors with one in Singapore and one in Shanghai that build them to our specifications. That exact chamber can be used in an ABTS system in a FOX-XP system or in the OEM system, so it's just a slight variation.

If you looked at them all you couldn’t tell the difference between them. And so -- and they can be modified and swapped we have actually built what is at AB test in couple of months and shipped it as an XP.

Those chambers when we were originally looking at the XP some of the applications our customers might need 10 or 20 systems or so and they might need them over one or two quarters. So we actually ensure that our suppliers could ship a very high number of them in a short period of burst capacity.

That infrastructure was sitting there idle, when we actually started our conversation with our OEM partner and come to find out as I have stated they have the potential of buying hundreds of systems. And so there was nobody out there that could build hundreds of systems in a year.

And so when we have the ability to actually I think our current stated capacity between two suppliers is about 12 systems a week. And so that was plenty and I think that might be one of the critical reasons they chose us is because we can build more than anybody else can through our subcons, an incredible chamber.

So we have this dry powder if you will in chambers, which are the most visible they are big and bulky and you can say well those look like a lot of work. But also in our printed circuit boards which is where a lot of the dollar content is.

Our printed circuit board PCB fabrication facilities and our assembly and test facilities can do way more than we could tap into them and that's not unique to an ATE company. Our highest growth is not that big ever, we can ship hundreds and hundreds of systems and they would not be tapped.

So typically and if you come to the manufacturing floor, one of the things you’ll notice is remember these test systems they test themselves, if you do it right they run their own self diagnostics and they'll tell you if they are good. So what our test floor looks like is something that has electrical hookups in water and vacuum.

And so you come in and I will point out look up and you'll see our 15 drops and I’ll say that something that we can be building in parallel and if it takes us one or two weeks to build one that's what our capacity limitations are, it doesn't take a lot of people it doesn't take a lot of infrastructure and we physically have way more capacity than we currently are shipping.

And by the way, our OEM the end target model for this and as it's doing today we direct ship directly from our subcons..

Okay. Great, well thank you for the color. .

You're welcome, George. .

And it appears there are no further questions in the queue at this time. I'd like to turn the conference back over to Gayn Erickson for closing remarks..

Okay. Well thank you everybody again. We appreciated. It's nice to start off this year. We're looking forward to a nice strong second half. And as always, we invite folks to get in touch with us if you happen to be in the bay area and want to come by and take a look at our manufacturing floor, we’d love to host you.

And we'll talk to you at the next quarterly call. Thank you now. Bye-bye. .

Thank you ladies and gentlemen. That does conclude today's conference. We thank you for your participation. And you may now disconnect..