Jim Byers - Senior Vice President, MKR Group, Inc. Gayn Erickson - President and Chief Executive Officer Ken Spink - Vice President of Finance and Chief Financial Officer.

Tyler Burmeister - Craig-Hallum Capital Larry Chlebina - Chlebina Capital Geoffrey Scott - Scott Asset Management.

Good day, and welcome to the Aehr Test Systems’ First Quarter Fiscal 2019 Financial Results Call. Today’s conference is being recorded. At this time, I’d like to turn the call over to Mr. Jim Byers of MKR Group. Please go ahead, sir..

Thank you, operator. Good afternoon, and thank you for joining us today to discuss Aehr Test Systems’ first quarter fiscal 2019 financial results. 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 first quarter of fiscal 2019 before opening the call to your questions. Aehr Test announced its first quarter results and press release issued this afternoon, which is available on the company’s website at aehr.com.

And in addition, this call is being broadcast live over the Internet for all interested parties and the webcast can be archived on the Investor Relations page of the company’s website. 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. And with that, I’d now like to introduce Gayn Erickson, Chief Executive Officer..

Thanks, Jim, and good afternoon to those joining on today’s conference call and also listening in online. Ken will go over the first quarter financial results later in the call, including details on our guidance for fiscal 2019.

But first, I’ll spend a few minutes discussing our financial business and product highlights, including our continued progress with our FOX-P platform for our singulated die/module wafer level of Test and Burn-in products. We’ll then open up the lines for your questions.

Let me start off with some color behind our fiscal Q1 revenue and the impact of a couple of key shipments that pushed into Q2. Our revenue in the first quarter was lower on a year-over-year basis with many of our customers’ capacity ramps expected later in our fiscal year. We had anticipated this as we discussed in the last quarter’s call.

We do continue to see our customers forecasting the need for additional volume capacity by the end of our current fiscal year that ends in May 2019, with a heavy concentration of shipments in the second half of our fiscal year.

However, our first quarter revenue and bottom line reflect the impact of two key shipments anticipated near quarter end that pushed into the second quarter. The revenue from these two shipments will now show up in our second quarter, which ends November 30. One of these shipments was part of the order announced today that we had built into inventory.

However, the customer purchase order did not come in until after the quarter end, and so we’ll ship and recognize this revenue in the current fiscal second quarter.

The second shipment involved an upgrade to an existing FOX-XP system already in backlog, which we ended up holding back from shipment due to a vendor material issue that was caught in our manufacturing quality and reliability test screening process.

We’ve since resolved this issue to ensure the highest quality and reliability of those products in the field and are back on track to complete this upgrade this fiscal quarter. Now let me move on to talk about business moving forward and provide some updates on our wafer level and singulated die burn-in business.

It also includes our consumable WaferPak contactors and DiePak carriers. We’re pleased to announce today an additional production order from our lead customer for wafer level burn-in of silicon photonics devices on our FOX-XP system.

This order is approximately $2.7 million, was only for a single production XP multi-wafer system, plus a WaferPak Aligner and what is without the typical set of WaferPaks that are needed for this tool to be run in production.

This lead customer continues to increase our capacity and is forecasting orders for delivery of a significant number of new WaferPaks, both for this system and for their installed base to FOX-XPs by the end of this fiscal year to meet this capacity. They’ve also indicated the need for additional systems and WaferPaks in calendar 2019 and beyond.

We’ve also received a forecast from our other lead customer, which is our lead customer for a singulated die test and burn-in of silicon photonics devices on the FOX-P system as well. Again, this one is the singulated die testing, whereas the other silicon photonics customer is a wafer level system.

This customer is another industry leader in the photonics market space, and this true singulated die application not only allows for aging reliably testing and basically burn-in of the devices, but also for functional testing in a separate automated test equipment system before and after the burn-in step using the same DiePak’s tiles from Aehr Test.

This unique capability of our DiePak products is particularly important to our customers, as it enables a single contact insertion rather than three. It shortens their cycle times and reduces wear and tear on the device pads on the bare die integrated circuit itself, which they said is a key feature of the entire solution.

As we’ve discussed before, our FOX test and burn-in systems utilize our proprietary contactor technology.

These are highly differentiated products that provide a cost-effective solution for making electrical contact with a full wafer or panel using our WaferPak contactors or with hundreds or even a thousand singulated die per DiePak carrier in a parallel test and burn-in environment.

Customers use one WaferPak per blade of our FOX system and the FOX-XP can test up to nine wafers up to 2 kilowatt per wafer, or 18 wafers up to 1 kilowatt each. We continue to believe that silicon photonics and photonics sensors markets will be significant growth drivers for Aehr Test in the years to come.

Silicon photonics devices are being introduced to significantly lower the cost of transceivers for high-speed broadband connections between computers and between and within data centers, enabling more cost-effective and faster network performance. They’re expected to be used heavily in 5G wireless infrastructure and data centers.

According to Market Research Engine, silicon photonics for data center and high-performance computing is projected to grow at a compound rate of about 27% from 2017 through year 2024.

One of the key drivers of the growth of the silicon photonics transceivers is the low cost enabled by full wafer level integration of the communication transceivers and modulators with the fiber optic laser transmitters and receivers.

Silicon photonics, rather than the historical discrete fiberoptic transceivers, bring semiconductor manufacturing scale of lowering cost, while increasing performance to this market.

And this integration, cost reduction, and manufacturing scale increases the available market from traditional long-haul applications all the way down to the data center server and data storage interconnect level.

However, to open up this market opportunity, the transceiver needs to get closer to a price point that can allow it to replace the traditional copper interconnects.

Based on feedback from our lead customers, we believe that Aehr’s FOX-XP system is a key enabler to meeting the integration and achieving the price points to allow significant manufacturing scale and cost reductions.

Let me turn to our program with our lead customer for testing singulated die and modules for mobile device sensors on the FOX-XP system, and that program continues to move forward.

We completed the initial qualification and acceptance of the new DiePak and production test program for a new device, and we’re expecting them to add capacity for our DiePak carriers during this fiscal year, as this new production ramps into - product group ramps into production.

We continue to work with this customer on other applications and believe we’re well-positioned to win additional applications for wafer level and singulated die and module test and burn-in of sensors they produce.

Beyond our lead customers mentioned above, we continue to be actively engaged in discussions with several other potential new customers for our FOX-P platform for wafer level and singulated die testing and devices. These include data communications, silicon photonics, 2D and 3D sensors and some automotive lighting applications.

We’re also focused on the significant market opportunities we see for test and burn-in of stack memory devices, which I’ll touch on more in a moment. Our growing installed base of FOX systems leads to growth in our consumables business.

During the first quarter, we booked $1.8 million for WaferPaks and DiePaks for use on our installed base of FOX test and burn-in systems. As part of our FOX business model, customers purchase these WaferPak contactors and DiePak carriers with new system sales for capacity expansions or when devices change such as with new designs.

Our WaferPak and DiePak contactor business is becoming a more significant part of our business, and we expect it to continue to grow with current and new customers, both in absolute terms and as a percentage of revenue, as we increased our installed base of FOX systems.

We expect to see this business strengthen this year with new orders for FOX single and multi-wafer systems, as well as singulated die and module test with our FOX-XP multi-wafer system. And we believe we could see this business to grow upwards of 50% of our business to over 50% of our business over the next few years.

Now let me turn to our traditional package for test and burn-in business. As we noted in our last call, our largest customer for packaged parts burn-in is currently not forecasting any near-term ABTS capacity expansions, as they absorb the systems that they’ve delivered to them in the past year.

However, we do see additional opportunities for both qualification and production test in burn-in and expect to add additional customers, as well as ship additional capacity to other existing customers this fiscal year. We expect continued growth, particularly in automotive, where we have a large installed base of ABTS in our legacy MAX systems.

As we’ve highlighted before, the rapid automotive IC growth and sensors control, information and entertainment is a key market driver for Aehr Test. And as an example, the number of sensors per car is estimated to reach over 200 per car by the year 2020, which is representing a 34% CAGR.

The automotive market obviously demands very high-quality and reliability, as the impact of failures ranges from very expensive to deadly. And the need for reliability increases exponentially as these sensors become an integral part of vehicles autonomous or advanced driver assistance systems.

Beyond automotive, we also see a potentially significant opportunity to provide test and burn-in solutions to the memory device market, particularly the flash memory market, where more and more flash is being used for data storage applications and customers requiring cycling burn-in to get the initial quality and reliability needed for this market.

More and more devices are being demanded by applications, where the only way to address the need is by assembling multiple individual semiconductor devices in a single package.

These can be the same devices such as Stacked flash or DRAM memories or completely different devices, where a mix of memories logic, high-performance analog in RF or microwave devices are packed together in a system in a package. We believe that we have great technology to test these devices with our ABTS and FOX product lines.

Each customer in this space has somewhat different needs. And we believe we’re very well-positioned to adapt our standard products to address these differing needs with little to modest modifications or develop. The memory market is a key focus for Aehr this fiscal year.

And we believe that we have products and solutions in the manufacturing capacity and infrastructure to address this large and growing market in a unique and differentiated manner. I look forward to providing more details on these new opportunities throughout this fiscal year. Turning now to our guidance for our fiscal 2019.

While we’re pleased with the strong forecast for increased capacity that we’re seeing from multiple customers and programs in calendar year 2019, one of the new programs at our lead FOX-XP customer that we had anticipated to begin volume shipments in our fiscal second-half has pushed out a few months.

The impact of this shift is that we now expect our fiscal 2019 revenue to be in the range of $30 million to $35 million. Our GAAP profit range is expected to be between break-even and $2.5 million. And that includes the investments we’re making in manufacturing operations, sales and marketing.

Even with the push out of this customer program, we expect to have a significant increase in bookings and backlog year-over-year in fiscal 2019. Looking ahead, we remain very optimistic about the significant market opportunities in front of us and about our customers and our unique capabilities to serve their test needs this year and beyond.

We continue to expect to see continued customer deployment of systems, particularly our FOX systems and our proprietary WaferPak and DiePak contactors. With that, let me turn it over to Ken..

Thank you, Gayn. Net sales in the first quarter were $4.7 million, down from $7.3 million in the preceding fourth quarter and $7 million in the first quarter of the previous year.

As Gayn noted, our actual fiscal first quarter revenue and bottom line came in below expectations, due to the impact of two key shipments that we anticipated near the end of the quarter, but pushed into the current second quarter. We will see the impact from these in our second quarter, which ends November 30.

Non-GAAP net loss for the first quarter was $1.3 million, or $0.06 per diluted share, compared to a non-GAAP net income of $365,000, or $0.02 per diluted share in the preceding quarter and non-GAAP net income of $226,000, or $0.01 per diluted share in the first quarter of the previous year.

The non-GAAP results exclude the impact of stock-based compensation expense. On a GAAP basis, net loss for the first quarter was $1.5 million, or $0.07 per diluted share.

This compares to GAAP net income of $191,000, or $0.01 per diluted share in the preceding quarter and GAAP net income of $10,000, or $0.00 per diluted share in the first quarter of the previous year.

Gross profit in the first quarter was $1.6 million, or 33% of sales, compared to gross profit of $3.2 million, or 43% of sales in the preceding quarter and gross profit of $2.9 million, or 42% of sales in the first quarter of the prior year.

The decrease in gross margin percentage, both sequentially and year-over-year is primarily due to higher and absorbed overhead costs related to lower revenue in the quarter, product mix, as well as an increase in other cost of sales related to inventory scrap and tooling and setup charges.

Operating expenses in the first quarter were $3 million, compared to $2.9 million in the preceding quarter and $2.7 million in the prior year first quarter. The year-over-year increase includes an increase in R&D of $161,000 and an increase in SG&A of $88,000, primarily due to an increase in employment related expenses.

R&D expenses were $1.1 million for the first quarter, compared to $1.1 million in the preceding quarter and $955,000 in the previous year first quarter. SG&A was $1.9 million for the first quarter, compared to $1.8 million in both the preceding quarter and in the prior year first quarter. Turning to the balance sheet for the first quarter.

Our cash and cash equivalents were $15.9 million at August 31, a decrease of $1 million from $16.8 million at the end of the preceding quarter and up $1.9 million from the first quarter a year ago. Accounts receivable at quarter-end was $2.3 million, compared to $2.9 million at the preceding quarter-end.

Inventories at August 31 were $9.6 million, compared to $9 million at the end of the preceding quarter. The increase in inventory is primarily due to the impact of the two key shipments that we anticipated near the end of the quarter, but pushed into the second quarter. The material for one of the shipments was included in our inventory at August 31.

Property and equipment was $1.2 million flat compared to the preceding quarter-end. Customer deposits and deferred revenue was $2.7 million, compared to $2.1 million at the preceding quarter-end. Bookings in the quarter totaled $2.3 million and included $1.8 million and WaferPak and DiePak bookings.

Backlog at August 31, 2018 was $6.1 million, compared to $8.4 million at the end of the preceding quarter and $15.2 million at the end of the first quarter of the previous year. Now turning to our outlook for fiscal 2019.

As Gayn noted, one of the new programs that our lead customers that we anticipated in this fiscal year is pushed out a few months into our next fiscal year. The impact of this shift is that, we now expect our fiscal 2019 revenue to be in the range of $30 million to $35 million.

Our GAAP profit range is expected to be between break-even and $2.5 million with a significant increase in booking and backlog year-over-year. In terms of operating cost, during fiscal 2018, the company made investments in human capital to improve operations and support revenue growth.

These include adding a quality control engineer, senior operations manager and corporate controller. During the current fiscal year, we are planning on adding sales to staff to address opportunities from both current and new customers.

With the increase in our lease costs, resulting from the renewal of our operating lease and our headcount increases, we are forecasting an increase in operating expenses for fiscal 2019 of approximately 9% compared to fiscal 2018.

With our revised forecast and the expectation that our debt will be converted in April 2019, we expect our cash position to be up from the end of fiscal 2018. Lastly, on an investor relations front, we will have a booth at the upcoming ITC conference taking place in Phoenix, Arizona on October 28 through November 2nd.

We welcome any attending visitors to stop by. In addition, we’re scheduled to present at the Craig-Hallum Alpha Select Conference on November 15 in New York city and also at this year’s New York NYC Investor Summit taking place December 11th in New York City. We look forward to seeing many of you there. This concludes our prepared remarks.

We’re now ready to take your questions. Operator, please go ahead..

Thank you. [Operator Instructions] And we’ll take our first question from Christian Schwab with Craig-Hallum Capital..

Hi, Christian..

Hi, Christian..

This is Tyler on behalf of Christian. Thanks for letting me ask questions. So you had said previously that you expect all three of your FOX-XP customers to grow year-over-year in fiscal 2019.

So I guess, first, just with the moving parts, we announced today, do we still expect that? And then I guess, could you give some color, maybe possibly rank three customers, what sort of opportunities were the most excited about?.

So, we do believe that both of our silicon photonics customers will grow substantially year-over-year. They actually continue to be optimistic, and there is upside to their forecasts even potentially within this year - our fiscal year and certainly, within the calendar year 2019.

I think the - our lead mobile customer to go through the math maybe slightly up and/or higher. It’s still really unclear. We’ve taken a very conservative stance in our current forecast related to the newest program.

It’s - there’s still a lot of time left, but we - for all intents and purposes shifted that out of our - the bulk of that out of our forecast in this fiscal year and into early part of next year. So I think that one would be more flat, maybe slightly up or possibly up substantially. We’ll see how the year plays out..

Okay, that’s great. And then could you talk a little bit more about the new customer opportunities that we mentioned on mobile and automotive space.

Maybe some sort of timeline we could maybe expect some announcements for this year if these are multi-year? And again, maybe rank them over what we’re most excited about their new customers?.

Well, there’s a couple of things.

I think, what we have been focusing on into the discussion related to some of the changes that we’re looking at and additional resources in the marketing and sales side is that with our lead customers now ramping and released into production, we have gotten inquiries and/or we have proactively gone out additional customers in that space and have gotten positive feedback on it.

And, as I’ve often said, we’re in a very -- a much better position, because we have standard products here. We can do benchmarks very quickly in the factory and inexpensively, because they are available here to be able to show and demonstrate.

So I think, within the spaces of the silicon photonics, transceiver side, Datacom side, as well as on the sensor side of things, we see more opportunities in the FOX. We’ve also talked to some interesting customers related, I mentioned to it in sort of the lighting space too.

There’s some very interesting smart lighting applications in the automotive; and other sensors, I mean, there’s a lot of discussion related, I think, there’s a conference going on right now in LIDAR Conference in Detroit. There’s a lot of discussion related to the implications of these devices and sensors and what that really means.

I will tell you that right now, it seems to be a lot more talk and tension related to opportunities than what I would say, I think, we have none forecasted for revenue this fiscal year, but it’s things that head in towards next year and beyond.

And I think a lot of people still just trying to get their arms around how big that market is going to be, but nevertheless, it’s very clear that the sensitivity to assurance of quality -- it’s hard to get more distinct than when you think about sensors that are being used directly in ADAS or auto - autonomous driving vehicles.

So that’s an area, where we’re tending to try and put a lot of focus and look under those rocks, because those are areas that - it’s not very hard to convince the customers how important reliability testing is.

I’ve mentioned also related to the memory side of things, I’m going to probably hold my cards a little bit to my chest here, but we already have some engagements between – generally, you want to get in the details related to the memory side, we see some additional opportunities, and I just want to put a stake in the ground that this is a - there’s a key focus for us this year and heading into next year as more and more reasons for people to be looking at the reliability and test can create opportunities for us.

So, trying to think about capturing all of them. I hope that helps a little bit, Tyler..

No, that was perfect. Thank you for that color.

And then my last question, just try to put the pieces together for me a little bit, maybe on the ABTS business, so with the digestion from your largest customer also being offset by some of these new orders from other customers and new customers, would it be fair to assume that, that business is still down year-over-year, is that kind of - are those two things offseting each other more flattish? Help me to put that together, if you could?.

Yes, I think, I’m looking over at Ken here. I believe they certainly feels like our ABTS business year-over-year is definitely down, but offset easily by the FOX, both systems and WaferPaks. We had always anticipated that our business would shift more and more towards the high value add of the wafer level products and singulated die.

Last year, I’m not sure, I want to say, it’s an anomaly, but it was a very strong year for our packaged part business, but this is also relatively a soft year by contrast, certainly, by contrast year-over-year. But it is something to note.

As we head it into the year, where we had talked about doing, I think, at least $35 million is what we forecasted at the beginning of the year. That was really without very - a very strongly ABTS business. And so if we had a repeat of our ABTS business, it would have been substantially more than that..

Yes. So just to provide a little bit more information, Gayn, last year was one of our largest years in the last several related to the packaged part business. And I think, I spoke with this when we talked about year-end results.

But we had almost $11 million of our - almost $30 million of revenue being packaged parts businesses last year, so a significant growth last year. We were not expecting to see close to those levels….

Yep..

…this year..

Yep..

That’s perfect. All right. Thanks, guys. That’s all for me..

Okay..

And our next question will come from Larry Chlebina with Chlebina Capital..

Hi, Ken. Since you have push outs in the Q2, the fiscal year 2019 should be on the order of $30 million to $35 million in revenue still. When we model that out assuming midpoint of that roughly.

Is that - would it be a good model to say that ramp should be linear in shape because of the push out or just quarter-to-quarter?.

Yes. In terms of the growth, what you can expect is the first-half to be soft, as Gayn indicated, the second-half will be coming on strong much more in the fourth quarter.

We kind of talked about our model before where we say, “Hey, we - our spending is pretty much $4.2 million that I think we talked - mentioned before, that a gross margin of 42%” So that gives us a break-even of a little over $7.5 million.

And then as Gayn and I spoke in the past, anything beyond that goes to the bottom line in essence at $0.50 on the $1..

All right. So that implies that Q4 - fiscal Q4 should be at or north of $11 million.

It was last time you had a revenue quarter of that magnitude?.

So, Larry, that that’s a strong number. The second-half includes Q3 as well as Q4. So I don’t think that you can really….

Do you think Q3 and Q4 might be somewhat the same or close to it?.

Let me just say, we’ll be progressively ramping up revenues through the end of the fiscal year..

Okay. Gayn, at SEMICON West, I ran into three different vendors that offer systems that screen out failures due to signalization. They said our failure rate for that Aehr is something on the order of 15 parts per million or 0.15%.

What’s the typical failure rate for infant mortality?.

I think, it depends on the process and the device….

Okay..

Gayn Erickson:.

But I’ve heard numbers in the 1% to 3% kind of range, fairly high for any application. It may be, in fact, one of the highest ones.

Flash memory in an application, where the target is an SSD - our performance enterprise SSD, for example, because - so in flash memory, one of the unique things about flash memory is the nonvolatile nature of it allows you to potentially do real-time remapping of the internal devices. So they could effectively be repairing themselves as they go.

That sounds all wonderful, except for as they do that, they’re running out of these redundant elements as they do that. And eventually, once they’re out of that, then you start seeing the real hard failures.

My understanding particularly in the enterprise area, the high-end customers, the data center guys actually, that is one of the incoming quality reliability aspects of it. They want to ensure that you have not used up more than a certain amount of that.

And by the time you take that into account, the high-end applications failure rates can be on the order of, say, 1% or more per die.

And then, if you look at an eight die stack of a target high-end SSD target stack application, that would equate at package level to be in the 8% failure rate, which is a huge number when you think of the - the size of that market. That’s really the basis by which we have talked about the move towards wafer level burn-in has and a very good ROI.

I think [Multiple Speakers]….

What I’m getting at - oh, I’m sorry..

I’m sorry..

Go ahead..

And then there are many logic type devices, where I’ve heard even in high - at - in mature processes. The parts are not measured in 1% or - as they tend to be more and maybe 30, 40, 50, 70 part per million. I know there are some sensors that are 1,000 part per million, which is an interesting way of looking at it. So there’s a range of those, Larry..

So there’s a spend right now, again, from three different vendors that are selling equipment to screen out for the signalization failure, which is on the order of 15 parts per million. There’s money being spent to screen that out for stacked-die applications. And then what you’re saying is for infant mortality, it’s multiples.

The failure rates is multiples higher than that.

And to my understanding, your XP system is the only thing that I’m aware of that can capture both of those and do it efficiently, is that correct?.

We are….

With your DiePak approach?.

Yes. I mean, we know that there are customers that have used different types of tools with much lower parallelism to try and achieve that. I mean, for example, my background was in memory ATE, Automatic Test Equipment.

You can functionally test a flash wafer, but at a price point that is in order of magnitude higher than our FOX-XP Wafer little burn-in system, for example. And so it isn’t so much, in some cases, just capability, but it’s at a particular price point.

Now having said that, in the singulated die and the wafer level burn-in of the silicon photonics devices, there’s nothing else out there in that power range that can do that kind of device as we understand..

Correct. But I don’t think you understood, the spend is taking place on singulated dies. In other words, the screen out, the failure that’s occurring, it’s about 15 parts per million when they singulate the dies within the stack, because they’re going into a stack and that 15 parts per million starts to really hurt once you stack them up..

Right..

So if they’re spending money to screen that all, your system can - with a DiePak approach can screen out both the signalization failure and infant mortality. And it seems to me that’s a pretty compelling sales….

Yes..

…argument of the curve, or I’m missing?.

And I think the key difference - I think the key difference there is that we’re actually screening out the electrical failures within the device, which may show up over time in temperature, whereas the traditional failure to singulated die pick and place tools are looking for mechanical defects through optical inspection..

Rather doing that and also electrical?.

Okay, understand..

Yes. So I mean, that’s why I’m - it seems to me, the industry has a need and the XP unless I’m missing some and one - that’s what I’m asking.

It seems like there should be a win here somewhere and I guess, my - I’ve asked you in the past when you expect to announce a win, because it seems like the industry has this huge need, the whole industry and you’ve got a solution that could be going to change the….

So, Larry….

…future of the company?.

So, Larry, I understand that Ken mentioned that we are adding additional resources in the sales and marketing. Are you bucking for a new job? Because we can use some help..

Maybe I’ll tell you, but when I….

[Multiple Speakers].

Yes. So - but you have - you are working on several….

Right..

…potential applications or customers in that….

Yes. And, Larry, I think this - I kind of make a - make that a joke. I mean, one of the things that I’ve experienced over the - the last, even just, call it, several years. If you go back three years ago, little less even, we had not shipped this new production tool..

Right..

And we sat on the edge of our seat talking about how great it’s going to be that if we can get this tool that can actually test nine or 18 wafers at a time in a way that no one has ever done this before. It would enable these different capabilities.

And to be fair, there were more than a few customers that were in a wait and see to say, it could actually be done much less from a company of our size. The exciting part is just people now understand through our 10-Ks who are a list of top 10 customers are, some very big names chose to work with us based on the technology.

And now they sit there with a competitive advantage of having deployed these things into production. But I do think that now we’re kind of shifting to get the message out that these tools are real. They can really move into production. They’re production worthy and we have the manufacturing capacity and infrastructure to be able to deploy them.

And so that’s kind of why we’ve talked about shifting from an R&D focus to manufacturing operations and sales focus. Although we will still have to do some modest to....

Right..

…modifications as needed for each individual customer. We think we’re well-positioned to serve that..

No, I think that DiePak approach, it kills two birds with one stone. It seems like that should be an easy sale for somebody with your capabilities, Gayn.

Why don’t you just go on and sell a couple of applications that seems like [Multiple Speakers]?.

I actually do plan to spend a lot more time in front of customers this year. So thank you, Larry..

Good. All right. That’s all I had, thanks. Thank you, guys..

You’re welcome..

Thanks, Larry..

And for our next question, we’ll go to Geoffrey Scott of Scott Asset Management..

Good afternoon, guys..

Hey, Geoff..

Follow-up from last, from the - I guess, the year-end conference call. You talked about in the ABTS system, you talked about two potential new customers, one in the auto and one on the medical. You kind of mentioned the auto.

Anything happening on the medical side?.

We’re actually still engaged with a key leader in the medical space, and it’s our understanding. Well, I guess, I don’t want to get too carry away. Well, it’s our understanding that they’re very happy with the proposal that we had provided to them. There is always not a big shocker, the element of the timing of when that comes in.

On the medical side just as people understand, too, when we talk about medical, we’re really talking about medical devices and/or semiconductor, sometimes that go into those is actually a medical device company. And so unlike maybe just a component that goes into medical, the medical device has a trail related to FDA approvals and other things.

So there’s - in terms of lever amount of energy to get it released into production, automotive is sort of one level and medical is about another level above it. And so that’s something I will say this imply why I think may be moving slowly or methodically..

But the delay would be the - a customer process and FDA process issue as opposed to a machine issue?.

Yes, that is our understanding. That’s right..

Okay.

The - you did not mention anything about the OEM customer that you have?.

That’s a good test..

You finished the first order before the May 31 year-end.

Any progress on in new order? And do you know what their sell-through is on the - on what they bought at first?.

Yes. So that’s actually a really good catch, Geoff. I didn’t - there’s so much other exciting stuff going on, not that the OEM business is an exciting. Let me just restate here and put that in.

We actually expect kind of similar, I’ll leave it, it’s sort of similar revenue levels this year with some variation on that, and do expect additional orders from them, as well as orders that shift into in an anticipated ramp in the following year as well..

But there was no revenue in Q1?.

No, there is no revenue in Q1. We have - do not have a backlog against that order right now - against the new order again yet either..

That particular customer, do you sell anything to them other than what’s included in that OEM business?.

No. So the customer that purchases from us, that is what we sell to them only. That’s correct..

That’s the only thing you’re selling them. Okay..

That’s right..

The sales and marketing expansion, we had a - it’s kind of a false start in China during the last fiscal year.

Is - where is the emphasis going to be on the additional people? Is going to be outside of the country in specific geographic areas, or you think you need improvement?.

We do have plans to expand some headcount and we call it, we referred as greater China, so and it can shift between Taiwan and the Chinese opp there - China opportunities in addition to the resources that we have right there in the United States, because there’s still a very - if you look at our target markets, there’s still a very high concentration of that.

We do have reps, and so there are some indirect enhancements that don’t necessarily right - go right to the bottom line, for example, in Southeast Asia and in Korea. And I think those are fair statements for now..

But additional direct salespeople in China is not contemplated?.

No, no, no. Yes, no, I’m sorry, we do plan that ahead in Taiwan, China..

Okay. The potential for new FOX customers, we have three now.

If you are looking at the fourth and the fifth, and I give you the sensor and the silicon photonics and the stack tie opportunities, the fourth and fifth would come out of which of those areas?.

I think we - you asked the question. So timing wise, I would anticipate additional new customers in silicon photonics and the sensor space prior to revenue base customers in the memory space chronologically. But I’ll be happy to split those around if the customers pull things in..

All right.

Is the stack die opportunity real for fiscal 2019, or is it really real for 2020?.

I would not count on revenue in this fiscal year..

Okay. I’ll pass it on to somebody else. Thanks..

Okay. Thanks, Geoff..

Thank you. [Operator Instructions] And next, we’ll go to a private investor, [Charlie Doe] [ph]..

Good afternoon.

Gayn, how would you describe your expectations of the uptake curve for the FOX-XP or any kind of similar products maybe out there?.

Okay. Let me make sure you understand. So meaning, upgrades or revenue enhancements to the installed base..

But not the - so the - we’re - it seems like we’re in the infancy of the uptake of the XP products, and it’s just going to be a five-year uptake or 10-year before it’s like how long is that curved in terms of really reaching its next own potential?.

Okay, I understand. I think I understand right now. That’s just really a good point. I believe that when silicon photonics, 3D sensors of mobile, 2D and 3D sensors of mobile, sensors on automobile, I’m not at sell piece of sports analogy, we’re definitely in the early innings of that.

I mean, if you think about it, there’s - the deployment of sensors on mobile, we’re excited to see more. I don’t want to talk any specifics obviously, but we’re a long way from saturating that market. If you follow along with the transceiver side of things, the silicon photonics, so remember that. So silicon photonics are basically kind of a catchall.

There’s several different applications. The easiest one to describe is actually our fiber optic transceiver is used in communication backplanes.

And I - there’s - if you can - if I can draw on your head kind of a picture of a pyramid, okay? At the very top of the pyramid, our fiber optic transceivers launching under the ocean from country to country, there’s not very many of those, okay? And then as you see fiber optic communication going from that point to, say, international or across national or to states, and then within states, it explodes 10x from there.

Within a City, it goes 10x larger. By the time, it gets into a building, the reality is that, that’s almost entirely copper today. And, in fact, as you know, I mean at home, we don’t have fiber optic to our house. I don’t have fiber optic to hear at Aehr Test. We’re not even at a point of deploying the fiber optic here.

But each time you do that, the market or the total available market for those transceivers is - all those point connects go up by, at least, in order of magnitude. So what’s going on in that side is, people are saying, “I mean, you can go buy a transceiver for like $5,000 for a long haul transceiver”.

Well, that’s never going to be put in a computer or a backplane or a server much less even the point in your house.

So what’s interesting is the whole premise around the silicon photonics roadmap is that by taking the integration of all these discrete high-end components that are put together into these transceivers and sold for hundreds or thousands of dollars, they’re put entirely into a single piece of silicon.

And then wafer made in one of the high-end wafer fabs that are - if you go Google it, you can go find out about the people that are making those investments. Then they’re testing hundreds or more of these devices on a wafer or making them. So you start thinking about the cost of what a wafer is.

And then you say, you can divide that by hundreds of devices. And you start to realize, the cost of manufacturing of that is one or two orders of magnitude lower than the cost of the fiber optic transceivers today. And as that starts to approach copper, the TAM explodes open one to three orders of magnitude.

And so I remember I was in the flash memory side for a very long time and watched that industry go from a time when nobody even knew what flash memory was. There was sort of the founder of the - one of the founders in flash memory, Eli Harari, out of SanDisk used to say every single time for over a decade.

If I can make flash memory half as expensive, I’ll sell four times as much. And for over decades, every time they have the cost of the memory, the market exploded. And I think there may be some analogies there.

I’m not suggesting the lever be as big as the flash memory market itself, but by actually decreasing the cost, it allows them to actually exponentially increase the total available market. Now where unit dies, all we care about is, how many units need to be tested.

And having to do with some physics and I don’t want to get into all of the reasons for it. 100% of those devices need to be burnt in for a considerable amount of time. And so that’s one of the things that are [Technical Difficulty] exceptionally well suited for.

And we’re - want to think - we feel like we’re on the edge of watching this start to explode, and we’re all trying to understand even with the market forecasters, is this going up 10%, 20% percent CAGR, or is this going to start seeing 100% CAGRs like we saw in the flash memory business. So it’s pretty exciting.

And every time, we talk to our two lead customers, they seem to increase their forecast. So, we might just very well be in the very early innings of that..

Thank you very much..

You’re welcome..

[Operator Instructions] And gentlemen, I see no further questions in the queue..

All right. Well, thank you very much, operator, Jim and Ken, with folks, we really appreciate you listening in. And as always, we invite you out. If you happen to be in the Silicon Valley area and want to stop by, we’d love to host you here and give you sometime to ask one-on-one questions.

And we’ll look forward to talking to you at the next quarterly call Thank you very much. Bye-bye..

And that concludes today’s conference call. We thank you for joining..