Aehr Test Systems (NASDAQ:AEHR) Q1 2020 Earnings Call

0:00 Good day and welcome to the AR Test Systems first quarter fiscal 2020 financial results call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jim Byers of MKR Investor Relations. Please go ahead, sir.

0:17 Thank you, operator. Good afternoon and welcome to AR Test Systems first quarter fiscal 2020 financial results conference call. With me on today's call are Hehr Test Systems President and Chief Executive Officer Gayn Erickson and Chief Financial Officer Ken Spank. Before I turn the call over to Gayn and Ken, I'd like to cover a few quick items. This afternoon, Hehr Test issued a press release announcing its first quarter fiscal 2020 results. That release is available on the company's website at hehr.com. This call is being broadcast live over the internet for all interested parties and the webcast will be archived and the Investor Relations page of Ehr Test's website. I'd like to remind everyone that on today's call, management will be making forward-looking statements today that are based on current information and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

1:15 Those factors that may cause results to differ materially from those in the forward-looking statements are discussed in the company's most recent periodic and current reports filed with the SEC. These forward-looking statements, including guidance provided during today's call, are only valid as of this date, and Air Test Systems undertakes no obligation to update the forward-looking statements. And now I'd like to turn the conference call over to Gayn Erickson, President and Chief Executive Officer.

1:41 Gayn Erickson Thanks, Jim. Good afternoon to those joining us on today's conference call and also listening online. Ken will go over the first quarter financial results later in the call, but first I'll spend a few minutes discussing our business and product highlights. including our continued progress with our FOXP platform for wafer level and singulated dye and module test in Vernon. Then we'll open up the lines for your questions. While our revenue in the fiscal first quarter was lower on a sequential basis, it was in line with the expectations that we discussed on last quarter's call for a slower first quarter. We continue to expect to see a pickup in momentum in the remaining quarters of this fiscal year and are seeing continued growth in customer engagements worldwide, particularly for high growth applications that include photonics, silicon carbide, automotive and memory. This includes several new customer opportunities in our existing markets as well as customer engagement opportunities to penetrate new markets.

2:40 We're excited to have announced last week an initial order from a new customer for our Fox XP system to enable high volume wafer level production test and burn-in of the customer's line of silicon carbide devices. This new customer is a Fortune 500 supplier of semiconductor devices with a significant customer base in the automotive semiconductor market and selected the Fox XP for its unique high voltage and high power capabilities. The order, which totaled over $3 million, includes a Fox XP system configured to test 100% of the devices on 18 silicon carbide wafers in parallel and multiple wafer pack contactors. It's our understanding that the higher defect density inherent in today's silicon carbide devices presents an additional test and burn-in challenge to achieve the initial quality and long-term reliability needed by many industries, and in particular, the automotive market. This is a new and very exciting market opportunity for AIR, as our FOXP family of products are cost-effective solutions for ensuring reliability of wafer and bare die in the emerging silicon carbide device market.

3:46 We've successfully proven out our ability to test the customer wafers on our system as we've run a number of wafers in our factory as part of the initial qualification and also for the final buy-off of the solution and its ability to catch and remove the infant mortality failures that were working their way into the customer's modules. This correlation proved that we can successfully catch and weed out these failures, which is a significant cost savings and improvement in the initial quality and reliability for this customer. This capability is unprecedented in this space and provides our customers with a unique ability to improve their end product reliability in a very cost effective way. According to market research reported this past July by High Tech News, the major factors driving the growth in the silicon carbide semiconductors include the rise in demand of power electronic modules across various industry verticals, the increase in installation of solar panels for electric Electric Generation, and the surge in demand of electric vehicles, plug-in electric vehicles, and hybrid electric vehicles.

4:53 An analysis of the silicon carbide market published this summer by Grandview Research stated that semiconductor devices manufactured from silicon carbide exhibit tremendous speed and exceptional toughness and are therefore considered to be a more effective alternative to silicon, particularly for higher voltage applications. They predicted future demand will be substantially driven by silicon carbide power semiconductor applications in aerospace, automotive, energy, and electronics with those applications that require very high levels of quality and reliability. We also have multiple customers using our FOXP solutions for test and reliability verification of silicon photonics devices. These customers have forecast the need for additional production test and burning capacity this year and into the future.

5:41 and we continue to work closely with them to support their production ramp and plans to transition to high volume production test using our systems. With our full family of FOXP products, we're able to provide a seamless transition from initial product qualification to very high volume. We're excited to mention that our lead customer in silicon photonics has forecasted a ramp that we believe will drive new orders for additional FOXXP systems and a significant number of wafer packs this quarter. This customer, one of the world's largest semiconductor manufacturers, continues to look to air to support their high-volume production ramp, and wafer-level burning capacity is forecasting significant growth in shipments for silicon photonics devices that we expect to drive the need for additional production test capacity for multiple years in the future.

6:30 During this quarter, we received factory acceptance from two new silicon photonics customers that we announced this past fiscal year on their Fox systems for wafer-level and module level test during burn-in. One of these customers is using the FOX-NP for initial product development, qualification and production and then plans to transition to high volume production test and burn-in of 100% of their silicon photonics chips using our FOX-XP multi-wafer singulated module test solution. The new silicon photonics customers completed factory qualification acceptance of the FOX-P family for full wafer test during burn-in and their integrated silicon photonics devices. They're doing 100% test and burn in other devices and are forecasting incremental production capacity needs to begin in our fiscal second half.

7:20 They too are forecasting significant growth in shipments for silicon photonics devices over the next several years. We remain very optimistic about the silicon photonics and the photonics sensors markets. which we've had significant success with our FOXP products and consumable contactors. We believe these markets will be significant growth drivers for air over the next several years at a minimum. During the quarter, we also completed customer acceptance and manufacturing release to our new major customer for our new FOXCP single waiver test and burn-in system. This system is being used for 100% test and burn-in of devices by contrast to a sampling that will be used in a very high volume application for the enterprise and data center market with a build out of this production ramp over the next several years.

8:13 As our customers move to high volume production test on our Fox XP and CP systems, we see their ramps driving significant incremental capacity of both our systems and also our proprietary wafer pack contactors and dye pack carriers. There's pent up demand for consumable wafer packs and dye packs that has not really been satisfied because while they have built up the number of systems they receive from AIR, they have not yet purchased all the contactors to fully utilize these systems. As we've talked about on past calls, as we grow our installed base, we believe we'll reach a point in the next few years where our wafer pack and dive pack contactors exceed over half of our annual revenue. The high quality and reliability requirements of mobile devices which increase with every new product generation is driving utilization of our tools for both wafer level and module level and singulated dye and module level test in Vernon.

9:09 And we are engaged in critical new programs in this space that are expected to ramp next year and that we believe will require our systems as well as further drive our consumables growth. As we look to other addressable markets, we believe data storage market, network infrastructure, several devices related to the worldwide 5G build-out, electric vehicles market, and volatile and non-volatile memories, as well as heterogeneous packaging that enables new solutions with mixed technologies are all substantial new opportunities for our test and burn-in systems. All of these end markets and customers require devices to have extremely high levels of quality and long-term reliability and are perfect targets for our solutions.

9:57 We saw a significant reduction in our operating expenses during the quarter, reflecting the structural changes we made this past year to improve efficiencies in key areas of our company. And we continue to streamline our sales organization and processes to address the customer opportunities we see ahead for our FOXP platform. As part of these changes, we've added a new manufacturer's representative in Europe, HTT, or High Tech Trade, to more effectively target the significant growth opportunities we see there. I recently returned from a very successful business trip to Europe where I visited several current and new potential customers with HTT. And this new sales partnership has already increased our exposure and activity with potential European customers. Looking ahead, we remain very optimistic about growth in systems and consumables within our installed base of customers, as well as expanding the number of customers with our family of FOXP solutions.

10:53 On our package part systems business, we continue to anticipate an overall slow market recovery of these legacy traditional markets and customers for package part business and still have no forecast from the largest customer of our high power ABTS package part systems. Their systems are at fairly low utilization rate and so we do not anticipate additional orders from this customer this fiscal year. Our customer interest continues to be more and more focused on the wafer, singulated dye, and module test and burn-in level applications with our FOX line of products, and we forecast this to continue for at least several quarters. This low level of business in our packaged part business has been expected and was already built into our financial forecast and is not impacting our strong growth expectations this year that will come from our FOXP family of systems and consumables.

11:46 We continue to expect to see a pickup in momentum as we move through the rest of this fiscal year. For the fiscal year ending May 31, 2020, we're reiterating our previously provided guidance for four-year total revenue to be between $27 and $30 million, which will represent a growth between 28% and 47% year-over-year growth and to be profitable for the fiscal year. With that, let me turn it over to Ken.

12:12 Thank you, Gayn. Net sales in the first quarter were $5.5 million. down 24% from $7.2 million in the preceding fourth quarter and up 17% from $4.7 million in the first quarter of the previous year. The sequential decrease from the preceding quarter reflects a decrease of $1.7 million in wafer-level burn-in revenues. Non-GAAP net loss for the first quarter was $214,000, or one cent per diluted share, compared to non-GAAP net income of $428,000, or two cents per diluted share, in the preceding quarter. and a non-GAAP net loss of $1.3 million or $0.06 per diluted share in the first quarter of the previous year. The non-GAAP results exclude the impact of stock-based compensation expense and restructuring charges. On a GAAP basis, net loss for the first quarter was $413,000 or $0.02 per diluted share. This compares to GAAP net income of $110,000 or $0.00 per diluted share in the preceding quarter.

13:12 which includes the impact of $118,000 in restructuring charges related to our workforce reduction we announced in Q3 of last year and a gap net loss of $1.5 million or $0.07 per diluted share in the first quarter of the previous year. Gross profit in the first quarter was $2.3 million or 41% of sales compared to gross profit of $3.4 million or 47% of sales in the preceding fourth quarter. and gross profit of 1.6 million or 33% of sales in the first quarter of the previous year. The decrease in gross margin from the preceding quarter is primarily due to higher unabsorbed overhead costs to cost of sales resulting from lower revenue in the quarter and a change in product mix. The higher unabsorbed overhead costs resulted in a 6.1 percentage point decrease in our gross margin percentage in Q1-20 compared to the preceding Q4.

14:08 reflecting our ability to scale very well with an increase in revenues. Operating expenses in the first quarter were $2.7 million, a decrease of $556,000 or 17% compared to operating expenses of $3.3 million in the preceding quarter and a decrease of $295,000 or 10% from operating expenses of $3 million in the prior year first quarter. The decrease in operating expenses both sequentially and year-over-year reflects the cost reduction initiatives we undertook in fiscal 2019. The sequential decrease also reflects restructuring charges of $118,000 for costs incurred in Q4-19 that were unable to be taken in Q3-19 when the cost reduction initiatives were originally announced.

14:57 R&D expenses were $892,000 in the first quarter compared to $1.1 million in both the preceding fourth quarter and the prior year first quarter. The decrease in R&D expenses is primarily due to a reduction in employment-related expenses of $0.1 million and $0.1 million in R&D product materials from the completion of the FOXP project in FY19. SG&A was $1.8 million for the first quarter compared to $2 million in the preceding fourth quarter and $1.9 million in the prior year first quarter. The decrease in SG&A expenses is primarily due to a reduction in employment expenses also related to the cost reduction initiatives announced last year. Turning to the balance sheet for the first quarter, our cash and cash equivalents were $5.3 million at August 31st, 2019 compared to $5.4 million at the end of the preceding quarter.

15:52 Accounts receivable at quarter end was $3.3 million compared to $4.9 million at the preceding quarter end. Inventories at August 31st were $9.2 million compared to $9.1 million at the preceding quarter end. Property and equipment was $1 million flat compared to the preceding quarter end. Under new accounting guidance effective for air test beginning in fiscal 2020, we are now required to report our facility operating lease as a right to use asset with a corresponding short-term and long-term lease liability. For Q1, we reported an operating lease right to use asset of 2.5 million with an offsetting long-term liability of 1.9 million and a short-term liability of 0.6 million reported in accrued expenses. Excluding the impact of the short-term lease liability, accrued expenses decreased by $0.5 million, primarily due to a decrease in accrued payroll and severance-related costs.

16:48 Customer deposits and deferred revenue short-term and long-term was $728,000, compared to $1.7 million at the preceding quarter end, primarily due to lower customer deposits related to bookings. Bookings in the first quarter totaled $1.7 million and included approximately $1 million in wafer pack bookings. Subsequent to quarter end, we received $3.9 million in additional orders, which included a new customer order exceeding $3 million for a Fox XP system and wafer packs and follow-on orders of $0.9 million from one of our lead Fox P customers for multiple wafer packs. Backlog at August 31st was $3.6 million compared to $7.5 million at the end of the previous preceding fourth quarter, and $6.1 million at the end of the first quarter of the previous year.

17:36 With the additional order subsequent to quarter end, as of today, our effective backlog is over $7.5 million. Now, turning to our outlook for fiscal 2020. We are reiterating our previously provided guidance for fiscal 2020 for full year total revenue of between $27 million and $31 million, which would represent growth of between 28% and 47% year over year, and to be profitable for the fiscal year. As we noted in our last call, we expect to see a pickup in momentum the remaining three quarters of the fiscal year. Our forecast is based on customer commitments to our FOX solutions for wafer level and singulated dye and modular test in Vernon. And we are assuming an overall slow market recovery in our packaged parts market. As such, we are not anticipating a significant amount of revenue from our lower margin packaged part business in fiscal 2020-20.

18:29 and remain focused on opportunities with key customers for our current Fox products, including our new Fox NP and CP systems that we both introduced and sold to customers in the prior fiscal year. Lastly, on an investor relations front, we'll have a booth at the upcoming ITC conference taking place in Washington, DC on November 12th through November 14th. We welcome any attending visitors to stop by. In addition, we're scheduled to present at the Craig Hallam Alpha Selects Conference on November 12th in New York City. And in December, we'll be participating in this year's New York Investor Summit Conference taking place in December 17th 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.

19:17 Operator, please go ahead. Of course, if you'd like to ask a question, please signal by pressing star 1. on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. And once again, press star 1 to pose a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We're going to take our first question from Tom Diffily at DA Davidson. Please go ahead.

19:53 Good afternoon. First, I guess, Gayn, a quick question about the photonics business. Obviously, a lot of excitement over that over the next few years, but I'm curious, in your mind, what has changed with your outlook today versus where it was a year ago when we were also pretty excited about the upcoming quarters?

20:13 Maybe there's even two questions there, just generically photonics and then also, you know, why does this feel different than last year? Try and capture both of those. And in this case, there's a lot of tie between them because of what we're really seeing in photonics. So, you know, you heard a lot of things related to the silicon photonics. For folks that are on the line that aren't really familiar with what that is, Fiber optic transceivers have been around for a while and they have been claimed to be the greatest thing that's ever going to happen to the internet. And in fact, back in 2000, you know, there were lots of high fires going on because fiber was going to go everywhere and be in everybody's homes.

20:58 But in reality, the cost of the transceiver was so expensive to be able to actually take electrical energy and turn it into photonics energy and transmit it down a line. that the cost has never really been there. I mean, a 100 gig transmission line transceiver might be seven or $800 and you need one of those at each end. So all of a sudden, people aren't putting $1,000 or $2,000 nodes in their homes. So long ago, there'd been this discussion that said, is there any way that you could do to these discrete system level transceivers What happened in the semiconductor market where everything was fully integrated into a piece of silicon and then you could start scaling it and have silicon scale.

21:51 The concept of silicon photonics is just that. If you actually look at a transceiver, which is maybe the size of your finger outstretched, that entire surface is just covered with RF and and microwave and optical transmitters and receivers and lasers and digital engines, modulators, all of these things. And if you look at a silicon photonics chip, it's literally a fraction of your fingernail and that's the entire system. And so what people were saying is if you could ever get to a point where you could integrate all of that onto a piece of silicon, and then just simply put the final laser on top of it, it would change the world.

22:37 The cost would come down by 10x or 20x or more and that's what silicon photonics is and what people that are following the market know, it's really happening and it's an awesome thing if you're a silicon photonics guy and it's not so often if you're not. There's actually been a number of companies that have already gone under as a result of the level of integration that some of the big market leaders that are out there and have publicly talked about it that have figured out a way to actually put all of these transceivers onto a single large semiconductor wafer. And instead of building them $700 at a time, they're building them at a fraction of that, maybe 10% of it or more. So there's the market value is enormous because of the explosion of the internet and data, et cetera. So the big data farms and all are all driving really hard to get the silicon photonics transceivers out there because it really enables fiber to go farther and farther into the fabric, not just at the high level between cities or between buildings, but to go all the way down to a point where it's between servers and disk drives and maybe even between disk drive subsystems.

23:49 So, okay, that's a big market, a lot of excitement, number of companies that are out there, a lot of money being spent on it. What does it mean for us? Well, it turns out that the photonics part of the silicon photonics, which is the laser, needs a thing called aging or stabilization. We actually test the devices and it takes a number of hours to stabilize the laser to be able to get it to a point where it is useful in that application. Historically, that stabilization was done in a discrete package at somewhere else. But when you put it into a silicon photonics, when you integrate it together, that laser exists on a wafer. Well, in order to actually enable that, you would actually need to be able to do a wafer-level burn-in to take advantage of all of this scaling that's going on. And that's where we come in.

24:44 The Fox XP system is capable of not only having all the power supplies and the capability to 100% discreetly determine and test every single laser that are measured in thousands per wafer in one shot, but also can deal with the amount of power to the devices and removal. And then we can do that with up to 18 wafers at a time. So now all of a sudden, it is a cost-effective enabler for silicon photonics and as the message is getting out, the customers are kind of overwhelmingly interested and scrambling and so we're kind of on a mad dash here to try and get to as many of those folks as possible and we see ourselves as an enabler for the overall silicon photonics market which is enabling kind of the next generation of the internet and 5G infrastructure.

25:38 What's happening here is we've been announcing these initial design wins, and in some cases customers already started to buy things, but there are public announcements out there by multiple customers, some of which include ours, that are talking about these eminent ramps that we have near-term forecasts and visibility of that are going to drive incremental capacity orders, and the wafer pack contactor, the consumable that's required in our tester, that is unique per design to be able to enable the capability of our Fox XP systems. So this is, we have very clear visibility across several different customers. There's a very real end market that's pulling.

26:23 There are orders being placed by their end customers and driving it. And so I think we have a different level of visibility certainly than we had a year ago.

26:35 So in the year ago period, this market, the photonics market, just wasn't mature enough?

26:40 You know, that's my understanding. I mean, for certain, a few of the customers we have right now, they weren't even sampling at that time. There were customers that were, that in fact had talked about some ramps that didn't actually happen. And we believe at this point that there is more data to support the pull through at that end and you know we we're we're absolutely testing multiple different customers devices and they are functioning we have lots more information than that but we're not going to get into it but it is definitely it's definitely different so I think you know this feels like 2020 is really going to be a year where silicon photonics is going to ramp and there will be multiple vendors out there supplying into that space and it's a mad dash as I understand it where many of them talk as if there's there's so limited supply they will absolutely be able to sell everything they can build and so that's a that's a great place to be yeah okay and then just quickly moving on to the the silicon carbide market you know all the producers there are double or quadruple your capacities over the next couple years

27:52 I'm curious, are you serving that broad market of silicon carbide chips, or are you in a small subsegment of that?

28:02 Okay, so you're stating about a broad market. What are you talking about? I mean, are you saying the automotive space or the power transfer?

28:12 It's on the, yeah, the EV side of that market or, you know, the high-speed part of the market, exactly, you know. Are you a sub-segment or just are you broad-based silicon carbide chip testing?

28:23 Well, right now, what we'll talk about is the devices that we have seen in some of the initial customer engagements have been power semiconductors being used in automotive, EV, and other subsystems. They have some very unique properties for being able to do extremely high speed, high power, high current switching. And that's one of their critical features that are being enabled. So when you say high speed, a high speed switch means one thing. There's also, this isn't a gallium arsenide RF transmitter that we're looking at here. But the automotive applications for silicon carbide, which kind of makes sense for us because of the reliability implications would appear to be where there's a real hotspot for us. What's interesting about these devices, so again, here's another one. We're kind of teeing it up. Silicon carbide is another type of material that you can build semiconductor devices out of.

29:29 But by contrast to traditional silicon, the silicon carbide structure will allow you to have a very high voltage without the device breaking down. Typical CMOS infrastructure processors, four, five, six volts, and if you go beyond that, it will completely fail. So whereas semiconductors are now widely in multiple called solid state switching applications because of their long-term reliability, they're only useful in low voltage applications. So as people went to the electric vehicles, the value of a solid state switch in an electric power system is similar except for they need to do something that is really high voltage hundreds or thousands or a thousand plus volts and how are we going to be able to deal with it.

30:16 Well silicon carbide can address that. The fundamental thing that's interesting and there's a lot of white papers and a lot of discussion if you go to these conferences that are going on right now is that the semiconductor substrate, the silicon carbide substrate itself has a significantly higher amount of defects per unit area. It's called defect density. And the numbers I've heard is up to 10 times as much as standard semiconductors. A silicon carbide FET switch is about the size of your fingernail or thumbnail. These are large devices. And in a device that large, Defect density really matters because if you were to have one or more defects in there, it will either have an initial failure or an infant mortality failure.

31:06 So on one hand, these devices are awesome for the automotive space and for the high voltage, but in that application, they need to be ultimately reliable, and silicon carbide still has structural issues with respect to the reliability. And the way you do that in the world is if you have that, if you go through an extended Vernon test, at elevated temperatures and voltages, you can actually initiate a defect that is unstable or slightly apparent to actually break down and you can get the device to fail before you ship it into a car. We call that burn-in. So we're doing true burn-in infant mortality where we're able to test thousands of devices on a single wafer, all of them in parallel, We can measure a microamp of leakage on each device, which would be a failure mode from a gate perspective failure.

32:01 And we can individually and with 100% certainty tell the customer exactly which device was properly burnt in and which device is failing under a burning condition. That is completely unprecedented. And our customer was excited as can be when we actually showed him the data. I alluded to the point that the customer was testing wafers here. I will also point out they were, after it was completely worked and qualified, they said, you know what, maybe we just need a little bit more information. In reality, they just wanted us to test some more wafers before they got the shipment of their system. And so we agreed to do that and help them out. And we're actually testing some more wafers for them here as a result of an agreement as part of them buying the first system that we will be shipping here shortly.

32:49 and just a model question for Ken. Right now we're roughly at break-even level. What kind of margins are you expecting on the incremental revenue as we move into profitability?

33:01 So I think I'm going to just kind of reiterate what we talked about last time. We finished our Q4, for example, a little over 46, a little under 47% on a gross margin standpoint. And we expect our FY20 gross margins to be pretty consistent with that. and that's going to tie in with an increase in revenues and also as Gayn talked about, you know, our contact or business unit, our wafer pack, dye pack sales, that really helps us in terms of profitability and margin. So I would dial in from a modeling standpoint in the, like I said, between 46, 47% gross margin for the year.

33:41 Thanks for your time today. Once again, if you'd like to ask a question, please press star 1. We'll take the next question from Jeffrey Scott at Scott Asset Management. Please go ahead, sir.

33:57 Good afternoon, guys. Hey, Jeff. Quick question on the ABTS. I thought you had hired somebody to kind of renew efforts in that market. Did that not happen? No.

34:12 Now you're just being mean to that guy that we did hire. No, we did. We absolutely have brought on an excellent new director for that product line. He has been out culling the world, talking to most or many of our installed base, gathering both information and opportunities for us to apply technologies both in the package part and potentially even proliferation of some of our FOX products. We're not giving up here. He's a great guy, but it is actually interesting that the bulk of our energy and the customer engagements are really around more of our conductive. So, you know, we keep diving into these things. So our package part burner, the traditional burn-in market takes devices that are packaged after they are singulated from a wafer and put into, say, a plastic package.

35:07 They are very inexpensive, including our own. thermal chambers that blow a calibrated, precise amount of air at a certain temperature over the devices while they're being tested. And that is convection, sort of the traditional convection oven as you're just blowing air over your food, if you will. Convection and air is actually not that good of a thermal medium, but it is very inexpensive to do. But it's not as accurate as what's called conduction or as effective. Conduction is when you touch something with a thermal plate or something and the transfer of heat energy or pulling out of heat when you are touching something is orders of magnitude more.

35:54 It's the reason that we can stand outside in 50 degree air and survive, but if you jump in water at 50 degrees, you don't last very long. The water is so much better at pulling the heat out. So our FOX products are actually conduction-based. All of the contact to the wafers and the dye are all done with a metal surface that has a precise amount of cooling and heating through the metal surfaces. Whereas on the ABTS, they tend to be air-cooled in convection. So there are reasons to do package part on a conduction-based system as well. So sometimes it starts to blur. What I will just tell you, though, is the energy in our customer base has been way more focused around conduction-based opportunities of our FOX products. By the way, some of them have been package-related, singulated die and modules, as well as the wafer-level side of things.

36:49 But John, who has joined us, has been doing an excellent job of gathering customer information, and please just stay tuned on sort of what our plans are with respect to that. But the install base of our Systems. Multiple customers are sitting at lower utilizations, maybe consistent with softness in those segments of the semiconductor space. But right now, we don't need the ABTS business to pick up for us to hit our numbers. And if it did, that'd be gravy and okay with us.

37:26 Okay. You did not... Change your forecast for the year of 27 to 31 and you didn't narrow it in any way. We're three months down the road, so let me ask this question. Are you more confident of hitting that number than you were three months ago or less confident or equally confident?

37:47 Much more confident.

37:51 Okay.

37:54 We had a lot of discussion about whether what we should say on this call and where we're at. Let me leave you with this. We're absolutely confident in that number. I'm feeling very optimistic about the year. Given our backlog, in order to do that, we're going to need more orders to actually do that. And we talked about some of the things that we're expecting this quarter. As those orders come in, we will certainly make those announcements. And with that strength in the backlog, et cetera, everybody will have as much confidence as I do right now that we're going to have a good year.

38:29 Okay, next question. The sales process for that silicon carbide customer. A couple minutes ago you went through the problems that it solved. How did that relationship start and how long did it take from kind of the initial contact until the purchase order?

38:55 Okay, so as I understand it, and I did talk to them, my understanding of the story was is the customer had a very unique or a very difficult problem in that they were putting these devices that were singulated in Bear Die into their end modules, and those modules were very expensive and, you know, kind of an automotive type space. and those devices were seeing failures consistent with other customers silicon carbide type devices and so they did burn-in of those modules. They had done some research I believe on the internet and may have picked it up out of one of our trade shows but had gotten wind that we made something that could do wafer level test and burn-in and they were out trying to see if there was anything that could possibly work. We got a phone call.

39:46 They came in. They actually saw one of the systems being built for somebody and were sort of shaking their head like, I don't even understand. What do you mean you can test 18 wafers at a time? I just wanted to test one wafer at a time. And we showed them a solution. We showed them the wafer pack contactors. When they described their device, it was actually fairly straightforward for us to do. And they were kind of... I guess not convinced that it was even possible because there's nothing like this out there. So we made a deal with them and said, listen, you buy a contactor, a wafer pack, and if it works, you buy it, and if it doesn't, we'll eat it. And then if it works, give us a forecast and you can buy a system.

40:32 We were that confident. They actually placed an order within a week or two We built up the wafer pack, showed them their wafers being tested. They went back and correlated and immediately, as I said, said, well, can you give me a couple more? And then went through their internal process and placed the order. And I think the whole thing started about six months ago. And it took us, I think, three months, maybe four months to get the definition design and actually show them their wafer testing on our machine. We have had engagements and discussions with other customers, including some that have already reacted to our press release. I'm hoping these will go even faster than that.

41:19 Okay. Was it the high power which really was what they were looking for?

41:25 You know what? It was a combination of our high voltage capabilities of the system but mostly our ability to be able to give them 100% discernibility of every single device on the wafer. We give them a bitmap that will tell them with 100% certainty that the device was burnt in properly and whether or not it failed before, during, or after burn-in. And that is a real key.

41:58 What would that customer have done without the XP?

42:03 They would have continued to burn in their modules and had a very massive yield loss related cost due to throwing away end products.

42:15 Okay. Thank you for that context. In the last call, you talked at some length about the 5G rollout. How big of an impact do you think that will be on air test?

42:30 You know, I don't know yet. I mean, we, you know, obviously 5G is a big sexy term that people use in the semiconductor space and it's going to, you know, the electronics build out is measured in the trillions of dollars, right? I mean, it's enormous. Where we right now see the areas of particular interest is in the fiber optic transceiver side that we're seeing in the photonics Space, as well as in the silicon photonics transceiver side in particular. There are also devices that have been out there publicly. I'm not going to talk about any of my customers, so I'll just talk generically, where companies are actually, unlike the standard TOSA-based fiber optic transceivers that snap into the back of a server, that all-in-one silicon photonics chips that actually allow you to put a single chip onto a subsystem, like, say, a disk drive, and talk directly to another subsystem. And some of those folks have referred to that as 5G infrastructure capable type applications.

43:36 You know, then you get into, you know, how many devices are impacted by 5G? A whole lot of them. I mean, there's memory applications, there's processor applications. You know, there's just so many things. The mobile side of things, you know, are As mobile phones are driven and some of the features that are in there and the sensors, someone might call that 5G. I think that's a rising tide that's impacting a lot. But really, I'd say our most pure play right now would be in the photonics transceiver side of that particular market today.

44:09 Okay. Last question. The OEM chamber business, you didn't mention. Is it still not going to happen for fiscal 2020?

44:19 We are currently not expecting any revenue in that in our current forecast range that we have said and so any business related to revenue in that would be upside to our current forecast. We believe that that is still a potential active ongoing application and we're ready and able to ship volume to that for those that are listening in online that are involved in those programs.

44:50 Okay, thank you, Gayn. Appreciate it.

44:52 You're welcome, Jeff. Once again, if you'd like to ask a question, please press star 1 on your telephone keypad. And I'll take our next question from Charlie Doe as a private investor. Please go ahead.

45:09 Gayn, good afternoon. So, quick question about revenue that would be break-even for fiscal 2020. So, what's your current expectation of given the reduction of operating expenses?

45:23 So we weren't trying to be too cutesy on the way we forecasted our guidance for the year, but if you simply just read into the words, we gave a guidance of 27 to 31, right? 27 to 31 and profitability. So you can certainly read into that that at the low end, we're still going to be profitable. and by that math at the high end, we should be more than just profitable, okay? So I think that's a reasonable way of looking at it. If you look at an annual basis, take 27 divided by four, even a little less than, yeah, a little less than 27. And we normally think about breakeven on a quarterly basis. As you realize, the fun of our life is we have to live by quarters.

46:12 Right. So in terms of the consumables, are you expecting that as a relationship to the FOXP revenue that they'll go from current neighborhood of I'm estimating 20% to as high as 30% or as high as 35% per year?

46:34 Okay. So let me – it's not like I always seem to answer them indirectly, but in general – And Ken's pointing out we do actually report that so you can go get the real numbers on here. But the consumable business, I want to remind people there's two pieces of this. When you buy a system, conceptually, every time you buy a machine, you will buy the mating set of contactors that allow you to take the electronics and touch your devices on wafer or the die itself. So that contactor we call a wafer pack when it touches an entire wafer or a die pack when it's touching an individual singulated die or module. Now let's say you go buy one of our Fox XP's that comes in either a nine site configuration or 18 sites. You would normally buy nine or 18 wafer packs with that. A lot of times what we're seeing with the customer is they buy the systems up front and then they buy a few wafer packs and then they build into it.

47:38 But conceptually, within some period of time, for every system that we ship, you would get a full set of these wafer packs with it. So now, a year later, I have a handful of systems that are out there. And the next year, I sell another handful. On the new ones, they will buy a new set. But on the ones that are installed at some turn rate, they will buy replacement contactors Not because they wore out, but because for every new design, they actually need a new set of contactors from us. So there's two things going on. There's actually a consumable business that gets sold along with every new system. And so as long as our system business is growing, so will our consumable business.

48:26 However, as the install base grows, you get this exponential advantage that, you know, four or five years from now, I have five years with the testers out there. and if somebody says, if we have a turn rate of maybe 50% or even 30%, that means that one third of every blade or tester that's out there will need another die pack or wafer pack. At some point, you actually sell more in revenue in your wafer pack and die pack business than you do of your systems business. So it really is about a third of our business today, which is a combination of the ones we sell with the new products and the new systems but also with the install base that we're just selling the consumable which is one of the things that makes this business not only more sustainable but more interesting over time and we become a lot more stable to our customers and we're absolutely going to be growing both the total dollars of our consumable business but the dollars as a percent of overall.

49:34 Thank you. Okay. And I'll take the next question from Tom DeFilly, once again, at DA Davidson. Please go ahead.

49:46 Yeah, just a quick follow-up. If you see a large ramp in the photonics business over the next, you call it, few quarters, where are you from a factory capacity point of view? I know you've done some cost reduction programs. Just curious, you know, how much, you know, double, triple the capacity versus the current level of business?

50:06 So from a infrastructure, for those who haven't come and visited us and we do open ourselves up for investors with an appointment to come in and we'll give you some tours and things, we have substantially more infrastructure capacity than is reflected in our forecasts. So we do final assembly and test of our systems and our wafer packs and dye packs here. The major subsystems we purchase through contract manufacturers that are designed specifically to our requirements. And so a lot of the people and infrastructure isn't in this building for doing that. An example of that is our thermal chambers that we use for both our ABTS and our Fox XP systems. We contract manufacturer with two suppliers.

50:58 both of them are designed only for our needs. They do not sell this chamber to anybody else. You can't actually tell them apart. We've done a really good job of getting the paint and everything else solved. One of them happens to be out of Shanghai and one is out of Singapore. And those suppliers each have incremental types of capacity. One can do two to four systems a month and the other one has given us has shown us the capability and capacity to do 10 chambers per week. We are not forecasting anywhere near that type of capacity, and we have probably 15 stalls here that could be building systems in parallel, which would allow us to build 15 to 30 XP systems a month if we needed to out of this building.

51:48 And again, those are at an ASP of $2 million apiece, so you can see we're not even coming close to tapping into it. The actual thing that right now just limits our ability to quickly ramp is inventory, forecasted inventory and ensuring that we have the components and the things on order to be able to meet an incremental ramp. We do buy some inventory of our NP and XP materials that allows us to meet some of the short-term needs. Outside of that, the customers need to place orders and then we can make provisions to ship a fairly substantial quantity certainly inside six months.

52:27 Okay so no necessarily long lead time items that you need to stock up ahead of a ramp?

52:34 Yeah I mean honestly some of our lead time items are six months or certain components and four months and that sure seems like a long lead time sometimes but you know that's not necessarily ridiculously long and so we do try and keep inventory and forecasts and those things on hand so that we can meet capacity requirements from our customers. We've had recent customers come and talk to us. In fact, we have, you know, a number of customers forecasting systems for us and we're just making sure that, you know, how do we go through the allocation process and who gets the systems first and how fast can we get them and, you know, we are reacting to it but I think right now we're in control in our ability to ramp and I also just don't want to go out and buy all of the inventory on the con in anticipation of this. But we do have a highly leveraged infrastructure, meaning the XPs and the NPs and the CPs all use similar material of some of the most critical stuff and allows us to build to configuration or build to order, but also buy things long term on forecast.

53:41 So I think we have a really good business model to be able to address customer needs.

53:47 Okay, thanks again. It appears there are no further questions at this time. I'd like to turn the conference back to management for any additional or closing remarks.

54:01 Okay, that sounds good. Well, hey, I really appreciate everybody for joining us on this call. As always, we do appreciate the questions and they give us a chance to add some color behind it. We do have our annual shareholders meeting coming up in October. You can check out our website or talk to our MKR folks if you'd like an invitation. It is open to everybody, and you can have an opportunity to have a glass of wine with us and take a look at our systems on the floor if you'd like, if you want to join us this year. And with that, we'll leave it at that, and we'll talk to you at the annual shareholders meeting. Bye now. This now concludes today's call. Thank you for your participation. You may now disconnect.