Long-time readers should note some significant changes in how I communicate in the public domain. The primary purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.
Accordingly, this document should not be construed as an endorsement or recommendation of the companies or securities discussed herein. I am not an investment advisor and this is not an investment thesis. It is merely one part of the story, which I present for debate in hopes of determining all risks and upside potential. The disclosure at the end of this piece is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.
Last night, AEHR Test Systems (AEHR) announced strong results for its third quarter ended February 28, 2018:
I was personally surprised by the strength of the results. This is typically a seasonally-weak quarter for orders. However, revenues, bookings (orders), and backlog were all well ahead of my expectations.
Separately, AEHR announced that it has received a $1.5 million follow-on order from a leading wireless communications chipset company for multiple ABTS systems for production test and burn-in of devices used in a wireless automotive communications chipset platform for device-to-cloud communications and other Internet of Things (IoT) applications.
After issuing these press releases, management hosted an equally-bullish conference call. Key quotes from the call are as follows (with commentary from me in italics):
“There’s a rising tide of concern in the automotive, mobile, and photonics markets — particularly focused on human safety and extended-reliability testing (and burn in of devices), which Aehr Test is very well positioned to address.
This is a key driver behind the strength and interest we continue to see from the semiconductor market”
“We’re engaged in numerous new business opportunities with both existing and multiple new customers that include capacity expansion of current applications and testing of new devices.”
“During the quarter, we received a follow-on order from one of our lead customers for additional FOX-XP capacity…their production ramp will begin later this year and they’re forecasting additional capacity needs from Aehr Test to meet those needs and also for additional capacity needs later in our fiscal year 2019.”
THIS is what I’ve been waiting and hoping for! Many of the orders I’ve seen from AEHR have seemed like evaluation-type orders, where the customer wants to extensively test the products before expanding into broad production usage.
That word, “production”, is music for investors’ ears.
They continue… “They’re very committed to Aehr Test and plan for 100% burn-in and test of the new silicon photonics product to meet their need to burn in those devices before they’re installed into the end product. It’s our understanding that doing the burn in at wafer level addresses several critical, technical and commercial needs for them to ramp this new product.”
FYI, the customer, while not specifically named, is Intel (INTC). As I understand it, this has been 2-3 years in the making and is rumored to be for their Data Center business. Saying that this will use AEHR for 100% burn-in and test is strong evidence (finally!) that AEHR is crossing the chasm into broad production deployment.
They went on to say, “I think a second customer in that space was particularly interested in the capabilities of our machine… hearing publicly that we’re in that space helped.”
“We also announced a new customer during the quarter for the FOX-XP test and burn-in system with a set of custom DiePak carriers that enable burn in and aging of integrated lasers and special circuitry on silicon photonics devices for data communications applications. This customer is an industry leader in the photonics market space representing our fourth new customer for the FOX-XP system and additional application for our FOX-XP test cell… A key advantage to the customer is the ability to simplify their manufacturing test process while at the same time limiting the contact with their device electrical pads to a single insertion”
OK, this one was a bit technical and just a starter order, but that’s how the Intel relationship started. We need these early-stage wins to go along with the later-stage production ramp-ups. I’ll take it.
“We believe this is the only solution like this on the market today and Aehr has already received feedback from other potential customers that this is a very valuable and a new unique solution for several types of devices… such as silicon photonics, VCSELs (vertical cavity surface emitting lasers) and LEDs.
They’ve said this before, but it’s good to hear that competition is not surfacing.
“As we continue to build on our installed base of FOX systems we’re pleased to see the strengthening consumables business emerge as our WaferPak and DiePak business continues to grow…We had a good quarter for our WaferPak… with nearly $1.7 million shipping to our install base… We also shipped multiple DiePak loader/unloaders…
Looking ahead we expect our WaferPak and DiePak contactor business to continue to grow with current and new customers both in absolute terms and as a percentage of revenue as we increase our installed base of our FOX systems…
…year-to-date in FY ’17 we only had four WaferPak DiePak sold for the first three quarters. So far year-to-date FY ’18 we have 45 WaferPak and DiePak sold. So you can see, as Gayn pointed out, thay is becoming a much more significant part of our business.”
They’ve also said this before, but it’s an underrated part of the story. We’re all focused on the machines, but these consumables represent the “razor blades” which will gradually smooth out much of the lumpiness in the business.
“Turning to our package part burn-in and test business we continue to see strength and good momentum (with) our OEM… This customer is using our thermal chambers for use with their own electronics and software for custom test application. We continue to believe this project will drive significant revenue over the next couple of fiscal years and then there may be additional new opportunities beyond this customer for this interesting and new business model for Aehr Test.”
“As we’ve noted before, the rapid growth and increasing demand for reliability and automotive sensor technologies is a key market driver for Aehr Test. These technologies include the advanced driver systems such as collision avoidance systems using laser, LIDAR, radar and other sensing technologies.
Today we also announced a follow on order for more than $1.5 million… for production test burn-in of automotive devices used in GPS systems… to assure the reliability of devices used in critical automotive applications including autonomous cars, device-to-cloud communication and other Internet of Things applications.”
There’s that word, “production”, again. With Intel ready to ramp up and the probable timing of its numerous evaluations, we’re getting close to the point where AEHR should start to show accelerating growth.
Indeed the Wall Street estimate for next year calls for $42.6 million (representing nearly 50% growth over this year) and EPS of 30-cents, up 500% versus this year.
This gives them a P/E of just 6.5x on their $1.90 enterprise value. This would make sense for a slow-growing player at the top of its cycle, but this is a fast-growing player just beginning its growth cycle.
The big jump in EPS is because 1) the company has already shown itself to be profitable at these lower revenue levels and 2) management has previously stated that they don’t need to spend much to support additional business.
This is called operating leverage, and is very powerful for EPS growth. More on this in past and future posts. For now, understand that fiscal 2018 estimates will give way to 2020 estimates in three months. When that happens, we could see an EPS forecast exceeding 55-cents.
Incidentally, that would add a cumulative 85-cents of cash to the balance sheet over the forecast period (giving them a total of $1.20 in cash per share).
Many investors start valuing their companies on forward estimates in the middle of the company’s fiscal year (in this case, November). So, even if AEHR’s P/E ratio remains down here at 6.5, a 55-cent estimate for fiscal ’20 would still send the shares back above $4 by the end of this year.
Expansion to a P/E of 10 gets us back to last year’s high of $6.10 and a P/E of 15 moves the stock forward to about $8.75. All of this makes sense when we look at the chart:
Finally, despite the recent bad press surrounding driverless cars, the tests have shown that driverless cars are significantly safer than human drivers. They’ve driven millions of miles, but we only hear about it when there’s an accident, something that happens far more frequently (even on a per-miles driven basis) in the human-driver world.
Still, the caution makes sense. We should demand driverless cars to earn our trust… and AEHR is a key to ensuring reliability. Thus, I expect the recent driveless news to prove beneficial for AEHR.
“During the quarter we received a new customer order for an ABTS system from a prominent U.S. government military and aerospace contractor for testing their devices for applications where reliability is absolutely critical. This production burn-in application involves more than 400 types of integrated circuits designed and built by the contractor.”
From what I’ve heard, testing starts in about 3-6 months with production (there’s that word again) orders probably ramping up next year, with 8-figure potential.
“The company recognized strong bookings and backlog in the 3rd quarter of fiscal 2018.”
Bookings were actually flat year-over-year, but last year’s Q3 was exceptional (due to the timing of orders — booking were just $0.5 million in Q3 of 2017). By comparison, I estimate that Q3 bookings in 2016 were closer to $0.
So, coming off of a quarter were they delivered $5 million in bookings, I was ecstatic to see AEHR deliver $7.8 million in bookings.
“Gross profit in the third quarter was 3.2 million or 43% of sales up from gross profit of 3.1 million or 40% of sales in the preceding quarter and gross profit of 503,000 or 19% of sales in the third quarter in the prior year.”
This is consistent with management’s comments, which suggest that incremental revenue will likely carry 50% gross margins going forward, enabling overall gross margins to continue creeping up as they grow.
“(Cash was) 15.1 million at February 28, 2018, a decrease of $865,000 from 15.9 million at the end of the preceding quarter. The decrease reflects purchase of inventory to support future shipments and the impact of timing of collections of accounts receivable and customer deposits…
…a lot of companies that maybe traditionally didn’t have burn-in or burn-in processes are getting into this space…it feels like almost every customer I go talk to has some concern related to how the products and the opportunities in the automotive side of things…
…silicon photonics is an implementation of a technology to go after the more traditional VCSEL based transceivers… which is something we’ve been in production on for I think almost 10 years since 2009 with our wafer level burn-in system.”
For those who don’t know, VCSELs are the devices that enable facial recognition on the new iPhones… and this is going to be huge, because they’re going to recognize a lot more than faces. They’ll eventually scan and recognize millions of 3D objects in the real world. It’s going to create more changes than most of us can imagine.
For some examples, you can search YouTube for videos like this:
They ended the call with this:
“The total available market of the semiconductor test space (is) $3 billion itself. The contactors are another $2 billion to $3 billion… The handling business, including handlers and probers, is another $1 billion or so.
There’s a significant amount of money in the traditional semiconductor test and burn-in space. There’s also a system level test market that is estimated to be about the same size that we’re playing in with our OEM business and some of the other opportunities that we’re talking about.
So, you know, Aehr Test is still operating at a very tiny amount of the opportunity that faces us. So yes, we’re seeing these very good year-over-year growth rates, but we still have a appreciation / understanding of the size of our company and there are some really big opportunities that are out there…”
After these results, and with the stock where it is, it’s not hard to understand why I used this morning’s market selloff as a smokescreen to buy more. Cheers!
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Disclosures / Disclaimers: I am long AEHR. However, this is not a solicitation to buy, sell, short, or otherwise transact any stock or derivatives. Nor should it be construed as an endorsement or condemnation of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.
I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.
I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.
I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.