Aehr Test Systems: Mixed Analyst Reactions to Q4 Earnings and Future Outlook

Aehr Stock: Upgrading On Derisked Outlook And Improved Sentiment (NASDAQ:AEHR)

Looking for a helping hand in the market? Members of Value Investor's Edge get exclusive ideas and guidance to navigate any climate. Learn More " Note: I have covered Aehr Test Systems (NASDAQ:AEHR) previously, so investors should view this as an update to my earlier articles on the company. Shares of wafer level test and burn-in system supplier Aehr Test Systems, or "Aehr" have rallied by more than 80% since my last update on the company four months ago. While the company's core silicon carbide wafer level test and burn-in business remains challenged by lower-than-expected BEV production growth, investor sentiment has improved quite meaningfully in recent weeks with BEV posterchild Tesla (TSLA) leading the way: On Tuesday, the company reported Q4 and full fiscal year 2024 results in line with its preannouncement last week: While Q4 revenue of $16.6 million slightly outperformed management's recently revised outlook, the company's order intake of just $4.0 million was disappointing. That said, Aehr managed to secure $13.5 million in new orders since the beginning of FY2025 thus resulting in effective backlog of $20.8 million. The company remains heavily dependent on demand for its silicon carbide wafer level test and burn-in products but with BEV demand nowhere near previous expectations, Aehr's core business will continue to be challenged in FY2025 as very much evidenced by management's initial guidance: For the fiscal year ending May 30, 2025, Aehr expects total revenue of at least $70 million and net profit before taxes of at least 10% of revenue. Please note that the outlook includes approximately $10 million in contributions from the proposed $21 million acquisition of Incal Technology, Inc. or "Incal", a small provider of burn-in test solutions, allegedly "used by a significant number of leading Artificial Intelligence ("AI") semiconductor manufacturers". However, management was reluctant to provide details on Incal's customers and revenue trajectory which in combination with the very modest purchase price raises questions regarding the company's ability to turn this acquisition into a major growth driver. There's basically no way that a red hot AI semiconductor growth play would sell for below 2x revenues. At least in my opinion, the proposed acquisition might be less of a strategic move but rather an attempt to mask persistent weakness in the core business. Kudos to Jon Gruber from Gruber & McBaine Capital Management LLC for asking the right question on the conference call: Jon Gruber Yeah, yeah, I mean good presentation, a lot of prospects, but what I don't understand is with the acquisition, all these prospects (...) why is there no revenue growth excluding the acquisition? Gayn Erickson (...) It's really about the push-outs that we saw with respect to the silicon carbide ramps, things we were expecting people to be coming in pretty strong. And we're just looking at soft forecasts right now. We have multiple customers in our forecast that are going to buy one or two systems and not a lot of big ones. So our key customers themselves, for example and again, if you just look at the big silicon carbide guys, so let's just back up so I'm not talking about my customers in general or who they are. But I think if you look at the top four silicon carbide customers, they all guided down this year. And so, there have been people that are -- we're wondering how bad it was going be for us, and can we even continue to maintain our growth while they're having a soft year followed by a strong year. So I think we're -- it's the right thing to do right now is to communicate this. If we see strength in the second half come in harder than we are currently conservatively forecasting, then we'll guide up at that time. Quite frankly, management did not "communicate this" in the prepared remarks and only came up with the details after being poked by the analyst during the questions-and-answers session. Adjusted for the Incal acquisition, management guided for FY2025 revenues to decrease by 10% on a year-over-year basis despite some success from the company's diversification efforts with anticipated, meaningful contributions from new customers in the AI-acceleration and hard disk drive space. Despite stated accretion of the Incal acquisition, management projected a 30%+ year-over-year reduction in the company's net profit margin for FY2025. Once again, it took an analyst question for management to provide more color on the issue: Jed Dorsheimer (...) And then could you just help me connect the dots? If I use, you know, you said $12 million with 2 months of $1 million, so $10 million for Incal. It would suggest that the core business is kind of your guidance for a conservative or down year at the low end of $60 million. But on the operating income, if it is immediately accretive, which I think was stated in there, are you making a significant investment in the OpEx to cause the EBIT to come down by 6% or so percentage points or is that -- is something going on in gross margin? Gayn Erickson Yeah you know what it's I'd say, it's mostly the prior than the gross margin of it. We've actually made incremental expense investments, some of which candidly was in anticipation of much higher revenue this year, but it was things like the additional infrastructure we put in place in sales support infrastructure for all the selling that's going on. And eventually those need to turn into orders, as we are now very diversified in terms of the number of engagements at high level, but they obviously need to come to fruition, otherwise you put all these dollars in place and they're not helping. So there's explicit direct sales costs associated with that. We also have in our forecast, it's a little different than last year, the mix of our customers changing with some new customers includes customers that today were engaged in both directly and with local reps in those countries and they have a commission structure in them that is higher up front than later. So we have a pretty material, I think it's $700,000 -- $800,000 or so in external commissions on, would seem to be the same dollars, but it's actually dollars that are bought by new customers in new markets or new countries that has kind of messed us up a little bit. But I mean good money spent for sure, but that's another one. And then we've got some of the legal things, legal costs that we've talked about with respect to, I'm just going to use their code name with the acquisition, right, that are going on. And there's a few other things just respect to some profit sharing and some other things are slightly different year-on-year. We definitely are making investments in R&D this year, both incremental to the -- I'll call it the wafer level burn-in product line, we have to get used to thinking about that, but also we'll be making some incremental investments in the package part. (...) Given the persistent weakness in the core business, President and CEO Gayn Erickson spent plenty of time on the conference call elaborating on the company's diversification efforts with a special focus on AI in an apparent move to change the narrative away from silicon carbide. At least when judging by Wednesday's 20%+ move in the shares following an almost enthusiastic upgrade by Craig-Hallum analyst Christian Schwab, management did a great job and with expectations for FY2025 now set at very low levels, the risk of massive guidance reductions similar to last year has decreased considerably. In combination with the recent change in investor sentiment, I am upgrading the company's shares from "Sell" to "Hold". Bottom Line Aehr Test Systems reported Q4 and full-year fiscal 2024 results in line with the company's preannouncement last week. Adjusted for the proposed acquisition of Incal Technology, the company's outlook for FY2025 was disappointing, as the core silicon carbide-related business will remain challenged well into FY2025 and potentially beyond. However, management successfully highlighted the company's diversification efforts in an apparent move to change the narrative away from silicon carbide. As a result, Aehr Test Systems managed to lower FY2025 organic sales expectations well below consensus expectations without hurting the stock price. While I have my doubts regarding the rationale behind the proposed Incal Technology acquisition and remain concerned about management's apparent focus on the company's stock price, I am raising my rating from "Sell" to "Hold" due to recent changes in investor sentiment and sufficiently derisked expectations for fiscal year 2025. Massively Outperform in Any Market Value Investor's Edge provides the world's best energy, shipping, and offshore market research. Even during turbulent market conditions, our long-only models have outperformed the S&P 500 by more than 30% YTD. We also offer income-focused coverage geared towards investors who prefer lower-risk firms with steady dividend payouts. Our 8-year track record proves the ability of our analyst team to outperform across all market conditions. Join VIE now to access our latest top picks and model portfolios. I am mostly a trader engaging in both long and short bets intraday and occasionally over the short- to medium term. My historical focus has been mostly on tech stocks but over the past couple of years I have also started broad coverage of the offshore drilling and supply industry as well as the shipping industry in general (tankers, containers, drybulk). In addition, I am having a close eye on the still nascent fuel cell industry. I am located in Germany and have worked quite some time as an auditor for PricewaterhouseCoopers before becoming a daytrader almost 20 years ago. During this time, I managed to successfully maneuver the burst of the dotcom bubble and the aftermath of the world trade center attacks as well as the subprime crisis. Despite not being a native speaker, I always try to deliver high quality research to followers and the entire Seeking Alpha community. Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Aehr Test Systems: Good Numbers But The Future Growth Is Uncertain (NASDAQ:AEHR)

The company's diversification plans into new revenue segments, including AI, show potential for growth, but lack of concrete numbers and vague language from management warrant caution. Aehr Test Systems (NASDAQ:AEHR) recently reported its FY24 numbers, which were met very positively and may be construed as the company finally saw the bottoming of its operations. The company also shed some light on its future endeavors, which involve further diversification and expansion into other product testing segments. I will go through the numbers and some comments on the outlook of the company and whether it would be a good time to add or start a position. For the quarter, the company saw revenues of $16.6m, a beat of $1.15m and down 25% y/y. Note that the decline in revenues is not as aggressive as it has been in the previous quarters, which is a sign of improvements on the horizon. GAAP net income came in at $23.9m, or $0.81 per diluted share. This is a massive beat of $0.74 but it was already communicated previously that most of that income was due to the tax benefit of $20.8m and not through the company's operational improvements. The company's effective backlog got a nice bump from one of their main customers of around $12m for WaferPak, which was received in the first quarter of FY25, bringing its effective backlog to $20.8m. I think what got everyone excited in the past week about the company is its guidance for FY25, which came in around $2m more than the consensus anticipated. Overall, I believe that there was nothing too exciting in the numbers or the guidance, to be honest. The massive beat on EPS had nothing to do with improvements in operations, and the reaction to the upside was an overreaction, probably caused by the massive short interest in the company and the fact that the company itself finally did not guide lower for once. I also don't understand why the stock went up another 25% on the earnings release when these numbers were already pre-announced a week ago, when the company saw its share price skyrocket too. I also think that the reaction to the results had something to do with the company diversifying away from just being mainly in silicon carbide, which should lower its concentration risk to an extent. The company still expects its main revenue contributor to be SiC, but now the management is looking at three different revenue generators, each to bring around 10% of total revenues in the near future. These are hard disk drive applications, wafer-level burn-in of GaN power semis that are used in data centers, and of course AI applications. The company mentioned others like silicon photonics ICs used for I/O (Input/Output) communication and flash memory devices in SSDs, but management isn't certain of the revenue potential from those just yet. Also, the company isn't certain of the potential of the three mentioned, but they are optimistic that those will yield good results in the end. There was a lot of hedging in the comments about the potential of these revenue segments with words such as "could do", "could be", and "could maybe". These are not very strong tones in my opinion, so I would take that statement with a grain of salt and adjust your expectations. However, the company is heading in the right direction by diversifying, which should in the end convince more investors that its concentration risk is coming down. One of the revenue catalysts that probably got the most attention is the AI part of it. The company also announced it has acquired Incal Technology, which expands Aehr's product portfolio of test products specifically within the ultra-high-power capabilities for AI accelerators, GPUs, and HPC processors. The deal was for $21m, which consists of $14m in cash and around half a million in AEHR common stock at an average closing price of $12.60. The acquisition is already baked into the company's FY25 revenue guidance. This was a good acquisition in my opinion. The ever-growing demand for AI may become a much bigger part of the company's overall revenues, but that will take a while before it can scale its operations. The company is excited about the opportunity within the AI processes for LLMs, which is still in the testing phase, and has said it is working with an AI accelerator company to move its AI processor testing and burn-in to wafer-level, however, what probably was on everyone's minds is that it was Nvidia (NVDA), unfortunately, the management confirmed it was not. Nevertheless, there is a lot of excitement there, but no concrete numbers yet, so I will be cautiously optimistic for now. In terms of EVs starting to recover, Tesla (TSLA) has had a massive run recently due to beating delivery expectations at the beginning of the month and then getting picked up by momentum and what I assume FOMO and meme traders to rally over 40% in one month. Onsemi (ON) has been a little more cautious about the second-half outlook, citing "We expect customer inventory levels to normalize and the market to stabilize." So, there does seem to be some sort of stabilization on the way, which should help AEHR to grow its top line at a more acceptable pace than it has in the last few quarters. In summary, I like the diversification ideas that the company has provided here. They all seem to be a positive for the company and lessen concentration risk, however, we cannot be certain how well these will perform since the verbiage management used was vague and no concrete numbers were presented, apart from what these avenues "could" bring in going forward. I would like to see how these perform once they are operational. I am still holding on to a small position that is about to break even right now. The last time I made assumptions about the company, management was very optimistic about growing revenues to "at least $100m, representing growth of over 50% y/y". What followed since then were disastrous quarters with many lowered expectations. Back in December, I modeled that the company would reach $102m in FY24, now that number came in at $66m, with FY25 to be at least $70m by the company's expectation, which is less than half of what I expected for FY25 to be (I said around $160m). My estimates were very off, to say the least. I gave the company a 37% CAGR over the next decade, which I thought was reasonable given how the company was growing in the last three years (at an average of 98%). Now I cannot come up with reasonable forecasts because I need to see a few more quarters to have a better idea of the revenue trajectory going forward, what the new catalysts will bring in, and how the EV sector will recover. The company mentioned that Incal did around $12m last year, so taking out the acquisition, the company would not be growing. Therefore, it is tough to give some growth numbers that would exceed more than 10%, and that is quite low for a company this size. I am not going to be adding any more shares but will let them ride for a little while longer until at least I see what the recovery looks like. Therefore, I am downgrading to a hold rating for now.