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Aehr Test Systems: Enthusiastic Management But Weak Near-Term Prospects, Hold

Oct. 10, 2024 11:18 PM ET| Aehr Test Systems, Inc. (AEHR) Stock|1 Comment

Henrik Alex
Investing Group Leader

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Summary

Shares of wafer level test and burn-in system supplier Aehr Test Systems rallied after the close of Thursday's regular session as investors cheered better-than-expected Q1/FY2025 results.
Results and backlog benefited from the recent acquisition of Incal Technologies.
As usual, management remained enthusiastic about the company's diversification into new markets, including AI.
However, expansion into new markets won't offset persistent weakness in the core silicon carbide system business anytime soon.
While market participants are likely to celebrate perceived AI market prospects in the near-term, persistent weakness in the company's core business is keeping me sidelined for now.

PhonlamaiPhoto

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" rallied by more than 10% after the close of Thursday's regular session as investors cheered better-than-expected Q1/FY2025 results:

Company Press Releases

Both revenue and profitability came in ahead of muted consensus expectations as the company benefited from the contribution of Incal Technologies or "Incal" following the close of the acquisition in late July.
While Aehr generated positive cash flow from operations during the quarter, the Incal acquisition resulted in unrestricted cash decreasing by $11.4 million on a sequential basis.
Management also provided very encouraging market commentary:

We finished the first quarter with revenue and non-GAAP net income ahead of consensus estimates and are off to a good start to our fiscal year.
Silicon carbide wafer level burn-in test systems and full wafer contactors are poised to be key contributors to revenue again this year.
We are also forecasting material bookings and revenue contributions from several other markets this fiscal year, as we are successfully executing on our strategy to expand our test and burn-in products into other large and fast-growing markets such as artificial intelligence processors, gallium nitride power semiconductors, hard disk drive components and flash memory devices.
We have been seeing a stabilization and increasingly positive discussions within the silicon carbide power semiconductor market over the past quarter. (...)
We are highly optimistic about our silicon carbide business and expect it to gain momentum over the next few quarters.

In addition, management was enthusiastic about the company's prospects in the gallium nitride semiconductor market:

We are now in negotiations with our first gallium nitride ("GaN") semiconductor customer for volume production wafer level test and burn-in of their devices. (...)
We believe GaN is a significant up and coming technology for power semiconductors. With a forecasted CAGR of more than 40% to over $2 billion in GaN devices sold annually by 2029, it has the potential to be a significant market opportunity for Aehr’s wafer level solutions.

Perhaps even more important in the current stock market environment, Aehr claimed substantial progress in the evaluation of its wafer level burn-in solution for the production of next-generation AI processors:

Last quarter, we announced that an Artificial Intelligence ("AI") accelerator company committed to evaluating our FOXTM solution for wafer level burn-in of their high-power processors. (...)
The evaluation is progressing very well, and once we demonstrate successful wafer level test results and throughput, we anticipate they will adopt our high-power FOX-XP systems for production of their next-generation AI processors, beginning this fiscal year.

Management also stated expectations for multiple near-term FOX-CP production system and WaferPak Contactor orders being placed by "a key customer in the hard disk drive space" with shipments expected in the second half of the current fiscal year.
Last month, the company announced an order for six Sonoma ultra-high-power systems for volume production test and burn-in of AI processors by a "large-scale data center hyperscaler". Please note that the Sonoma system has been contributed by recent acquisition Incal Technology.

Incal Technology

Despite the better-than-expected quarter and very positive market commentary, management only reiterated the company's previous FY2025 guidance for revenues of "at least $70 million and net profit before taxes of at least 10% of revenues".
In addition, Aehr Test Systems abstained from providing its effective backlog number, which includes all orders received since quarter-end.
After being asked by an analyst on the conference call, management stated that the above-discussed Sonoma multi-system sale was the only meaningful order received so far in Q2/FY2025 and providing the effective backlog number would have allowed for extrapolating Sonoma system pricing.
Given this issue, Aehr Test Systems would be well-served to secure additional orders in the current quarter, as otherwise the company would also have to go dark on their quarter-end backlog number.
Please note also that the acquired Incal products tend to have much longer lead times than Aehr's core offerings.
For my part, I wasn't overly impressed by management's performance, as many topics had been already discussed in a similar manner on the Q4/FY2024 conference call.
While there's certainly nothing wrong with the company's diversification efforts, new markets won't offset persistent weakness in the core silicon carbide system business anytime soon.
That said, management's recent efforts to shift investor focus away from silicon carbide to the company's alleged AI opportunity will almost certainly bear fruit in the current stock market environment even with Aehr's prospective AI customer not being NVIDIA ( NVDA), as outlined again on the conference call.
Bottom Line
Aehr Test Systems reported Q1/FY2025 results above muted expectations and reiterated full-year guidance.
While management remained enthusiastic about the company's prospects, Aehr's core silicon carbide system business is likely to remain weak for at least the next couple of quarters.
In addition, it will take more time for the company's diversification efforts to show tangible results and while the recent Incal acquisition appears to be off to a good start, it is too early to draw conclusions on the growth trajectory of the business.
While market participants are likely to celebrate perceived AI market prospects in the near-term, persistent weakness in the company's core silicon carbide system business is keeping me sidelined at this point.
Consequently, I am reiterating my "Hold" rating on the shares.

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