2024-01-11 06:28:58 ET
Summary
- Aehr Test Systems reported Q2/FY2024 results slightly ahead of expectations but significantly lowered full-year revenue expectations.
- Lower-than-anticipated growth in the electric vehicle market has negatively impacted customer orders and capacity increases for silicon carbide devices.
- Based on management's stated forward growth expectations, the company is likely to miss the FY2025 analyst consensus by a mile.
- Based on current order patterns and the tiny backlog number, I do not expect the company's 2024 sales to come even close to the revised guidance range.
- With the revised outlook likely to be lowered again next quarter and considering management's less-than-stellar performance on the conference call, I'm reiterating my "Sell" rating on Aehr Test Systems' shares.
Note:
I have covered Aehr Test Systems ( AEHR ) previously, so investors should view this as an update to my earlier article on the company.
After the close of Tuesday's regular session, wafer level test and burn-in system supplier Aehr Test Systems or "Aehr" reported Q2/FY2024 results slightly ahead of expectations but lowered full-year expectations substantially (emphasis added by author):
In the last sixty days, we have seen how the slowing of the growth rate of the electric vehicle market has had a negative impact on the timing of several current and new customer orders and capacity increases for silicon carbide devices used in them. (...)
Given the latest forecasts from our customers and the uncertainty on the timing of their orders, we believe it makes sense to take a more conservative approach to our fiscal year forecast and have reduced our growth estimates for fiscal 2024 revenue. We are reducing our revenue expectations of at least $100 million this fiscal year by 15% to 25% to a range of $75 million to $85 million dollars .
Following a recent earnings warning by the company's largest customer ON Semiconductor ( ON ) which included the announcement of substantial reductions in silicon carbide investments, I already expected Aehr to be impacted materially.
However, on the conference call , management didn't blame the lowered guidance on ON Semiconductor:
Our largest customers' overall forecast for revenue with us has actually remained relatively flat for the year, but the revenue mix has shifted to fewer systems and more WaferPaks.
The statement apparently perplexed a number of conference call participants and resulted in management being poked on the issue a number of times during the questions-and-answers session with some analysts looking for additional color on ON Semiconductor's anticipated contribution in FY2025 (emphasis added by author):
Christian Schwab
Just then maybe another way thinking about as we exit this year and go into fiscal year 2025, would you assume that your lead significantly much greater than 10% customer, can you know grow or sustain itself at a material run rate $50 million, $60 million, $80 million. How should we be thinking about -- I understand you don't want to make a proclamation about what is their aggregate demand is, but they've made comments about it. So given their public comments, I guess, let's start with that, how would you anticipate that customer materiality in fiscal year 2025?
Gayn Erickson
I mean, we -- I believe that they will still be material. I don't know that they will be the dominant customer [Technical Difficulty] they'd be or they not be. My guess is, they will not even be the largest, as some of the other customers are kicking in with their ramps . One thing we've tried to look at is, how fast is the market growing itself. I mean, silicon carbide is growing, let's say 40% a year topline revenue. Can we grow faster than that? I think there is examples where we can, but I think it would be more realistic to think that we grow alongside the market itself.
At least in my opinion, management's statements are highly concerning as there's apparently no visibility into customer deployments going forward. At the mid-point of the revised FY2024 range, management's stated 40% growth expectation would calculate to FY2025 revenues of $112 million, a far cry from the $160 million currently projected by analysts.
Even worse, I do not expect the company to come even close to the lower range of the revised FY2024 guidance.
While Aehr recorded $42 million in revenues for the first half of FY2024, the company's backlog at the end of November was down to just $3 million as the book-to-bill ratio for the quarter came in at a measly 0.1.
Even achieving the low point of the revised range would require $33 million in revenue for the second half and with just $3 million in the books at the end of Q2 and less than five months left in FY2024, Aehr would have to secure and almost instantly ship $30 million in new orders until the end of May which I consider highly unlikely.
On the call, CEO Gayn Erickson assumed a likely 40/60 revenue split between Q3 and Q4 but I have absolutely no idea how the company would manage to secure and ship more than $10 million in new orders until the end of February in the current market environment, particularly given the fact that Aehr's orders tend to have longer lead times.
Regulatory Filings / Press Releases
Please note the fact that the company did not state its " effective backlog " at the time of the earnings release which includes orders received in the quarter to date despite this metric usually being part of Aehr's quarterly reports.
Given this issue, it is fair to assume that the company hasn't received any material orders so far in the quarter, except for one system reported in December.
When asked about its confidence level in the revised guidance on the conference call, management insisted on having " very good visibility " albeit the Q2 order intake and stated capex reduction plans by ON Semiconductor are actually pointing to the opposite.
We are in constant communication with all of these customers, and our lead customer is [indiscernible] candidly. I'd say that the numbers and the forecasts they've given us have been constant for the last 30 to 60 days but on the low end. And so that's why we have more clarity.
I think they have direct visibility of orders that they have from their customers and what that drives in terms of wafer packs and capacity, et cetera. But I will -- my personal belief is I don't think they have perfect visibility. And I think there's a little bit of reaction to the seeming slowdown. But now, with interest rates recovering and perhaps people getting through their inventory, maybe they'll be pleasantly surprised on their side. But, yes, I mean, we're down to knowing -- when we have these forecasts, we know what wafer pack mix it is, et cetera. So we have pretty good visibility. I'd say very good visibility.
For my part, I wouldn't be surprised to see full-year FY2024 revenues coming in closer to $60 million. Applying management's preliminary FY2025 growth expectations of 40% to this number would result in a FY2025 revenue expectation of just $84 million.
For the most part of Tuesday's conference call, management seemed to be more concerned with protecting the stock price rather than managing investor expectations appropriately and even came up with a pretty far-fetched shortseller conspiracy:
By the way, I wasn't sure if I was going to do this, I'm going to throw this out publicly out here. We are aware of a scenario where an investor approached one of our customers and had some conversation related to, we believe it was a hedge fund that had our -- short our stock, we had like a 20% short position, approached one of our customers and was complaining to them about how much money we're making. They clearly had a vested interest to try and get the customer to try and negotiate our prices down. And I think that's garbage, but it's not against the law.
Quite frankly, I consider this hard to believe as institutional shortsellers usually don't lobby customers of their target company as simply sharing their rationale with market participants would be a vastly superior way to cause damage. After all, there's a reason why a customer has agreed to certain contract pricing.
With the revised outlook likely to be lowered again next quarter and considering management's less-than-stellar performance on the conference call, I'm reiterating my " Sell " rating on Aehr Test Systems' shares.
Bottom Line
At least in my opinion, things are likely to get considerably worse before getting better at some point going forward.
Given the ongoing headwinds in the silicon carbide market, I would expect Aehr Test Systems to miss management's revised FY2024 guidance range by a mile and initial FY2025 projections to be a far cry from current consensus estimates.
Consequently, I am reiterating my " Sell " rating on the company's shares and would advise investors to move to the sidelines until the business shows signs of stabilization.
For further details see:
Aehr Test Systems: Revised Guidance Likely To Be Lowered Again - Sell