Aehr Test Systems (NASDAQ:AEHR) Q3 2020 Earnings Call

0:00 Good day and welcome to the Heir Test Systems third quarter fiscal 2020 financial results call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Jim Byers of MKR Investor Relations. Please go ahead, sir. Thank you, operator. Good afternoon and welcome to Heir Test Systems fiscal 2020 third quarter financial results conference call. With me on today's call are Heir Test Systems President and Chief Executive Officer, Gayn Erickson, and Chief Financial Officer, Ken Spink. Before I turn the call over to Gayn and Ken, I'd like to cover a few quick items. This afternoon, Air Test issued a press release announcing its third quarter fiscal 2020 results. That release is available on the company's website at air.com.

0:45 This call is being broadcast live over the internet for all interested parties, and the webcast will be archived in the investor relations page of the company's website. I'd like to remind everyone that on today's call, management will be making forward-looking statements 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. 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 Ehr Test Systems undertakes no obligation to update the forward-looking statements.

1:36 And now with that, I'd like to turn the conference call over to Gayn Erickson, President and CEO. Gayn Erickson Thanks, Jim. Good afternoon to those joining us on today's conference call and also listening online. Ken, our CFO, will go over our third 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 wafer-level and simulated dive test and burn-in solutions. And then we'll open up the lines for your questions. Before I discuss our performance and financial results for the third quarter, I'd like to say a few words about the impact of the coronavirus and our response to this global pandemic. First, I'd like to express our heartfelt concern to all those who've been impacted. and to everyone listening today, I hope that all of you and your family and friends are staying safe and healthy.

2:23 As the COVID-19 pandemic continues to unfold, our foremost concern at Airtest is to ensure the health and safety of our employees, their families and our worldwide community. As of today, I feel fortunate to report that none of Airtest direct employees or their immediate families have contracted the virus. On March 19, 2020, the Executive Department of the State of California issued an executive order ordering individuals in the State of California to stay home or at their place of residence except as needed to maintain continuity of operations of the federal critical infrastructure sectors. AIR is a global supplier to critical infrastructure, specifically companies in the IT, communications, and manufacturing sectors that require semiconductor components.

3:11 As such, we're taking extraordinary measures to maintain continuity of our operations and to continue to safely operate with full capacity available in manufacturing and across the company to support the vital needs of our critical infrastructure customers while complying with the local and state mandated shelter in place directives. Wherever possible, our employees continue to work from their residences using the best possible remote communication and collaboration tools available. as well as securely accessing remote operation of our tools at our facilities and also at our customer sites. While working remotely, our R&D and applications teams continue to be highly effective in advancing our, easy for me to say, our ongoing product enhancement programs and customer applications to meet critical releases in customer product roadmaps.

4:04 In addition, through direct and indirect representatives, AIR also has engineers and infrastructure around the world to support our customers and meet our contracts, response times, and critical parts lead times for our installed base of AIR Test products. Personally, I feel very fortunate that AIR Test is in the position to currently not have any employees yet directly impacted by this pandemic, and that we have the capability, capacity, and government support to be productive, effective, and Abel to meet all customer needs at this time. We're also in the position where our customers are open for business, which I realize is simply not the case with so many businesses around the world. Let me turn to our business highlights. We're pleased with our results for the fiscal third quarter, which include continued profitability and strong gross margins. Profitability for the quarter exceeded our historical business model reflecting higher than average consumables as a percent of total revenue for the third quarter.

5:07 Despite the current challenging global environment, we remain engaged with a large number of potential new customers. We continue to see a substantial number of customer evaluations of our FOX NP, XP, and CP products to address their production needs and test in Vernon on a number of applications. We think this is a combination of so many of our customers' engineering teams having more time or more focus to work on improvements to the production processes so that they come out of this environment stronger than they came into it. And or because so many of our applications are related to the global infrastructure of IT and communications that are clearly more important than ever before and are being stretched to their limits. We have several customers that are saying that they're trying to actually pull in plans for new programs and new products as a result of the new demands on the worldwide communication infrastructure.

5:59 We're currently working with more than a dozen new customers for production wafer or die-level testing Vernon. That includes silicon photonics devices for 5G and data storage farms, power silicon carbide devices for automotive, sensors for mobile and automotive applications, and memory devices for data storage and computing. Our sales, marketing, and applications teams remain very busy supporting these sales efforts. using online conferences, videos, and other collaboration tools. During the quarter, we shipped an additional Fox XP multi-wafer test and burn-in system to meet the production ramp of a leading supplier of silicon photonics devices. This customer continues to look to AIR to support their high volume production ramp and wafer level burn-in capacity and to forecast significant growth in shipments for silicon photonics devices. that we expect to drive the need for additional production tests and burning capacity for multiple years into the future.

6:57 As we talked about on past calls, as our customers move to high volume production tests on our FOXP systems, we see their ramps driving significant incremental capacity of both our systems and also our proprietary wafer pack contactors and dye pack carriers. When they buy a FOXX PRMP system from us, they also buy a set of either wafer pack or dye pack contactors. that allow us to make contact to their specific and unique device design. These consumables are needed with each new device they introduce or with each device shrink or new design. During the quarter, we received orders totaling more than $2.9 million from our installed base of Fox Test and Vernon System customers for our wafer pack and dye pack consumables, including orders from a single customer of approximately $2.3 million for dye packs for test and mobile sensors. Other device applications for these orders include production tests of silicon carbide devices, flash memories, and silicon photonics devices.

7:59 Shipments of our consumables for our Fox systems accounted for 51% of our total revenue for the third quarter. As I've noted before, the consumable business continues long after a system is installed, and that as we grow our installed base, we believe we can reach a point where our wafer pack and dive pack compactors exceed over half of our annual revenue. providing stable baseline for our test. Over time, we feel that the percent of our business made up of consumables will grow, although it will still vary as a percent of total from quarter to quarter. Turning to our package part and OEM chamber business, as I noted on our last call, the low-level business we've experienced in our package part business has been expected and was already built into our financial forecast.

8:46 We've started to see some forecasts for renewed market demand for package part burn-in systems from customers who are asking us about our high-voltage capability and adding this capability to our package part systems. We see the need for high-voltage capabilities in both wafer-level and package part now as a new high-growth opportunity for air tests. These changes in our customer long-term forecast for our package part burn-in systems reflect a move towards higher voltages and other requirements for smartphone devices and automobiles particularly with electric and hybrid automobiles and autonomous vehicle sensors. As a result, we've seen a drop-off in demand of our older package system configurations, and we're currently evaluating these markets.

9:32 Now, turning to our guidance for fiscal year 2020. Currently, all of our customers have their wafer fabrication facilities open to support the critical infrastructure around the globe in information technology, Communications, and Critical Manufacturing Sectors. And AIR is able to ship orders for systems, wafer packs, dye packs, and parts needed to support these customers with little to no limitations or delays. However, due to the uncertainty of the full impact of the COVID-19 pandemic on our customers, we simply cannot predict how this will impact our business in the near term. and we are taking the conservative stance to withdraw our previously provided guidance for fiscal 2020 year that ends this May 31st. Looking ahead, we remain optimistic about the significant market opportunities in front of us and about our customers and our unique capabilities to serve their test needs this year and beyond. As we continue to focus on our selling resources and processes, we've continued to make some structural changes in a few areas of our company that we began last fiscal year to both position us for success in addressing our new market opportunities as well as improve our efficiency.

10:44 This month we completed closure of our Japanese subsidiary and the transition away from direct sales in Europe moving to sales representatives in both Europe and Japan. I'm pleased to note that with these changes, we've already seen far better sales coverage of Europe, while at the same time reducing our fixed costs in both Europe and Japan by approximately $120,000 per quarter, beginning at the start of our fiscal 2021 year, which will start this June 1st. As a result of these changes, we'll be taking some one-time charges associated with these closures and layoffs of employees in those offices in our fiscal fourth quarter. Lastly, I'm pleased to announce that we recently hired a new VP of Operations, Michael Brannan. Michael comes to us with extensive background in the semiconductor test industry and particularly the printed circuit board and assembly and probe card industries, where our traditional manufacturing spend is over 75% of total today.

11:39 Michael is replacing David Fucci, who served as our VP of Operations for the last six years and is retiring at the end of May. We wish David well and thank him for his contributions during a pivotal time in AIRS history. David's retirement has been in the works for some time, and we began looking for his replacement several quarters ago, well before the coronavirus outbreak. We're excited to have Michael on board to lead our team in manufacturing operations, supply chain quality, and inventory management. To conclude, we had three solid quarters before the world got hit by COVID-19. We increased revenue by 34% year-over-year and, most importantly, turned a $5 million loss into a profit, and we expect to get back on track once this crisis is over.

12:26 The fundamentals for air tests remain strong long-term, and we believe that we will emerge from this difficult period even stronger than we went in, with an even larger number of customers committed to using our Fox systems to meet their production tests and burning needs. With that, let me turn it over to Ken before we open up the lines for questions. Thank you, Gayn. As Gayn noted, our financial performance for the third quarter included continued profitability and strong gross margins, as well as lower operating expenses reflecting our cost containment measures. Net sales in the third quarter were $6.1 million, down 11% from $6.9 million in the preceding second quarter, and up 93% from $3.2 million in the third quarter of the previous year.

13:11 The sequential decrease from the preceding quarter reflects a decrease of $841,000 in wafer-level burn-in revenues. The increase from Q3 last year includes an increase in wafer-level burn-in revenues of $3.4 million, reflecting an equal mix of system revenues and wafer pack and dye pack revenues, partially offset by a decrease in customer service revenues of $435,000. Non-GAAP net income for the third quarter was $452,000, or $0.02 per diluted share. compared to non-GAAP net income of 456,000 or 2 cents per diluted share in the preceding quarter and a non-GAAP net loss of 1.6 million or 7 cents per diluted share in the third quarter of the previous year.

13:56 The non-GAAP results exclude the impact of stock-based compensation expense, restructuring charges, and write-down of excess and obsolete inventory. On a GAAP basis, net income for the third quarter was 245,000 or 1 cent per diluted share This compares to gap net income of $251,000 or one cent per diluted share in the preceding quarter and a gap net loss of $3.2 million or 14 cents per diluted share in the third quarter of the previous year. The gap net loss in Q3 of fiscal 2019 includes the impact of approximately $1.4 million or six cents per share in one-time restructuring and inventory write-down charges taken in the quarter. Gross profit in the third quarter was $3 million or 49% of sales compared to gross profit of 3.2 million or 47% of sales in the preceding second quarter and gross profit of 272,000 or 9% of sales in the third quarter of the previous year.

14:54 The sequential increase in gross margin percentage is primarily due to a change in product mix, reflecting an increase in wafer-packed and dye-packed revenues from Q2. The increase in gross margin over prior year Q3 is primarily due to the impact of 795,000 and inventory write-down charges, along with higher unabsorbed overhead costs due to lower revenue levels in the third quarter last year. As we've noted on prior calls, our wafer pack and dye pack revenues are accounting for a more significant portion of our overall revenues, favorably impacting our gross margins as they maintain higher margins than our systems or pass-through products. In the third quarter, our wafer pack and dye pack consumables business accounted for 51% of total revenues, up from 44% in the preceding Q2 and 46% in Q3 of last year.

15:45 Operating expenses in the third quarter were $2.7 million, a decrease of $216,000 or 7% from $3 million in the preceding quarter, and a decrease of $652,000 or 19% from $3.4 million in the prior year third quarter. The decrease in operating expenses from the prior year primarily reflects the impact of a restructuring charge of $607,000 taken in Q3 last year related to workforce reduction severance costs. SG&A was $1.9 million in the third quarter, down from $2.2 million in the preceding second quarter, and flat compared to $1.9 million in the prior year third quarter. The sequential decrease is primarily due to a reduction in costs associated with new product introductions, including travel and presale support activities and lower commissions from a decrease in bookings. R&D expenses were $845,000 in the third quarter, compared to $795,000 in the preceding second quarter and $931,000 in the prior year third quarter.

16:46 Turning to the balance sheet for the third quarter, our cash and cash equivalents were $5.1 million at February 29, 2020, compared to $5.3 million at the end of the preceding quarter. The cash receivable at quarter end was $3.5 million, down from $5.2 million at the preceding quarter end primarily due to the impact of customer deposits and deferred revenue on current quarter revenues and a decrease in revenue from the prior quarter. Inventories at February 29th were $9.3 million down from $9.8 million at the preceding quarter end primarily due to the consumption of inventory on hand at prior quarter supporting current quarter revenues. Property and equipment was $783,000 compared to $860,000 at the preceding quarter end.

17:34 Customer deposits and deferred revenue, short-term and long-term, were 419,000, down from 1.9 million at the preceding quarter end, related primarily to customer deposits offsetting current quarter revenues and the decrease in backlog from prior quarter. Bookings in the third quarter totaled 3.1 million. Backlog at February 29th was 3.6 million, compared to 6.5 million at the end of the preceding second quarter and 6.9 million at the end of the third quarter of the previous year. Now turning to outlook for fiscal 2020. As Gayn noted, due to the uncertainty of the full economic impact of the COVID-19 pandemic on our customers, we cannot predict how this will impact our business in the near term, and we're taking the conservative stance to withdraw our previous provided guidance for fiscal 2020 ending May 31st.

18:24 In terms of operating expenses, the company has implemented cost reduction initiatives to reduce costs and align company resources for future growth. Action taken including dissolving our Air Test Systems Japan subsidiary and reducing headcount at our Air Test Systems Germany subsidiary. We expect to take a charge in the fourth quarter of fiscal 2020 of approximately $150,000, which includes severance payments for individuals impacted in the reduction and legal fees associated with these actions. Through these actions, we expect to recognize cost savings of approximately $120,000 per year, starting in Q1 of fiscal 21, which begins on June 1, 2020. We will be moving to a sales rep distributorship model for sales in these regions. The company is maintaining R&D investments and enhancements to our products for automotive, silicon carbide, silicon photonics, and memory, even with restrictions in place resulting from the COVID-19 pandemic. Our R&D application teams are working effectively to meet critical releases and customer roadmaps.

19:28 This concludes our prepared remarks. We're now ready to take your questions. Operator, please go ahead. Yes, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure that your mute phone is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll pause momentarily to allow everyone an opportunity to signal for questions. We'll take our first question from Christian Schwab. Sorry about that, I had it on mute. Guys, when we go into next quarter, and if this lingers for multiple quarters, do we feel confident in our cash position? And given the fact that some customers you highlighted possibly were talking about pulling in orders, those large expensive systems that you'd have to put into inventory?

20:27 Okay, so there's a couple of jewels in there. Let me start with the latter one there, Christian. So I'll remind people, you know, it has been a great idea all along, and now it seems even like a better idea. We do have policies in place with all of our large customers that systems and wafer packs that are purchased from us, we receive a 30% down payment up front to secure the order. That allows us a significant ability of the way to meet all cash flow requirements to be able to build, you know, qualify and ship those products to those customers. So if we get customers and orders in for things that we don't have on hand in inventory, we're not needing to necessarily, we don't need cash for that per se.

21:18 Keep in mind that dye packs and wafer packs, although we do have sub-assemblies that can be common, are unique to them. But we've also done a substantial amount of work during the last nine months, actually something we probably should spend more time on, of getting our lead times down. So now we're able to meet lead times for wafer packs and dye packs at about eight weeks and less, which allows us to do quick turns. That includes the procurement assembly test of all of the material and out the door. So that minimizes the cash requirements for that. And keeping in mind, we still get down payments on them. So your other question was just in general, you know, if this thing extends, how are we doing for cash? You folks won't be surprised that we spent a lot of time just looking at that, understanding, you know, if we need to hunker down for an extended period of time, what that looks like. I mean, one of the things that we're trying to get our arms around completely on the model is right now is that you know we do have a believed to be sustainable level of base business in addition to the support contracts that are done annually. You know our certain support business tends to be about a million dollars a quarter and then we see approximately two million dollars a quarter of additional revenue that comes in as base level business kind of in you know always be careful saying worst case but the worst case and even at those really low levels given appropriate and consistent

22:51 pay cuts or temporary pay cuts and things that we've done in the past. We think that our cash position lost us five plus quarters easily. And that's without taking any really drastic action. It would also mean that we would have to be at sustainably lower levels than we're expecting or forecasting during that entire time. so you know you also mentioned the customers are pulling in and that's interesting I mean we had a customer within just the last couple of days on a new application call us and ask for eight week lead times on something so there really are you know we wake up every single day in fact we have a daily conference call with the executive staff every single morning to review you know the health of everybody and go all the way down all the things that need to be We have so many customer engagements right now that are keeping us really busy.

23:49 The conservativeness, which is eventually going to be one of the questions, where is it coming from? We have so much activity and so many customers that are talking up a storm about the things they want to do. But as you guys know, when we get large orders, we report them. So in the absence of reporting, that means there aren't those large orders. So we're just taking a stance right now to just be as conservative as we possibly can Going forward, while at the same time you hear this level of optimism in our voice, which seems inconsistent with respect to just the environment, but it's indicative of the customers kind of pushing really hard to get more products and pull things in. In an optimistic scenario, I guess my last question and follow-up is it seems Is there any new customers or new customer applications for existing customers that could lead to meaningful revenue in calendar 2021?

24:58 You mean from a longer term, are there some big deals out there? Yeah, Gayn, you highlighted a lot of opportunities and a lot of different verticals. I'm just wondering, in a lot of customer engagements that you're having daily meetings about, I'm just wondering if, you know... Some engagements will happen, others will not, but, you know, is there anything out there that you're, like, super excited about from a revenue perspective? Yeah, okay, so, I mean, there's two things. One of them is the piece that is sort of, I guess, you wake up every day and read the news that is maybe surprising is the number of engagements with people that are talking about things they want, you know, shipped into this summer or sooner or this fall or... And so... You talked about 2021. I'm talking about customers, talking about ramping and pulling things into this calendar year. Related to next year, yes, we actually talked about it before. We booked to deal with our first Fox CP customer, which is the integrated program version for what we were kind of elusive on, but is a data storage application that is an enormously large unit volume that we believe they would start to kick in their production volume that would drive capacity

26:32 of FOX CP test cells. That right now we see could start towards the end of this year and be a 2021, the start of the major ramp, if you will, then. We have engagements on multiple mobile applications that include things this summer, this fall, I believe, next summer. There are some things that are potential there that have more upside than the recent couple of years that we're talking about. And then the silicon carbide customers that we're engaged with right now, the unit volumes around the silicon carbide, the long test and burn-in times, and the yield implications, the improvements that we're able to give people seems pretty exciting that can move the bar.

27:20 And of course, we spend a ton of time talking about the silicon photonics customers and everything related to 5G and the data storage. And that's probably the bulk of the number of companies that are saying, I want to pull in, pull in, pull in, because they're actually being asked to put more infrastructure in place. Let's accelerate the stuff that's going on with the data servers or the 5G infrastructure. So, There's a mix of things, both this calendar year as well as next year, that look very promising. Great. No other questions. Thank you. Thank you. We'll take our next question from John Fitchthorne. Please go ahead, sir.

28:05 Hi, guys. Thanks for taking the call. First question is this quarter was maybe below consensus, at the very least. And so, you know, that quarter ended in February. It was kind of pre-corona. It's a little down sequentially. It sounds like things are going really well. It seems like things have been going really well. Things have been trending in the right direction. Why the trend break in this quarter? Well, I mean, just, you know, just by the numbers, right, we ended up with a backlog of three, six, is it? Yeah, 3.6. Yeah, so we start off March 1st with the backlog of 3.6. Clearly, if we don't get more orders, we would only have 3.6 to ship. Now, we absolutely have systems, NP, XP, dye packs, wafer packs that can turn within the quarter.

29:06 But as the quarter draws on, the question is, are they going to come in in time to come in this quarter, or is it going to be moving into June? and, you know, customers are talking up a storm about eminent orders, but, you know, I'd like to see them. I mean, I think that's really where we sat around as a board just a few days ago and said, you know, what do you do? How do you describe your end of year when you have things that can shift between May and June? And so we just, you know, said let's just pull it off the table. People, you know, I mean, to sit here and be extra bold right now would seem to be completely against the grain. We could still have a good quarter this quarter, and we could have not so good a quarter this quarter.

29:54 But for the quarter that ended in February, what was the weakness in that quarter? Because the question I'm trying to answer is, are you pulling guidance because of uncertainty over coronavirus, like you're saying, or was there already some softness in the quarter and in February that I should be concerned about that's a red flag outside of the coronavirus uncertainty? Yeah, I mean, we certainly have had customers that we were expecting some orders in like late in the quarter for shipments in Q4, even some orders that potentially could have come in towards the end of the quarter that didn't come in. and you know we're trying to get our arms around is it you know can we point to specific things that are coronavirus related I would say no nor can we specifically point to uh exactly why some of their ramps are you know shifting left or customers that were implying they're going to place orders immediately didn't I can't help but feel that you know any CEO is wondering Is this something I absolutely positively have to pull the trigger on now, or can I just wait a couple weeks or something? The one thing that we're not seeing is, you know, that the ramps are going away. You know, as I said before, I really feel we could be in such a different place.

31:20 I mean, we get weekly calls, in some cases, you know, twice a week. from key customers saying, you know, you're still fine. Can you do a deep dive on your supply chain? Are all your suppliers still around? You know, we're forecasting these needs and these ramps, and you need to tell me you're going to be able to ship to me. Right? And so you've got that going on at the same time that, you know, obviously the orders haven't come in that would be consistent with what our original guidance would have been to finish the year off. So Yeah, I feel, you know, like I said, it's not like we're a restaurant and people aren't coming in to the restaurant because of coronavirus. So you can't point specifically to that. But there does seem to be a general cautiousness going on in capital equipment out there that I feel like we are feeling.

32:15 And so the caution, the cautious guidance as opposed to the softer quarter is really you're afraid I mean, it gives you an idea of the sensitivity. So it's, you know, But you wait three, four, five more weeks, and then you can't.

33:01 So, Gayn, can I just add a little something here? Also, the mix makes a difference. So keep in mind, DiPak, Waypaks are a more custom product. The lead times are much, much longer relative to our systems that we have in-house and on hand. We actually even have a marketing lab that we've built up over the last several quarters. that we could quickly turn a system order of any configuration very easily by the end of the quarter as long as that order came in. So it's more order nervousness than it is your ability to deliver. and and that's not due to activity it's just concern that that activity might not turn into an order is there something concrete you can point to because it sounds like everything you say is gee we're on fire but we're pulling guidance so we're all going to try and connect that we're on fire to the we're pulling guidance whether it's cancellations whether it's whatever it is is there anything Yeah, I mean, actually, that's a very specific question I want to answer.

34:13 We have had no cancellations. We've actually had no push-outs. Everything we have in backlog, the customers have called us and asked if we can ship faster. Now, you're pointing out our backlog isn't very big. We even have customers that haven't given us the orders that are asking us to ship faster. I love that conversation. So, Yeah, it would seem inconsistent, and we're just trying to give you as raw data as we possibly can. I, you know, we had anticipated having, you know, a really good quarter this quarter, and so I can't help but believe the only thing that really makes sense is that there's cautiousness of people just trying to hold their breath, get their arms around things.

35:03 You know, this certainly feels, I think we would believe that as we get through this thing, you know, our business would come back, you know, just as strong as ever. And like I said, you know, we tried to add the color behind it. I mean, we've had an uptick in customer engagement, you know, in the last three weeks. I mean, I can probably think of four or five. Like, you know, it's like where are these guys coming from? and, I mean, there's certainly a sense that they have time on their hands, maybe. There are people that are saying, you know what, we've got to move towards this or we've got to pull over this resource. You know, what can you do?

35:51 You know, can you test these parts? And the answer in many cases is yes. You know, we're confident we can build it. We don't, you know, we had a customer say, we can't, you know, we can't travel. Can we do a video conference and get a demonstration of your equipment? We're getting pretty good at that stuff. It's kind of interesting. Okay, last question. Go ahead. Look, it's not a super clear time. I understand. So the linearity of this quarter, I mean, I know your standard, you know, half your business or something is in the last month. I don't know if that's the right number, but I don't know. Any thoughts on linearity or book and ship in the quarter and kind of That one I will fess up to.

36:43 It is very typical for us to have a disproportionate amount of our bookings in the third month, often more than half. And then it kind of repeats itself because we ship everything we can before the end of the quarter and then manufacturing is sitting around tumbling their thumbs in the first month. That is very true in this quarter. In fact, the timing of, you know, the, if you will, the stay-at-home directives have been almost unfelt by us. We've not had any restrictions, yet we actually don't have everybody in the office right now. But anybody who needs to be is there. And so, but as we get towards May...

37:31 We are already planning that, you know, the manufacturing floor is expected to be relatively full. And we've been redistributing our dye pack and wafer pack labs, the other manufacturing floors to actually make room so that we can keep our six feet distances. We're talking to, okay, how are we going to be creating up these systems in May? when it takes two people to move a tool and how will we think through that so that we can maintain social distancing at the same time that we're going to start seeing our manufacturing folks coming back and filling up the place. Okay, thanks, guys. Good luck. Okay, Jeff. Thank you. Thank you. We'll take our next question from Jeffrey Scott.

38:18 Please go ahead. Good afternoon, guys. It's been a long time since we've talked. It seems like forever. It seems like forever, yeah. Going back to last quarter, you reported that you had three photonics customers in high-volume production. Is it still three, or have you added one? So I think I might have chosen the word production because, you know, some are higher than others, so I don't want to give relative terms. Let me just think through here. I have – I still have – I think we still – gosh, I wish we were over here.

39:04 I think – I know the three are still in production, and I believe we have another one that might be shipping parts off of it now, so it might be a fourth. Okay. Are all of those customers using the FOX to solve the same problems? or are the problems unique to each of those three customers? Well, they're slightly different, but because they listen in, I want to be careful of that. So let me make it generic, though. They all solve a similar problem of what we will call aging and stabilization. So it turns out that all silicon photonics transceivers, the output laser itself, During its first 24 to 48 hours of continuous use and operation, the output efficiency drops and the power, therefore, for the input power, you get less output power. That's a big problem with multi-channel fiber optic communication transceivers. You can't have each of the four laser wavelengths, think of colors, and different power outputs.

40:20 They all need to be balanced, okay? or else you lose bandwidth. And so they all specify the output power to be stable over time. But in order to do that, one of the manufacturing process steps is they need to stabilize the lasers, which R2 does. They've always had to do this. The traditional device, though, was done discreetly. And it was burnt in or aged in, in most cases, homegrown test bays in big rooms, and they were hand-placed in it, and 48 hours later you would come back and the thing has aged. And then you test it, and if it meets the certain qualifications, you pick it out and you hand-place it into these transceivers.

41:08 Keep in mind, these transceivers for these high-performance ones were several hundred dollars, $700, $7,000 a piece. The real jewel, if you will, in silicon photonics that folks like the intels of the world are out claiming is the scalability of basically taking a silicon wafer, creating all of the transceiver components on it, and then effectively overlaying or attaching these laser processes so that the laser is directly attached to the silicon. The trick is those lasers still must be aged or stabilized. and what we do is we can stabilize them in wafer form.

41:54 We test all the lasers on a single wafer, thousands of them in parallel, which gives, it allows you to maintain the cost effectiveness and the scale of doing wafer level silicon photonics devices. So it is an enabling capability. So in all of our customers, we're doing the stabilization of those lasers and when we talk about silicon photonics devices. Now, Each of our customers also does slightly different things in terms of test and other types of functional infant mortality performance related to specifications that are unique to them that makes our system more valuable to them, but they're all a little bit different.

42:44 But it's the stabilization process which is kind of the most valuable part I would say that that's fair. And since the Fox has this performance and capability to discern every single device good from bad, the customers are taking advantage of that. But it would be fair to say if it weren't for them using it for stabilization, they probably wouldn't have done that other test. Okay, fair enough. Again, in Q2, you said that you had a new customer for a silicon carbide customer for automobile applications that was high voltage and high temperature. Was that a onesie, or was that the first of potentially more orders?

43:34 We believe that is the first of more orders, and that was an 18 wafer system. Okay. that tool itself has the ability to test 18 wafers at a time. And my belief, my understanding from last night's report is they're running 16 or 17 wafers at a time right now with their mix of wafer packs and they have more on order and more planned. Which means that the next order should be forthcoming. That was what we all were describing too. Okay. In the business highlights today, you said that you shipped an additional Fox XP for silicon photonics. Was that to one of your original lead customers or not?

44:27 Yes, it was. It was. And we had announced the order before. I just was trying to explain, you know, where did this $6 million come from. Yes. and the mobile sensors again was to a lead customer, right? It was. The wafer packs and dye packs. The order, the order, the order, yes. So a big chunk of that order, those orders were for that and you could imagine that that would be something that we would be scrambling to be shipping right now because they're using this up every day to get them as quickly as they can. Yeah, but their reemergence was... was not definite for fiscal 2020. It sounds like their activity has been accelerated.

45:14 Is that fair? We've actually, they have been forecasting this for a while in anticipation of a periodic need that we think is pretty regular every single year. And it did come in. So in that sense, I wouldn't say it was certainly not a bluebird. We were building dye packs for them throughout the fall. We were critically important. Every single order they've given us, they've been pressing us for as quick as we can as possible. It is not the only engagements with them. There are more. Okay. You said you were engaged with more than a dozen potential new customers.

46:00 That is a continuation of the dozen new customers that you were engaged with a quarter ago, right? I have to go through what the math is, but I think to be fair, we have only announced one or two new customers during the year. One of the customers is interesting. One of the ones that came back this last week, we were engaged with last summer, and Vernon had explained that they had gone off and decided they were going to try and do it in package level instead. which we understand we sell packaged systems too, but they came back. So, you know, I don't know how I'd have to do my math there.

46:46 I do force myself to count out loud. We do that as part of the audit committee whenever we say that to count to verify that there really are that many. I think it was like 12 or something. I'm sorry, it was like 14. It was like two more than what we had said with greater than a dozen. Yes, Gayn, and I did validate that from our press release that there was more than 12, and I do have the list. Sorry, Jeff, we can't give it to you. I know. Last quarter you talked about solar panels. Is there any activity in there? No. I mean, the only thing that we specifically know that there's an application for is that the silicon carbide devices are particularly good in the solar panel power conversion.

47:40 So typical device applications, one of the big ones everybody's heard about is Tesla uses those in their electric cars. All the electric cars are going to be using silicon carbide motor controller systems and power systems for certain purposes. But another one of the big ones is actually all the solar power conversions. But that's it. We're not doing anything related to panels themselves or the electrical battery of the panel. We don't have anything like that. Yeah, I was just surprised to hear you talk about it last quarter. It kind of surprised me. Okay, that's all I have for right now. I'll let somebody else jump on. Thank you. Thanks, Jeff. Thank you. We'll take our next question from Larry Treblina.

48:25 Please go ahead. Good afternoon, gentlemen. Hi there. Several customers are pulling in plans. Does that include any systems, or is that mostly consumables? Both. Both? Yeah, I have one that's asking for wafer packs and dye packs and plan to use it on their current system, and I have some that are new customers, so they'd be new systems and new wafer packs and dye packs. So when you talk about that, is that like pulling in within the next three months or is it still farther out? I mean, how would you define that? I mean, one for certain, I mean, we just signed all the NDAs and everything within the last 48 hours and they're asking for eight weekly tests.

49:19 So would that be a system or a... That was actually one of the packs. It was one of the more of the consumables. We have, yeah, I mean, I have a customer that has been talking about that their end customers are pulling in some 5G infrastructure requirements and increasing their forecast for them, and they are, you know, they haven't even ramped yet for them. So that would be an example where they will absolutely need additional capacity of systems and wafer packs, die packs. I have both. Okay. Did I just hear you correctly in saying your pipeline is 14 potential customers now, or did I mishear that?

50:09 Yeah, I mean, just in Fox related, I think I counted about 14 of them. More than 12, that's how I wanted to make sure, and there was a couple more. And then we actually have probably another half a dozen package parts, which we haven't really been talking a lot about. Of those 14, how many of those would be in regards to silicon carbide? You know, I don't have it in front of me, but... I actually probably don't want to do that because eventually you'll go down to and you're going to really ask me how many are memory. So I'm just going to stay generic. I know. So I'm going to stay very generic right now because for all kinds of reasons. But it is multiple of each, more than one or two in every one of those categories.

51:09 Mm-hmm. I know in the past you mentioned that in that pipeline you had three memory potential customers. But unlike in the past, you did announce as part of the 2.9 in total consumables recently that one included a wafer pack for a flash memory potential customer. So somebody's spending money. Go ahead. Yeah, Larry, I actually don't want your particularly – aware buyer of details that I'm going to be very specific. So that was not for a new customer. That was a current memory customer. That was a what?

51:56 It's one of our installed base customers already. It's not one of the new ones. Okay. Where do you stand on I know you said in the past that you're involved in designing automation to automate MXP so it can operate its own. Larry, let me jump in on that. I actually don't want to talk about the future so I'm not at this point. I have all kinds of pioneers with competitors and things like that too. I know that we have generically talked about at some of our public events and things like that that we Absolutely see customers asking us to do more and more automation.

52:43 And how do we take our products and make them more production worthy so that they can even go to higher and higher volumes? And those are things that we are spending money on. I'm ready with that. Okay. And the data centers are obviously big. working overtime with so many people at home, working from home and burning up the internet. Do you see maybe additional business from maybe existing customers on the silicon platonic side or maybe these pull-ins? That's what it feels like.

53:29 That's what it feels like. I know very specifically there's 5G infrastructure as in towers. that are driving them, and there are data center things that, you know, people are not fully back on those. So those are, you know, and that would bode well. And I think what we're seeing is, you know, there's sort of the, you know, the Wild West of everybody and their brother rushing in and trying to do silicon photonics because it's just at a price point, you start to wear where fiber optic bandwidth is as cheap as copper. There's all you can build. As best as I can tell, it is 100% supply limited. There's not enough silicon photonics out there.

54:21 Every one of them is being bought up. So there are people, big and small, doing all kinds of things to try and get more capacity out there. One last thing on the memory. So you still have three active potential memory customers in that pipeline. Did you quantify that? We are actively engaged with multiple memory suppliers on roadmaps related to Waco-Level Bennett.

55:09 And is there any kind of time frame on that where it might be kicked off? I would expect that you would have to, you know, build wafer packs to prove out the concept initially. I mean, I believe that this is something that would be for a, I think this is like a 2021 product. Mm-hmm. and as we get a little closer in engagement, we can kind of narrow in when that would be. We are actively spending money in R&D with respect to roadmap products this quarter, each quarter throughout this calendar year.

55:56 All right. That's all I had. Good luck, you guys. Thanks, Larry. Sorry to sort of cut you off there on one of those, okay? I appreciate it. No, that's all right. Thank you. All right. No problem. Thanks, Larry. Thank you. We'll take our next question from Tom Diffley. Please go ahead, sir. Yeah, good afternoon. I'm curious what you're seeing on the supply chain right now. And if you were at full capacity, would you be having any kind of supply issues? Yeah, so we've been really paranoid about that as well. And for the most part, all of the distributors and our subcontract manufacturers are all open. Let me be more specific. Pretty much everybody is. We have a couple of small mechanical assembly guys who have asked us to provide them with links to our letter that we put out on the website related to our positioning as a critical supplier of the critical infrastructure to basically as part of their justification to keep shipping upon demand and everything. We've actually had little or no direct impacts related to this. Everyone that we have is able to ship within their standard lead times.

57:11 Wow, that's great. I mean, it seems sort of confusing, but by the way, many of our subs cons are, you know, when I talk to them, I pick up the phone and talk to them, listen, we're directly involved with military. You know, it wasn't even, you know, we're a contract manufacturer to a Capital Equipment Supplier to semiconductors that are important for IT, which is sort of a progression that's normal. They're like, you know, the government is saying, you will stay open. Yeah. So far, that's good. Yeah. Hey, sorry, can I do one more? Sure. Can I just do one more on this? So the other thing is we have basically zero supply chain out of check right now. All of our critical infrastructure, all of our critical components, we have put things in place for dual sourcing long before this.

58:04 And quite frankly, when the tariffs kicked in last year, we placed our last order with something out of China last February. So we actually, as things got ugly, and of course now it's not, you know, we're not all talking about China. It's a worldwide crisis. But at that time, We already had dual sources on things. So we've been able to purchase things without a critical supply impact. Go ahead, Tom. Okay. No, that's helpful. So Ken, I was wondering, when you move to a distribution model for Japan and Europe, what does that do to your internal model? Does that impact margins, either gross or operating margins? So it does give us a little bit more flexibility from a variable cost standpoint.

58:49 From an overall margin standpoint, it's not going to make a difference. Those costs will hit in our operating expense sales and marketing area. But it really moves from a fixed cost structure to a variable cost structure, which I think will ultimately benefit our bottom line. Okay. So even the rate that the distributor gets is fairly similar to what you're paying internally then? Correct. Okay, that's it. Thank you. Okay, I see there are no further questions at this time. I would now like to turn the call back to management for closing remarks. Operator, do you want to just give anyone a second chance? Anyone else? Yes, sir. And as a reminder, for anyone that would like to ask a question, that is star one.

59:40 Okay. If no one All right, well, folks, we really appreciate you taking the time to listen in. We actually had a fairly long list, and we appreciate everybody calling. If you have other further questions, I think I've always ended this with, if you're in town, stop by, but this will be the time I'll tell you don't. But we'd be happy to set up a video conference or something else. We've gotten exceptionally good at that. And answer your questions as you need it. Everybody stay safe. and copies. Thank you very much. Bye-bye. Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.