Aehr Test Systems (NASDAQ:AEHR) Q4 2020 Earnings Call

0:00 Good day and welcome to the HEIR Test Systems Fiscal 2020 Fourth Quarter and Full Year Financial Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jim Byers of the MKR Group. Please go ahead, sir. Thank you, operator. Good afternoon and welcome to HEIR Test Systems Fiscal 2020 Fourth Quarter and Full Year Financial Results Conference Call. With me on today's call are Hehr Test Systems President and CEO Gayn Erickson and Chief Financial Officer Ken Spang. Before I turn the call over to Gayn and Ken, I'd like to cover a few quick items. This afternoon, Hehr Test issued a press release announcing its fiscal 2020 fourth quarter and full year results.

0:47 That release is available on the company's website at hehr.com. This call is being broadcast live over the internet for all interested parties. and the webcast will be archived on 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 today 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. These factors that may cause results that 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. Now, with that said, I'd like to turn the call over to Gayn Erickson, President and Chief Executive Officer.

1:47 Gayn? Thanks, Jim. and good afternoon to those joining us on today's conference call and also listening online. Then I'll go over our fourth quarter and full year 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 diet testing burning solutions. And then we'll open it up for your questions. This past fiscal year, we've made substantial progress with our new Fox products that strengthened our customer base, expanded our markets, and enhanced our operations and sales capabilities to capitalize on the significant market opportunities we see at home. While we were on track to meet our expected guidance for fiscal 2020, due to the challenging global environment and uncertainty around the COVID pandemic, we experienced push-outs of customer-forecasted orders in our second fiscal half for our Fox 2 systems and consumables in data center and some 5G end-use applications for silicon photonics transceivers.

2:44 These customers have indicated the push-outs are temporary and that they'll require the additional system capacity and consumables in the current fiscal 2021 year. We'll cover the details supporting our optimism, but want to quickly state that we are reinstating guidance and expect FY21 full-year revenue to be between $25 and $28 million, up 12% to 26%, and to be profitable for the year. With the increase in number of customers in production using our systems, the new market opportunities we added with new customers this year, our move to our higher margin clock systems and consumables, and the completion of our previously announced restructuring and sales enhancements this past year, going forward, we are well positioned to address our new market opportunities and are now profitable at a much lower revenue level.

3:38 Let me walk you through some of the key business highlights for this last quarter and for the last fiscal year as we outlined in our earnings release. First highlight, we closed a new order with a major new customer in Silicon Photonics. During the quarter, we closed an initial order with a new customer that is a major global leader of communication transceivers for data centers, telecom, and 5G infrastructure for our Fox full wafer level test and burden system for production stabilization and test of their Silicon Photonics devices. This new customer is deploying our FOX NP system for initial production burning and stabilization of our high performance silicon photonics devices and is forecasted to then transition to our FOX XP wafer level testing burning systems during this fiscal year 2021 to meet their volume production forecast.

4:26 We categorize this customer as a tier one customer, which we define as a customer with the resources and market size to be able to purchase six to $10 million per year or more of our systems and consumables. The next highlight is we closed an initial order with the world's largest OSAT. During the quarter, we closed an initial order with the world's largest outsourced semiconductor assembly and test supplier to use the FOXP family of products, including air wafer packs and dye packs for production tests, burning, and reliability screening in devices with full wafer simulated dye and module. They have already added our system to their list of tools and capabilities in their marketing with sales material to their customers, and we have begun some cross-marketing and sales activities with them. Stay tuned for more updates and announcements.

5:19 Next, AIR added a key new market with the addition of wafer-level burning of silicon carbide devices. This year, we successfully took the initial order for and installed our first production capacity for silicon carbide devices. including into the list of markets such as silicon photonics, 2D and 3D sensors, automotive lasers used in photonics devices, and have shown the value and feasibility of using our Fox solutions to address these market needs. The initial system order was for a Fox multi-wafer system with proprietary wafer packs configured to test 18 wafers in parallel at up to 1,000 watts of power per wafer. and the customer is using it for 100% production burn-in and infant mortality screening of silicon carbide devices at wafer level.

6:08 This new silicon carbide application with a Fortune 500 market leader in silicon carbide and power models adds a significant new Tier 1 customer of our Fox XP system and wafer packs for whole wafer burn-in and infant mortality screening of silicon carbide devices. Since our initial installation in January, we've received multiple follow-on orders for additional wafer packs from this customer, including multiple new designs that now have a significant number of different devices that have been released into production. This customer is forecasting additional capacity needs for our Fox XP systems during this fiscal year and for years into the future. The silicon-carbide semiconductor device market is growing at a tremendous rate. with a unit growth of high power devices of over 50% CAGR per year of research from 2019 to 2025. Silicon carbide is a very impressive material for high power and particularly high voltage devices for applications such as the needs of electric and hybrid electric vehicle power trains, electric vehicle charging infrastructure, IT data center power supplies, and renewable energy power conversions such as wind, solar, as well as power storage.

7:19 These devices have shown reduction in power losses as much as 78%, and many articles have been written about the first mainstream use of silicon carbide power devices that were in the Tesla Model 3, which enabled much longer driving range per charge. This has basically changed the market with most, if not every, hybrid electric vehicle automotive company moving to silicon carbide-based powertrain and charging systems. The challenge is the reliability of silicon carbide is known to have high infant mortality rates, but after a reliability burn-in screening, these defects can be completely removed to provide extremely reliable devices for these mission-critical applications. AIR is able to provide a complete solution for one of the key reliability screening tests on an entire wafer of devices all at one time.

8:08 while testing and monitoring every device for failures during the burn-in process to provide critical information on devices so they're not later packaged into multi-die modules where the yield impact is 10x or 100 times as costly. The old research is forecast of over 600 million yielded power MOSFET 20 amp equivalent devices shipping per year by 2025 equates to over a half a million wafer starts per year. which creates an enormous opportunity for our wafer-level and simulated dye systems given the long durations required to burn in the devices and to remove the defective parts. Burn-in times can be as long as days per wafer, so even at our industry-leading 18 wafer-per-system capacity Fox XP, that's a significant number of systems.

8:58 The next highlight is pretty important. In fiscal 20, we saw the industry adopt production wafer-level burn-in. We made significant progress with our new FOX products for Wafer and Seaglade, Digest, and Vernon during the fiscal year with two Tier 1 customers added and five customers transitioning to production with 100% stabilization or infant mortality screening with our FOX systems. We saw our silicon photonics customers move to production for the first time in just this last fiscal 2020. During the fiscal year, we saw our lead customers for silicon photonics move to full volume production. We expect them to purchase additional systems this fiscal year and into the future as they continue to maintain or grow their market share and add additional silicon photonics devices to the mix. We also moved three additional silicon photonics customers to production with our Fox Systems in fiscal 2020.

9:53 all three of these customers are expected to ramp production during this fiscal 21 as well, adding capacity in both systems and consumables. And near the fiscal year end, we announced yet another new Silicon Photonics customer that is deploying our Fox NP system for initial production, burn-in, and stabilization of our high-performance Silicon Photonics devices and is forecasted to then transition to our Fox XP multi-waker systems during the fiscal 2021 to meet the volume production forecast. Silicon Photonics devices are highly integrated silicon-based semiconductors that have embedded or integrated the non-silicon-based laser transmitters and receivers to enable a smaller, lower cost, higher reliable alternative to traditional fiber optic transceivers.

10:39 Historically, fiber optic transceivers are made up of many different logic ICs, multiplexers, DMUXs, external discrete lasers and receivers into a mechanical package that is used in data center and telecommution systems. Health and Communication Infrastructure. Basically, this has been the high-speed transmission lines for long-haul and data center-to-data center backplane of the Internet. However, these fiber optic transceivers have been extremely difficult and expensive to build. This has been seen as a limiter to the adoption of fiber optic transmission of data and to the maximum data rates and transmission in the data centers that store the world's data. The old research has stated that market leaders like Intel, Cisco, Luxterra, Products, InFi, and Acacia are setting the standards for 100,200,400, and even 800 gigabyte transceiver standards based on transceivers with fully integrated silicon photonics devices, while many other companies are also jumping into this exploding market.

11:41 One of the key claims of these transceivers are their lower manufacturing cost and the ability to scale manufacturing Due to the full wafer-level integration of these devices, which brings the scale of semiconductor manufacturing to fiber optic communication for the first time in history. Where AIR fits in is that these devices all need to have their photonics transmitters stabilized under high power and temperature, and also customers use our systems to screen for infant mortality of these devices to ensure high energy quality and long-term reliability. This is a manufacturing step down on 100% of the value. and in the case of silicon photonics, we provide a much more cost-effective and scalable solution for this step than doing this equivalent stabilization and screening after the dye are put into the final PCB substrate and package.

12:30 The silicon photonics market is growing at a CAGR of 42% between 2019 and 2025 to a $3.6 billion annual market and we believe that the entire industry will transition to wafer-level or simulated dye for this critical manufacturing step. which is where our FOXP products stand alone as the most cost-effective solution for this and a portfolio of patents and IP in this area. We estimate that the market opportunity for wafer stabilization and reliability screening equipment and contactors for silicon photonics is approximately $150 million by 2025 with well over 300 wafers of test capacity required by that time. Our Fox XP production system is the only multi-wafer system available to test and burn in these high-power silicon photonics wafers in a single insertion.

13:20 And we can test up to nine 2,000-watt wafers in parallel on a single system. So the total capacity needed by 2025 is about 35 of our nine wafer Fox XP systems to put this into perspective. Today, air has shipped about 50 wafers of capacity into this application. Interestingly, while fiscal 20 was the first year to see volume production soak in photonics with wafer-level burn-in, FY20 also saw a second half push-outs in silicon photonics ramps. We experienced push-outs from customer forecasting orders in our second fiscal half of fiscal 20 for our FOX systems and consumables in data center and some 5G end-use applications for silicon photonics transceivers.

14:05 These customers, as I said before, have indicated the push-outs are temporary, and the required additional system for consumables in the current fiscal 2021 year. Our next highlight is shipments of consumables were a significant percentage of revenue this year. Shipments of our proprietary wafer pack contactors and die pack carrier consumables for our box systems accounting for 48% of total revenue in fiscal 20. In fiscal Q4, which we just ended, our consumable revenue was 79% of revenue. as anticipated customer orders for systems did not materialize, but cost their demand for the consumables for the install-based systems held steady. As we stated in the past, historically, consumables can often soften any weakness in systems as customers contemplate new capacity but maintain, and in some cases actually increase the need for new wafer pack compactors and die pack carriers to get new designs or devices out to market.

15:06 In the semiconductor test industry, This is just over $9 billion total last year in 2019. It is made up of $3.7 billion in test systems, another $3.7 billion in consumables, such as probe cards for contacting wafers and sockets and prep boards for contacting package parts. And then another $1.7 billion is semiconductor device handling equipment in wafer and package form. With Air's Fox product line, we play actually in all three segments. Our Fox systems serve the test systems market. Our wafer packs and dye packs serve the contractor consumables market. And our liners and the Fox systems themselves that have the integrated thermal capabilities of a wafer prober are turnkey solutions for handling devices.

15:55 So the consumable business as a whole is approximately the same size and often higher than the systems business in down years in the overall semiconductor test business. Again, both about $3.7 billion. But for reliability and burn-in space, which we primarily play in, the consumables can be two to four times the annual sale of systems, as the systems typically are used for longer periods of time with annual needs for new contactors and consumables. This is why we're confident that our consumer business is likely to exceed our overall systems business over time, even though both will grow in absolute dollars. Our next highlight is that AIR is currently engaged with over a dozen new potential customers.

16:41 We're currently working with well over a dozen additional Tier 1 and Tier 2 customers that are considering using our products for high market growth applications including silicon photonics, silicon carbide, automotive, and memory devices production burning. While Tier 1 customers are seen as those with the opportunity to drive $6 to $10 million or more in systems and consumables per year, are two customers that have the market share and application to drive one to three million per year or more. Several of these companies are expected to place their orders this year with ransom to production later in the fiscal year and or the following fiscal year. We see an increasing awareness and adoption rate that we believe could drive the majority of the market for silicon carbide as well as silicon photonics to move to wafer level or simulated dye burning within the next few years.

17:31 Our final highlight is in fiscal 20 we completed our planned restructuring and shift to higher margin products. AIR completed our previously announced restructuring and also moved to much higher margin box systems and consumables during the fiscal year. We started this before the pandemic outbreak and completed it during the last few months. As part of the previously announced and planned restructuring, we completed the close of our Japan subsidiary and also transitioned are European sales to third-party sales representatives late in the fiscal year. We also added key marketing directors and made some additional structural changes to our sales force. We believe these enhancements have already and will continue to both improve our efficiency and materially increase our sales activity and bookings going forward and increase our penetration of key customers in our target markets.

18:22 We believe these changes position us for success with sales of our current products as well as additional new products planned for introduction this year. We also have shifted to higher margin, highly differentiated systems and consumables. As I noted in the last call, we've started to see some forecasts for renewed market demand for Package Part burning systems, particularly from customers who are asking us about our high voltage capability and adding this capability to our Package Part systems. These changes in long-term forecasts reflect the move toward higher voltages and other requirements for devices and automobiles, particularly with electric and hybrid automobiles and autonomous vehicle sensors.

19:08 We expect to see a resurgence of packaged part burn-in systems orders from some specific ABTS system customers and to generate additional new opportunities with our planned introduction this fiscal year of a new Package Part Burning System product that adds very high voltage test capabilities. We see the need for high voltage capabilities in both wafer level and package part as a new high growth opportunity for air test and expect to see sales from current customers resume and also add several new customers that include both tier one and tier two level customers for package part burning. At the same time, and as discussed last year, We had seen a significant drop-off in our packaged part product business as several of our customers have shifted their businesses for entirely closed product lines that were driving the need for testing Vernon using the high power and high pin count capabilities of our ABTS family products. In one specific case, a customer that had been buying multiple systems per year has all but shuttered a line of products and we feel they are unlikely to take additional capacity of that particular configuration of systems that we had several systems of inventory left on hand when they dropped their forecast to zero. Interestingly, this and several other customers have at the same time shifted their focus to other product lines, particularly for automotive and other new applications that are expected to drive new needs in the future.

20:31 I've mentioned this specifically last quarter and noted that as a result, we were going to do a deep dive in our inventory for all the products and configurations. We decided it was prudent and appropriate to write down the inventory that we simply do not see a likelihood of selling in the foreseeable future, which resulted in a one-time charge this quarter of $1.6 million of inventory. This leaves us with significant inventory of systems and material that is in our near-term forecast, particularly in our Fox products, which also allows us to make short lead time shipments as well as meeting significant revenue forecasts without taking on additional inventory expenditures. Last year we reported on the shipment of our new FOX CP test and burn-in system to a major new Tier 1 customer for a very high volume application for the enterprise and data center market with a planned build out of this production ramp over the next several years. The Fox CP is our low-cost single wafer compact testing reliability verification solution for logic memory and photonic devices.

21:33 And their solution is comprised of a test system integrated with a wafer probe configured with a high-powered thermal chuck that allows up to two kilowatts of testing or burning in of full wafers. This customer has indicated they plan to begin their production ramp within our current fiscal year. And so we expect to begin additional shipments of test cells to them in the second half of this fiscal year. We're very excited about this application, which is expected to drive very high volumes of devices that we believe will drive test system sales for several years. Let me try and wrap this up. We added two key Tier 1 customers this past year. We now have five significantly large Tier 1 customers. Again, applications and market sizes that can drive $6 to $10 million or more a year.

22:18 On our Fox wafer level, it's regulated by test systems and consumables. We also have another seven Tier 2 customers that are each capable of FOX product sales typically between $1 to $3 million and sometimes more. In addition, five of our customers moved to production during the year using our FOX products for 100% stabilization and burn-in and infant mortality. And we will be growing the list of both Tier 1 and Tier 2 customers this year in both wafer levels, singulated dyes, but also some packaged part markets until we can significantly grow these and new customers in the markets we're already serving. Additionally, we will be adding new markets and enhancements to address some significantly large new markets later this fiscal year. We're also seeing renewed activity and interest of our Fox systems and consumables for several new applications in the 2D and 3D sensor markets, particularly for mobile devices. These sensors are becoming ubiquitous in smartphones, tablets, and are forecasted to be adopted in laptops and computers as well.

23:23 The level of security associated with facial recognition far exceeds fingerprint-based biometrics and certainly greater than traditional keyboard entry passwords. These new opportunities in 2D and 3D sensing are opportunities that could add significant upside to our currently forecasted revenue for this year and next, but are not built into our current guidance. Although COVID-19 has created challenges such as international travel, some small impacts on our supply chain, and created caution and or delays with some customer production ramps, we believe that there is no long-term negative impact to air, the demand for our products, or for the attractiveness of the key markets that we serve. We absolutely believe that we'll come out of this stronger than we went into this worldwide pandemic with more production customers, more applications, and higher margins with higher value products. Our key customers' products are being used to build out new data centers, improve data rates and increase storage in data centers, build out the 5G infrastructure, enable the newest sensors and technology in smartphones and tablets, enable the widespread adoption of electric and hybrid electric vehicles and charging stations, and address the unstoppable demand for memory and data storage in computing data centers, mobile devices and hundreds of applications that are keeping the world connected.

24:46 As we move into fiscal 2021, we remain optimistic about growth in systems and consumables within our installed base of customers, as well as expanding the number of customers with our family of FoxP solutions. We expect significant growth in both our top and bottom lines moving forward, with much lower fixed operating expenses and significantly higher margin products and services. With that, let me turn it over to Ken before we open up the line for questions. Thank you, Gayn, and good afternoon, everyone. As Gayn mentioned, our fourth quarter results reflected the impact of the current challenging global business environment around the COVID pandemic and customers who pushed out forecasted orders during the second half of fiscal 2020. In our prior year call, we announced our two new Fox NP customers and our new Fox CP customers were expected to ramp to volume production during fiscal 2020 and add capacity, resulting in orders for Fox XP systems and CP systems.

25:46 While these orders did not happen in the fiscal 2020 year just reported, as their timing was pushed out by the customer, we are confident that these orders will occur in our current 2021 fiscal year. It is important to note that through the third quarter of fiscal 2020, the company recognized revenues of $18.5 million, or a little over $6 million per quarter, and was profitable. This reflects the impact of the cost reduction initiatives announced in the prior year, effective fiscal 2020, and a change in product mix which allows the company to be profitable at lower revenue levels. In the fourth quarter of fiscal 2020, revenues decreased significantly as there were no system revenues recognized during the quarter.

26:32 Now let me take you through our results. Net sales in the fourth quarter were 3.8 million compared to 6.1 million in the preceding third quarter and 7.2 million in the fourth quarter of the previous year. The decrease from Q3 includes a decrease in wafer level burn-in revenues of 2.2 million primarily due to a decrease in wafer level burn-in system revenues of 2.1 million. The decrease from Q4 last year includes a decrease in wafer-level burn-in revenues of $3.3 million, primarily due to a decrease of $3.6 million in wafer-level burn-in system revenues and a decrease in customer service revenues of $206,000. Non-GAAP net loss for the fourth quarter was $720,000, or $0.03 per diluted share, compared to non-GAAP net income of $452,000, or $0.02 per diluted share, in the preceding quarter and a non-GAAP net income of $428,000 or $0.02 per diluted share in the fourth quarter of the previous year.

27:36 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 loss for the fourth quarter was $2.9 million or $0.13 per diluted share, which includes the impact of approximately $1.9 million or $0.08 per share and inventory write down and restructuring charges taken in the quarter. This compares to GAAP net income of $245,000 or one cent per diluted share in the preceding quarter and GAAP net income of $110,000 or zero cents per diluted share, which includes the impact of $118,000 or one cent per share in restructuring charges in the fourth quarter of the prior year.

28:22 Access and obsolete inventory reserves of 1.6 million were taken in Q420 related to slow moving and obsolete packaged part burn-in product inventory, legacy FOX inventory, and down-rev FOXP products and subsystems. The $220,000 restructuring charge consisted of severance payments and associated legal fees for individuals impacted by the closure of our subsidiary in Japan and a reduction in headcount in our German subsidiary. As noted in our last call, We will be moving to a sales rep distributorship model for sales in these regions. Gross loss in the fourth quarter was 93,000 or 2% of sales compared to a gross profit of 3 million or 49% of sales in the preceding third quarter and gross profit of 3.4 million or 47% of sales in the fourth quarter of the previous year.

29:14 The sequential and year-over-year decrease in gross margin is primarily due to the impact of the $1.6 million excess and obsolete inventory provision in Q4, accounting for a 44% point margin impact during the quarter. In addition, gross margin was unfavorably impacted due to higher unabsorbed overhead cost to cost of sales due to lower revenue levels in the fourth quarter. As we've noted on prior calls, our wafer pack and die pack revenues are accounting for a more significant portion of our overall revenues. favorably impacting our gross margins as they maintain higher margins in our system or pass-through products. In the fourth quarter, our wafer pack and dye pack consumable business accounted for 79% of total revenues, up from 51% in the preceding Q3 and 36% in Q4 of last year, providing a favorable direct material margin impact for the company.

30:11 Operating expenses in the fourth quarter were $2.7 million, were flat compared to the preceding third quarter and down 508,000 from 3.3 million in the fourth quarter last year. While Q420 was flat to the preceding quarter, a decrease in SG&A of $217,000 was partially offset by the restructuring charges of 220,000 taken in the quarter. The decrease in operating expenses from prior year fourth quarter is primarily due to restructuring actions taken in the prior year related to reduced costs. SG&A was $1.7 million for the fourth quarter compared to $1.9 million the preceding third quarter and $2 million in the prior year fourth quarter. The decrease from Q3 is due primarily to lower labor-related costs, including lower salary expense and lower commissions from lower bookings and sales incentives in the fourth quarter. Savings resulted to closure of our Japan subsidiary and lower travel due to travel restrictions related to COVID-19.

31:14 The decrease from prior year fourth quarter is primarily due to the impact of cost reduction initiatives in fiscal 2019. R&D expenses were $854,000 in the fourth quarter, flat compared to $845,000 in the preceding third quarter, and down $266,000 from $1.1 million in the prior year fourth quarter. The decrease in R&D expenses from Q4 last year is primarily due to cost reduction initiatives in fiscal 2019. and Lower R&D Project Materials. Now turning to results for the full fiscal year. Net sales for fiscal 2020 were $22.3 million, up 6% from net sales of $21.1 million in fiscal 2019.

32:00 The increase includes an increase in wafer-level burn-in revenues of $5.3 million, partially offset by a decrease in packaged parts revenues of $2.2 million and customer service revenues of $1.9 million. The decrease in packaged parts revenues is due to no ABTS system revenue in FY20 compared to three ABTS systems sold in FY19. Fiscal 2020 net sales were comprised of $18.9 million in wafer-level burn-in revenue and $3.4 million in customer service revenue. For the full fiscal 2020, system revenues accounted for 36% of revenues compared to 45% in fiscal 2019. Wafer pack and dye pack consumable revenues accounted for 48% of total revenue in FY20 compared to 29% of revenues in FY19.

32:53 Customer service revenues accounted for 15% of revenues in FY20 compared to 25% of revenues in FY19. Non-GAAP net loss for fiscal 2020 was $27,000 or zero cents per diluted chair compared to a non-GAAP net loss of 2.8 million or 13% per diluted chair in fiscal 2019. While revenues increased by 1.2 million FY20 compared to FY19, the non-GAAP bottom line improved by 2.8 million. As noted earlier, this reflects the impact of cost reduction initiatives effective in fiscal 2020 and the change in product mix, which allowed the company to be profitable at lower revenue levels. On a GAAP basis, net loss for the fiscal year was 2.8 million, or $0.12 per diluted share, which includes the impact of approximately $1.9 million, or $0.08 per share, in inventory write-down and restructuring charges taken in Q4.

33:52 This compares to a gap net loss of $5.2 million, or $0.23 per diluted share, which includes the impact of $1.5 million, or $0.07 per share, inventory write-down and restructuring charges taken in fiscal 2019. Gross profit for fiscal 2020 was 8.4 million, or 38% of net sales, compared to a gross profit of 7.6 million, or 36% of net sales in fiscal 2019. The increase in gross margin percentage in FY20 compared to the prior year is primarily due to lower direct material costs due to a change in product mix, partially offset by the impact of excess and obsolete charges in FY20 compared to FY19. Operating expenses for fiscal 2020 were 11.1 million, a decrease of 1.5 million, or 12%, from 12.6 million in fiscal 2019.

34:46 The decrease included a decrease in SG&A of 194,000, a decrease in R&D of 767,000, and a decrease in restructuring charges of 505,000. SG&A was 7.5 million in fiscal 2020, down from 7.7 million reported in fiscal 2019, primarily due to cost reduction initiatives in fiscal 2019. R&D expenses were 3.4 million in fiscal 2020, down from 4.2 million in fiscal 2019. The decrease is primarily due to cost reduction initiatives in fiscal 2019 and lower R&D material expenses. Overall, the decrease in SG&A and R&D of 961,000 included 922,000 decrease and labor-related costs as a result of cost reduction initiatives implemented.

35:40 Turning to the balance sheet for the fourth quarter, our cash and cash equivalents were $5.4 million, up $375,000 compared to $5.1 million at the end of the preceding quarter. Accounts receivable at quarter end was $3.7 million, an increase of $206,000 compared to $3.5 million at the preceding quarter end due to the impact of customer deposits and deferred revenue on current quarter revenues. Inventories at May 31st were $8 million compared to $9.3 million at the preceding quarter end. The $1.3 million decrease is primarily due to the $1.6 million E&O inventory provision taken in Q420. Propping equipment was $663,000 compared to $783,000 preceding quarter end. Customer deposits and deferred revenue, short-term and long-term, were $192,000 a decrease of $227,000 compared to $419,000 at the preceding quarter end, primarily due to the decrease in backlog from the prior quarter.

36:38 Our current and long-term debt of $1.7 million is related to funds we received during the fourth quarter under the Paycheck Protection Program, or PPP, which we announced in an 8-K filing in late April. We expect over $1.4 million up to the full loan balance to be forgiven under the provisions of the CARES Act. Bookings in the fourth quarter totaled 2.6 million. Backlog at May 31st was 2.5 million compared to 3.6 million at the end of the preceding quarter and 7.5 million at the end of the fourth quarter of the prior year. Now turning to our outlook for fiscal 2021. For our fiscal 2021 year ended May 31st, 2021, we expect full year total revenue of between 25 million and 28 million, which will represent growth between 12% and 26% year over year and to be profitable for the year.

37:31 As a requirement to receive funding under the CARES Act, the company is required to use the funds from the PPP loan to retain employees and maintain payroll. While our revenues and backlog have decreased from the impact of the current challenging global business environment around the COVID pandemic, the company has made no headcount reductions. However, the company has taken actions to control spending through mandatory vacations, shutdown days and travel restrictions. This concludes our prepared remarks. We're now ready to take your questions. Operator, please go ahead. Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you were using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

38:17 Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. As a reminder, that's star one to ask a question. We'll take our first question from Christian Schwab with Craig Hallam. Hi, this is Tyler on for Christian. Thanks for letting us ask a couple questions. First, as we look into fiscal 21, hey guys, as we look into fiscal 21, could you help with any expectations for linearity quarter to quarter? You know, within that, are you expecting maybe some softness and some customer push-offs to continue in the first half or Any customer orders or conversations with them that would give you any indication that the first half or second half would be strong or weak or be helpful?

39:12 A couple things. One is I think it's a fair number of the customers, and we specifically stated in the call notes, are forecasting second half. So I think we do think our second half will be stronger than our first half and I think that's a reasonable conservative stance to take. We have not provided quarterly guidance before and basically we do start the quarter with a small backlog. We've got several customers with Forecaster Systems that we have on hand and in inventory and can turn in weeks. In some cases they had planned to take them last quarter So we have that in the inventory that we have. Whether they come in in time to shift by the end of this quarter or next is the over-under.

40:02 And honestly, we're focused on new wins in customers and markets and other systems. I can tell you waking up every day and checking for expected POs doesn't help. I will also tell you I do that more often than I want to admit to. I mean, our customers are telling their customers and their shareholders that they're ramping. I mean, in many cases, that's, you know, I don't even care what the customers' messages tell me. I'm out checking and making sure that I believe them by what are they telling the street. Most of these customers are public and large. They need our tools. We're the plan of record. That was a critical thing for us this year if we looked at our business plan is to make sure that those wins move to production, that they actually are counting on us and get those qualified through to their end customers.

40:49 and particularly things where they're automotive qualification, that's a big deal. And basically we think we, you know, plan to do our guidance or more without winning another customer. We have the customers, we have the applications, the products, the inventory and we actually, we completely have the manufacturing capacity. We didn't talk much about that but have the ability to build far in excess of even our guidance to meet customer needs and we're adding more customers and applications and and basically that's what we're focusing on. Thanks, that was very helpful. Second question then is you outlined you have six tier one customers that are capable of doing six to ten million dollars a year and you have seven tier two customers that are capable of doing one to three million a year.

41:36 So obviously just math that if those customers, the majority of those customers ramped into those revenue levels, your total revenue would be significantly higher than it is today. and also understanding and you have thousands more customers you're engaging with. So I was just wondering how we should think about or how you guys think about those customers ramping to those types of levels. Is this a three to five year kind of time range where we would expect most of those to be in that kind of revenue level or how should we think about that? Well, and again, I So realistically, when we put this in this tier one, tier two, this is the first time we've introduced that term and we had some feedback and just how do we get our arms around it? When we look at the total available market that these customers serve, the unit volumes, the test times, is it a 100% burn in our sampling? We can estimate what their buying power is for any given year, right? The intent of that was that is a range of the kind of customer. I don't want to get into all the detail, but our 10% customers that we are forced to talk about, and we're adding one or two more this year, our 10% in our 10Q customers are the likes of Intel and ST and Apple, TI. So these are large multinational companies with large scale applications. And for them to be able to do $10 or $12 million

43:08 in a year, they've all proven that they can do that. So that's the kind of class we're trying to describe that as. We have other customers, including ones that we've announced. And I want to be careful not to not mention them, but I don't want any of my customers to think I don't love them as much. You know, they're just not, the likelihood of them doing $10 million is nowhere near the same. But we would expect them to do one, two, or three million bucks a year or so. As always is the case, at least early on, we can see even customers being lumpy, like maybe they have a good year and then a soft year the next year. But if you start to look at these new devices, silicon photonics, and Silicon Carbide, and some of these others, they're actually growing so fast, it's reasonable for them to be sustainable year after year. And, you know, kind of ignoring some of the craziness going on in the world right now, we would have expected this to be an up year even over last year's guidance. So, you know, again, I don't think you should just linearly add them all up, but, you know, it's not crazy that they all, you know, have good years in the same year.

44:18 I think it's really going to be maybe two-thirds of them at any given time are having good years and then they kind of alternate over time. And the goal for us would be to get 15, 20 customers, which we think is reasonable, so that we don't have to wake up at the beginning of the year and think we're totally dependent upon one customer to do a significant amount of our sales. That's great. Very helpful. That's all for me. Thanks, guys. Thank you. We'll take our next question from Jeff Bernstein with Cowan. Yeah, I'm sorry. I think you cut out for a minute. At one point, you were talking about some business that is not in the guidance. Is that correct?

45:04 And can you just go back over that? Sure. Okay, so did you hear me cut out or did I stumble maybe talking? All right, okay, so anyhow, yes, so what I did, and I'm not going to go back and necessarily read it, I'll just pull it back up again to make sure. So this was specifically, we've seen in the last, you know, several months maybe, and even picking up steam, some renewed activity in our 2D, 3D customer base that have wafer and singulated dye systems installed. They actually continually have been buying dye packs from us and wafer packs, the consumable, with new product releases. And that, you know, it's been a material business for us.

45:51 But interestingly, they have not added any system capacity last year. We've been brought into several new programs that we are aware of now that appear to be a good fit for our products. and we're just getting our arms around it right now but it's very interesting that there's some renewed activity there. If you followed us several years ago, you know, one of the tough years we had was we started the year with a customer saying how great it's going to be and, you know, we forecasted that thinking that that was a gimme and ultimately they pushed out that program and ultimately canceled that specific program and so I'll tell you I'm a little gun shy about, you know, Thank you for joining us.

47:11 100% burn-in kind of thing versus some sort of statistical sampling and that kind of thing? Or is this really just about brand new programs? Well, let me do this. The programs that we're in, which include both 100% and sampling programs, are continuing along those. These are new programs. We actually don't have all the details. I think we believe that one of them is 100% and one of them is a sampling. But we don't have all the details. Gotcha. That's great. Thanks so much. Thank you. As a reminder, to ask a question, please press star 1. We'll take our next question from John Fitchthorne with Dialectic Capital.

47:59 Thanks for taking my question. How are you? I apologize because I've been on multiple calls, so I just want to apologize in advance in case you've addressed this. But I guess I'm partially confused at the progress you keep making. You introduce new products, you get new customers, and yet I don't see it in top line guidance expectations, top line performance. Granted, you've got COVID for this quarter, I understand. But where's the disconnect? I mean, you've signed up a ton of new customers in the past. You continue to sign up new customers. You've got existing products. You've got new products. You talked at length about them. Everything seems to be going the right way, and it doesn't seem to be flowing through.

48:45 So I'd just love some help with that basic question. Well, I think to, you know, if we step back or as the board and I do sit and try to look at the overall business to try and get our arms around it, we've been putting together three-year plans, looking at what those forecasts are. You know, one of the things I think is fair, just at the minimum, was, you know, customer, like our first, our lead token for Toronto's customers was buying Fox XP Systems. but they didn't go to production yet. And we talked about that several times, maybe almost every single quarter. And they, for whatever reasons, had not actually introduced the new products that were moving to the wafer-level burn-in and then finally have and qualified it, got it to PLR. But actually that was, if you look at the linear time, that was over a couple of years.

49:45 That was not what we expected. and ultimately it was okay. When's this going to happen? And we finally saw that shift to production this year and they started to buy all the contactors. So we knew they couldn't go to production because they didn't have the contactors with them. So they have these beautiful systems sitting there that were not being used yet. The reason was they were bringing up the systems and they wanted to run quickly. We were able to ship a lot of wafer packs all within a month or two. and that's part of the business model to get them to production. Now other customers were kind of a mix, some that had bought after our lead customer but also didn't get to production until this year. And then we had another customer that was like a six-month period.

50:33 The customer that we just shipped to with the order that we announced in Q4 is going to be in production here shortly. and then interestingly on our silicon carbide customer, they went from zero to 100% within two months. So what we, actually Vernon, my VP of sales was presenting in our board discussion, the collapsing amount of time it's taking for the customers to go from say, when we first ship it to get to production. But the lead time on the sales cycle is still a little bit spotty. Some of those have been shorter and some of them have, you know, we've been talking to some customers for a year now, maybe a year and a half. And then we've had other customers that, you know, were first in the base and, you know, one to two, maybe two quarters later, they already are purchasing.

51:25 So I think there's this balance of either our own over-optimistic or, you know, how fast customers are actually ramping or the deployment I think to some extent the deployment of silicon photonics devices in the main end customers. So remember the big, if you know this or not, we have a couple of folks that follow our stock that really track this market. It's really interesting to talk to them. But the big buyers of this market are Facebook, Amazon, Google. It's the large data centers. And so they have enormous buying power. One of the things was it appears they now finally are buying silicon photonics devices. Before they were buying the traditional kind of much more expensive fiber optic transceivers. So this is a major inflection point for us because the end customers are now buying in volume and shifting to the higher performance, higher speed devices as well, all of which is good for us. and so at least at this point, it feels more believable that there's more data behind that. Everybody's saying it's gonna be great and now we actually have customers that are ramping and the end users are pulling.

52:41 What I will tell you is one of the big things we were surprised by is the push outs of capacity. Well, maybe we weren't surprised, but we saw push outs of capacity for those end use customers, you know, you know starting and beginning this calendar year and so you know some absolutely customers point specifically at the COVID implications of it and others are you know what happened why did the data center slow down was there a push out so it's something that we're trying to understand but there's no doubt in my mind data centers aren't going away we move to more fiber optic the move to the fiber optic down at the lower levels of the data center because of the bandwidth, all the data is there to support it. And I think that's the trend that's happening.

53:33 All those trends make sense and everything you said just makes sense except for the fact that it doesn't necessarily line up with guidance that is necessarily lower than the guidance you gave last year at the same point in time. I mean, I just don't understand why 25 to 28 relative to 28 to 31 or wherever you were a year ago Thanks for joining us. Well, we certainly have stated on the push-ups that we have directly seen from customers that they themselves are explaining that and saying that that is turning around and they're planning to move forward.

54:29 We have some customers that have, you know, for the first time actually given us heads up of capacity and forecasts. I think related to guidance and that, I mean, certainly in the board discussions, there's a sense of, How aggressive or conservative should we be in this environment? We want to make sure that we can do what we say we're going to do, and there's obviously certain things that are out of our control, but we believe that this is a comfortable number. Hey, Gayn, I'd like to add a comment related comparative to prior year. So if you take a look just at wafer-level burn-in, even though our overall total revenues only went up 6%, wafer-level burn-in went up 39%. or $5.3 million compared to last year. So even though we didn't get any system revenues in Q4 and there were the push outs we talked about, we did recognize a 39% increase.

55:25 One of the items built into the numbers was we had a decrease of $4.1 million if you take a look at our package part revenue and our customer service business that included the upgrades of the ABTS systems from prior year. so keep in mind building into our our modeling in FY 2020 were additional revenues in those areas as well. My last comment is just that you know I really think you guys should take a serious look at your board ahead of this year's proxy season. It looks like it could use a refresh under ISS standards and I think that's something that could maybe help you guys progress more rapidly or bring a set of fresh eyes to the entire situation.

56:15 So I would recommend that as a shareholder. And otherwise, thank you. All right, Don, appreciate it. And just a comment, just in general, I know there was a specific question there. I'm actually very happy with, we've added a couple of, there's been a transition in our board over the last couple of years of adding some additional board members. Laura Oliphant, who had been a Capital Director at Intel. Very influential. Has been wonderful. John came on our board a couple years ago as well. And we did actually have our lead board member, independent board member pass away during the year. And there's been some discussions about when's the appropriate time to add a board member both for any kind of government related things and then just honestly with some reasonable balance and expenses and others.

57:09 So I appreciate it, John. Thank you. We'll take our next question from Jeff Scott with Scott Asset Management. Hi, Jeff. Hi, Gayn. How are you? Okay. First question. You added a new sales rep in, I guess, German base to cover the European accounts. How long do you think it will take to get some sense as to whether or not that is working out? And precisely what kind of metrics will you be looking at to determine whether or not it was a good move?

57:57 Is that number of new customers? Is it dollar volume that they're able to generate? Please help me out. Okay, well, a couple things there. I mean, certainly early on, and I did, and so did Vernon, made several trips and had customer calls with them, and I was really pleased with the level of, I guess, the number of quality customers and the levels within those customers they were able to get to. You know, and the last time we were there was, I think, February or March. One thing that definitely has impacted us has been some of the international travel. I think Ken kind of alluded to it, the expense controls.

58:45 It's not very hard to have expense controls right now. So we've been doing some pretty creative things with our reps and remember we have employees around the world to ensure that it's not limiting our capabilities for installations and support of customers. but HTT, who's out of Germany and covers Northern Europe, has actually been a good start. I do expect them to move from great customer calls to orders, both in terms of volume, quality, and eventually dollars as well. And those are expectations that we would have starting this year. As well as reps in Southern Europe, and we are working to close on a rep or two in Japan right now. We've already been in discussions but we didn't formalize anything with them and looking at some other things. There's absolutely people that are really good at some of these non-silicon application customers around silicon carbide in particular but also silicon photonics that we're trying to bring on. So I'm hoping and expecting, and Vernon has metrics around getting more sales to those reps as well.

59:58 Okay. Next question. You have been working on engineering for a more fully automated Fox system. Where are you on that engineering progress? That is a system that is still in development. We haven't talked and given customers exactly what the integration and lead time is due to some specific competitive and other reasons, but that is in the process. I'm just going to leave it at that for now. Okay. Last question. I'll have to go back and kind of parse the statements made about the Tier 1 customers, Tier 2 customers, things like that.

1:00:47 My gut instinct is that if you add the revenue guidance for fiscal 21, that virtually all of that is coming from further penetration of existing customers and no need for any real new customers. Is that fair? Sure. That is fair, but I also want to just point out that's not because we think we are going to win new customers. So you want to take that from how conservative we are. It's like, guys, I'm not starting off this year thinking that if we can just win that one big guy, I can make my numbers. That is not the case. We can build up that guidance entirely with current customers and applications.

1:01:34 What my sense was, was any new customer would represent an upside from that that guide range that you gave us. Is that good? Yes, that is true. And to be balanced, it obviously creates some potential for de-risking, but yes. Yes. Okay, so the guidance is really going into production from existing customers as opposed to a hopeless that you're going to sign up any large new customers. That's true. Okay, that's all I have again. Thanks. Thank you. Thank you. We'll take our next question from Tom Diffley with DA Davidson.

1:02:23 Hello. Quick question on the balance sheet. Assuming that you do get a couple of customers that happen to come at the same time, what can you say in terms of working capital or inventory bills and the balance sheet? All right. So in terms of the balance sheet and inventory bills and capitalization, We have $8 million in inventory as of the end of May 31st. 6.5 of that is in our FOXP product. And included in that is about $1.7 million, what we call our demo lab that is turnkey. So it allows for quick turns on that. And the benefit of that is we can turn quickly and we do not need to add inventory. We're in a position where we don't expect a tremendous increase in inventory to meet our goals during the period.

1:03:12 and don't expect a whole lot of additional capitalization to be able to fund that. And Tom also, just to put it in perspective, we had, and it's interesting, I think I talked about it the last quarter and didn't do it this, I certainly had enough content already, but this last year, one of the other big things that we did, we just did our end of year plan, is we significantly lowered our lead times for our wafer packs in increased capacity. So we're able to do short-term, quick turns on fully custom wafer packs and dye packs. And what's important about that is we don't need any material around for it. So, you know, and given that half of our business is dye packs and wafer packs, you could say, oh, wow, that's it. But we really, in most cases, we're being paid by our customers by the time we pay our vendors on those things.

1:04:10 So, and then lastly, we didn't talk about it because we also didn't use it. We did put in place a line of credit this last quarter. I don't think you want to cover that a little bit, Ken? Sure. It actually was prior to last quarter, but with our banker, Silicon Valley Bank, we have a $4 million line of credit that's available to borrow for domestic AR, and we have not borrowed anything. Any of those funds that are available to us through the bank. So we have that ability. Plus, we also have customers that also allow to factor any open AR that's actually at a rate that approximate prime. So it's very favorable with these tier one customers. In fact, one of our lead customers. So there's many avenues that we have to really build our cash position as needed.

1:05:02 Okay, so it sounds like for those that Sorry, go ahead, Tom. I was just going to say, it sounds like even to exceed the high end of your guided range for the year, you've got plenty of working capital inventory and manufacturing capacity already in place. Well, that would certainly be our goal. I want to be careful of getting too far ahead of my skis on this, given kind of where we're at. But, yes. And, Tom, one thing, and I think you know, for those folks that have followed us for a while, I haven't said the words in a while, but we still, all of our standard quotes are 30% down payment time. So it's typically quite rare that we look the other way on some of those things and in many cases it's contractual obligations as part of these.

1:05:49 So we get large system orders from these tier one customers for either wafer packs, dye packs or systems. They're actually giving us down payment, which in many cases is the majority of the actual material costs of the sale itself. That comes with non-cancel, you know, they're not cancelable either. So from a, you know, the old classic, well, what happens if you get a $30 million order? How are you going to afford it? That has been removed from our vocabulary. Okay. Well, I appreciate all the detail in the conversation. Thanks. Thank you. Thank you. Thank you. We'll take our next question from Larry Slabina with Salina Capital. A real quick question on your silicon carbide application, the wafer-level system that you've sold. That does both the ATE test and the burn-in reliability test in one fell swoop, doesn't it?

1:06:50 You don't need to do an ATE on the wafers after it comes through the fab with your system, right? Well, it depends. There are certain test steps that they functionally test the devices with our system. So we're able to, one of the very unique things that they're very pleased about, in fact, there are white papers out there. I'm not a big message board, but I did see that somebody posted on the Yahoo message board. They have done white papers on the street talking about and beating their chest about their new wafer-level burning system. and they did specific comparisons talking about the 90,000 devices per week capacity compared to the 7,000 on their system plus the ability to test it before it gets packaged into these modules.

1:07:42 And then on top of it, they specifically point out that one of the key things is they can discern good from bad devices and as the devices fail during the burn-in process, they can see exactly where they're failing. which is very unique for a Vernon system. And so the testing capability gets into voltages and currents and opens and charts and things, but we can give them 100% certainty that it's validly tested and that the proper voltages and currents were put there. That's a big deal. There are other tests that people do in an ATE insertion before and after Vernon typically, but in the case that we fail a part, they won't even test it. They don't do things differently.

1:08:27 So it's a little of both. So you're saying that the throughput on the wafer level is something like 12 times what the part burn-in system is. But I think you said in your comments that because you're catching those failures, the infant mortality failures and the die level on the wafer level, You haven't put any more money into it, or they haven't put in packaging and so on. Did you say it was up to five times more expensive once it's packaged when they find that failure and throw it away? So the numbers I said is like 4 to 10x or so. But the specific things, if you go look at it, if you physically actually have one in my hand right now, okay? which too bad you guys can't see it.

1:09:17 So I'm physically holding one of these high power modules that goes into a car. And it's this large metal frame with a large heat sink on it. It's encapsulated. This thing, they put eight or ten of these MOSFETs in it in parallel. And then they'll sell it. And if you go out on DigiKey or anything else, you can find it from the folks. There's several people that are out there. I don't want to go into which one is my customer, although they will show up as a 10% with our 10K. But they specifically, these things are doing hundreds of amps, but they're put into this thing, integrated in, encapsulated, and then they burn this module in. And then one of the devices fails, and it's pretty high failure rate.

1:10:02 So they're throwing away 10 or more percent. I don't need to give you the numbers, but that's an easy number. of this entire module. Well, the module, the package itself might cost $100, $200 to build. And then the die inside them might be in the fives of dollars a piece or tens of dollars a piece because that's the price of them when they're discreet. So that's a reasonable thing. When they throw that away, they throw the whole module away. The big BS. So that's why everyone's scrambling. They all have edicts to wait for. So the throughput's like 12 times higher, give or take? you're catching those failures at the lowest cost before any more money is put into them which sounds like a huge savings and then the road map down the road is to go to 8 inch wafers and your system is capable of 12 inch so it's future proof and of course the economics is getting even better in that scenario so I guess I go back Why isn't everybody going to this? Is everyone currently burning in their components in the parts system? And so why isn't it such a no-brainer to go to your wafer level?

1:11:22 We have a large punch list, customer list of the ones that we are targeting. A reasonable majority of them we have not been in contact with. That's just the truth. Others we have been and we started to make engagements and we're going to start at the top of the list, if you will. And now that we have proven the feasibility and the capabilities, we are engaged with multiple other customers on this. There are certain tests that we can do. and there are certain tests right now that we do not yet have proven on our Fox systems that we are also working on.

1:12:08 And we're working with one or more of the largest silicon carbide customers on working through that application. So I think that this is an area that maybe How do we get in front of customers? How do we make phone calls? How do we get it? That's one of the reasons we're trying to beef up and make the changes in our sales so we can get in front of more customers. Right. I mean, it seems like this approach is a no-brainer, but assuming the industry would go this route, is there an idea how many systems could potentially be involved for the silicon carbide application? How many XPs? Well, I think I specifically walked through some of the math there.

1:12:59 I talked about half a million wafer starts a year. And I referred to the burning times as much as days. So if you kind of walk through the math there, there are multiple hundreds of wafers worth of capacity out there we believe today and growing significantly. and what I mean by waivers of capacity would mean how many blades in our case need to be installed worldwide. And so that market is substantially larger and to be blunt, the whole world only has one XP in production right now.

1:13:44 That's the first one. That was why it's so exciting. And that customer is going to be taking on more. We are going to win other customers. and sort of a mad scramble right now. So it seems like if you get this... Go ahead. And I know this may sound interesting, but anybody who also follows some of those customers, we actually have talked to a couple of the CEOs. We'd like to talk to them all. So... You're an enabling technology on silicon photonics, which is an emerging new technology that has great potential. And then hopefully you'll be recognized as an enabling technology provider for silicon carbide, which looks like it has tremendous potential.

1:14:40 But, you know, one or two more proof points. We think silicon carbide is and will grow. It's already larger than silicon photonics and will grow much larger than that. All right, that's all I had. Thanks for your time. Thanks, Larry. Thank you. We'll take our next question from Charlie Doe, private investor. Gayn, can you break down the revenue for the lower end of guidance between product sales, consumables, and service? Or as an alternative, can you provide the level of product sales you think will be needed for the lower end of guidance for...

1:15:32 You know, we haven't... Let me give you some ranges sort of that are reasonable based on historical. I mean, we historically... are reporting somewhere, you know, $800 to $1 million a quarter in service support. Those are service contracts, time and material things. So, you know, using that going forward makes sense. So take $4 million out of that and you've got service support. And then, you know, generally we've been tracking maybe 30% to 50% of consumables as a normal runway, and you could use that as a reasonable contract. I think we do believe we'll get some packaged part business this year, but probably a not paid significant number.

1:16:19 And the rest will all be between FOX and the FOX consumables. We do think our packaged part business is likely to pick up the following year, but I don't want to get out there too far. And then from a margin and mix perspective, our FOX systems and wafer packs have a very very good margin and our what we call kind of a material margin which is you know the price minus the raw material or the direct manufacturing costs are you know in the you know 60-65 percent margins so whether they're the consumables or the systems are about the same from a mixed perspective and it's actually somewhat similar for the certain support costs so are overall, we're probably going to be less subject to mixes, although there are certain configurations and certain consumables that have higher margins.

1:17:16 Great. Do you expect any material changes in the R&D expenses for fiscal year 2021? We generally run about a million bucks a quarter. I think we've been a little less than that in the last because of just some R&D spend with respect to where we're at in the programs. But it's my expectation that that's about what our run rate should be. Right, Ken? Yeah, you're actually correct. We've been running about 800,000 and plus the last several quarters, but we are going to be ramping up. Keep in mind, Gayn, we have a few of our programs that will be ramping up towards the third and fourth fiscal quarters. Cam and I are not in the same room, but we have an audio with Zoom on our computers so we can signal to each other.

1:18:14 What can you tell us about the prospects for new products, their timing, and the potential markets, given that you're going to continue with that R&D spend rate? You know, we specifically already either alluded or directly stated that we are working on a new platform product in the package part that has very high voltage on it. And that looks actually really exciting. Customer feedback has been very positive on it, and we think that it opens up. There are certain applications for silicon carbide, for example, I mean, a discrete MOSFET and customers may want to put it only in a packaged park running system.

1:19:02 And there's just not the capacity out there to address it. And so that's an area that we've had. Other high voltage from 300 volts to 600 volts and then that's sick and nitrites up to 1600, 1700 plus volts. So that's an area that we see is going to drive some things that we've got on these things going on. We have some automation programs and some other things that we're working on that we believe not only enhance our ability to address the current customers, but also some high volume market opportunities. And I have just discussed briefly in our calls that we are talking with some of the memory suppliers related to their roadmaps for wafer level burning. And we'll continue to provide information as we get further along in those discussions.

1:19:57 Thanks, appreciate the input. Thank you. Thank you. We'll take our final question. It comes from Jeff Bernstein of Cowen. Yeah, hi, just two quick ones. So you just touched on gallium nitride, and my question was what's going on in terms of opportunity for you in gallium nitride RF and gallium nitride power, and what have engagements kind of looked like so far? And then I have one more. We might actually already be testing a gallon nitrate wafer. I apologize. I know that that is the plan, but it is a power device. So from our tester, it looks pretty similar to if it was... That's interesting.

1:20:44 Hey, operator, I got one of our people that was just on the call calling myself. So did we have a problem? Is everybody still on? Okay, anyhow... so they absolutely are doing both silicon carbide and gallium nitride and to be blunt they look the same to us they both have similar reliability issues it's sort of you got to have a certain sense of humor but if you're a tester guy and you're testing semiconductors you love devices that fail and it turns out and fail in an application where it matters. And then the other thing is you want devices that fail and are never going to stop failing.

1:21:31 Silicon carbide is actually a very mature process in many ways. It's just that substrate is inherently not going to give you the crystalline structure and ever get to the defects of silicon well. People know that. but you can't get semiconductors up to 1700 volts with the efficiency. So okay, you do a burn-in step and all you do is one or two days later you weed it out. These aren't actually very expensive steps even on our tool. And so from a cost effectiveness, it's cheap. People were just surprised we could do it. For folks that weren't on the call last year, when we first engaged with this initial customer, They were like, what do you mean you can do this?

1:22:17 And we said, yeah, we'll show you. And we just simply offered them to buy a wafer pack and then we tested one of their wafers because they didn't even know that it was feasible. They didn't think it was at all possible. We tested their wafer. We sent it, I think we tested two or three of them, sent it back. It went through their entire qualification process. We not only told them which devices failed but what time they failed and they went through the whole call process. It caught 100% of the threaders. They then turned around and said, can we ship you more wafers and here's a PO. And we actually, while we were building our system, continued to ship wafers for them. So they said, can we please borrow more time? So we actually shipped out of our apps lab.

1:23:02 We were shipping them wafers. I believe they were shipping the customers because they were like, this is fantastic. And that's why they immediately ramped. and so that's been a very positive experience for all of us. And GAN-RF, is that a different test structure? So far, I had not heard about people driving the RF part of it, these tiny little transceivers for the same level of reliability, but our ears are open. I think it's just that maybe the criticalness of the first one, the first application was these power modules going into automotive where they were stacked. But I believe that people will be doing this for discrete and it will not surprise me if we go to the RF side.

1:23:55 The system capability is there. Yeah, gotcha. Okay. Great. So then just back on the question on the relative guidance, which kind of jumped out to me as well. But I think what I'm hearing is in each one of these markets, we've had a Gartner hype cycle. Gallium nitride, silicon carbide, 5G, silicon photonics, 3D sensing, AR, autonomous driving, every one of these things. We all know they are all coming. So it feels like we're just in that early phase where you just don't have enough that's all going to production and getting out there in the world to really get a trend going for you guys. And hopefully that means that this year's guidance has sort of been shaken down to take all that into account.

1:24:52 and say, we're going to stop hoping this stuff hits the inflection point and we're going to let it hit the inflection point when it does. Is that a proper characterization? I think majorly so. And that part about, you know, there's only so much we can do. When we have a customer that says we're POR, they have the products, they say, I mean, we had specific quotes we were giving to ourselves and the board. It's like, nobody else has anything like this period at any price. Of course, then it's like, then why are we I know that we charge more for them, but that's a different discussion. And so we know that they're planning to, and again, my intention was not to spend a lot of time talking about COVID. There are some businesses that I think we all can just wonder what the heck is going to happen.

1:25:40 This shouldn't be one of them. I mean, our semiconductor companies are all engaged. All their fabs are open. The end-use applications for us are not being impacted, we believe. There's nothing materially impacted related to anything related to COVID or pandemics or international travel or hotels or something that should have any impact. But, you know, certainly more communication, more data, all of that stuff is in play. But I think that I'm comfortable with where we're at. One of the discussions was, should we go out with guidance? It's like, absolutely, we should. And we hope to have a really good year this year.

1:26:29 Great. Thanks very much for the time. Thank you, Jeff. Operator? and we have no further questions. Okay. Okay. I appreciate it. Folks, we appreciate your time with us and we, as always, if you have any questions or follow-up, follow-up questions, let me get a note out to us or to MKR and we can set something up from there, okay? Thank you all very much and have a good one. Everyone stay safe. This concludes today's call. Thank you for your participation. You may now disconnect.