AEHR came in as expected and beat in some cases. Management reiterated guidance of at least $100 million for 50% year-over-year growth. Given the company added its sixth customer this quarter, the market may have wanted a raise. If we are patient, it’s likely AEHR will see a raise over the next two to three quarters. Management alluded to more orders likely being placed and delivered this fiscal year. This is detailed in the earnings notes below.

AEHR has a large and obtainable TAM relative to its market cap, which we’ve covered in the past when we stated: “SiC wafer market is expected to grow 35X by 2030 – that’s not a typo. “Forecast from William Blair estimate that the silicon carbide market for devices in electric vehicles alone, such as traction inverters and onboard chargers is expected to grow from 119,000 6-inch equivalent silicon carbide wafers for EVs in 2021 to more than 4.1 million 6-inch equivalent wafers in 2030, representing a compound annual growth rate of 48.4%. This equates to almost 35 times larger in 2030 than in 2021.”

As industrial uses for SiC ramp, the TAM could be closer to 6 million wafers needed every year by 2030. This was discussed on the call as the past two customers were not EV related. Batteries were also discussed on the call, and we’ve included these notes below.

Revenue:

Revenue of 93.3% beat estimates of 80.4%. These beats are easier on small numbers. The difference was about $1 million in revenue at $20.6M reported compared to $19.25M expected.

Product revenue declined $1.7M QoQ to $19.4M in revenue. Services was flat at $1.27M in revenue.

Management went out of their way to remind investors that this is the strongest first quarter they’ve ever reported, and that first quarter is typically seasonally weak. We also reminded our Members going into the earnings call that AEHR’s revenue can be lumpy.

EPS:

EPS was in line:

• GAAP EPS of $0.16 is up from $0.02 in the year ago quarter.
• The adjusted EPS of $0.18 beat estimates of $0.16 EPS.

Margins:

The gross margin this quarter is weak at 48.4%, and this is the lowest gross margin since Q1 of last year.  The Fox-XP system’s automated WaferPak aligner caused the decrease in margin. The automated aligners are built externally. Per the CEO: “the first units have a higher incremental cost to us than the ones going forward.” When the CFO was asked if the gross margin would return to 50%, he affirmed this by saying “So we're still targeting 50% above the margin for the year, and that's what we're looking at.”

Operating margin was also softer than it’s been in previous quarters at 20%. The CFO stated opex was higher due to “increased headcount related expense and R&D programs.”

• Gross margin of 48.4% compares to 51.5% last quarter and 42% in the year ago quarter
• Operating margin of 20% compares to 25.3% last quarter and 4.3% in the year ago quarter. This resulted in operating income of $4.12 million.
• Net margin of 22.6% was also softer on a sequential basis but up nearly 700% year-over-year (due to small numbers).

Cash Flows:

The operating cash flow of $3.9 million was down 28.6% year-over-year. However, cash on the balance sheet of $51 million is up from $36.2 million in the year ago quarter and up 6.5% sequentially.

Key Metrics:

I suspect the key metrics is why we are seeing the weak price action after hours. Inventory is higher than usual at $31.56 million, up $7.6 million QoQ. Often, this can be a flag for a semiconductor stock yet management has stated their plan is to increase inventory to meet upcoming demand. Per the CEO: “ I mean we are able to ship more than anybody else. We literally can ship up to, call it, 50, 80, 100 testers, call it, wafers or blades of capacity a month, we are shipping more per month than the combined number of installed base of every other competing alternative has ever shipped.”

Bookings in Q1 of $18.4 million declined (-3.7%) year-over-year. Bookings were up from $15.2 million last quarter. Backlog of $22.3 million was up 14.4% year-over-year yet was down sequentially. We had discussed that these are lumpy in our pre-earnings report. The effective backlog of $24 million was a bit lackluster given management had stated they received $15 million in effective backlog for Q1 three months ago.

Earnings Call:

AEHR’s key metrics matter, but the stock tends to move intra-quarter with new order announcements. If AEHR gets more orders in the next two quarters, it will be very positive for the stock as we are hovering at a baseline guide of $100 million this year. As investors, we are already sold on the product’s potential but I do include a few more notes on that regard, as well.

Comments on Upcoming Orders, New Customers and Q2 Revenue Recognition

In the opening comments, the CEO stated the following: “Acceptance and production release of these FOX XPs with the integrated aligners and the associated revenue recognition provide a solid start to our second quarter revenue and pave the path for revenue recognition immediately upon all future shipments of these products to this customer and forecasted shipments to additional customers this fiscal year.”

An analyst asked for more clarification and AEHR stated that $8 million in revenue was being recognized in September due to a deferred situation on two aligners.

Separate from this $8M, this was also a bullish statement on the call: “We continue to feel confident that this customer will move forward with us using the FOX-XP multi-wafer solution for their high-volume needs, including initial purchase orders and system shipments this fiscal year.”

And management hinted again they may see more order than what is currently being forecast:

“Our meetings also included face-to-face meetings with potential new silicon carbide companies who have now told us that they intend to place their first purchase orders with us over the next several months, including some that want us to ship systems, WaferPaks and aligners to them this fiscal year.”

New Customers:

AEHR announced their sixth customer for silicon carbide this quarter. Customer #5 and Customer #6 are not EV customers, which is generally seen as a positive because it increases TAM by 2.8 million wafers in addition to the 4.5 million wafers estimated for the EV market.

“These additional applications expand our market opportunity beyond the 4.5 million 6-inch equivalent silicon carbide wafers that William Blair forecast will be needed per year by 2030 just for electric vehicles. These new applications are driving an additional 2.8 million 6-inch equivalent wafers annually by 2030 to address industrial, solar, electric trains, energy conversion and other applications.” 

With that said, ON Semi is 88% of revenue, and thus it’s quite apparent EV-related customers have a larger need for AEHR’s testing equipment as new customers have not been able to shake ON’s large customer share. ON was 79% last quarter so this is increasing – although, as stated, AEHR is lumpy and so this could decrease again next quarter.

More on 800-volt Batteries:

In the call, management elaborated on the need for silicon carbide by 2025 to 2026. Specifically management stated it was due to 800 volt EV batteries. Management stated: “Per UBS in 2023, 91% of the batteries sold in electric vehicles are forecasted to be 400 volts and only 9% are 800 volts. But by 2026, UBS expects a percentage of 800-volt battery cars to be above 30%, which is why it appears so many silicon carbide suppliers are timing their major ramps to be in the 2025 to 2026 time frame.”

The 800-volt battery needs to be tested up to 1,200 volts AC. AEHR’s WaferPaks are able to test and burn-in wafers up to 2,000 volts whereas competitive systems spark and create damage at 900 volts. We’ve covered AEHR’s product extensively (see recommended reading below) yet this was another mention of AEHR’s competitive advantage that is notable. 

This was also a big statement on the call product-wise: “In fact, we've never lost a head-to-head evaluation to a competitive product since introducing our FOX-NP and XP configured with the silicon carbide and gallium nitride test resources.”

Conclusion:

Overall, AEHR has a bright future but small caps are very volatile. This is where technical analysis helps quite a bit. For example, we moved to the sidelines during a drawdown in H1 2022 and then re-entered the stock and captured a 151% move from the August 2022 low. We will continue to use technical analysis especially for small caps, which carry much more risk than a large cap stock.

Interesting enough, Knox had stated last week that the $37 to $38 level is what he’s expecting to see. This level needs to hold for the earnings report to be a buy.

For real-time trade alerts and access to our 1-hour webinars, upgrade to Advanced Market Signals.Advanced Market Signals.

Product Thesis:
AEHR: The Silicon Carbide Revolution – read this for our investment thesis 

Original Analysis in 2021:
Deep Dive on AEHR – more information on our investment thesis

Earnings Coverage:
Fiscal Q4 Earnings: Strong Top Line, Strong Bottom Line
Fiscal Q3 Earnings: All Eyes on Next Fiscal Guide
Fiscal Q2 Earnings: Silicon Photonics and Inventory/Capacity – read this for why AEHR is outperforming its competitors. 

AEHR Customer:
ON Semiconductor: Powering the EV Highway