Silicon Carbide is powering a revolution in electric vehicles and AEHR is at the forefront. The company is a beneficiary of the switch from Silicon-insulated gate bipolar transistor (Si-IGBT) to wide-bandgap Silicon Carbide MOSFETs for electric vehicles components. The result in switching to Silicon Carbide (SiC) is that charging is quicker and the range of miles for electric vehicles increases with SiC.
AEHR has seen a ramp in demand over the past three years because silicon carbide is replacing silicon in electric vehicles. Tesla was the first to adopt silicon carbide for the 2018 Model 3 by working with ST Microelectronics to add SiC MOSFETs to an inverter design. The result was a more compact, lighter inverter at 4.8Kg compared to Si IGBT inverters that weigh 2-3X more (8kg to 12kg). SiC inverters offer 97% efficiency, resulting in more range, and this is achieved without the need to increase battery capacity.
During Q1 earnings, management reiterated the FY 2024 guidance of at least $100 million, representing over 50% year-over-year growth.
Since that earnings report, AEHR’s largest customer, ON Semi, provided a guide on SiC for 2023 that is 20% lower than the original guidance. As a reminder, ON is about 80% of AEHR’s revenue, and we’ve pointed out in nearly every write-up on the stock that customer concentration is the primary risk. Quick math indicates that if ON misses by 20% on SiC, then AEHR would miss by about $16M if we figure $80M of AEHR’s revenue is from ON Semi.
The risk that is involved with such high customer concentration is what the market is reacting to, but ON Semi’s call was not as bad as it sounds.
Here is what ON’s management team stated:
“We are taking a very cautious approach as we are starting to see pockets of softness with Tier 1 customers in Europe working through their inventory and increasing risk to automotive demand due to high interest rates.”
And later stated, “[…] for the full year, a single automotive OEM's recent reduction in demand will impact our $1 billion target, and we now expect to ship more than $800 million of silicon carbide in 2023, 4x last year's revenue. In '24, we expect the growth of our silicon carbide business to double the market growth.”
Management stated they plan to “double the market growth” in 2024, and more details were discussed further in the call:
Gary Mobley
Hassane, I want to pin you down on your market forecast for silicon carbide for next year to really get an insight into what your expectations are. I know you cited in your footnotes of your presentation today, a lot of Yole forecast, and Yole is forecasting roughly 43% growth in silicon carbide for next year. So are you expecting to grow your silicon carbide revenue 80% next year? Is that the proper read here?
Hassane El-Khoury
Well, it depends on what the Yole is. But yes, we are expecting a 2x market.
The CEO stated this again during the call:
“Hassane El-Khoury
Yes. Silicon carbide is — what we are looking at is silicon carbide in '24, basically growing about 2x the market. So it's still on track to the target that we've put out in Analyst Day of growing 2x the market, that we still have that visibility in '24.”
From this point forward, the conversations were positive, including SiC having a high utilization rate that is higher than ON’s corporate average, and that SiC will remain supply constrained in 2024, which is a positive read through for a company like AEHR that supplies ON Semi with wafers and wafer equipment.
Here is what was said about the utilization rate for SiC versus silicon:
“Quinn Bolton:
Got it. And then on the silicon carbide business, you talked about overall utilization rates being managed down to 68% for the next few quarters to manage inventory. I assume, given the outlook for EVs still growing in the fourth quarter into next year, that the silicon carbide is probably immune from some of those lower utilization rates, but wanted to clarify that? And if utilization remains high in silicon carbide, could you actually see a scenario where silicon carbide moves above corporate average in 2024?
Thad Trent:
Yes, that's a good question. So the utilization for silicon carbide in Q3 was up, where silicon was down, and that pulled the total up. As we look forward, we don't see the silicon carbide utilization decreasing. We will be bringing on additional capacity next year to support '25 and beyond. But I don't expect that utilization to decline. I think it's the silicon that will actually decline, that gets us down into that 65% to — mid-60% to high-60% range.”
What the Market Wants to See Tomorrow
Given that ON Semi forecast a fairly weak Q4 for SiC with the $200 million miss, the market will want to see AEHR maintain its fiscal year guide. The selloff is anticipating that ON’s miss will flow through to AEHR in the upcoming report. That’s the roughly $16 million mentioned above.
ON Semiconductor’s Q4 guide missed analysts' expectations by 9%, but to reiterate SiC missed by 20%. This miss puts increased pressure on AEHR’s management to deliver a confident outlook for the remainder of the year.
Below, is an interesting comment from ON’s management team during the earnings call, which if I’m interpreting it correctly, would indicate that the miss on SiC may not affect ON’s strategic plans to build wafer inventory. If so, AEHR has a chance of being unscathed (I’m being ever the optimist here, but there is some indication this could play out, per the comment below):
“Hassane El-Khoury
Sure. So it is all — I guess all of our '24 by now. For the '24, we have visibility on exactly what program, what voltage, what volume and what mix we need. As far as the inventory, Thad talks about ramping strategic inventory for silicon carbide, we stage inventory primarily in, I would say, in two spots. One is blank wafers or substrate, wafer substrate, which is fully fungible across any customer, any platform with any volume. And as we get closer, we stage inventory at Epi, which is when we, I guess, partitioned with the voltage levels of the product.
So this is where we maintain inventory to give us full flexibility should the shift change. Because we've always said, when we would have one or two platforms at a customer, if one vehicle sells better than the other, the customer would want to shift while still using onsemi. So we give that flexibility to be able to shift on between platforms at a similar OEM or between OEMs. So the best place to keep that inventory is blank wafers and/or Epi.”
Ideally, we hear updates on new customers. On Semiconductor constituted 79% of FY 2023 revenue, down from 82% of FY2022. Management said in the last earnings call that the last two new customers did not need their wafers tested on the company’s system before moving forward compared to the requirement for the early customers.
Bookings will be closely watched as last quarter was weak (more below). Backlog growth is also lumpy but will be looked at closely.
Revenue and EPS
The company’s Q1 FY2024 revenue grew by 93% YoY to $20.6 million and beat consensus by 7.1%. 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. They also highlighted the record shipments of FOX WaferPak Contactors, a key component for testing wafers and also provides recurring revenue for the company.
Gayn Erickson said in the earnings call, “As we've noted before, our proprietary WaferPak Contactors are needed with our FOX wafer level test and burn-in systems to contact with the individual die on the wafer and are designed specifically for a given device. As our customers win new designs from their customers, Aehr eventually secures orders for new WaferPaks to fulfill these new wins. With each new design, our customers will need enough new WaferPaks to meet the volume production capacity need for those new devices.”As our customers win new designs from their customers, Aehr eventually secures orders for new WaferPaks to fulfill these new wins. With each new design, our customers will need enough new WaferPaks to meet the volume production capacity need for those new devices.”
The company is expected to report $20.89 million in the November quarter, representing YoY growth of 41%.
Q1 GAAP EPS was $0.16 and is up from $0.02 in the year ago quarter. Adjusted EPS grew by 260% YoY to $0.18 and beat consensus by 12.5%. Overall, earnings are expected to nearly double in FY2024, per management guidance of “GAAP net income of at least $28 million, representing earnings growth of greater than 90% year over year.”
Margins
Q1 FY2024 gross margin came at 48.4% compared to 42% in the same period last year and 51.5% in the previous quarter. The higher revenue percentage of WaferPaks helped to improve the margins, and on the other hand, the WaferPak automatic aligners that are built externally led to a decrease in the margins. When an analyst asked the CFO in the earnings call 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.”
The operating margin was 20% compared to 4.3% in the same period last year and 25.3% in the previous quarter. The operating margin was also softer than the previous quarters as operating expenses increased 45.8% YoY to $5.9 million due to “increased headcount-related expenses to support our worldwide sales and marketing efforts and our R&D programs.”
Net income grew by 694% YoY to $4.7 million (due to small numbers). The net margin was 22.7% compared to 5.5% in the same period last year and 27.4% in the previous quarter.
Cash Flow and Balance Sheet
The operating cash flow was $3.9 million, down (28.6%) year-over-year. Cash flows have been lumpy in the past. The free cash flow was $3.6 million compared to $5.4 million in the same period last year. Cash and investments on the balance sheet were $51 million, up from $36.2 million in the year ago quarter and up 6.5% sequentially, with no debt.
Key Metrics
Q1 Inventory is higher than usual at $31.56 million, up $7.6 million QoQ. The management has stated their plan is to increase inventory to meet upcoming demand.
Bookings in Q1 were $18.4 million and declined (-3.7%) year-over-year. Bookings were up from $15.2 million the previous quarter. These are lumpy but can cause the stock to move quite a bit during a good quarter.
Q1 backlog of $22.3 million was up 14.4% year-over-year yet was down sequentially. The effective backlog of $24 million could have been better, given management had stated they received $15 million in effective backlog for Q1 during the Q4 earnings call in July.
Conclusion
Per Knox’s most recent 25-page Positions Report: AEHR’s technical pattern has always been a mess. If its earnings report is accepted by the markets, we should hold $20.45 and turn higher. If this happens, then the drop we just went through from its high was only a 3 wave pattern, and supports us pushing to new highs in a final swing higher. This is the green count in the chart, and once we break above $39, the odds will favor this scenario.
However, if we drop below $20.45, then we have a clean 5 waves down from the high, which will be concerning. If what follows is a 3 wave bounce, then we will be setting up for a bigger drop. If this happens, we will likely look to de-risk our Aehr position.
Technical Analysis by Portfolio Manager Knox Ridley, who holds a 1-hour webinar on Thursdays for Advanced Members.
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
Our Last Earnings Write-Up can be found here: