Last week, Aehr’s stock surged after providing a preliminary look at fiscal 2025’s revenue and net profit before tax, guiding to $70 million in revenue, for a YoY gain of ~5.7%, as well as net profit before tax of at least10%. However, $10 million in revenue would be coming from Incal, meaning organic revenue would be $60 million, or a YoY decline of just over (9.3%).
Today, the stock surged again due to an AI-related acquisition announced yesterday in the official earnings report. We’ve had close eyes on this stock as it was a former I/O Fund holding in the tough market of 2022, and was our highest performing stock that year, before it turned sharply downward in 2023. We ultimately closed the position around the time the EV market softened and bellwether Tesla sold off. As a reminder, AEHR supplies wafer burn-in testing systems for silicon carbide to ON Semi, who in turn, supplies silicon carbide inverters to Tesla and other EV OEMs. However, AEHR has discussed for some time that their end markets are diversifying. This report points toward progress in these new end markets.
The positive price action this week is not based on fundamental strength. Under the hood, AEHR is quite weak. The $70M guidance includes $10M per year from the acquisition. Therefore, organic revenue for FY2025 of $60M would represent a decline of (-9.3%) from the $66.2 million AEHR reported this past fiscal year (FY2024). Keep in mind, that a few months ago, AEHR was forecasting revenue of $100M for FY2024 ending in May. Despite the positive price action, this company will not return to growth in the next four quarters and the $100M is more than two years out, per current consensus.
With that said, AEHR is trading at a low valuation, and even after the 66% power move off the low, there’s still quite a bit of room in the valuation due to the ongoing, steep selloff over the past year. Of the stocks we monitor, this one has substantial room. Valuation alone may be enough to justify this price action.
AEHR Q4 Earnings Report:
Aehr Test Systems reported preliminary Q4 revenue and net income figures last week, with both figures exceeding management’s guided range. Management noted that while Aehr “saw customer push outs of our products for silicon carbide devices due to slowing electric vehicle (EV) demand in the second half of our fiscal year, we still achieved another record year for annual revenue.”
Management also provided a quick look into the trends driving fiscal 2025: while SiC is expected to remain a core part of Aehr’s revenue, management sees bookings and revenue from new markets and customers, including silicon photonic ICs, flash memory and SSDs, AI processors, and GaN power chips for data centers and solar.
Aehr also announced that it received $12.7 million in FOX WaferPak orders from an SiC customer, with WaferPaks expected to be delivered over the course of the next three months. This likely will provide a large boost to fiscal Q1’s results. The company also expects to receive orders “from a significant number” of SiC customers by the end of this fiscal year.
There was mention of a hard disk drive customer that is forecast to ramp in the current fiscal year, “most likely the second half.” This customer will be up to 10% of revenue. Management also discussed a silicon photonics customer that will ship in the third fiscal quarter of this year. GaN is expected to penetrate power conversion in EVs, solar and the data center. AEHR received “a significant number of WaferPak orders through the year” for GaN.
Revenue and EPS
- Aehr reported Q4 revenue of $16.6 million, for a YoY decline of (25.5%), and a QoQ increase of 120%.
- Aehr reported Q4 GAAP net income of $23.9 million, which includes a $20.8 million tax benefit from the release of Aehr’s full income tax valuation allowance. Excluding this impact, net income would normalize to $3.1 million.
- GAAP EPS was $0.81, including the $0.61 impact from the tax allowance. Adjusted EPS was $0.84.
- For fiscal 2024, revenue was $66.2 million, up 1.4% YoY and above prior guidance for $65 million.
- For fiscal 2024, GAAP net income is $33.2 million, including Q4’s tax benefit; excluding that, GAAP net income is $12.4 million.
- GAAP EPS was $1.12 for FY24; non-GAAP EPS was $1.21.
Margins
Aehr’s preliminary results offered no insights as to how margins would look, after taking a hit in fiscal Q3 as revenue declined substantially on a QoQ basis. Margins recovered sequentially in Q4, but operating margin remained substantially lower on a YoY basis.
- Q4’s gross margin was 50.9%, up 820 bp from 41.7% in Q3, but down 60 bp from 51.5% in the year ago quarter.
- FY24’s gross margin was 49.1%, down 130 bp from 50.4% in FY23.
- Q4’s operating margin was 15.3%, up from (27.1%) in Q3, but down from 25.3% in the year ago quarter. As discussed in the call, management believes they will reach an operating margin of 20% when they return to an annual run rate of $80M+.
- FY24’s operating margin was 15.2%, down 540 bp from 20.6% in FY23.
- Excluding the income tax valuation benefit, Q4’s net margin would be ~18.8%, versus 30.4% in Q4 2023.
- For the full year, net margin was 50.1% including Q4’s tax benefit; excluding that, net margin would be ~18.8%.
Cash and Debt
Cash flows have struggled this year, with Q3 seeing significant net outflows at nearly 40% of revenue.
- Q4 operating cash flow is $1.23 million, or a margin of 7.4%. This is down from an OCF margin of 26.4% in the year ago quarter.
- FY24 OCF was $1.76 million, down nearly (82%) YoY, for a margin of 2.7%.
- Cash and equivalents totaled $49.2 million in Q4, and debt remained zero.
Key Metrics
- Inventory was $37.5 million in Q4, down from $38.1 million in Q3, but up from $23.9 million in the year ago quarter.
- Bookings were $4 million in Q4, down from $24.5 million in Q3.
- Backlog was $7.3 million in Q4, down from $20 million in Q3. Effective backlog was $20.8 million.
To note, Aehr’s largest customer accounted for 59.6% of revenue in Q3 2024, and its second largest customer accounted for 19.3% of revenue.
Acquisition of Incal and Wafer Burn-in for AI Accelerators
Aehr also announced that it was acquiring Incal to expand its presence in the burn-in market for AI accelerators, which it believes is a $100 million annual market with the potential to capture “meaningful share” in fiscal 2025. Aehr purchased Incal for $21 million, or ~1.75x TTM revenue of $12 million (or ~2.1x forward revenue of $10 million). The purchase price is split between $14 million in cash and more than 552K shares, convertible at $12.673 per share.
The goal is to combine Incal’s high-power test solutions with AEHR’s wafer-level testing to sell FOX-XP systems to AI chip companies for wafer testing up to 3,500 watts. According to management, the opportunity size is $100 million “and with this combined product portfolio, we have the opportunity to capture a meaningful share of this market within this fiscal year.” This naturally led to questions in the Q&A as to why the guide is weak for next year. I’ve included the response in the section below.
On the note of wafer burn-in for AI accelerators, this comment was key in the opening remarks – I’m quoting it in full so our Members understand the full effect of the comment that has led to today’s price action as the comment implies AI revenue will come to fruition this year:
“Now let me talk about the AI processor market. Last month, we announced we're working with an AI accelerator company to move their AI processor test and burn-in to wafer level and have secured a commitment from them to evaluate our FOX Solution for production level test and burn-in of their high power processors. This company recognizes the potential of the significant benefits of production test and burn-in of their accelerators while still in wafer form before they're integrated into the end application product, which would prove to be more cost effective and significantly more scalable than doing the screening later in their manufacturing process.
We think this is an amazing opportunity to displace the current package and system level tests for AI processes for large language model development and we believe we can meet this enormous challenge with the current capabilities of our new high power FOX-XP system with up to 3,500 watts per wafer testing. We're working on this benchmark as I speak here in the lab right now and expect to complete the evaluation in the next couple of months. Upon successful demonstration of wafer level test results and throughput, we expect they will utilize our new high-power FOX-XP systems for production of their next generation AI processors, starting this fiscal year.”
It was later clarified the customer is “not Nvidia.” It’s also important to emphasize the qualification is not complete yet: “I've got my fingers crossed that we can work through all this stuff. And we think we are pretty confident that we can make this work. And the customer is hoping and cheering us on to make it work.”
Lack of Revenue Growth in FY2025:
The obvious issue is management’s opening comments do not match the revenue guide. There is a stark contrast between the bullish earnings call/commentary and the weak guide. The issue is the weak EV market, as despite AEHR seeing promising signs of new end markets, the fact remains that SiC is AEHR’s primary market as it stands today. The new markets are not able to offset the softness in EVs (yet).
Here was a question to that effect:
Jon Gruber
Yeah, yeah, I mean good presentation, a lot of prospects, but what I don't understand is with the acquisition, all these prospects, you get flash member 30% in new things, the disk drive, why is there no revenue growth excluding the acquisition?
Gayn Erickson
[…] It's really about the push-outs that we saw with respect to the silicon carbide ramps, things we were expecting people to be coming in pretty strong. And we're just looking at soft forecasts right now.
[…] But I think if you look at the top four silicon carbide customers, they all guided down this year. And so, there have been people that are — we're wondering how bad it was going be for us, and can we even continue to maintain our growth while they're having a soft year followed by a strong year. So I think we're — it's the right thing to do right now is to communicate this. If we see strength in the second half come in harder than we are currently conservatively forecasting, then we'll guide up at that time.
Valuation:
Aehr’s valuation is low if we look at its historic trend. Granted, the stock had stronger fundamentals at the time, it’s important to note this small cap remained GAAP profitable even after a 36% reduction in its expected annual revenue. The company also held onto a thin cash flow margin, yet to Aehr’s credit, remained FCF positive for FY2024.
Conclusion:
Small caps are being hyped in the market; this makes sense because many are on sale. We began to sniff this out with entries into AOSL but we certainly wouldn’t mind more exposure if this rotation is confirmed.
Due to a lack of fundamental strength, we will only consider AEHR a quality stock once the company has returned to growth. Aehr will one day report real AI revenue, but for now, the price action is exuberant in nature. We want to be clear as day quality fundamentals are not in the driver’s seat at this time, rather, pure speculation is driving the price action. In the meantime, it’s under consideration for a momentum play only. If we re-enter, the position will come with a tight stop.
Damien Robbins, Equity Analyst at I/O Fund, contributed to this analysis
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