AEHR reported a 20% cut at the midpoint to full year revenue guidance from $100M to $75M to $85M, — a near-perfect mirror of ON Semi’s 20% cut in its SiC revenue forecast from $1B to $800M.
We thought the impact could have been $16M given ON is 80% of AEHR’s revenue. Interesting enough, AEHR stated in the call the miss not from ON but rather from “other customer forecasts.”
We were cautiously optimistic that ON would not become a readthrough for AEHR, yet what has materialized is that the EV market is weaker than expected, and ON is one of many that will either report this or already has reported this. Therefore, it is irrelevant if ON created the miss as weakness in the EV market resulted in a similar miss.
This was the part in the Q&A where it was distinguished the miss did not only come from ON Semi or even primarily from ON Semi:
“Jed Dorsheimer
[…]it sounds like there was a material change in the last 30 days in terms of demand and visibility to your business. Is that correct? And I just asked that because your largest customer did flag something last quarter, but I want to separate what happened in the past versus what's occurred in the last 30 days. Thanks.
Gayn Erickson
All right. Well, one thing I'm going to start giving people heads up on is, I'm trying to be more thoughtful about giving insight into our customers, to be fair. But I'm going to specifically answer what I think you're implying. Right after our largest customer talked about their change in their forecast, we not only did not hear a negative impact to us, candidly, it flipped around and for a period of time, it was actually an uptick, right, which was a little hard to imagine and explain, but had to do with the wafer pack and the shift to new customers and some other things.
Literally in the last seven days, they have reconciled their plans, etcetera. And we've tried to thoughtfully reflect that in the latest one. But again, I actually said in my prepared remarks, their revenue to us is pretty close to what we were expecting when this all came out. So if you want to say the bulk of the $15 million to $25 million decrease was not from them, that was actually from other customer forecasts that have changed over the last, like three to four weeks candidly.”
This matched what was said in the press release:
“In the last sixty days, we have seen how the slowing of the growth rate of the electric vehicle market has had a negative impact on the timing of several current and new customer orders and capacity increases for silicon carbide devices used in them. […] The net of this is that we now expect a delay in the timing of new orders from current and new customers that will most likely impact this fiscal year’s revenue.”
In addition, Aehr says it believes it has a “large opportunity” with one of the market leaders in SiC, and while Aehr feels “confident they will move forward with our FOX-XP multi-wafer solution for their high-volume needs, [the] timing is taking longer than anticipated. We remain confident that we will receive initial purchase orders from them in fiscal 2024; however, it is not clear whether they will have the infrastructure ready to take shipments from us within our fiscal year that ends on May 31st.”
Revenue & EPS:
Revenue growth remained strong in Q2 as margins improved, though backlog and bookings decreased significantly QoQ. AEHR is lumpy with management announcing new orders intra-quarter, so we’ve seen these lows before on backlog and bookings, but it’s not exactly ideal.
- Revenue increased 44.6% YoY to $21.43M, beating estimates by 2.6%
- GAAP EPS of $0.20 increased 53.8% YoY
- Non-GAAP EPS of $0.23 increased 43.8% YoY, beating estimates of $0.19 by 21.1%
Given the fiscal year guide was lowered by $20M at the midpoint, analyst revisions will likely look like this:
- Q1 FY2024: $20.62M reported
- Q2 FY2024: $21.43M reported
- Q3 FY2024: $15M to 16M down from $20.89M consensus
- Q4 FY2024: $22M to $23M down from $26.91M consensus
I’m taking this from a comment in the call that 40% of what’s left will be in Q3 and 60% will be in Q4. Per the CEO: “Q4 will certainly be bigger than Q3. Maybe but not majority, maybe at 60, 40 spreads or something like that.”
Margins:
- Gross margin of 51.1% increased ~270 bp QoQ, but decreased ~230 bp YoY. Per the CFO, this was due to a high inventory reserve, up 24% from last year. This is a concern, should inventory continue to increase, it can weigh on pricing.
- Operating margin of 25.5% increased ~550 bp QoQ and ~200 bp YoY. The QoQ increase in operating margin was primarily driven by a (19.7%) reduction in R&D expenditures relative to Q1.
- Net margin of 28.4% increased ~570 bp QoQ and ~330 bp YoY, reaching the highest level since 28.6% in fiscal Q4 2022.
Cash & Debt:
- Cash and equivalents of $50.5M, a marginal (1%) QoQ decline from $51M in Q1.
- Debt remained at zero.
- Operating cash flow is implied to be ($0.54M) in Q2, with Aehr reporting $3.9M in operating cash flow in Q1 and $3.36M in operating cash flow in the first six months.
Key Metrics:
Bookings were $2.2M in Q2, a QoQ decline of (88%). This represented the lowest quarterly bookings in more than eight quarters.
Backlog was $3.0M in Q2, a QoQ decline of (86%) and YoY decline of (81%). This represents the lowest backlog in more than eight quarters.
Earnings Call:
ON Semi Won’t Be the Top Customer Next Year:
The boldest comment on the call was not regarding the miss, but rather regarding the fact their number one customer will not likely be their number one customer in FY2025. This either means AEHR sees EVs being so weak that ON will reduce its SiC forecast again, or that other industries will step up and place new orders that exceed ON’s roughly $80M. It’s likely a mix of both scenarios. Here is what was said:
“Christian Schwab:
[…] So given their public comments, I guess, let's start with that, how would you anticipate that customer materiality in fiscal year 2025?”
“Gayn Erickson:
I mean, we — I believe that they will still be material. I don't know that they will be the dominant customer [Technical Difficulty] they'd be or they not be. My guess is, they will not even be the largest, as some of the other customers are kicking in with their ramps. One thing we've tried to look at is, how fast is the market growing itself. I mean, silicon carbide is growing, let's say 40% a year topline revenue. Can we grow faster than that? I think there is examples where we can, but I think it would be more realistic to think that we grow alongside the market itself. But as we displace potential package part burn-in, et cetera, there is opportunities […] But we do think that they will still be a significant customer for us next year. We believe that they — and are consistent with what they have been telling people their growth plans are. But we think that there'll be other customers, most likely there'll be bigger than them next year.”
My translation: I would rather wait to see what this transition looks like than speculate on how it will play out when ON Semi is no longer the top customer. I believe ON Semi will have to come down in revenue from where we currently are otherwise next year’s fiscal year would be higher as a customer that rivals ON’s current revenue contribution would have a larger impact. It comes down to the backlog being very slim and also bookings. We track key metrics for a reason, and it’s not prudent to ignore them.
Auto Inventory Levels:
Auto inventory levels for December are high. In the United States, the total supply of unsold new vehicles was up 57% from the same time a year ago. Inventory is 17 days higher than it was a year ago.
According to SP Global, Ford has cut its EV production for F-150 Lightening in half and Chevrolet EV inventory is up 19% QoQ.
SP Global is also reporting that dealer inventory across all vehicles is up 60% year-over-year to 2.3 million units.
Conclusion:
The main negative for Aehr’s fiscal Q2 stems from the reduced FY revenue outlook, marking a significant reset in growth expectation from the high 50% range to the high teens to 30% range. This was certainly a negative surprise but what’s most concerning is the low bookings and backlog as we don’t have any history of owning AEHR with key metrics that are not supporting the $38 million in orders the company has to procure by the end of the fiscal year in May. AEHR is capable of getting orders in quickly but we prefer to see evidence.
Margin improvement was a positive, with gross margins recovering above the 50% range, while reduced R&D expenses aided leverage down the line. There is no argument that AEHR has an extraordinary ability to operate efficiently for its size, and this is one of the reasons we monitor the company closely.
It’s likely we close the position and reopen again in six months. Today, AEHR is a silicon carbide story relying squarely on the EV market. Unfortunately, with what we know today, the EV market suppliers are weaker than expected, and AEHR commentary is hinting it could continue.
We prefer to wait for evidence of a recovery rather than speculate on when this will happen. We will monitor AEHR closely for when the company secures orders from other large customers and industries. In other words, we will wait for a breakout, which is most likely to happen in the early part of AEHR’s next fiscal year.
Ultimately, we want to focus on putting stronger horses in the stable over the next six months. We suspect AEHR will break the $18 level Knox outlined and we will respect this stop and revisit later.
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