Aehr Test Systems (AEHR) on Q2 2022 Results - Earnings Call Transcript
Operator: Good day, and welcome to the Aehr Test Systems Second Quarter Fiscal 2022 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 MKR Investor Relations. Please go ahead, sir. Jim Byers : Thank you, operator. Good afternoon, and welcome to Aehr Test Systems' second quarter fiscal 22 financial results conference call. With me on today's call are Aehr Test Systems President and Chief Executive Officer, Gayn Erickson and Chief Financial Officer, Ken Spink. Before I turn the call over to Gayn and Ken, I'd like to cover a few quick items this afternoon. Right after market close Aehr Test issued a press release announcing its second quarter fiscal 2022 results. That release is available on the company's website at aehr.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 to 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. The forward-looking statements, including guidance provided during today's call are only valid as of this date and Aehr Test Systems undertakes no obligation to update the forward-looking statements. And now with that said, I'd like to turn the call over to Gayn Erickson, President and CEO. Gayn Erickson: Thanks, Jim. Good afternoon, everyone, and thank you for joining us for our second quarter fiscal '22 earnings conference call. We hope that everyone is off to a great New Year and are healthy and managing through these historic times with COVID-19. Also, I do want to apologize in advance that I have a lingering dry cough, after recovering from COVID myself over the holidays. While I was fully vaccinated and one of those that had the breakthrough case I'm happy to say I'm feeling fine and fully recovered from what little symptoms I had. Let's start with a quick summary of the highlights of the quarter and momentum we're experiencing in the semiconductor wafer level test and burn-in market. And then Ken will go over the financials in detail. Then we'll open up the lines to take your questions. In the second quarter, we're happy to announce our second consecutive quarter of record bookings and solid results for revenue, our bottom line, our balance sheet, and we finished the quarter with new record for bookings in a single quarter of $29.1 million. This follows the previous quarter where we set a record of $20.7 million. Revenue for Q2 was $9.6 million, a sequential increase of 70% over the first quarter and up over 470% year-over-year. Our backlog at quarter-end was $36.1 million, which is our highest backlog on record for the company. With our strong backlog and the incredible performance of our manufacturing and supply chain team, as well as the great job our suppliers are doing in ramping to meet the significant uptick in revenues, we're confident and are reiterating our previously provided guidance for full year total revenue of at least $50 million for the fiscal year ending May 31, 2022. This equates to fiscal '22 revenue, which is three times that of last year's full year revenue. Our projected revenue of $35 million or more for the second half of this fiscal year is over 2.3 times our revenue for the first half of the fiscal year. Today, I'm going to go into detail on the silicon carbide and silicon photonics market segments of our business. Let me start with a discussion on the silicon carbide test and burn-in market, which has been driven substantially by anticipated growth in electric vehicles. We continue to see very strong interest and an increase in inbound requests for information on our solutions for wafer level test and burn-in of silicon carbide devices, particularly for use directly in and in support of the electric vehicle market. Now for those who have not followed Aehr, let me describe the market opportunities for silicon carbide test and burn-in. Silicon carbide devices are used in solid state power conversion of electric vehicles. Some would say, it's an enabling technology to electric vehicles. Silicon carbide MOSFETs are used in converting alternating current or AC to direct current DC needed to charge batteries that store the power in the electric vehicles. Then the same devices, although higher current and power are used to convert the DC power in the battery pack back to AC to power the engine. The AC to DC conversion is the onboard or off-board battery charger and the DC back to AC is referred to as the traction inverter. There's one traction inverter per engine. So for a car like most Tesla Model Ss, Xs and 3s, as well as the Ford F-150 Lightning, there are likely two engines and therefore two traction inverters. A typical traction inverter today uses 48 silicon carbide MOSFETs to address the current and number of phases needed. A typical six-inch silicon carbide semiconductor wafer today has about 500 of these high current MOSFETs, and so yield about 10 engines per wafer with perfect yield and they do not get perfect yield. Every silicon carbide supplier agrees that these MOSFETs must go through an extended stress test called burn-in, to remove the extrinsic or infant mortality failures to get to the quality required to meet automotive standards. In addition, companies use burn-in to stabilize the threshold voltages of the devices, particularly for use in modules where the devices are gained in parallel. This burn-in step can be done in the final package form in discrete packages, but looking ahead the industry is moving mostly to multi-die modules. The modules are more efficient, require less cooling and are easier to integrate into inverter. The downside is that these modules contain many individual die that are all assembled in the modules. When customers burn-in these modules, the failure of a single die will cause the entire module to fail, reducing the production. Not only is the cost of the module packaging more expensive, but the other dies which could include up to 10 or more die per module are discarded. The combination of the industry moving to modules and this confluence of implication of burn-in in a package part versus wafer or die level is great for us at Aehr, where we have a clearly differentiated solution for full wafer level test and burn-in of these devices. Our FOX-XP wafer level burn-in system can test up to 18 wafers at a time, with 100% of the devices being tested and burned-in in parallel at the same time. This is an extremely cost effective and scalable solution for high volume manufacturing of a critical reliability step in the manufacturing process. We have qualified this to eliminate the extrinsic failure seen on the silicon carbide devices and it has been validated by multiple electric vehicle manufacturers so far. During this last quarter, we received a follow-on $19.4 million order for FOX-XP wafer level test and burn-in systems from our lead silicon carbide customer. This order was then followed by a $7.6 million order for WaferPaks that are the consumable, if you will, that makes contact between our FOX-XP system and the device specific wafers. This WaferPak order is actually not enough to fully populate the systems they ordered. So we are expecting additional follow-on WaferPak orders for these production FOX-XP systems. These systems and WaferPaks are being used to test and burn-in MOSFET devices and traction inverters in electric vehicle motor controllers, as well as both onboard and off board electric vehicle chargers. This customer, a major automotive semiconductor supplier, with a significant customer base in the automotive semiconductor market continues to forecast significant additional system and WaferPak purchases over the next several years to meet the silicon carbide market growth. In addition to a very strong backlog and forecast from our lead silicon carbide customer, we're currently engaged in discussions and/or evaluations with several other silicon carbide suppliers regarding their wafer level test and burn-in needs. This includes all of the current large silicon carbide suppliers, and a number of companies both large and small that intend to enter the silicon carbide market. The new entrants are actually quite interesting to us, as several are starting from a greenfield without any installed base of test or burn-in equipment and are looking to Aehr for advice on the best solutions for them to meet the critical quality reliability needs of the electric vehicle as well as other silicon carbide markets. Multiple industry forecasters and analysts expect the market for silicon carbide devices to grow at a compound annual growth rate or CAGR of more than 30% over the next decade, driven by demand from the electric vehicle market and other applications. It is more and more clear that silicon carbide is becoming the industry standard for electric vehicle powertrain conversion and the traction inverters, as well as for the onboard and off-board battery chargers for EVs. Tesla was the first to move to silicon carbide over the historical IGBT high voltage silicon-based devices as the silicon carbide devices promised to be more efficient, which translated into longer range and faster charging times, two of, if not the most important buying criteria for electric vehicles. Since their introduction in the Model 3 Tesla has since adopted silicon carbide in all of their vehicles, and most of the new electric vehicles across the industry will start the silicon carbide as the solution of choice for the power conversion electronics. While no one can completely predict the exact growth rate of the electric vehicle automobile market, there is no doubt that every car company in the world and many new companies are committed if not dedicated to new EVs and volume production. An example of how fast forecasts changes is that just recently Ford announced that it will nearly double its production capacity of its upcoming electric F-150 Lightning pickup truck to 150,000 vehicles a year by mid-2023 in response to enormous customer demand. The industry forecasters and analysts also appear to be converging on the idea that the typical electric vehicle will have more than one electric engine and traction inverter, as electric vehicles with two or more engines are being marketed with longer ranges and faster charging times two of the most critical features in the electric vehicle market. What this means to Aehr is that there'll be more silicon carbide devices forecasted per average vehicle than we saw only a few months ago. Forecasts from Canaccord Genuity estimates that the silicon carbide market for just devices and electric vehicles such as the traction inverters, and onboard chargers will require 4,000,000 6-inch equivalent wafers to meet demand in 2030, and another 4 million wafers for electrification infrastructure, industrial and photovoltaic power devices. This is incredible when you realize that this year the entire market is expected to ship fewer than 150,000 wafers to meet the automotive electric vehicle market. This represents a growth of over 25 times the current wafer capacity just for the in vehicle devices, and then double that for the entire silicon carbide market. Why I'm going into so much detail here is that folks at Canaccord Genuity are making the point that the industry has only yet -- has only yet even announced capacity plans to meet this demand, much less put it in place. So let me make sure that they do not have enough capacity even announced to meet this in place. They're forecasting that the announced capacity is somewhere near 2 million wafers. And yet the total capacity are maybe 2.4 I think, versus the total capacity is over 8 million wafers of demand. We're seeing multiple companies come forth and approach Aehr with a message that they're entering the market because there simply is not enough capacity out there to meet demand. And there's plenty of room for newcomers. Now think back on my comment about new companies not having an installed base or bad habits of using packaged or burn-in systems to test your IGBT or Silicon Carbide devices that we that we may have to talk them out of. Stay tuned on our progress with a broader array of customers than just the current top companies. Again, remember last year, the current companies that address the silicon carbide market only shipped about 2% of the wafers needed against the total demand needed by the end of the decade. Again all of the companies today including "the big ones" are only 2% of the total demand. So stay tuned to find out about the new companies entering the market. Now having highlighted that new players are not to be ignored, we have announced that we do have at least one currently large silicon carbide supplier that has moved to on wafer evaluation and benchmarking of Aehr's FOX-XP's multi-wafer system for testing and bringing in their silicon carbide wafers. We feel these benchmarks have demonstrated the value Aehr can provide and also validate our solution for screening of expensive or early life failures as we had predicted by looking at the actual failures of their devices, on their wafers. We're now being asked to do more tests and experiments and run more wafers, which we're happy to work with them on. Without getting into too much detail, I do want to say that companies all have their own internal processes and timelines for evaluating and qualifying the new tool. And not all companies move at the same pace. One thing is for sure, every company we talked to is a combination of excited and scared the size of the ramp expected to meet the electric vehicle market, particularly in the second half of this decade. Some companies are driving to meet this demand sooner than others. I do want to be clear that independent of different companies' timelines, we expect that we will add several new silicon carbide customers that will ramp into production with our solution by next fiscal year, as they look to capitalize on the rapidly expanding silicon carbide market. We are ramping our FOX multi-wafer test and burn-in systems and full WaferPak capacity -- full wafer, WaferPak capacity to meet this upcoming silicon carbide market opportunity, which we believe will grow significantly over the next decade or more. We really are only at the very beginning of this ramp as electric vehicles accounted for a small percentage share of the overall market last year, and are expected to be over 30% of total vehicles sold by 2030. We provide a very cost effective solution for testing and burning in these silicon carbide devices, and we're confident in our ability to capitalize on the expected growth in the silicon carbide market over the next several years and for many years beyond that. So let me turn to the Silicon Photonics stabilization and burning market. So in addition to our success in the silicon carbide applications, we continue to see signs of strengthening in the Silicon Photonics test and burn-in market as our FOX multi-wafer systems and WaferPaks provide a very cost effective and scalable solution for burning in the optical lasers and stabilizing their output power, while also removing any extrinsic or early life failures. Silicon Photonics describes photonic systems that use silicon as an optical medium, and can be made using existing semiconductor fabrication techniques. A critical manufacturing step is a stabilization step where energy is used by applying high temperatures and electric power to quote burn-in the optical lasers and stabilize their output power. Aehr is able to do this critical step while the devices are still in wafer form, before their singulated input into a modular system, or system using our FOX multi-wafer systems and WaferPaks. This provides a very cost effective and scalable solution for this critical step, while also removing any extrinsic or early life failures. Today, silicon photonics devices address the 5G and data center infrastructure industry as well as several other key markets. And Yole research predicts that the silicon photonics transceiver market alone will reach $4.6 billion in 2026, with a CAGR of 25% between 2021 and 2026. Several companies including Intel and Cisco have proven it is possible to create hybrid devices in which the optical and electronic components are integrated onto a single microchip, and the first products in volume production are being used for fiber optic transceivers used in the datacom and telecom infrastructure such as data centers, and 5G communications. But in addition, there have been many technical presentations and public announcements about silicon photonics and co-packaged optics being integrated with MPUs and GPUs from companies such as Intel and Nvidia as a means for keeping on track with Moore's Law by using optical interconnects to provide faster data transfer both between and within microchips. We believe that the market for silicon photonics will expand beyond being used for only fiber optic transceiver photonic integrated circuits, and will start to be used in high end processor applications and intra chip, as well as inner chip communications within the next few years. During the last few months, we received orders from the current Silicon Photonics customer for six additional FOX-NP wafer level test and burn-in systems to support the characterization and product qualification of new types of photonics based devices in wafer form. This customer is expected to purchase new sets of WaferPak for wafer contactors to be used with these systems. As the applications and market for silicon photonics-based devices continue to grow, we expect this customer to continue to increase the capacity in the future. Several other customers addressing the silicon photonics market have also forecast additional FOX systems as well as WaferPak or DiePak contactor capacity needs over the next 12 months. These include needs to address incremental production capacity, as well as capacity to address new customer and new product qualification and engineering. Again, as the only supplier of a commercially available and cost effective solution for testing and burn-in in the silicon photonic devices and wafer form, we're also very confident in our ability to capitalize on the expected growth in the silicon photonics market over the next several years. Before turning it over to Ken, let me summarize where we're at. We remain very focused on serving the very large market opportunities we see ahead, which includes a significant opportunity for test and burn-in of silicon carbide devices for electric vehicles, and electrification infrastructure, silicon photonics devices for data center and 5G infrastructure, and 2D and 3D sensors for mobile and wearable devices. With our record bookings and the strength of our semiconductor test environment solutions, we're confident in our ability to deliver significant revenue growth and are reiterating our guidance of at least $15 million in revenue for the fiscal year ending May 31. This represents revenue in the second half, which is 2.3 times that of the first half. As we have discussed in the past, and are proving now, Aehr has the manufacturing infrastructure and supply chain in place to ramp to significantly higher revenue levels. We have been ordering long lead components for systems and WaferPaks, particularly for the enormous opportunity we see for silicon carbide that is gaining momentum, and we have been able to maintain reasonable lead times to meet customer requests. Our supply chain is holding up to the increase in demand. And we're ramping all of our sub suppliers to meet the customer bookings and forecasts we are seeing. Aehr has a very robust supply chain with world class subcontract manufacturers and subsystems of our test systems, contactors WaferPak aligners and DiePak handlers. These are very mature subcontractors that has successfully supplied these subsystems to Aehr for years. In all cases, the suppliers have capacity well in excess of Aehr's historical shipments, and the ability to ramp significantly higher as well. We're very confident in our ability to meet the customer forecasted demand plus considerable upside. As we discussed and anticipated at the beginning of the COVID-19 pandemic Aehr test has emerged a stronger company with more production customers, more markets and applications and higher value products than we had before the start of the pandemic. With our record bookings and the strength of our semiconductor test and burn-in solutions, as well as the positive response we're getting from multiple new potential customers in the silicon carbide space we're confident in our growth forecasts and ability to meet them. The hard work we put in over the past several years is paying off for our customers, our financials and our shareholders. And we're excited about the large market opportunity ahead and for the future of Aehr Test Systems. With that, let me turn it over to Ken to review our financial results and guidance in more detail before we open up the line for questions. Ken Spink: Thank you Gayn, and good afternoon everyone. As Gayn noted we had another solid quarter for Q2, with our second consecutive quarter of record bookings, strong sequential growth in revenue and our highest backlog on record at quarter end. Looking at our financial results, net sales in the second quarter were $9.6 million, up 70% sequentially from $5.6 million in the preceding first quarter, and up 471% from $1.7 million in the second quarter of the previous year. The sequential increase in net sales from the preceding first quarter includes an increase in WaferPak DiePak revenues of $4.1 million. This was partially offset by a decrease in system revenues of $125,000. The increase from Q2 last year includes an increase in WaferPak, DiePak revenues of $4.3 million and an increase in system revenues of $3.6 million. Customer service revenues were flat for both periods. WaferPak and DiePak revenue comprised over half, 53% or $5.1 million of our total revenue in the second quarter. We also had a record number of WaferPaks and DiePaks shipped during the quarter, reflecting growth in the consumables piece of our business, as well as our ability to scale and meet customer demand. Non-GAAP net income for the second quarter was $1.4 million or $0.05 per diluted share. This compares to a non-GAAP net loss of $414,000, or $0.02 per diluted share in the preceding first quarter, which exclude the impact of forgiveness of $1.7 million in loans from the Paycheck Protection Program that we received in fiscal year 2020 and non-GAAP net loss of $1.7 million or $0.07 per diluted share in the second quarter of fiscal 2021. The non-GAAP results also exclude the impact of stock-based compensation in all periods reported. Stock based compensation costs of $718,000 in Q2 '22 reflect a significant increase from $588,000 in the preceding quarter, and $257,000 in the prior year second quarter. This increase is primarily due to $246,000 in stock awards accrued in Q2 '22, related to exceeding stretch goals for fiscal year 2022 key business objectives and over $200,000 in expenses related to the employee stock purchase plan, due to increased employee contributions and new enrollments. While these non-cash expenses exceeded our plan, it is good to have such problems where stretch goals are being exceeded, and we recognize and appreciate the hard work of all of our employees who helped achieve these goals. On a GAAP basis, net income for the second quarter was $717,000, or $0.03 per diluted share, compared to GAAP net income of $696,000, or $0.03 per diluted share in the preceding first quarter, which includes the impact of the PPP loan forgiveness, and a GAAP net loss of $2 million or $0.08 per diluted share in the second quarter of the previous year. Gross profit in the second quarter was $4.5 million or 47% of sales, up from gross profit of $2.3 million, or 40% of sales in the preceding first quarter, and up from gross profit of $377,000 or 22% of sales in the second quarter of the previous year. The increase in gross margin from both the preceding first quarter, and Q2 of the last year is primarily due to a decrease in unabsorbed overhead costs to cost of goods sold due to higher revenue levels in Q2 '22. As noted in prior calls, we scale very well as manufacturing overhead remains relatively fixed as revenues increase. The benefit in labor and overhead was partially offset by unanticipated costs impacting cost of goods related to tariffs, and broker-related premiums paid to resolve short term semiconductor shortages. In addition, we increased freight charges -- we incurred increased freight charges on many items, particularly for items shipping historically by ocean where due to the shortage in ocean freight capacity with shipments into the U.S., we were required to ship by air. In one example, we are seeing an increase in freight costs for our chambers by over $40,000 per chamber to ship them by air from one of our suppliers in Asia to the U.S. While this appears temporary we do not see this reducing materially anytime soon. The good news is our suppliers are able to meet the demand, but we are certainly feeling it in higher shipping costs. Operating expenses in the second quarter were $3.8 million, an increase of $528,000 or 16% from $3.3 million in the preceding first quarter and up $1.5 million or 64% from $2.3 million in the second quarter of the previous year. SG&A in the second quarter was $2.5 million, an increase of $536,000 from $2 million in the preceding first quarter, and up $988,000 from $1.5 million in the prior quarter of the prior year second quarter. The increase from the prior quarter includes an increase in employment costs of $348,000. The increase from the prior year second quarter included an increase employment costs of $745,000. The increase in employment costs included salary increases, related to raises provided to employees during fiscal 2022, higher commissions and incentive payments related to increased bookings and key bonus objectives and stock-based compensation costs related to our employee stock purchase plan, due to new participants to the plan and employee and contribution increases. In addition to the increase in employment costs, the company recognized increased travel costs and consulting cost during the quarter. R&D in the second quarter was $1.3 million, unchanged from the preceding first quarter, up a point or $93,000 from $820,000 in the second quarter of the prior year. The increase in R&D from the prior year including an increase in employment costs of $427,000. The increase in employment costs included salary increases related to raises provided to employees during fiscal 2022, higher incentive payments related to key business objectives, and stock-based compensation costs related to our employee stock purchase plan, due to new participants to the plan and employee contributions increases. In addition to the increase in employment cost, the company recognized an increase in contractor cost and the materials related to new R&D program initiatives during fiscal 2022. We continue to invest in R&D to enhance our existing market leading products and introduce new products to maintain our competitive advantages and expand our applications and addressable markets. Turning to the balance sheet for the second quarter, our cash and cash equivalents were $35 million at November 30, 2021, up $28.5 million from $6.5 million at the end of the preceding quarter. During the quarter we completed a successful capital raise that netted $24 million in cash to the company. A total of 1.7 million shares were issued through the offering at an average price of $14.73 per share. These proceeds provide additional working capital to serve the very large market opportunities we see ahead. In addition, we generated year-to-date cash flow from operations of $5.2 million in fiscal 2022. Accounts receivable at quarter end was $7.4 million, up from $4.3 million at the preceding quarter end, due to the due the impact of higher revenue levels. Inventories at November 30 were $13 million, an increase of $2 million from the preceding quarter end and $4.2 million from Q4 '21. The increase in inventory is to support our existing backlog and to prepare to fulfill expected future orders. A significant portion of the inventory increase is due to semiconductor components, which we have been ordering and stocking up on to meet the anticipated demand we see from the markets we address. This is critical as we ordered these long in advance and have been able to continue to provide reasonable if not best-in-class lead time to customers in an environment where most semiconductor test companies are quoting up to 52 week lead times on their equipment. Property and equipment was $661,000, compared to $676,000 at the preceding quarter end. Customer deposits and deferred revenue, short term and long term, were $10.3 million, an increase of $6.8 million from the preceding quarter and $10 million from Q4 '21, related to the increase in backlog from prior quarters. The company has no debt. This compares to our May 31, 2021 fiscal year end, where we had $1.4 million outstanding on our line of credit and $1.7 million outstanding on our paycheck protection program or PPP loan. Bookings in the second quarter were $29.1 million, our highest quarterly bookings on record. This is our second consecutive quarter of record bookings and is up from $20.7 million in the preceding quarter. Including the announced orders since the beginning of the fiscal third quarter, our total bookings for the fiscal year-to-date is over $52 million. Backlog as of November 30 was $36.1 million, our highest backlog on record. This is up from $16.6 million at the end of the preceding first quarter and up from $1.1 million at the end of the second quarter last year. Now turning to our outlook for fiscal 2022 year which ends on May 31, 2022, with our record bookings and the strength of our semiconductor test and burn-in solutions, we are confident in our ability to deliver significant revenue growth for the year and our growth opportunities over the next several years. For fiscal 2022 ending May 31, 2022 we are reiterating our previously provided guidance for full year total revenue of at least $50 million, which would represent revenue of three times that of last fiscal year. While the increase in gross revenues on a relatively fixed manufacturing overhead will increase gross margins, this benefit is partially being offset, and temporarily with the noted increase in freight and tariff costs, as well as the additional non-cash based -- non-cash stock-based compensation expense from our equity incentive plans related to exceeding stretch goals. Still we expect our full year GAAP net profit, which included the $1.7 million benefit from the PPP loan forgiveness would be above $10.5 million or 20% of revenues. Lastly, looking at the investor relations calendar, next week, we will be presenting a meeting with investors virtually at the 24th Annual Needham Virtual Growth Conference on Wednesday, January 12. We hope to see some of you virtually at the conference. This concludes our prepared remarks. We are now ready to take your questions. Operator, please go ahead. Operator: Thank you. And we will go first to Christian Schwab of Craig-Hallum Capital Group. Christian Schwab: Congratulations on a great quarter and continuation of strong bookings. Gayn Erickson: Thanks, Christian. Christian Schwab: Gayn, I'm just wondering if you could give us just a little bit of -- or help me with a little bit of clarity on the silicon carbide. We talked about a large silicon carbide supplier, who's in evaluation and then we talked about several new silicon carbide customers that will ramp into production. So is that a minimum of three customers that could be close at hand? Or is -- are you referring to the large silicon carbide supplier, when you talk about several car customers? It wasn't clear to me. Gayn Erickson: All right, let me try. And folks, one of the challenges that we're dealing with right now is, and we've made statements like talking to all of the suppliers, and then some. The subtlety here is, when you're talking to all of the players, there's always this balance of trying to maintain competitive information and where they're at, and not giving too much information about one player versus the other. And so sometimes my, I guess, indirection and all is just related to that, because obviously, my key customers listen in on this thing as well. And we have pretty clear non-disclosures and things in place. So we always have to try and muddy it as best we can. But when you're talking, some of these deals and the really large deals and the discreteness of it, I know that gets difficult. So let me try now a little bit of color as well. So just for clarity, the industry, market forecasters that talk out there, generally refer to the largest suppliers in this space traditionally have been FT had the number one position, and then Infineon and Cree, now Wolfspeed are others. And then ON Semiconductor that kind of came out of nowhere, and people know that On Semiconductor is one of our top 10% customers, are generally thought of by most people as the current larger players in the space. In addition to that, you have Mitsubishi and ROHM that historically were kind of filled out the top six. We have some level, if not a deep level of engagement with all of the above, okay? And we certainly are in conversations with the - all top four of them, including one of them being our biggest lead customer. What we have done is we've been involved in, I generally refer to at least one benchmark, there's different levels of engagements and discussions, but we're clearly doing on wafer measurements and all for one of those as a new potential customer of ours. And the data is quite compelling, and is giving us results, consistent with what we told them, we would show them and expect. And they've actually asked for additional testing and clarification, some more wafers, et cetera., and we're happy to oblige. It's our expectation and our offer to all of the suppliers out there, pretty much all the big guys that we will be happy to demonstrate on wafer for them. And what I have tried to allude to, and I said it in a lot of different ways, it's quite interesting to see the difference in pace between all the different companies. And it isn't necessarily how big you are, it just may be how aggressive management is about commitment to new capacity, or to changes, et cetera. One thing that historically is true, in general, in the test business, and I've been doing this all my life is that, being the installed base has its advantages. It's usually pretty hard to just displace someone. That's not to say that we can't displace them, nor we can't displace all of them. But if there were companies that were shipping a lot of silicon carbide before we got there, by definition, they're using another tool. And they have in fact convinced their customers that the quality associated with that is good enough. So as we go to ship the customer, not only do we have the dynamic of shifting them away from the current installed base, but they have to convince their customers that the reason they're switching is because the new tool is better. And that is our intention to do that, okay? Companies that are brand-new to the space, okay, who are entering or have very little market share, have effectively nothing to prove. And they don't have to necessarily talk their customers out of one thing and into something else. Also companies that are entering the market space right now, in many cases, like ON is very public about this, is entering based upon quality and reliability in their modules, a very differentiated solution. And imagine if you - they were our customer, it's a little easier to work with them, because I've also stated every single company that we have talked to has stated they are getting into wafer level burn-in. They're moving from package to wafer level. Now the companies that we're talking to that are not in silicon carbide are saying they're starting with wafer level burn-in. There's no reason to switch. So one of the challenges that I have, and I'm kind of frustrated as well at times, is the pace of which companies will go to their evaluations to identify what the best move is for them. And just one thing I tried to make pretty clear in there is that, yes, large customers are really important. And they're very important, and we're going to cover them. And we're -- it's our intention to win as many, if not all of them, if at all possible. But having said that, the combined capacity of all of the -- in all six of those last year is still only 2% of the forecasted need in 2030. So the largest of them is only 2% of the market share of - at the end of the decade. So if you're the market leader or not, if you're not anticipating growing your business by 10x, you're not going to have 20% market share. And so the real key is which companies are growing their silicon carbide business the most, and making sure that we align with them. So I mentioned six companies. There's also think, four, maybe five more apologize, Vernon and I've been going through this right now, so far, so about another half a dozen companies that have come forward and are talking about new silicon carbide capacity and fabs that are going in. So there's a lot of activity that's going on. Part of the challenge is how do you bet on -- which horses do you bet on. Our current strategy is we're betting on all of them. We have the capacity and sales. I'll tell you one thing that is frustrating, and I tried to promise not to complain and whine about COVID, but it is very real. The travel restrictions are still real. I mean, we have companies in -- companies plural, in Japan, in China, in Korea, in Taiwan, in Southeast Asia, that we have not been able to even go to, either because of pure restrictions, or very extreme restrictions that would preclude us from going in and making sales calls. So we're having to do all this stuff over Zoom and things like that. It's not as easy. And we kind of thought, Vernon and I were pretty happy, we got to travel around Europe, and in the U.S. in -- earlier this fall. And then that came to a stop, too. So it is something that is slowing us down. But I think we're making the bets and we're a little bit I know people overuse this, but we're like trying to sell shovels to everyone. It's really hard to pick who the market leaders are. But I do believe that we're going to have an opportunity to win more than our fair share. And when a number of companies -- and by the way, they're going to be companies that are irrelevant, even next year, 2023, let's say that will be significant in '24, and '25. So part of this is trying to not necessarily play the long game, but make sure that we don't keep -- lose track of the fact that some of the smaller players or the new entrants may end up being significant market leaders, two, three, four years out. Hope that helps. Christian Schwab: That does help Gayn. And then just a follow up on the pace of evaluation of the customers. In the press release you talked about adding several new silicon carbide customers that will ramp into production by next fiscal year. So I assume that means that by the end of May of 2022, there'll be a couple other customers ramping. Am I reading that sentence correctly? Gayn Erickson: I wouldn't know. I apologize if that's how I wrote it. And no, the intent was not to push it all the way out. But I wouldn't say we expect several companies to be ramping into production by this May. I intended to imply by next or through next fiscal year, so by next May. Now that's not to suggest that, we couldn't get a customer or even make shipments by May. That's not the intent. But I probably wouldn't describe that as ramping into production anyhow. But I think, we were -- we kind of were referring to before, over the next 18 months, we said that before, I'm just trying to tighten that up a little as to what we're thinking. But we do believe by our next fiscal year, which we call fiscal '23, which ends in May, at the end of May of '23 that we would expect to be adding several new customers. Christian Schwab: Right, it would and then production is different from like, potential initial. Would you anticipate seeing orders from other customers here in the first half of this calendar year, that would lead into more "kind of real capacity ?" Gayn Erickson: It is fair, I would -- I guess it would surprise me. It's most likely that any new customer will start by ordering one, before they will order multiple. And there might be three to six months break in between perhaps. I mean, it was longer than that to begin with. I feel like it will move faster. But so in that sense, there is sort of a timing. Is it -- it's certainly possible that we could be getting our first customer orders before the end of this fiscal year. I also want to, I guess hedge my bet a little bit in terms of if we didn't, does that mean, we have lost the production of these key customers? I would say that is definitely not the case. One thing that kind of surprised me a little bit is -- and I -- now I don't, I don't want to get too carried away with specific customers. But there's some companies that were out there that were talking about this expansion, new fabs that were going in 2022. And six months ago, I was like, oh, my gosh, we got to hurry, hurry, hurry. We're going to miss the ramp. They bought from us yet, they're going to be ramping in January of 2022. We're going to miss out. That's just not the case. I mean, those same companies are now saying, well, we're going to be sampling in 2022. So they barely even need a production tool by the end of 2022. So part of this is just trying to understand what's really going on out there and make sure that we're not missing anything, that specific customer, for example, we don't feel we're missing. We're still talking to them, etc. And they're not on a timeline. They were not looking for a solution to be installed this quarter, for example. So I think there's a little bit of this challenge of trying to guess exactly when people are going to be ordering. And the timing of that is obviously pretty important, because if you're in the stock before that, that's good. And if you are out when those orders are announced, obviously, that's bad. I tried my best to try and get an estimate of what's going on. Again, I'll give you at least the window that I expect, not only will people have bought their first orders, but we'll start to see orders that would be going to be ramping into production by the end of next May. Christian Schwab: Great, and then I guess my last question, just as it relates to silicon photonics, and the packaging, technology changes, etc., and inter chip technologies. Have you guys had a chance -- I know you guys kind of previously talked about how large you thought the potential TAM could be over time, if everybody, was a silicon carbide customer. And there was, 30 some million cars sold by 2030. Have you guys been able to do any work behind the scenes in silicon photonics to say, a range of potential revenue outcomes to the company could be kind of x to y, in two to three year? Gayn Erickson: Candidly, I don't think we have really good numbers on that yet. And we'll be working with that and doing the best we can -- there's not actually anyone forecasting that yet publicly. So obviously, anything we would know about that through non-disclosures with customers and stuff that you have to wait for somebody to talk about it publicly. To us right now, we see it as a rising tide, in an area, we have a great, very fast boat, if you want to call it that. Also, just in general, the physics are such that it makes sense to have to be thinking about stabilization. It makes sense to be doing this at wafer level. So many of the bets that we've made for those folks that have followed us for a number of years, we make these bets to basically anticipate major waves. It's tough to make calls and look for market opportunities that don't exist. But this would be one of them. This would be an example where you can see why people are going towards this. You know, I didn't mention it in my prepared remarks, but one of the things that I was, I guess, just surprised at or I don't know, shocked is the right word. But the folks that really get into the technical details related to why silicon photonics makes sense long term for these inter chip communications or these chip to chip communications in these multi die modules, or in the packaging technology that Intel has talked about publicly, is that, SerDes, serial to deserialize high speed gigabit channels are nearing the end of their physics. So basically, today, you can go get a SerDes channel that's 120 gigabit or something like that, or I think 104, 108 or something like that is sort of the standard that's out there right now. And you can buy that from Xylem, our FPGAs on our tools actually run SerDes channels, okay. High speed digital serial channels, that are running down copper interconnects chip to chip. Now they don't run very far. They might only run a meter or something like that. But they're nearing apparently the physical limitations that an electrical signal and an electron can travel in a copper medium. And what that means is that someone has said that as soon as 200 gigabit or like two generations from now, you will not be able to make an electrical signal go any faster, period. It's at the end of its strut. The whole concept of photonics, which a photon, remember like a light beam, if you remember, for those of us that were in physics, the whole debate about electromagnetic radiation or light, is it a particle or is it a wave. In a particle, a particle has mass and as such can only go so fast, whereas a wave does not have mass. And part of the whole argument is one of the reasons that an electromagnetic radiation or light, or photons can't really have mass is that it can travel faster than the mass can travel. So what that shows up that is all of a sudden, we're testing silicon photonics devices today's, that we're burning them in that are 200, 400, 800 gigabit devices, okay. So you're able to get transmission speeds that just get started at 800 gigabit, are at 100 gigabit. So what me -- just as electrical engineer and kind of in this space, what's exciting is that, as we look out 10, 20 years from now, or five years, or even three years, people like Nvidia and Intel are talking about having chips with integrated silicon photonics on their processors and their GPUs, even a couple of years out. So it's pretty exciting to see what that looks like. And I do know that other companies are making big investments in the testing of it. We've been making investments in the burn-in of it. And we hope that it will play out, and as we get a little bit more clarity we'll be sharing that with you folks. But still, we're just trying to get our arms around it. Hope that helps. Christian Schwab: That helps, Gayn thanks. No other questions. Thank you. Gayn Erickson: Thank you. Operator: And we'll go next to Jon Gruber, Gruber & McBaine Investors. Jon Gruber : Hey, good afternoon. I have two quick financial questions. One, I'm confused why your property, plant equipment which was -- has gone down in 12 months, given the amount of throughput you're putting through it? So you're spending nothing on the factories or what -- why is that -- why has property, plant gone from $700,000 plus to $600,000, which is by any stretch of the imagination? Ken Spink: Yeah, so let me -- Gayn, let me address that. Yeah, we closed the year out, or excuse me the quarter out in November 30, at $661,000 compared to $676,000, like we talked about, even if you compare to the last year of $677,000. So it's remained relatively flat. Keep in mind, we depreciate $100,000, we'll call it in depreciation per quarter. So we're actually adding equipment and we just happened to offset the adds with the amendment of depreciation that's getting recognized. Also a key that we like to say that allows us to scale is we use contract manufacturers. So doing final assembly and test and having the capacity that we have here in our 51,000 square foot facility, it allows us to really grow without having to add capital. So that's a great benefit that we have and a great opportunity we have. Jon Gruber : Now you've gone from 5.6 in Q1 to 9.6 in Q2. You're going to have to go to 15.5 and 21 to see your 50. Even with that you will not need to add any property plant equipment to your facility? Gayn Erickson: Very little. Ken Spink: Very little. Jon Gruber : My next question, Gayn, you want to say something? Gayn Erickson: Oh, I was going to say, I have a couple of engineers that are asking me to buy some really fancy test equipment right now that are listening, but it still won't tap this number. Jon Gruber : All right. Now gross margin went from roughly 41% to 47%, Q1 to Q2. Now your revenue is going to explode in Q3, and then even further in Q4. What kind of gross margin goal do we have here as we get up to these big numbers like over $20 million? I realize your shipping costs have gone up some, but we're talking such huge numbers relative to what we've been. We increased six points in Q2. What's going to happen in Q3 and Q4 in gross margins side? Ken Spink: Gross margins, just to reiterate what I had mentioned in our last call, we expect as we grow to our $50 million year end number to get gross margins up to 50%. So we're at 47% now. We've talked about there being impact for some unanticipated costs. And we still see those costs, even though we call them temporary, still impacting us for at least the next quarter, potentially next, all the way through our fiscal year end. However, I still believe that we expect to show gross margins in each of those quarters approaching 50%. I wouldn't say it's going to be 50% next quarter, but probably Q4. Jon Gruber : Okay, thank you. I got my questions answered. Thank you. Gayn Erickson: Thanks Jon. Ken Spink: Thanks, Jon. Operator: And we'll go next to Dylan Patel of SemiAnalysis. Gayn Erickson: Hey Dylan. Dylan Patel: Hey, thank you. I have two questions. The first one is that SemiAnalysis has tracked seven firms in China investing over $100 million and two hovering close to about the seven, over $1 billion in silicon carbide materials and device manufacturing. And it's basically all greenfield. You talked a lot about the fantastic wins and traction you have in the U.S., Japan and Europe. But what is Aehr doing to penetrate the China silicon carbide burn-in test market given it's potentially going to be just as large as the U.S. or Europe? Gayn Erickson: Okay, well, I'll take that one fairly at a high level. And I actually specifically in prepared comments mentioned customers with a plural as in China. Yeah, there is actually a number of companies in China that are talking about greenfield silicon carbide fabs of which, I guess, I think it's notable, reached out to us, okay. So our kind of marketing and our messaging and our reputation is getting out there. So I know at least one, if not two of them, called us and we had not even heard of them before for what that -- maybe that's scary too. But they're contacting us and talking to us about their capacity, and it's pretty significant. Now we do have systems, we have burn-in systems in China. We actually last quarter announced our first wafer level burn-in or our first box system that was going to be being installed into China in addition to we have a fairly large customer base of packaged fab burn-in systems. And we do have infrastructure and people there and Kevin , because it's particularly difficult to travel in and out of China right now. So we have the ability from a sales perspective, we have ability from applications and support perspective to support folks in China and the company that have been talking to us are actually near where our people are, which actually helps as well. So we're working on it, Dylan. Dylan Patel: That's awesome to hear. My other question is regarding on device liners and DoD illuminators, which will go incredibly pervasive if you're a big believer in the metaverse artificial reality, virtual reality. These devices can use PCSEL lasers and you've told us about burn-in test for those in the past and you've updated us on the burn-in test market for these lasers for 200G, 400G co-package optics. But can you update us on the burn-in test market for sensor applications and potential given how pervasive the native metaverse could be? Gayn Erickson: Okay, so actually, LiDAR, when I think of LiDAR, think of the automotive side of things. The DoD illuminators, I think of what's on, certainly on iPhones and things like that, or kind of consumer type electronics or heads up displays or AV/VR kind of things, right. So we're actually talking with both of those. We've got some activities going on with LiDAR. It's out in time, but I'd say we've got our toes in that right now, with one lead customer. And related DoD illuminators, I mean, actually one of the - our lead customer, our very first customer on the FOX-P system that we've now parlayed into number of others, I think people understand that they were a 10% customer early on, which was Apple. But we do -- we are using that tool in 2D, 3D sensing in mobile applications, a number of them. It's always been an interesting thing for us. And we've kind of -- I'm a pretty optimistic guy. This is an area you'll see a little bit of the cloud over, and that is most of the time the DoD illuminators and the pixel arrays, people are able to deal with what I'll call sampling. They are not doing 100% burn-in and they're not necessarily aging them. Whereas in the communication application and the pixel, they do 100% burn-in. So 100% burn-in and to age it might take 24 or 48 hours. But if you're actually only sampling, and you're not trying to age it, you might do that for several hours, and certainly not 24 hours. But if you're only sampling a few percent, then all of a sudden the market size is not as big. So today, so far, most of that has played out that way. Because the amount of time that the illuminator is actually on, and particularly with facial recognition and security access type points, is a very, very small amount of time. I mean, if it's only on for milliseconds, even if you look at your phone 100 times a day, it's only on for hundreds of milliseconds. So in the entire life, it might only be on for 300 seconds or something. So in reality that isn't even enough to notice that the thing is actually decaying like, but in a pixel array for communications, that's a big problem. So the one thing that people talked about is when you go into gaming and other applications or certainly automotive LiDAR, the decay of that would be a problem, and because it's in continuous use. And so we continue to keep our fingers in that. Some of those deals are fantastic. They've got great margin. They just haven't had the volume to them yet. But we're still involved in those and believe that if some of the applications proved to need capacity, that will be a great vendor already qualified, and certainly have the manufacturing capacity to meet their needs. Hope that helps. Dylan Patel: Thank you so much. Gayn Erickson: Operator, do we have others? Operator: And we will move next to Willard Brown , Otter Creek Investments. Unidentified Analyst: Hi, and a great quarter. You did exactly what you said you would do. Gayn Erickson: Thank you. Unidentified Analyst: I had a question. Out of the $9.6 million in revenues in the quarter, how many customers did you have? Gayn Erickson: We typically aren't giving that but I think it would be fair to say it was quite dominated by one lead customer in silicon carbide just by the announcements that we made, although it probably was made up of total, I mean, you have to get down to services and things like that. But certainly a dozen or more customers. But so that's fair to say that our lead customer in silicon carbide is dominating our revenue right now. Unidentified Analyst: So as we go forward, into the third and fourth quarter and then into fiscal '23 what kind of ideas do you have? I understand this market could explode. But what kind of ideas do you have as the number of customers that you will serve in a given quarter? One of the problems here is concentration. I don't think that's the big problem here because of your technology. But it's something I think about. So if you go forward several quarters, are we looking at more of a dispersed customer base? Gayn Erickson: Yeah, let me let me get to that. I mean, I think it is absolutely fair to point out that no matter how unconcentrated we get we're still concentrated by most methods. My previous company, which was Verigy, it was bought by Advantest for about a $1 billion in 2011. We were doing $600 million, $700 million, $800 million dollars a year. But I'll tell you, every single year, two or three customers accounted for 30%, 40% of the revenue. In the semiconductor world, it's very typical to have a fairly high concentration. If you've got -- if you need 20 customers to get the 90%, you're doing pretty good. The reality is there's more concentration in semiconductor companies than there were, certainly when I started in my career. So we have to build a business model around the fact that we would aspire to be able to have 20 customers make up 90% of our revenue, but most industries, that's a high concentration. But I will not be surprised if we continuously have a 20%, 30% customer, even over the next decade, because even if we have ten customers, it's very typical that one might be ramping more than the others. Now, having said that, from a manufacturing planning perspective, we're actually betting a little bit different than that. And that is seldom do you see, or have I seen where a market is so uniform, and so clear on what the discontinuity and what the ramp is as this. As we saw, in flash memory is one of my experiences where every company was growing, every single company could not supply enough. And so you have to have be able to supply to everybody. That doesn't mean we win everybody, but what I mean by that is, it's not like you're going to see one customer ramp one year, and then the next customer the next. Most of the -- most customers over the next decade are going to have to ramp every single year to keep up with the demand. Unidentified Analyst: Yeah, I had come to that conclusion also. Gayn Erickson: So we're -- so we have -- as we've done deep dives with our customers, we have, in almost every case, at least two suppliers for every critical subsystem. And for the ones that we have single suppliers, we've done some pretty spectacular things to ensure that we have buffers in there. But we are not only activating our second suppliers, but we're ramping both primary and second suppliers like mad right now, because they have to have the bandwidth to be able to react to it. And it's not just total capacity, but also to within reasonable short lead times, because the reality is we think that companies are going to get to a point where it's like, at some point someone, I'm sure will have something that will compete with us, right? And if they do, we want to be able to compete based upon being the industry experts, the industry standard. We can list all the companies that are already counting on us, and also be the people that can supply in short times. But we're going to have concentration. Don't bet against that. Unidentified Analyst: So here's my second question and my last question, but it's a really tough one. And it's really tough because of what appears to be a mind boggling expansion of the products that you supply. And that is the total addressable market. I've tried to do this. I've gone through the number of wafers that are going to be needed. And then okay, how many Aehr systems do we throw in there? I don't know how to do the math, basically what the problem is. And so how do I look at that? Gayn Erickson: Well, we've walked through the math several different ways. And let me do it a little bit briefly, without filling in the numbers. Let me just show you how to calculate. And then I'll give you a rule of thumb that's been working for us. Okay, so figure out how many cars are going to be built, and how many engines there's going to be, and I guarantee it'll be at least one engine in it, right. A year and a half ago, people were assuming that every car had one engine. And most people were saying there'll be at least 30 million cars a year built by the end of the decade. Every car engine needs about 50 devices. It's actually 48 plus some onboard stuff. And a wafer today for those types of devices contest about, have about 500 devices on it for 10 engines. So you just go through the math and say, okay, if you need 30 million cars, okay, and a wafer can give you 10 of those cars per wafer, if there's one engine on it. And then you start looking at burn-in times and test times and, and there have been people that have talked, it ranges from six hours or 12 hours or 24 hours or 48 hours that we've talked about, people would hope to get to 24 hours right now. And then you can give some estimates. What we ended up doing is there was a couple of people that had done this, and I think it's still very conservative rule of thumb, and that is for every million cars that are shipped, you're going to need at least eight of our systems in the world, either from us or somebody else, and keep in mind these are 18 wafer systems. . Gayn Erickson: Yeah something on the order of a system with all the WaferPaks and everything else being maybe $4 million apiece, okay, you need about $32 million worth and that's a way of looking at it. And it still holds up under pressure. And it's easy to say that's conservative, but it's still a big number. Unidentified Analyst: I appreciate. Very good job, gentlemen. Gayn Erickson: Okay, thank you. Operator, maybe one or two maybe quicker. Is there other folks? Operator: And we have a question from Mark . Unidentified Analyst: Okay. Hey, Gayn, thanks for taking the call. You talked about the sampling going on at the potential new customer. Is that the typical process that we should be looking for, as you go down the path? You've been great about giving us visibility into how your pipeline looks publicly, and, and things of that nature. What if you could just briefly walk us through what the process is, getting to the point. They sample. Do they have to do internal wrangling, qualification negotiation with you? What's the process that leads to the finish line? Thanks. Gayn Erickson: Generally speaking, and that should be typically of our test equipment, burn-in systems in our history. Our process from the time you first talk to somebody until they might place a first order is probably minimum nine months. I mean, one, we used one example where the silicon carbide customer, we talked to him in February, they put -- we were on wafer doing benchmarks with them in the summer. They were shipping wafers that we were building for them, to sample with their customers. And we actually installed the system in November now -- or shipped it to them in November. And now to be fair, and not to advertise that we do this very often or at all anymore, I think they gave us the order a couple of days before we shipped it to. That's pretty rare. But nevertheless, that's how it played out. And that, I think, would be fair to say that was moving pretty quick. We had a discussion going on with another silicon carbide customer for over a year, and they're still taking data. So it kind of can depend. This is not typically -- this isn't a 30 day process. And historically, what people will do to whenever they start, they'll bring in a system, and then they'll start doing qualifications of it with both internally and with their customers. And then they will ramp. So I think it's also reasonable to imagine that the time between the first system and the next system, often times is a minimum of a quarter or two as well. So there is a length to this. And I know that that can be frustrating, it is to me sometimes. But you also don't want to drop the ball nor do you want to guess wrong. You know, this is -- there's -- it's interesting, I said it in my prepared remarks. And I mean it. I mean, I've had conversations with executive management for siliAEHR Ratings Summary
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Aehr Test Systems Reports Q1 Beat, But Outlook Unchanged, Shares Plunge 14%
Aehr Test Systems (NASDAQ:AEHR) saw its stock price drop by over 14% intro-day today following the release of its Q1/24 results, despite beating expectations for the quarter. The company reported Q1 EPS of $0.18, surpassing the Street estimate of $0.16. They also achieved a 93% year-over-year revenue growth, reaching $20.6 million, compared to the Street estimate of $19.23 million.
CEO Gayn Erickson expressed satisfaction with the Q1 performance, calling it the strongest first quarter in the company's history, even though traditionally it has been their weakest season. Erickson stated that they are off to a strong start for the fiscal year and reaffirmed their expectation to achieve at least a 50% year-over-year revenue growth and over 90% profit growth for the full fiscal year.
Despite the beat, the company kept its previous full-year guidance unchanged, aiming for total revenue of at least $100 million (compared to a Street estimate of $102.93 million).
