AEHR and revenue recognition

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This is a follow-up to some discussion on a different AEHR thread regarding revenue recognition. I mentioned there that I had some questions I would ask AEHR’s investor relations person – below are my questions and his responses.

The executive summary is that we on the board are likely over-thinking how volatile and uncertain their sales and revenue are.

Question: It is common in many industries (note: I used food and beverage as an example) that for new equipment or processing lines, the contracts are generally structured so that the customer pays 1/3 upon execution of the contract, 1/3 after factory acceptance testing (at the vendor) and delivery of the machine, and 1/3 after commissioning is complete. Does AEHR structure its contracts similarly? If not, how are they done?

AEHR IR: Aehr’s general term has been 30% down, a large percentage on delivery, and the remaining small percentage on acceptance.

Q: Regarding revenue recognition in financial statements, your management has stated that it takes a very conservative approach, and only recognizes revenue after the customer has fully attested that the machine is performing as expected.

AEHR IR: This is only true for first of its kind new products only. Once the customer qualifies and accepts the first unit of the new product, revenue of any subsequent sale of this new product to any customers is recognized based on shipment, not acceptance.

Q: What is the typical lag time between commissioning being complete, and the customer ‘accepting’ the product?

AEHR IR: It depends on the customers and the products. What we have seen is usually between 1-3 months after shipment.

Q: Have there been any instances (and how many) of machines not being accepted? If so, how does AEHR deal with those cases?

AEHR IR: No, not aware of any.

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@coldmountain, Thanks for asking these questions and posting the answers from Aehr’s IR. This post clarifies Aehr’s revenue recognition policy and significantly improves my understanding of how Aehr actually receives and records payment for their most expensive products.

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I had been meaning to add to the previous thread that revenue recognition is a highly technical accounting subject. It actually (mostly) has nothing to do with the receiving of cash collections.

Normally, when you are delivering a piece of capital equipment, it is hard to take revenue until you have satisfied all the customer obligations associated with that product delivery. So for example, if you have an obligation to install the equipment and run an acceptance test, normally you would not be able to take that revenue until that is completed. If your obligations stop at shipment, then you can take revenue on shipment.

While AEHR may have some ability to select the revenue recognition method, in my experience, it is limited. Their auditors are going to want to use FASB standards which dictate all this stuff. The best AEHR can do is structure their customer contracts to maximize revenue recognition (but there is often a tradeoff around customer friendliness).

Caveat: I am not an accountant, but I did develop and deliver capital equipment products for a public company in a previous life!

Thanks,
Rob

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