Aehr Q2 2024 Earnings

Investment Analysis Clubs Saul’s Investing Discussions
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I sold Aehr a few months back but was curious to see what happened. I’m fine staying on the sidelines - too small of a company, too much uncertainty, and the nail in the coffin for me was the slowdown in EV production by many of the major automakers. Stock down 19% AH.

Looks like a fairly decent quarter at quick glance, main issue was the FY24 forecast was reduced from “at least 100M” to be between $75 million and $85 million, and GAAP net income of between 20% and 25% of revenue. The reason for the downward revision was slowdown in EV’s.

"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. For clarity, we do not see the silicon carbide market decreasing, only a temporary slowing of the growth rate. We are also experiencing the impact of shifts in our customers’ product mix, which specifically includes an increase in WaferPakTM full wafer contactors from our lead silicon carbide customer. 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.

"Given the latest forecasts from our customers and the uncertainty on the timing of their orders, we believe it makes sense to take a more conservative approach to our fiscal year forecast and have reduced our growth estimates for fiscal 2024 revenue. We are reducing our revenue expectations of at least $100 million this fiscal year by 15% to 25% to a range of $75 million to $85 million dollars. This is still a growth rate of 15% to 30% year over year."

Fiscal Second Quarter Financial Results:

  • Net revenue was $21.4 million, up 45% from $14.8 million in the second quarter of fiscal 2023.
  • GAAP net income was $6.1 million, or $0.20 per diluted share, up 63% from GAAP net income of $3.7 million, or $0.13 per diluted share, in the second quarter of fiscal 2023.
  • Non-GAAP net income, which excludes the impact of stock-based compensation, was $6.7 million, or $0.23 per diluted share, up 49% compared to non-GAAP net income of $4.5 million, or $0.16 per diluted share, in the second quarter of fiscal 2023.
  • Bookings were $2.2 million for the quarter.
  • Backlog as of November 30, 2023, was $3.0 million.
  • Total cash and cash equivalents as of November 30, 2023 were $50.5 million, compared to $51.0 million at August 31, 2023.

Fiscal First Six Months Financial Results:

  • Net revenue was $42.1 million, up 65% from $25.5 million in the first six months of fiscal 2023.
  • GAAP net income was $10.8 million, or $0.36 per diluted share, up 149% compared to GAAP net income of $4.3 million, or $0.15 per diluted share, in the first six months of fiscal 2023.
  • Non-GAAP net income was $11.9 million, or $0.40 per diluted share, which excludes the impact of stock-based compensation, up 105% compared to non-GAAP net income of $5.8 million, or $0.20 per diluted share, in the first six months of fiscal 2023.
  • Cash provided by operations was $3.4 million for the first six months of fiscal 2024.

Full Press Release:

Aehr Reports Strong Revenue and Earnings Growth for the Second Quarter and First Six Months of Fiscal 2024 | Seeking Alpha

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Painful, but I got out. I have every intention of getting back in again–maybe 6 months out. It’s still an awesome opportunity and everything that isn’t EVs is growing. They have patented technology that is in demand.

But I bought my shares way too high and it will be dead money for some time. Better to put the fraction I have left to better use for awhile and then buy back in at a lower cost down the road.

But…ouch.

I was expecting a meh quarter and strong guide. Instead, they beat the quarter on top and bottom and significantly cut the guide due to the slowing EV market. I see nothing that was their fault.

What we saw last quarter was that their earnings were predictive of the earnings of EV OEM’s who reported later. I expect this is a harbinger of another difficult quarter for EV makers–and likely difficult guides for them as well. When I think about how far ahead of EV production you need Aehr’s systems, the EV makers seem to be anticipating a slow go of it for awhile.

JabbokRiver

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I did the same, selling my shares around $18.35 after hours. I feel your pain - I sold for a 57% loss. Already getting a head start to tax loss harvesting this year :stuck_out_tongue:

I held on this quarter thinking it was de-risked and that we might actually see a solid pop if earnings went well considering the stock was cut in half since the Q1 report. I figured most the bad news was ‘priced in’. Another swing and miss on my part.

I considered ever so briefly to hold because of the low valuation but that decision has never worked out well for me. I calculate the forward PE to be around ~25, and it became a very easy decision to move on immediately when I realized that’s not too far off what Nvidia is trading at.

So what would I rather own, a company that is having to slash its guidance due to slowing demand or one who can’t keep up with demand? Like you, I decided there are much better places for this money and moved on.

To better times (and earning reports) ahead!

Rex

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I remember going in this direction when S reported a few quarters ago. I am going to stand pat as this story seems much better than S. I see this as a quarterly hiccup and when the acceleration begins, the price will be higher than it is now. Still trying to figure out a process rather than a hunch.

Vince

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I agree with you Vince, this is a cyclical business. So you have to watch where in the cycle we are. Automobile sales are going down, but it is to late to sell now. In about 6 months automobile sales should start climbing. MBLY claimed they had to clear up their inventory because all their customers ordered to much. This happens a lot, Ie NVDA during the crypto craze. But it will come through this because the company basically has no debt. This quarter, while Revenue came down alarmingly, it still had earnings but FCF was negative. This will be a rough couple of quarters but in 2 quarters I think they will start climbing again. It could get down to 10 to 12 dollars at the trough though. This isn’t the kind of company you want to buy and forget but buy let it go higher sell most and then wait for the next drop and buy again.

Edit: I should rephrase that if you have a small position it might be to late to sell, but if you have a large position for your portfolio you could see a much larger drop.

Andy

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I think it depends where you bought at. I had shares at $47, and lowest shares were $35+. Not going to see that for quite some time. Sounds like something similar for @MajorFool20 .

If I got out like many here did after last quarter, I might consider getting back in at these prices. But it’s not going to get better this quarter barring some unforeseen announcement. And it would basically have to triple just to get me back to square.

It could be a repeat of last quarter when it dropped on earnings and then dropped again every time an EV manufacturer said they had a slowdown. If past is prologue, that will happen again as the rest of the earnings season gets underway. They said they had been seeing the slowdown in EVs for the past 60 days.

I guess the good news is that last year pretty much all of my companies were like this. Bought at the highs in 2021 and then everything tanked. Now I’m back in some of those names at far better prices and it’s looking much better overall.

But I have my tax deduction baked in for basically the rest of my life!

JR

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l think it depends where you bought at….

Why? That is anchoring. This should not matter at all when making decisions today, except, perhaps, for tax harvesting reasons. All that should matter is if it is a good investment from today moving forward.

… If I got out like many here did after last quarter, I might consider getting back in at these prices….

If this is true, then you would hold at today’s prices as well. When you woke up this morning, you essentially got in at today’s price.

First, I think the investment thesis is still intact. They have a patented process that their customers need and a strong relationship with each customer due to customized product integration. Not that they need it when so small, but the TAM is going to accelerate for the foreseeable future. Without the slowdown effect, I expect revenue growth north of 50% year over year; should not be hard, again, due to the company size. So, with this general confidence in the company in mind, the only things I’m really thinking about right now are:

  • this is an extremely small company which will make it extremely volatile. I have low confidence I can time the market here.
  • is the current uncertainty priced in already?
  • the size of the position in my portfolio - exposure and if I have a better place for the money.

The price has really come down a lot and my position is not very large, especially after the drop in value. I believe the slowdown is temporary. I can wait a couple of quarters with a smallish position. I don’t want to try to time the market because this company is so small that any news could send it up at any time. I will probably hold on to what I have for now. If it does continue to drop, and I feel the news is priced in, I will consider purchasing a ”trading position”. Of course, I could change my mind too.

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@RafesUserName What I see here are two (or more) conflicting ideas about when selling is appropriate. Put succinctly, is it price anchoring or opportunity cost?

My investing journey is short–just three years long. And the first advice drilled into me came from TMF–buy a good company regardless of price and hold it forever. Valuation doesn’t matter. I did just that. Sadly for me, I followed that advice in early 2021.

When I found Saul’s board, I heard a new twist–even before things got really ugly in the market. It’s right there in the Knowledge Base: “Opportunity cost.” Sure, the great company I bought may one day get back to the price I paid for it. And if my thesis isn’t broken, why not just wait it out?

The answer I found here? Get out because whatever the value still is in that way underwater company could sit there for a year or more earning nothing, while moving it to something that is growing could earn that money back much more quickly. Saul reiterated that earlier today.

The thing I faced in late 2021 and in most of 2022 was that the dilemma applied to every single company I owned because I had bought at such high prices. I left them there for quite some time as companies across the board dropped like stones and there seemed to be only opportunities to lose rather than to gain value, no matter where I put the money.

In 2023, I began finding my stride and trying to sort out those conflicting positions and how to build my own confidence in a company. At times here it began to feel like people were trading every quarter, which made me to prone to panic selling at earnings time. But I could also see the real opportunity cost argument.

With AEHR last night, the opportunity cost won out. It is a great company. My thesis was not broken. But I’ve followed them closely and think it will be not a quarter or two, but a year or two, before that S-curve really starts to ramp, at least on the EV side.

I will mostly likely take a small position once the wash sale rule times out to make sure I don’t miss a sudden jump in their other offerings. After all, AI went “boom” overnight, just as EVs showed their boom had been greatly exaggerated, at least in its timing, almost as quickly.

Maybe I’m totally wrong. I have not yet experienced a “normal” market and thus the things I am learning may be totally skewed. But I had an almost 8% position that was down over 50% and opted to take what I could get of that for other purposes.

JR

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That may just be a healthy self-preservation instinct. But a cold and heartless analysis suggests you sold because the stock was down rather than because of what the company did – otherwise you wouldn’t be talking about buying it back.

While I agree with Saul’s lesson that conviction should have started to fall when they reported last quarter (90 days ago), I truly think our big mistake with this company was having any conviction in the first place. You say it’s a “great company.” Why? I mean maybe it’s a great place to work, maybe they’re doing something valuable, maybe they have a product that will be more and more needed for a period of some years…but are SiC chips great? Is testing them great? I would say this is a good business, but a small niche business, and it always will be – even if they have success in verticals beyond SiC. I don’t think this is the type of company we look for here. We look for companies gaining customers by the droves, and where customers subscribe indefinitely, providing a growing stream of recurring revenue. I wish I’d stuck to my guns about that, but I did do one thing sorta right: I never made it a large position. I still lost money as it fell when they reported last quarter, and as it fell more between last quarter and this quarter, and as it’s falling more now. But I wish I never would have bought even a small position. I’ve now sold, and I will not be buying back.

I think even if you disagree with what I have written above and still think this is a company worth owning, I’d very much encourage keeping the position small, as I think self-preservation is always going to make it hard to hold in the time where things suck most, and therefore probably the time to buy (if there is one).

Bear

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Bear, I’m totally with you. My conviction was fundemtally wrong, in my case based on my confidence in the CEO and his optimism and guidance. This company has absolutely no business giving any guidance whatsoever. They clearly have zero clarity into their sales for next month, less so into next quarter or a year.

I’ve been following these guys for a while and they have an interesting view on AEHR’s earnings:

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After reading through this earnings report there are a number of things that stand out as bizarre to me, with Gayn Erickson making some unhinged comments.

  1. In a very long Q&A session, there is not a single question posed to the CFO Chris Siu. Literally every question is targeted to Gayn. So none of the analysts had any questions for the CFO after they are revising guidance significantly down?

  2. They refuse to mention Onsemi (ON) by name even though it’s public knowledge this is their 80%+ customer

  3. Gayn says in fiscal '25 only two quarters away that he thinks Onsemi will no longer be their largest customer after other customers ramp up! This prediction here alone means they’d be doubling or tripling their revenue easily in the next few quarters! He even says “customers” plural, implying there will be multiple companies doing revenue larger then Onsemi.

  4. He revealed some attack on Aehr by a hedge fund who told a customer they are paying too much. And he says I “wasn’t sure” if I was going to reveal this publicly or not. How the heck is he deciding on the earnings call he’s just randomly going to reveal this information?! Shouldn’t it be decided in advance whether this is public information or not?

Here’s what got said about Onsemi (the unspoken of company) no longer being the biggest customer in less than a year and half,

Christian Schwab - Analyst
Just then maybe another way thinking about, as we exit this year and go into fiscal year '25, would you assume that your lead significant, much greater than 10% customer, can grow or sustain itself at a material run rate, $50 million, $60 million, $80 million? How should we be thinking about, I understand you don’t want to make a proclamation about what, their aggregate demand has, but they’ve made comments about it. So, given their public comments, I guess, let’s start with that. How would you anticipate that customer materiality in fiscal year '25?

Gayn Erickson - Executive
I mean, we – I believe that they will still be material. I don’t know that they will be the dominant customer at our times, but they may 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, if silicon carbide is growing at, say, 40% a year top-line revenue, can we grow faster than that?

I think there’s 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’s opportunities.The wild card of this would be the mix. So as a customer, if they have purchased WaferPaks from us, and they’re shipping, $100 million worth of revenue a year to a customer, the next year if the devices stay the same, they wouldn’t buy any more WaferPaks, and certainly not systems, to meet that $100 million. If that customer or our customer’s customer grows from $100 to $200, they would buy more systems and more WaferPaks. But if their customer mix or the product mix changes, they might displace all of those WaferPaks, so we would get revenue even though their revenue isn’t growing.

That’s a very important part of, obviously, our business for our shareholders, but also to our customers that we can continue to generate revenue and have the dollars to spend on R&D and applications and support and new enhancements for their needs, even if they’re not necessarily buying new systems, 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 will be other customers most likely that will be bigger than them next year.

Next we have this part about the hedge fund attacking Aehr and Gayn is not sure if he should reveal this publicly,

So we’ve been able to hold our pricing, which as a vendor, I appreciate a lot. And so, candidly, our customers raised their prices on us because we buy their components.But we’ve been able to hold our pricing, even in a time when we’re extra competitive, and we’ve not been gouging our customers. And I think that’s really important. By the way, I wasn’t sure, if I was going to do this. I’m going to throw this out publicly out here.

We are aware of a scenario where an investor approached one of our customers and had some conversation related to, we believe it was a hedge fund that had our short our stock. We have like a 20% short position. Approached one of our customers and was complaining to them about how much money we’re making. They clearly had a vested interest to try and get the customer to try and negotiate our prices down. And I think that’s garbage, but it’s not against the law.But I’m publicly pointing that out, out there.

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I definitely will not invest in Aehr again in the future. This management team looks so amateur. I wouldn’t trust them with a dime of my money. The lack of preparation for the call and the lack of insight into their customer base is truly embarrassing.

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I agree the thing about sharing what some hedge fund said was weird and amateur. Erickson is still the CEO of a micro cap company and still talks with analysts on the calls as if they’re buddies talking shop at the club. Since he goes way out of his way to not cheat or gouge his customers, I can see why that charge stung. But he should have kept that to share with friends and colleagues.

But on the visibility into what customers are doing, it’s worth remembering that AEHR is at least one tier removed from the customers who are actually generating the revenue.

Onsemi is not going to be ordering more testing equipment if EV manufacturers are not ordering more chips than ON can test with the equipment they already have. So AEHR has to rely on the chip and module manufacturers to pass accurate information about their own visibility into the their own customers up the chain to AEHR.

AEHR does talk to some of those end-users directly. But a large one of those is Tesla, which likes to overpromise and underdeliver. Hertz is in the news today because they chose to believe Tesla’s hype.

Several months ago I called Aehr’s IR. We were (on this board) having a debate at the time about whether Onsemi’s business with Aehr was basically a pass-through to Tesla. Tinker made that claim; and I wanted to ask them about it, since if Aehr’s 80% customer was, in the end, Tesla, that was a level of risk I was uncomfortable with. Gayn Erickson is as honest as the day is long. Musk, imo, is…not.

So, I called. After getting the guy’s attention by saying we were having a debate on a thread that currently had 12k views, I described the claim that Onsemi’s business was basically a pass-through to Tesla, the guy said, “That’s not wrong.”

Not what I wanted to hear, but the guy kept giving me information so I followed up. “So tell me,” I said, “If Tesla went belly up tomorrow, would that have a material impact on Aehr’s bottom line?” He paused and thought for a moment. Then, with a bit of hesitancy, he said, “No, I don’t really think so. We think long term, but other areas are beginning to ramp up.”

That squares with the information on the call that Onsemi’s revenue percentage will begin to even out, and what they have been saying for as long as I’ve been listening: There are other things on the horizon. Of course some of that other business could also come from Onsemi, in addition to whatever smaller amount continues to come from Tesla.

I also just went to Glassdoor to see how management at Onsemi was rated. Not terrible, but below 70%. And the top comment, which gave the company (but not the CEO) a 5-star rating, had this to say about top management at Onsemi,

Cons

Lack of communication and understanding in higher level management leading to frustration of lower level workers.

Advice to Management

Reaccess and come up with new approach for understanding what’s actually occurring in your section. If you don’t know how your section operates fully you have no place being a part of it because you won’t be able to properly advise and assist when help is truly needed.

In the summary of all reviews for Onsemi (over 1,500) one of the top listed “cons” was “Upper management disconnected from the work that goes on.”

So, in the end, getting good-faith estimates from both their direct and indirect largest customer, means trusting the estimates of Onsemi and Tesla. Employees report that upper management at Onsemi is disconnected and…well, I can’t use words acceptable to my profession to talk about Tesla’s CEO.

On top of that unreliability in forecasting from your chief source(s) of revenue, you have the long lead times to manufacture equipment. That, too, has been on every call–how much inventory Aehr has and how quickly they can ship. And their customers have their own long lead times from when the equipment is received, installed, and integrated into their chip manufacturing process. Even for reliable partners, forecasting that far out is hard.

I totally get why that level of uncertainty and complexity would be unappealing to those on this board. It’s way harder than looking to see how many cans of Celsius are in the corner store. And I agree that Erickson needs to be as cautious with off-the-cuff responses on calls as he is in not naming their customers. I sold completely out because I think the ramp to other things will take a bit and would have taken years to get back to the price I paid. But Erickson’s chief failure in my book is being too trusting of his largest end-user’s estimates.

JabbokRiver

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We have to learn from our mistakes and learn as a community imho.

I therefore feel I have to go back to the big debate last quarter in which some posters took issue with people interpreting the CEO’s comments as begging for orders.

That single matter is crucial, I believe, and some got it right, some didn’t.

Seems the CEO was indeed begging for orders last quarter, and his customers didn’t oblige. Some people vehemently disagreed, and that interpretation of the CEO’s words were therefore clearly incorrect. The learning point here imo is to critically listen to management on ER calls and allow for the possibility that your interpretation of nuances could be wrong, and possibly then erring on the side of caution.

I also want to point out that they are already halfway through this quarter and they have only announced a single order of a new test system.

If they don’t get those orders in very, very soon, their revenue will drop off a cliff next quarter-it may actually already be too late to get orders in and then fulfill them in time to generate revenue now (remember they only had 3m of backlog end Nov).

They may very well have to lower guidance further next quarter.

Lastly: AEHR has a pretty awesome glassdoor rating I think and lots of people love the CEO. Further learning point is that that doesn’t necessarily translate into good stock returns. In fact I don’t know if it has any correlation at all.

-wsm

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This has always been true with Semiconductor Equipment industry. It’s either feast or famine and it can go from “up-and-to-the-right” to “cancel everything”.

About the only way to get around this for Aehr is to have a LTA with their customers that states they will take x-amount over the next year, non-cancelable, and it continues to a forecast that’s updated monthly. This smooths things out and requires folks like ON to manage their business accordingly and smooth things out. If not, they will go from “full-on” to “full-off” at the first hint of a slowdown. And this will punish ON, because when they suddenly need to go “Full-on” again, they will be punished by paying expedite fees, overtime etc to get their needed machines. This sort of LTAs typically require dominant market command, where the supplier’s leverage is such that they just “can do it”.

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Hi WSM,
Well at the end of 2020 they had 71 total employees, at the end of 2021 they had 79, and at the end of 2022 they had 91. Not sure if that qualifies as “lots” :grinning:, but it sure makes clear what a tiny company Aehr is, with less than 100 employees.
Saul

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