Last week, Aehr Test Systems (AEHR 1.50%), which makes semiconductor test and reliability qualification equipment, released its fiscal second-quarter 2024 report. Investors disliked the report, sending shares tumbling 16.8% on the following day.
The results for the quarter ended on Nov. 30, 2023, did not spark the sell-off. Indeed, they were strong, driven heavily by demand for the company's wafer-level burn-in equipment from manufacturers of silicon carbide (SiC) semiconductors for use in electric vehicles (EVs). Revenue grew 45% year over year to $21.4 million, beating Wall Street's expectation of $20.9 million. Adjusted earnings per share (EPS) jumped 44% to $0.23, topping the analyst consensus estimate of $0.19.
The catalyst for the stock sell-off was management's lowering of its full-year guidance for fiscal 2024, which ends on May 31. The company now expects annual revenue from $75 million to $85 million, which represents a growth rate of 15% to 30% year over year. Its prior outlook was revenue of at least $100 million. It also projects net income on the basis of generally accepted accounting principles (GAAP) of between 20% and 25% of revenue. Its prior outlook for this metric was at least $28 million.
Earnings releases tell only part of the story. Below are two key topics management discussed in depth on Aehr's Q2 earnings call that investors should know about.
1. Annual guidance cut due to slowing of EV market growth rate
From CEO Gayn Erickson's remarks:
In just the last 60 days we've 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 actually decreasing, only a slowing of the growth rate. And we've seen delays in both current customer and new customer purchase orders for production ramps to meet the electric vehicle demand, compared to what we were expecting.
First, context about the electric vehicle market: While EV sales growth continues to be strong, at least in the United States and many other developed countries, it has recently been slowing. In the fourth quarter of 2023, U.S. EV sales increased 40% year over year, according to Kelley Blue Book estimates. In the prior quarter, this metric was 49% year over year, and in the year-ago quarter, it was 52%.
EV sales growth rates have been slowing in large part for the same reason that's been hurting worldwide auto sales in general -- high interest rates, which make the total cost of buying a vehicle more expensive for most buyers.
Now to the CEO's quote: The key word in the quote is "timing" -- as in the timing of orders. The company has not had orders canceled, but simply pushed back, and anticipates that further pushbacks could occur if the slowdown in the EV market growth rate persists.
As one example, Erickson said that a "very large customer that we've been engaged with on a significant automotive benchmark" has changed the timing of taking possession of multiple Aehr production systems. Management believes that "most likely" these orders will now be booked in fiscal 2025, which begins in June, rather than at the end of fiscal 2024, as previously expected.
According to Aehr's management, nothing has changed with respect to the company's robust long-term growth potential. Naturally, the company's financials will be impacted over the short term when its largest end market's growth rate is slowing largely due to macroeconomic factors, such as high interest rates.
2. Progress expanding customer base
As background, Aehr's extremely heavy customer concentration significantly increases the risk level of its stock. In fiscal 2023, one customer (widely known to be ON Semiconductor) accounted for a whopping 79% of its total revenue. And that number increased to 88% in the first quarter of fiscal 2024. (Given the company's small size, quarterly numbers will be lumpy, so it's best to consider annual ones.)
Here's what Erickson had to say on this topic on the Q2 earnings call:
We've made significant progress in expanding our customer base for silicon carbide, or SiC, and gallium nitride, or GaN, wafer-level burn-in for a wide variety of applications. We currently have a total of seven customers [emphasis mine] purchasing our solutions for SiC and GaN devices and are also actively engaged with more than two dozen SiC and GaN companies to address their needs for wafer-level test and burn-in of these devices. Importantly, 10 of these additional companies have already engaged with Aehr for on-wafer benchmarks.
In the prior quarter, Aehr had a total of six customers, so it picked up one new customer in the fiscal second quarter. Notably, this new customer is its first one that will use Aehr's equipment for gallium nitride devices. So, beyond just expanding its customer base, the company also expanded its markets.
Moreover, management believes it will have more than 12 silicon carbide and gallium nitride customers by the end of calendar year 2024.
It will likely take a while for Aehr's customer concentration risk to come down from its sky-high level to a more acceptable level for many investors, but things are moving in the right direction.
In summary, Aehr Test Systems stock remains a high-risk, potentially high-reward investment. It's worth at least watching if you're a long-term investor with a high risk tolerance.
