AEHR Test Systems - AEHR
Some companies just never seem to learn their lessons.
Sometimes companies just can’t help themselves. Despite barely clearing an already twice-lowered bar, for some reason they feel compelled to slap themselves on the back and expect to hear the crowds roar with adulation.
Let’s use AEHR as an example, and let’s take a look chronologically rather than simply the reason for today’s stock move, which is yesterday’s earnings announcement.
Let’s start by going back a year ago during their Q4 2023 earnings release when the company announced that revenues for FY 2024 would be “at least $100M.” Despite numerous cautionary signposts, the company would maintain that guidance until January 2024.
They announced Q2 revenues on January 9th, when they lowered the bar for FY 2024 revenues down to $75M-$85M from at least $100M. That was the quarter they gave an absolutely disastrous set of bookings and backlog numbers and opted to stop disclosing their “effective backlog” number since it was likely the same as their normal backlog.
That turned out to be the sign that things were about to get really ugly.
During their Q3 announcement, after announcing revenues of only $7.6M which were down over 55% from the same period in 2023, they lowered the bar once again for FY 2024 revenues down to “for total revenue of greater than $65M” for the year along with net income of $11M or more. They once again failed to disclose an “effective backlog” number during this earnings release.
If there is such a thing as “kitchen sink” quarterly guidance for these folks, this quarter would likely have been that quarter. They had $20M in backlog at the end of Q3, all of which they were expecting to ship in Q4, which should have placed FY 2024 revenues in the $69M range. Dropping guidance down to $65M was a sign of conservatism, if not outright caution, that bad stuff can still happen.
That brings us up to the present.
On July 9th, a week before earnings were due, the company pre-announced FY 2024 and Q4 revenues of $66.2M and $16.6M, respectively, slightly higher than what they had most recently promised, but far below where they had originally been guiding. Net income was slated to come in at $33.1M, far higher than originally planned, but $20.8M is due to a tax valuation adjustment rather than anything one can consider operational. If you take that part away, you are left with $12.3M, which is once-again slightly higher than what they had most recently forecast.
So following one disappointment and lowered guidance with another disappointment and lowered guidance, what do we get from the company?
“Our full-year revenue and net income results exceeded our previously provided guidance of at least $65 million in revenue and $11 million in GAAP net income and surpassed analyst consensus”
Exceeded? Give me a break. Surpassed analyst consensus? They beat a twice-lowered bar.
And yet what does the stock do? Rises $3 on the news. Relief rally? The bottom is in? They didn’t lower guidance once again? Who knows.
Now along comes yesterday, July 16th, and the company formalizes their pre-announcement and announces FY 2024 Q4 revenues of $16.6M, down from $22.3M in FY 2023 Q4, but inline with what they announced in their pre-announcement a few days earlier.
Once again, we get the same line from the company.
“Our full-year revenue and net income results exceeded our previously provided guidance and surpassed analyst consensus”
What does the stock do? Up $4 currently to $21. Why? Apparently, people are pleased with their guidance estimate for their FY 2025 (and mentioning NVDA on their conference call likely doesn’t hurt either).
“Aehr expects total revenue of at least $70 million and net profit before taxes of at least 10% of revenue”
For those paying attention, 10% of net revenue would be net income of $7M, which happens to be down almost 50% from their adjusted, non-tax-benefit net income number. Last year they were promising net income margins closer to 30% on their revenue projection of “at least $100M.”
“GAAP net income of at least $28 million”
So now we are getting revenues up maybe 8% year over year and net income down almost 50% year over year, and that’s cause for celebration. And to top it all off, they will now start paying taxes.
Ding, Dong, the bottom is in!!!
But is all of that $70M coming from actual demand for their tools?
No. They are also making an acquisition.
“the Company will acquire Incal for an aggregate purchase price of $21.0 million”
And how much did Incal do in revenues? They didn’t mention in the press release, but they were asked (kudos to the analyst who is actually doing his job here) on the conference call.
“And they did about $12 million over the last 12 months, and so, plus or minus a month or 2, even at that same run rate, it's plus or minus $1 million or $2 million or something like that. Candidly, we're taking a pretty cautious stance.”
So Incal is doing about $1M per month, the acquisition is going to take a couple of months to close, and we’re a month and a half into FY 2025, so let’s just say $8M of that $70M is going to be due to Incal and not to AEHR. Just to be conservative, as he says, or perhaps cautious, as I say.
(Why cautious? Despite the glorious wish-list of potential customers, current customers, and new relationships and introductions about to be made (you know, that buzzword “synergy” everyone likes to use), there is only 1 reason a so-called profitable technology tools company doing $12M in annualized revenues would be willing to sell themselves for under 2x revenues rather than the 10x or more revenue multiple everybody else (including AEHR) is able to command. Everyone else may be thinking “what a great deal!!!!” while I’m thinking “what’s wrong with this thing?” If selling themselves to AEHR at under 2x revenues after what was presumably some sort of an auction they conducted was the best deal they could manage, then something is likely wrong. This is a silicon valley startup we’re talking about, not the neighborhood pawn shop.)
So in reality, AEHR is expecting FY 2025 revenues to be LOWER than FY 2024 revenues for their main tools. They’re telling you in the press release that business still sucks, but they’re hoping that by the end of this fiscal year (yeah, I know, they said the same thing before) that business will be really good and the EV slump will be over once and for all time and new markets are just waiting for our solutions. Here is the quote.
“We remain actively engaged with a significant number of new silicon carbide device and module suppliers and seek to meet their anticipated capacity coming online beginning in 2025. We are also seeing growing demand for silicon carbide devices beyond the EV market, such as solar, data center, and other industrial applications for power conversion. We believe we are well positioned to continue to grow our business in silicon carbide, and we expect to receive first orders from a significant number of additional silicon carbide customers by the end of this fiscal year.”
(I am responsible for the highlighting.)
Or maybe this quote from the conference call.
“We expect to add a significant number of silicon carbide customers both this fiscal year and the next fiscal year as silicon carbide ramps in the second half of 2025 and into 2026.”
Second half of 2025 would be part of AEHR’s FY 2026, but let’s not quibble.
Remember those 5 or 6 customers that they had been wooing for the last year or two? They bragged about it on every earnings release and call. Those customers that have been on the brink of handing over some large and significant order sizes? Well, on the conference call, they increased that number to a couple dozen. No kidding.
How about proving yourselves indispensable to a second customer first before you go out and triple your adjusted customer base?
Since at the start of this press release they felt compelled to share this tidbit.
“To that point, we announced today that we received $12.7 million in orders from one of our silicon carbide test and burn-in customers for FOX WaferPak™ full wafer Contactors to support production of silicon carbide power devices for electric vehicles to be delivered over the next three months.”
That’s likely just their one big old customer ON Semiconductor (ON) that managed to get back into the game after taking a brief 2-quarter nap on the ordering front.
Why do I think that? Why not somebody new? On their conference call they expanded a bit on it.
“We're excited about our continued partnership with this customer and to receive these orders to help them meet their needs for new device designs.”
So not somebody new, but a new project from somebody old.
But one thing this order DID manage to do was to coax the company into once-again disclosing their “effective backlog” order book, which was $20.80M. If they didn’t do that, then all they would have had to disclose was bookings of $4.0M and backlog of $7.30M, which are both back to disaster-level numbers, and absent that disclosure, this stock price would be back to $10.
Isn’t it great when companies get to cherry-pick which metrics they announce and how often they choose to announce them? And nobody calls them out on it (but for yours truly, of course)?
So ON Semi bailed them out big time once again.
For the past 9 quarters (we don’t know Q4 2024 quite yet…), since February 2022, ON SEMI has been averaging about $12.5M in quarterly revenues for AEHR, from a low of $4.5M (Q3 2024) to a high of $18.2M (Q4 2023). That’s just fact. Add up all of their other customers and they are averaging maybe $4M each quarter, and that’s including the odd quarter when a second customer manages to step up to the plate.
That’s $16.5M a quarter, AVERAGE, over the last 10 quarters. Annualize that and you get $66M in revenues.
Yet, where are they guiding AEHR (pre-Incal acquisition) revenues for the year? Around $62M.
So the company is actually guiding revenues to be DOWN year over year, and yet the shares have doubled.
Some companies (and apparently investors) just never learn.
(As a side-note, if any of this interests you, I would recommend reading the transcript from yesterday’s earnings call. You will hear the CEO bobbing and weaving in so many “i probably shouldn’t mention this” or “I may get in trouble some day” and nevertheless goes ahead and mentions it. My favorite quote? “and this might get me in trouble someday, but it's not Nvidia.”)
Note: I removed shares or AEHR from my interest list back in March, and even at the currently inflated levels have no plans on adding them back to my list. Let’s see how far the bulls manage to push this on such a crappy set of fundamentals.