AEHR Test Systems Inc. - AEHR
Is this finally the bottom of the cycle? Or is this the beginning of the end?
Back in October, I predicted that AEHR’s (currently down 25%+) next earnings release wouldn’t be a pretty one for shareholders, and concluded it with these words:
“What does this mean for their ability to avoid disaster come quarter end?
Not great.”
You can read the entire piece below, and I removed the paywall for any free subscribers interested in reading the entire thing.
This is the third time shares of AEHR have failed in an aborted attempt at regaining their lost momentum, and I think it’s fair to ask whether or not this bottom is going to hold once again or if this time the bottom will finally drop out from beneath the stock.
Q2 was One Ugly Quarter
On the negative side, this quarter was ugly. Not only did they miss revenue projections, but if you account for the outperformance of their recent Incal acquisition, then they underperformed rather badly.
“Our systems revenue decreased by $7.3 million due to the decrease in our FOX-P systems revenue, which was partially offset by the increase in package parts burn-in systems revenue of $4.8 million in connection with the Incal acquisition.”
So out of the $13.5M of revenues that they recognized, $4.8M of it came from an acquisition, which leaves the other $8.7M from their core business, and it’s this last number that really should be compared to 2024’s $21.4M. If you do that, then revenues down 60% year over year surely doesn’t feel like much of a bottom, right?
Inability to capitalize on new customers
What happened to that other large customer from FY2024’s second quarter? The one that was responsible for 34.6% of overall revenues? In Q3 2024 this same customer was 19.3% of revenues, ended the year at 14.4% of overall revenues, and has not made an appearance in the 10%+ club ever since.
Primary customer cutting expectations
Another negative for shares of AEHR has to be the horrible performance of their largest customer, ON Semiconductor (ON). In the most recent quarter, ON accounted for 46.5% or $6.3M of their overall revenues and is down from 90.8% or $11.9M from Q1 2025. Year over year both those numbers are down from $10M and $18M, respectively.
Looking at this most recent number another way, $6.3M of their $8.7M core revenues came from a single customer, leaving the other $2.4M in core revenues coming from somebody else. In the past I have had a chart (of my making) that shows AEHR total revenues, ON related revenues, and then non-ON revenues.
This last number, non-ON revenues, has stubbornly averaged around $2.5M over the last 3 years, which tends to counter the management narrative that they have a full pipeline and that the future is looking bright: take away ON and add 3 years of flatlining revenues then regardless of how many prospects you have this is a $2 stock once again.
But back to ON. Last Friday shares of ON were down around 10% as analysts came out and pretty much lowered their target prices across the board, citing a poor showing from the CES show and continued headwinds coming from the EV market. For analyst to uniformly lower their target prices on a stock without some sort of a public earnings announcement typically means that the company is whispering to analysts that their numbers are too high and that they need to come down. ON will also be disposing of certain non-core businesses, much like the folks at WOLF did last year, in order to focus on silicon carbide chips. Hope this works out better for ON than it did for WOLF: WOLF shares are down 75% since they started that process.
I wonder aloud if anyone would be truly shocked if ON announced on their next conference call that they will be cutting back on CapEx during this process in order to preserve some capital. When your business is in a prolonged slump with no real signs of recovery, at some point it is prudent to just stop spending.
Primary sector continues to underperform, and absolutely zero talk on their call about new significant silicon carbide customers stepping up
Throw in the horrible performance of a third large silicon carbide manufacturer, European chip giant ST Micro (STM), and you pretty much have problems popping up across the entire sector that AEHR is trying to service.
One missed opportunity…
In hindsight, rather than just picking on the shares of AEHR I should have been picking on the entire sector: there were signs long ago that EV adoption was slow and with 70% of all silicon carbide chips heading into EV’s, that would have made a decent thesis for some stories. Which I totally missed…
Are estimates really possible?
Depending upon how you look at it, this one is both a positive and a negative. While it is undoubtedly positive that the company is maintaining their $70M revenue target for the year, despite whiffing the first half of the year, what is the actual likelihood that they are going to be able to do it?
If they are to make that target, that means they will have to come up with $44M in revenues, or average $22M per quarter, in each of the next two quarters. I would point out that the company has only once managed to hit that $22M quarterly revenue bogey, much less twice, and that was in a quarter when ON was 82% of overall revenues while ON is now apparently expected to fade in the back half of this year.
I would just say unlikely, but not impossible.
Some green shoots…
..starting with Incal
On the positive side, Incal was only supposed to be around $2M-$3M a quarter of revenues, so coming close to $5M their first quarter since the acquisition closed is something of a pleasant surprise. Incal bailing out the entire company was likely an afterthought when the acquisition was announced, but it just may be happening.
Also something of a surprise is the amount of time the CEO spent on the conference call talking about their Sonoma tools (which came courtesy of Incal) and the various new customers, demonstrations, and cross-selling opportunities that have opened up for them. Maybe they did manage to purchase a decent company on the cheap.
Diversification is good
This led to something else that may be positive which is a diversification away from their overreliance on silicon carbide and into other technologies.
“As we look at the composition of our total revenue for this fiscal year, silicon carbide is expected to account for less than half of our total revenue as we've seen our expansion into additional other markets capture real market share gains. AI processors, including wafer-level and packaged parts, could comprise as much as 40% of our total revenue this fiscal year, up from effectively 0 revenue last year. GaN, hard disk drives, silicon photonics integrated circuits, and other semiconductor packaged part revenues will comprise about another 20% of revenue.”
I would point out that ON Semi has done $18.1M of overall revenues so far this year, and should silicon carbide truly be less than half of the $70M total, then for the back half of the year they can be no more than another $17M. This may be the CEO’s way of talking down this customer, but doing so without cutting numbers? Either really aggressive or really stupid.
AI could be significant
The company announced back in December a $10M order for their equipment to service the AI chip market. While originally hoped to partially ship in Q2, that number will now be part of Q3 revenues.
Assuming this isn’t just a one-off order from a single customer, which unfortunately has been their experience with silicon carbide so far, then this could lead to some bigger numbers. If the company is correct and the AI chip market can be up to 40% of their overall FY2025 revenues, then that would mean they are either hoping for or expecting to receive an additional $15M+ in orders to fill this year, or more than half of their remaining orders needed to hit their guidance.
Effective backlog makes a re-appearance
I mentioned in my last note that the company had failed to announce an effective backlog number in Q1, which was not a good sign, but it made an appearance here in Q2, and it looks quite positive.
They announced $26.6M in “effective backlog”, quite a bit higher than the $12.4M of normal backlog at the end of the quarter. This difference is the amount of new business the company has booked in the weeks since the end of Q2, or November 29th.
This is likely the number that is giving the company some confidence that they will be able to hit their annual target, though it is not a given by any stretch.
At the end of FY2025 back in May, they announced $20.8M in effective backlog, and in the 6 months since, have only booked $26.6M in total revenues. With a current effective backlog of $26.6M (an uncanny coincidence i’m sure), the company needs to find an additional $18M they can recognize this year in order to hit their $70M target.
Tough, but not impossible. The CEO appears to acknowledge that.
“So we have like $16 million, $17 million to go, I think, whatever the math is. We've identified what those customer opportunities are.”
So is this another bounce off the bottom or the beginning of the end?
To answer that, you need the answer to some other questions.
Will their largest customer, ON Semi, cut their CapEx guidance for the year?
While promising, will AI chips be able to fill that hole if they do?
Will the recovery in the silicon carbide business get pushed out yet another year to 2026, or the company’s FY2027?
Is gallium nitride a real opportunity or simply more hot air?
Is the strength in Incal’s business for real or have they simply pulled forward future orders?
Will the coming Trump tariffs help or hurt demand?
I am currently more of a mind that the worst is behind the company and they may have a few opportunities ahead of them. While the CEO still goes to great lengths to try and outline their opportunities, he seems a bit more humble in his remarks than he has in the past. Just my 2 cents.
Yes, estimates may get cut yet again, I would guesstimate at worst to the $60M level, which should be a total washout.
However, throw in some sort of silicon carbide chip revival in FY2026 with the addition of an AI chip market that doesn’t appear to be fading, and I can see how you can get some kind of a move higher from here in the next 12-18 months.
Just my thoughts.