Aehr Test Systems, Inc. (AEHR) Earnings Call Transcript & Summary

Good day, and welcome to the Aehr Test Systems Fiscal 2020 Fourth Quarter and Full Year Financial Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jim Byers of the MKR Group. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to Aehr Test Systems Fiscal 2020 Fourth Quarter and Full Year Financial Results Conference Call. With me on today's call are Aehr Test Systems President and CEO, Gayn Erickson; and Chief Financial Officer, Ken Spink. Before I turn the call over to Gayn and Ken, I'd like to cover a few quick items. This afternoon, Aehr Test issued a press release announcing its fiscal 2020 fourth quarter and full year results. That release is available on the company's website at aehr.com. This call is being broadcast live over the Internet for all interested parties, and the webcast can be archived on the -- will be archived on the Investor Relations page of the company's website. I'd like to remind everyone that on today's call management will be making forward-looking statements today that are based on current information and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These factors that may cause results to differ materially from those in the forward-looking statements are discussed in the company's most recent periodic and current reports filed with the SEC. These forward-looking statements, including guidance provided during today's call, are only valid as of this date and Aehr Test Systems undertakes no obligation to update the forward-looking statements. Now with that said, I'd like to turn the call over to Gayn Erickson, President and Chief Executive Officer. Gayn?

Thanks, Jim, and good afternoon to those joining us on today's conference call and also listening online. Ken will go over our fourth quarter and full year financial results later in the call. But first, I'd like to spend a few minutes discussing our business and product highlights, including our continued progress with our wafer-level and singulated die test and burn-in solutions, and then we'll open it up for your questions. This past fiscal year, we made substantial progress with our new FOX products that strengthened our customer base, expanded our markets and enhanced our operations and sales capabilities to capitalize on the significant market opportunities we see at Aehr. While we were on track to meet our expected guidance for fiscal 2020, due to the challenging global environment and uncertainty around the COVID pandemic, we experienced pushouts of customer forecasted orders in our second fiscal half of our -- for our FOX-P systems and consumables in data center and some 5G end-use applications for silicon photonics transceivers. These customers have indicated the pushouts are temporary and that they'll require the additional system capacity and consumables in the current fiscal 2021 year. We'll cover the details supporting our optimism but want to quickly state that we are reinstating guidance and expect FY '21 full year revenue to be between $25 million and $28 million, up 12% to 26%, and to be profitable for the year. With the increase in number of customers in production using our systems, the new market opportunities we added with new customers this year, our move to our higher-margin FOX systems and consumables and the completion of our previously announced restructuring and sales enhancements this past year, going forward, we are well positioned to address our new market opportunities and are now profitable at a much lower revenue level. Let me walk you through some of the key business highlights for this last quarter and for the last fiscal year as we outlined in our earnings release. First highlight, we closed a new order with a major new customer in silicon photonics. During the quarter, Aehr closed an initial order with a new customer that is a major global leader of communication transceivers for data centers, telecom and 5G infrastructure for our FOX full wafer-level test and burn-in system for production stabilization and test of their silicon photonics devices. This new customer is deploying our FOX-NP system for initial production burn-in and stabilization of their high-performance silicon photonics devices and is forecasted to then transition to our FOX-XP wafer-level test and burn-in systems during this fiscal year 2021 to meet their volume production forecast. We categorize this customer as a Tier 1 customer, which we define as a customer with the resources and market size to be able to purchase $6 million to $10 million per year or more of our systems and consumables. The next highlight is we closed an initial order with the world's largest OSAT. During the quarter, we closed an initial order with the world's largest outsourced semiconductor assembly and test supplier to use the FOX-P family of products, including Aehr WaferPaks and DiePaks for production tests, burn-in and reliability screening of devices at full wafer, singulated die and module. They have already added our system to their list of tools and capabilities in their marketing and sales material to their customers. And we have begun some cross-marketing and sales activities with them. Stay tuned for more updates and announcements. Next, Aehr added a key new market with the addition of wafer-level burn-in of silicon carbide devices. This year, we successfully took the initial order for and installed our first production capacity for silicon carbide devices, including it to the list of markets such as silicon photonics, 2D and 3D sensors, automotive, lasers used in photonics devices and have shown the value and feasibility of using our FOX solutions to address these market needs. The initial system order was for our FOX multi-wafer system with proprietary WaferPaks configured to test 18 wafers in parallel at up to 1,000 watts of power per wafer. And the customer is using it for 100% production burn-in and infant mortality screening of silicon carbide devices at wafer level. This new silicon carbide application with a Fortune 500 market leader in silicon carbide and power modules adds a significant new Tier 1 customer of our FOX-XP system and WaferPaks to whole wafer burn-in and infant mortality screening of silicon carbide devices. Since our initial installation in January, we've received multiple follow-on orders for additional WaferPaks from this customer, including multiple new designs, and now have a significant number of different devices that have been released into production. This customer is forecasting additional capacity needs for our FOX-XP systems during this fiscal year and for years into the future. The silicon carbide market, semiconductor device market is growing at a tremendous rate with a unit growth of high-power devices of over 50% CAGR per Yole Research from 2019 to 2025. Silicon carbide is a very impressive material for high-power, in particular, high-voltage devices for applications such as the needs of electric and hybrid electric vehicle powertrains, electric vehicle charging infrastructure, IT data center power supplies and renewable energy power conversions, such as wind, solar as well as power storage. These devices have shown reduction in power losses as much as 78%, and many articles have been written about the first mainstream use of silicon power devices that were in the Tesla Model 3, which enabled much longer driving range per charge. This has basically changed the market with most, if not, every electric vehicle, hybrid electric vehicle automotive company, moving to silicon carbide-based powertrain and charging system. What challenges the reliability of silicon carbide, it's known to have high infant mortality rates. But after a reliability burn-in screening, these defects can be completely removed to provide extremely reliable devices for these mission-critical applications. Aehr is able to provide a complete solution for one of the key reliability screening tests on an entire wafer of devices all at one time while testing and monitoring every device for failures during the burn-in process to provide critical information on devices so they're not later packaged into multidie modules where the yield impact is 10x or 100x as costly. The Yole Research has forecasted over 600 million yielded power MOSFET 20 amp-equivalent devices shipping per year by 2025, equates to over 0.5 million wafer starts per year, which creates an enormous opportunity for our wafer-level and singulated die systems given the long durations required to burn in the devices and to remove the defective parts. Burn-in times can be as long as days per wafer. So even at our industry-leading 18 wafer per system capacity FOX-XP, that's a significant number of systems. The next highlight is pretty important. In fiscal '20, we saw the industry adopt production wafer-level burn-in. We made significant progress with our new FOX products for wafer and singulated die test and burn-in during the fiscal year with 2 Tier 1 customers added and 5 customers transitioning to production with 100% stabilization of infant mortality screening with our FOX systems. We saw our silicon photonics customers move to production for the first time in just this last fiscal 2020. During the fiscal year, we saw our lead customers support silicon photonics move to full volume production. We expect them to purchase additional systems this fiscal year and into the future as they continue to maintain or grow their market share and add additional silicon photonics devices to the mix. We also made 3 additional silicon photonics customers to production with our FOX systems in fiscal '20. All 3 of these customers are expected to ramp production during this fiscal '21 as well, adding capacity in both systems and consumables. And near the fiscal year-end, we announced yet another new silicon photonics customer that is deploying our FOX-NP system for initial production burn-in and stabilization of their high-performance silicon photonics devices and is forecasted to then transition to our FOX-XP multi-wafer systems during the fiscal 2021 to meet their volume production forecast. Silicon photonics devices are highly integrated silicon-based semiconductors that have embedded or integrated the nonsilicon-based laser transmitters and receivers to enable a smaller, lower cost, higher reliable alternative to traditional fiberoptic transceivers. Historically, fiberoptic transceivers are made up of many different logic ICs, multiplexers, demuxers, external discrete lasers and receivers into a mechanical package that is used in data center and telecommunication infrastructure. Basically, this has been the high-speed transmission lines for long-haul and data center to data center back point of the Internet. However, these fiberoptic transceivers have been extremely difficult and expensive to build. This has been seen as a limiter to the adoption of fiberoptic transmission of data and to the maximum data rates and transmission in the data centers that store the world's data. Yole Research has stated that market leaders like Intel, Cisco, Luxtera, Broadex, Inphi and Acacia are setting the standards for 100-, 200-, 400- and even 800-gigabyte transceiver standards based on transceivers with fully integrated silicon photonics devices, while many other companies are also jumping into this exploding market. One of the key claims of these transceivers are their lower manufacturing costs and their ability to scale manufacturing due to the full wafer-level integration of these devices, which brings the scale of semiconductor manufacturing to fiberoptic communication for the first time in history. Where Aehr fits in is that these devices all need to have their photonics transmitters stabilized under high power and temperature and also customers use our cut systems to screen for infant mortality of these devices to ensure high initial quality and long-term reliability. This is a manufacturing step done on 100% of the die. And in the case of silicon photonics, we provide a much more cost-effective and scalable solution for this step and doing this equivalent stabilization and screening after the die are put into the final PCB substrate and package. The silicon photonics market is growing at a CAGR of 42% between 2019 and '25 to a $3.6 billion annual market, and we believe that the entire industry will transition to wafer-level of singulated die for this critical manufacturing step, which is where our FOX-P products stand alone as the most cost-effective solution for this, and a portfolio of patents and IP in this area. We estimate that the market opportunity for wafer stabilization and reliability of screening equipment and contactors for silicon photonics is approximately $150 million by 2025, with well over 300 wafers of test capacity required by that time. Our FOX-XP production system is the only multi-wafer system available to test and burn in these high-power silicon photonics wafers in a single insertion, and we can test up to 9 2,000 watt wafers in parallel on a single system. So the total capacity needed by 2025 is about 35 of our 9 wafer FOX-XP systems, to put this in a perspective. Today, Aehr has shipped about 50 wafers of capacity into this application. Interestingly, while fiscal '20 was the first year to see volume production in silicon photonics with wafer-level burn-in, FY '20 also saw second half pushouts in silicon photonics ramps. We experienced pushouts from customer-forecasted orders in our second fiscal half of fiscal '20 for our FOX systems and consumables in data center and some 5G end-use applications for silicon photonics transceivers. These customers, as I said before, have indicated the pushouts are temporary and they'll require additional system capacity and consumables in the current fiscal 2021 year. Our next highlight is shipments of consumables were a significant percentage of revenue this year. Shipments of our proprietary WaferPak contactors and DiePak carrier consumables for our FOX systems accounted for 48% of total revenue in fiscal '20. In fiscal Q4, which we just ended, our consumable revenue was 79% of revenue as anticipated customer orders for systems did not materialize but customer demand for the consumables for the installed base systems held steady. As we stated in the past, historically, consumables can often soften any weakness in systems as customers contemplate new capacity but maintain and, in some cases, actually increase the need for new WaferPak contactors and DiePak carriers to get new designs or devices out to market. In the semiconductor test industry, which was just over $9 billion total last year in 2019, it is made up of $3.7 billion in test systems; another $3.7 billion in consumables, such as probe cards for contacting wafers and sockets and back points for contacting packaged parts; and then another $1.7 billion of semiconductor device handling equipment in wafer and packaged form. With Aehr's FOX product line, we play actually in all 3 segments. Our FOX systems serve the test systems market. Our WaferPaks and DiePaks serve the contactor consumables market, and our aligners in the FOX systems themselves that have the integrated thermal capabilities of a wafer prober are a turnkey solution for handling devices. So the consumable business as a whole is approximately the same size and often higher than the systems business in down years in the overall semiconductor test business, again, both about $3.7 billion. But for reliability and burn-in space, which we primarily play in, the consumables can be 2x to 4x the annual sale of systems as the systems typically are used for longer periods of time with annual needs from new contactors and consumables. This is why we're confident that our consumable business is likely to exceed our overall systems business over time, even though both will grow in absolute dollars. Okay. Our next highlight is that Aehr is currently engaged with over a dozen new potential customers. We're currently working with well over a dozen additional Tier 1 and Tier 2 customers that are considering using our products for high-market growth applications, including silicon photonics, silicon carbide, automotive and memory devices production burn-in. While Tier 1 customers are seen as those with the opportunity to drive $6 million to $10 million or more in systems and consumables per year, our Tier 2 customers are considered to have the market share and applications to drive $1 million to $3 million per year or more. Several of these companies are expected to place their orders this year with ramps in their production later in the fiscal year and/or the following fiscal year. We see an increasing awareness on adoption rate that we believe could drive the majority of the market for silicon carbide as well as silicon photonics to move to wafer-level or singulated die burn-in within the next few years. Our final highlight is we -- in fiscal '20, we completed our planned restructuring and shift to higher-margin products. Aehr completed our previously announced restructuring and also moved to much higher-margin FOX systems and consumables during the fiscal year. We started this before the pandemic outbreak and completed it during the last few months. As part of the previously announced planned restructuring, we completed the closure of our Japan subsidiary and also transitioned our European sales to third-party sales representatives late in the fiscal year. We also added key marketing directors and made some additional structural changes to our sales force. We believe these enhancements have already and will continue to both improve our efficiency and materially increase our sales activity and bookings going forward and increase our penetration of key customers in our target markets. We believe these changes position us for success for sales of our current products as well as additional new products planned for introduction this year. We also have shifted to higher-margin, highly differentiated systems and consumables. As I noted in the last call, we've started to see some forecasts for renewed market demand for packaged part burn-in systems, particularly from customers who are asking us about our high-voltage capability and adding this capability to our packaged part systems. These changes in long-term forecasts reflect the move toward higher voltages and other requirements for devices in automotive -- automobiles, particularly with electric and hybrid automobiles and autonomous vehicle sensors. We expect to see a resurgence of packaged part burn-in systems orders from some specific ABTS system customers and to generate additional new opportunities with our planned introduction this fiscal year of a new packaged part burn-in system product that has a very high-voltage test capability. We see the need for high-voltage capabilities in both wafer level and packaged part as a new high-growth opportunity for Aehr Test and expect to see sales from current customers resume and also add several new customers that include both Tier 1 and Tier 2 level customers for packaged part burn-in. At the same time, and as discussed last year, we had seen a significant drop-off in our packaged part product business as several of our customers have shifted their businesses or entirely closed product lines that were driving the need for test and burn-in using the high-power and high pin-count capabilities of our ABTS family of products. In one specific case, a customer that had been buying multiple systems per year has all but shuttered a line of products, and we feel they are unlikely to take additional capacity of that particular configuration of systems that we had several systems of inventory left on hand when they dropped their forecast to 0. Interestingly, this and several other customers have, at the same time, shifted their focus to other product lines particularly for automotive and other new applications that are expected to drive new needs in the future. I've mentioned this specifically last quarter and noted that as a result, we were going to do a deep dive in our inventory for older products and configurations. We decided it was prudent and appropriate to write down the inventory that we simply do not see a likelihood of selling in the foreseeable future, which resulted in a onetime charge this quarter of $1.6 million of inventory. This leaves us with significant inventory of systems and material that is in our near-term forecast, particularly in our FOX products, which also allows us to make short lead time shipments as well as leading significant revenue forecast without taking on additional inventory expenditures. Last year, we reported on the shipment of our new FOX-CP test and burn-in system to a major new Tier 1 customer for a very high-volume application for the enterprise and data center market with a planned build-out on this production ramp over the next several years. The FOX-CP is our low-cost single-wafer compact test and reliability verification solution for the logic membrane photonic devices. And their solution is comprised of a test system integrated with a wafer prober configured with a high-power thermal chuck that allows up to 2 kilowatts of testing and burning in of full wafers. This customer has indicated they plan to begin their production ramp within our current fiscal year. And so we expect to begin additional shipments of test cells to them in the second half of this fiscal year. We're very excited about this application, which is expected to drive very high volumes of devices and we believe will drive test system sales for several years. Let me try and wrap this up. We added 2 key Tier 1 customers this past year. We now have 5 significantly large Tier 1 customers, again, applications and market sizes that can drive $6 million to $10 million or more a year on our FOX wafer-level and singulated die test systems and consumables. We also have another 7 Tier 2 customers that are each capable of FOX product sales typically between $1 million and $3 million and sometimes more. In addition, 5 of our customers moved to production during the year using our FOX products for 100% stabilization and burn-in and infant mortality. And we will be growing the list of both Tier 1 and Tier 2 customers this year in both wafer-level singulated die but also some packaged part markets and feel we can significantly grow these and new customers in the markets we're already serving. Additionally, we will be adding new markets and enhancements to address some significantly large new markets later this fiscal year. We're also seeing renewed activity and interest of our FOX systems and consumables for several new applications in the 2D and 3D sensor markets, particularly for mobile devices. These sensors are becoming ubiquitous in smartphones, tablets and are forecasted to be adopted in laptops and computers as well. The level of security associated with facial recognition far exceeds fingerprint-based biometrics and certainly greater than traditional keyboard-entry passwords. These new opportunities in 2D and 3D sensing are opportunities that could add significant upside to our currently forecasted revenue for this year and next but are not built into our current guidance. Although COVID-19 has created challenges, such as international travel, some small impacts on our supply chain and created caution and/or delays with some customer production ramps, we believe that there is no long-term negative impact to Aehr to the demand for our products or for the attractiveness of the key markets that we serve. We absolutely believe that we'll come out of this stronger than we went into this worldwide pandemic with more production customers, more applications and higher margins with higher value products. Our key customers' products are being used to build out new data centers, improve data rates and increase storage and data centers; build out the 5G infrastructure; enable the newest sensors and technology in smartphones and tablets; enable the widespread adoption of electric and hybrid electric vehicles and charging stations; and address the unstoppable demand for memory and data storage in computing data centers, mobile devices and hundreds of applications that are keeping the world connected. As we move into fiscal 2021, we remain optimistic about growth in systems and consumables within our installed base of customers as well as expanding the number of customers with our family of FOX-P solutions. We expect significant growth in both our top and bottom lines moving forward with much lower fixed operating expenses and significantly higher-margin products and services. With that, let me turn it over to Ken before we open up the line for your questions.

Thank you, Gayn, and good afternoon, everyone. As Gayn mentioned, our fourth quarter results reflected the impact of the current challenging global business environment around the COVID pandemic and customers who pushed out forecasted orders during the second half of fiscal 2020. In our prior year call, we announced our 2 new FOX-NP customers and our new FOX-CP customers were expected to ramp to volume production during fiscal 2020 and add capacity, resulting in orders for FOX-XP systems and CP systems. While these orders did not happen in the fiscal 2020 year just reported as their timing was pushed out by the customer, we are confident that these orders will occur in our current 2021 fiscal year. It is important to note that through the third quarter of fiscal 2020, the company recognized revenues of $18.5 million or a little over $6 million per quarter and was profitable. This reflects the impact of the cost reduction initiatives announced in the prior year, effective fiscal 2020, and a change in product mix, which allows the company to be profitable at lower revenue levels. In the fourth quarter of fiscal 2020, revenues decreased significantly as there were no system revenues recognized during the quarter. Now let me take you through our results. Net sales in the fourth quarter were $3.8 million compared to $6.1 million in the preceding third quarter and $7.2 million in the fourth quarter of the previous year. The decrease from Q3 includes a decrease in wafer-level burn-in revenues of $2.2 million, primarily due to a decrease in wafer-level burn-in system revenues of $2.1 million. The decrease from Q4 last year included a decrease in wafer-level burn-in revenues of $3.3 million, primarily due to a decrease of $3.6 million in wafer-level burn-in system revenues and a decrease in customer service revenues of $206,000. Non-GAAP net loss for the fourth quarter was $720,000 or $0.03 per diluted share compared to non-GAAP net income of $452,000 or $0.02 per diluted share in the preceding quarter and a non-GAAP net income of $428,000 or $0.02 per diluted share in the fourth quarter of the previous year. The non-GAAP results exclude the impact of stock-based compensation expense, restructuring charges and write-down of excess and obsolete inventory. On a GAAP basis, net loss for the fourth quarter was $2.9 million, or $0.13 per diluted share, which includes the impact of approximately $1.9 million or $0.08 per share in inventory write-down and restructuring charges taken in the quarter. This compares to GAAP net income of $245,000 or $0.01 per diluted share in the preceding quarter and GAAP net income of $110,000 or $0.00 per diluted share, which includes the impact of $118,000 or $0.01 per share in restructuring charges in the fourth quarter of the prior year. Excess and obsolete inventory reserves of $1.6 million were taken in Q4 '20 related to slow moving and obsolete packaged part burn-in product inventory, legacy FOX inventory and down rev FOX-P products and subsystems. The $220,000 restructuring charge consisted of severance payments and associated legal fees for individuals impacted by the closure of our subsidiary in Japan and a reduction in headcount in our German subsidiary. As noted in our last call, we will be moving to a sales rep distributorship model for sales in these regions. Gross loss in the fourth quarter was $93,000 or 2% of sales compared to a gross profit of $3 million or 49% of sales in the preceding third quarter and gross profit of $3.4 million or 47% of sales in the fourth quarter of the previous year. The sequential and year-over-year decrease in gross margin is primarily due to the impact of the $1.6 million excess and obsolete inventory provision in Q4, accounting for a 44% -- point margin impact during the quarter. In addition, gross margin was unfavorably impacted due to higher unabsorbed overhead cost to the cost of sales due to lower revenue levels in the fourth quarter. As we've noted on prior calls, our WaferPak and DiePak revenues are accounting for a more significant portion of our overall revenues, favorably impacting our gross margins as they maintain higher margins in our system or pass-through products. In the fourth quarter, our WaferPak and DiePak consumable business accounted for 79% of total revenues, up from 51% in the preceding Q3 and 36% in Q4 of last year, providing a favorable direct material margin impact for the company. Operating expenses in the fourth quarter were $2.7 million, flat compared to the preceding third quarter and down $508,000 from $3.3 million in the fourth quarter last year. While Q4 '20 was flat to the preceding quarter, a decrease in SG&A of $217,000 was partially offset by the restructuring charges of $220,000 taken in the quarter. The decrease in operating expenses from prior year fourth quarter is primarily due to restructuring actions taken during -- taken in the prior year related to reduced costs. SG&A was $1.7 million for the fourth quarter compared to $1.9 million in the preceding third quarter and $2 million in the prior year fourth quarter. The decrease from Q3 is due primarily to lower labor-related costs, including lower salary expense and lower commissions from lower bookings and sales incentives in the fourth quarter. Savings resulted to closure of our Japan subsidiary and lower travel due to travel restrictions related to COVID 19. The decrease from prior year fourth quarter was primarily due to the impact of cost reduction initiatives in fiscal 2019. R&D expenses were $854,000 in the fourth quarter, flat compared to $845,000 in the preceding third quarter and down $266,000 from $1.1 million in the prior year fourth quarter. The decrease in R&D expenses from Q4 last year is primarily due to cost reduction initiatives in fiscal 2019 and lower R&D project materials. Now turning to results for the full fiscal year. Net sales for fiscal 2020 were $22.3 million, up 6% from net sales of $21.1 million in fiscal 2019. The increase includes an increase in wafer-level burn-in revenues of $5.3 million, partially offset by a decrease in packaged parts revenues of $2.2 million and customer service revenues of $1.9 million. The decrease in packaged parts revenues is due to no ABTS system revenue in FY '20 compared to 3 ABTS systems sold in FY '19. Fiscal 2020 net sales were comprised of $18.9 million in wafer-level burn-in revenue and $3.4 million in customer service revenue. For the full fiscal 2020, system revenues accounted for 36% of revenues compared to 45% in fiscal 2019. WaferPak and DiePak consumable revenues accounted for 48% of total revenue in FY '20 compared to 29% of revenues in FY '19. Customer service revenues accounted for 15% of revenues in FY '20 compared to 25% of revenues in FY '19. Non-GAAP net loss for fiscal 2020 was $27,000 or $0.00 per diluted share compared to a non-GAAP net loss of $2.8 million or $0.13 per diluted share in fiscal 2019. While revenues increased by $1.2 million in FY '20 compared to FY '19, the non-GAAP bottom line improved by $2.8 million. As noted earlier, this reflects the impact of cost reduction initiatives effective in fiscal 2020 and the change in product mix, which allowed the company to be profitable at lower revenue levels. On a GAAP basis, net loss for the fiscal year was $2.8 million or $0.12 per diluted share, which includes the impact of approximately $1.9 million or $0.08 per share in inventory write-down and restructuring charges taken in Q4. This compares to a GAAP net loss of $5.2 million or $0.23 per diluted share, which includes the impact of $1.5 million or $0.07 per share in inventory write-down and restructuring charges taken in fiscal 2019. Gross profit for fiscal 2020 was $8.4 million or 38% of net sales compared to a gross profit of $7.6 million or 36% of net sales in fiscal 2019. The increase in gross margin percentage in FY '20 compared to the prior year is primarily due to lower direct material costs due to a change in product mix, partially offset by the impact of excess and obsolete charges in FY '20 compared to FY '19. Operating expenses for fiscal 2020 were $11.1 million, a decrease of $1.5 million or 12% from $12.6 million in fiscal 2019. The decrease included a decrease in SG&A of $194,000, a decrease in R&D of $767,000 and a decrease in restructuring charges of $505,000. SG&A was $7.5 million in fiscal 2020, down from $7.7 million reported in fiscal 2019, primarily due to cost reduction initiatives in fiscal 2019. R&D expenses were $3.4 million in fiscal 2020, down from $4.2 million in fiscal 2019. The decrease is primarily due to cost reduction initiatives in fiscal 2019 and lower R&D material expenses. Overall, the decrease in SG&A and R&D of $961,000 included $922,000 decrease in labor-related costs as a result of cost reduction initiatives implemented. Turning to the balance sheet for the fourth quarter, our cash and cash equivalents were $5.4 million, up $375,000 compared to $5.1 million at the end of the preceding quarter. Accounts receivable at quarter end was $3.7 million, an increase of $206,000 compared to $3.5 million at the preceding quarter end due to the impact of customer deposits and deferred revenue on current quarter revenues. Inventories at May 31 were $8 million compared to $9.3 million at the preceding quarter end. The $1.3 million decrease is primarily due to the $1.6 million E&O inventory provision taken in Q4 '20. Property and equipment was $663,000 compared to $783,000 at the preceding quarter end. Customer deposits and deferred revenue, short-term and long-term, were $192,000, a decrease of $227,000 compared to $419,000 at the preceding quarter end, primarily due to the decrease in backlog from the prior quarter. Our current and long-term debt of $1.7 million is related to funds we received during the fourth quarter under the Paycheck Protection Program, or PPP, which we announced in an 8-K filing in late April. We expect over $1.4 million up to the full loan balance to be forgiven under the provisions of the CARES Act. Bookings in the fourth quarter totaled $2.6 million. Backlog at May 31 was $2.5 million compared to $3.6 million at the end of the preceding quarter and $7.5 million at the end of the fourth quarter of the prior year. Now turning to our outlook for fiscal 2021. For our fiscal 2021 year ended May 31, 2021, we expect full year total revenue of between $25 million and $28 million, which will represent growth between 12% and 26% year-over-year and to be profitable for the year. As a requirement to receive funding under the CARES Act, the company is required to use the funds from the PPP loan to retain employees and maintain payroll. While our revenues and backlog have decreased from the impact of the current challenging global business environment around the COVID pandemic, the company has made no headcount reductions. However, the company has taken actions to control spending through mandatory vacations, shutdown days and travel restrictions. This concludes our prepared remarks. We're now ready to take your questions. Operator, please go ahead.

[Operator Instructions] We'll take our first question from Christian Schwab with Craig-Hallum.

This is Tyler on for Christian. A couple of questions. First, as we look into fiscal '21, could you help with any expectations for linearity quarter-to-quarter? Within that, are you expecting maybe some softness and some customer pushouts to continue in the first half? Or any customer orders or conversations with them that would give you any indication that the first half or the second half would be stronger or weaker would be helpful.

A couple of things. One is I think it's a fair -- a number of the customers, and we specifically stated in the call notes, were -- are forecasting second half -- so I think -- we do think our second half will be stronger than our first half. And I think that's a reasonable conservative stance to take. We have not provided quarterly guidance before. And basically, we do start the quarter with a small backlog. We've got several customers with forecast for systems that we have on hand and in inventory and can turn in weeks. In some cases, they had planned to take them last quarter. So we have that in the inventory that we have. Whether they come in and trying to ship by the end of this quarter or next is the over-under. And honestly, we're focused on new wins in customers and markets that need our systems. I can tell you, waking up every day and checking for expected POs doesn't help. I will also tell you I do that more often than I want to admit to. I mean our customers are telling their customers and their shareholders that they're ramping. In many cases, that's -- I don't even hear what the customers necessarily just tell me. I'm not checking and making sure that I believe them by what are they telling the Street. Most of these customers are public and large, okay? They need our tools. We're the plan of record. That was a critical thing for us this year, if we look at our business plan, is to make sure that those wins move to production that they actually are counting on us and get those qualified through to their end customers, and particularly things where they're automotive qualification, that's a big deal. And basically, we think -- we plan to do our guidance or more without winning another customer. We have the customers, we have the applications, the products, the inventory, and we actually -- we completely have the manufacturing capacity. We didn't talk much about that, but have the ability to build far in excess of even our guidance to meet customer needs, and we're adding more customers and applications and basically our total focus in on.

That was very helpful. Second question then is you outlined you have 6 Tier 1 customers that are capable of doing $6 million to $10 million a year, and you have 7 Tier 2 customers that are capable of doing $1 million to $3 million a year. So obviously, just math that if those customers ramp into those revenue levels, your total revenue will be significantly higher than it is today. And also understanding then you have thousands more customers you're engaging with, so I was just wondering how we should think about or how you guys think about those customers ramping to those types of levels. Is this a 3- to 5-year kind of time range where we would expect most of those to be in that kind of revenue level? Or how should we think about that?

Well -- and again, so realistically, when we put this -- and this Tier 1, Tier 2, this is the first time we've introduced that term and we had some feedback on just how do we get our arms around it. These -- when we look at the total available market that these customers serve, the unit volumes, the test times, the -- is it 100% burn-in or a sampling, we can estimate what their buying power is for any given year, right? And so the intent of that was that is a range of the kind of customer -- I mean I don't want to get into all the detail, but we've -- our 10% customers that we have are a force to talk about. And we're adding, I think, 1 or 2 more this year. Our 10% in our 10-Q customers are the likes of Intel and ST and Apple, TI. So these are large multinational companies with large-scale applications. And for them to be able to do $10 million or $12 million in a year, they've all proven that they can do that, okay? So that's the kind of class we're trying to describe that as. We have other customers, including ones that we've announced, and I want to be careful not to mention them, but I don't want any of my customers think I don't love them as much, but they're just not -- the likelihood of them doing $10 million is nowhere near the same. But we would expect them to do $1 million, $2 million or $3 million a year or so. As always is the case, at least early on, we can see even customers being lumpy, like maybe they have a good year and then a soft year the next year. But if you start to look at these new devices in silicon photonics and silicon carbide and some of these others, they're actually growing so fast. It's reasonable for them to be sustainable year after year. And kind of ignoring some of the craziness going on in the world right now, we would have expected this to be an up year even over last year's guidance. So again, I don't think you should just linearly add them all up. But it's not crazy, but they all have good years in the same year. I think it's really going to be -- maybe 2/3 of them in any given time are having good years and then they kind of alternate over time. And the goal for us would be to get 15, 20 customers, which we think is reasonable, so that we don't have to wake up at the beginning of the year and think we're totally dependent upon 1 customer to do a significant amount of our sales.

We'll take our next question from Jeff Bernstein with Cowen.

Yes, I am sorry. I think you cut out for a minute. At one point, you were talking about some business that is not in the guidance. Is that correct? And can you just go back over that?

Sure. I would -- okay. So did you hear me cut out or did I stumble maybe in talking? All right. Okay. So anyhow, yes, so what I did, and I'm not going to go back to essentially read it. I'll just pull it back up again and make sure. So this was specifically -- we've seen in the last several months maybe, and even picking up steam, some renewed activity in our 2D, 3D customer base that have wafer and singulated die systems installed. They actually continually have been buying DiePaks from us and WaferPaks, the consumables with new product releases, and that it's been a material business for us. But interestingly, they had not added any system capacity last year. We've been brought into several new programs that we are aware of now that appear to be a good fit for our products. And we're just getting our arms around it right now, but it's very interesting that there's some renewed activity there. If you followed us several years ago, one of the tough years we had was, we started the year with a customer saying how great it's going to be, and we forecasted that thinking that, that was a gimme. And ultimately, they pushed out that program and ultimately, canceled that specific program. And so I'll tell you, I'm a little gun-shy about beating my chest about these particular applications until they are a little bit more direct, right at their eyes. So I haven't been bold enough to say that we can meet our guidance without any of these, but some of these deals could be some material upside to that or certainly offsetting the other possible issues. But that's what I meant to say by that.

Got you. And is there a change going on with regard to 100% burn-in kind of thing versus some sort of statistical sampling and that kind of thing? Or is this really just about brand-new programs?

Well, let me do this. The programs that we're in, which include both 100% and sampling programs, are continuing along those, these are new programs. I -- we actually don't have all the details. I think we believe that one of them is 100% and one of them is a sampling, but I -- we don't have all the details, yes.

[Operator Instructions] We'll take our next question from John Fichthorn with Dialectic Capital.

I apologize because I've been on multiple calls, so I just want to apologize in advance in case you've addressed this. But I guess I'm partially confused at the progress you keep making. You introduce new products, you get new customers. And yet, I don't see it in top line guidance expectations, top line performance. Granted, you've got COVID for this quarter, I understand. But where is the disconnect? I mean you've signed up a ton of new customers in the past, you continue to sign up new customers. You've got existing products, you've got new products. You talked at length about them. Everything seems to be going the right way, and I -- and it doesn't seem to be flowing through. So I'd just love some help with that basic question.

Well, I think to -- if we step back, as the Board and I do, sit and trying to look at the overall business to try and get our arms around it, we've been putting together 3-year plans, looking at what those forecasts are. One of the things I think is fair, just at the minimum, was customer -- we -- like our first -- our lead silicon photonics customers was buying FOX-XP systems but they didn't go to production yet, and we talked about that several times, maybe almost every single quarter. And they, for whatever reasons, had not actually introduced the new products that were moving to the wafer-level burn-in and finally have, and qualified it, got it to PLR. But actually, that was -- if you look -- just look at a linear time, that was over a couple of years. That was not what we expected. And ultimately, it was, okay, when is this going to happen, and we finally saw that ship to production this year, and they started to buy all the contactors. So we knew they couldn't go to production because they didn't have the contactors with us. So they have these beautiful systems sitting there that were not being used yet. The reason was is they were bringing up the systems and they wanted to ramp quickly. We were able to ship a lot of WaferPaks all within a month or 2, and that's part of the business model, to get them to production. Now other customers were kind of a mix, some that had bought after our lead customer but also didn't get to production until this year. And then we had another customer that was like a 6 months' period. The customer that we just shipped to with the order that we announced in Q4 is going to be in production here shortly. And then interestingly, on our silicon carbide customer, they went from 0 to 100% within 2 months. So what we -- actually, Vernon, my VP of Sales, was presenting in our Board discussion the collapsing amount of time it's taking for the customers to go from, say, when we first ship it to get to production. But the lead time on the sales cycle is still a little bit spotty. Some of those have been shorter and some of them have -- we've been talking to some customers for a year now, maybe 1.5 years. And then we've had other customers that -- well, okay, the first innovation, 1 to 2, maybe 2 quarters later, they already are purchasing. So I think there's just balance of either our own overoptimistic or how fast customers are actually ramping or the deployment, I think, to some extent, the deployment of silicon photonics devices in the main end customers. So remember the -- if you know this or not, we have a couple of folks that follow our stock that really track this market, it's really interesting to talk to them. But the big buyers of this market are Facebook, Amazon, Google, it's the large data centers, okay? And so they have enormous buying power. And there's been -- one of the things was it appears they now finally are buying silicon photonics devices. But before, they were buying the traditional, kind of much more expensive fiber-optic transceivers. So this is a major inflection point for us because the end customers are now buying in volume, right, and shifting to the higher-performance, higher-speed devices, well, all of which is good for us. And so I believe at this point, it feels more believable that there's more data behind that. Everybody is saying it's going to be great. And now we actually have customers that are ramping and the end users are [ pulling ]. What I will tell you is one of the big things that we were surprised by is the seeming pushouts of capacity -- well, maybe weren't surprised, but we saw pushouts of capacity for those end-use customers starting in the -- beginning of this calendar year. And so some -- absolutely, customers point specifically at the COVID implications of it. And others are, what happened? Why did the data center slow down? Was there a pushout? So it's something that we're trying to understand. But there's no doubt in my mind data centers aren't going away. The move to more fiber optic, the move to the fiber optic down at the lower levels of the data center because of the bandwidth, all the data is there to support it. And I think that's the trend that's happening. So I mean that's kind of -- I wanted to try and just give you some perspective of that.

All those trends makes sense and everything you said just makes sense, except for the fact that it doesn't necessarily line up with guidance, that is necessarily lower than the guidance you gave last year at the same point in time. I mean I just don't understand why 25% to 28% relative to 28% to 31% or wherever you were a year ago makes sense given you have more customers, you're faster to production, like you have newer products -- more new products. Help. Help me. Why is there -- why are we not at the inflection point I thought we were at in terms of revenues really inflecting higher? What am I missing? Is it slower lead time? Is it pushouts? Is it coronavirus?

Well, John, I -- well, we certainly have stated on the pushouts that we have directly seen from customers that they themselves are explaining that and saying that, that is turning around and they're planning to move forward. We have some customers that have, for the first time, actually given us heads-up of capacity and forecast. I think related to guidance and that, I mean, certainly, in the Board discussions, it's -- there's a sense of how aggressive or conservative should we be in this environment. We want to make sure that we can do what we're saying we're going to do. And there's obviously certain things that are out of our control, but we believe that this is a comfortable number.

Gayn, I'd like to add a comment related -- comparative to prior year. So if you take a look just at wafer-level burn-in, even though our overall total revenues only went up 6%, wafer-level burn-in went up 39% or $5.3 million compared to last year. So even though we didn't get any system revenues in Q4, and there were the pushouts really we talked about, we did recognize a 39% increase. One of the items built into the numbers was we had a decrease of $4.1 million, if you take a look at our packaged parts revenue and our customer service business that included the upgrades of ABTS systems from prior year. So keep in mind, building into our model in FY 2020 were additional revenues in those areas as well.

My last comment is just that I really think you guys should take a serious look at your Board ahead of this year's proxy season. It looks like it could use a refresh under ISS standards, and I think that's something that could maybe help you guys progress more rapidly or bring a set of fresh eyes to the entire situation. So I would recommend that as a shareholder and otherwise.

All right, John. Appreciate it. And just a comment, just in general, I know there was a specific question there. Actually very happy with -- we've added a couple of -- there's been a transition in our Board over the last couple of years of adding some additional Board members: Laura Oliphant who had been a Capital Director at Intel, very influential, has been wonderful; John came on our Board a couple of years ago as well. And we did actually have a lead Board member, an independent Board member, pass away during the year. And there's been some discussions about when is the appropriate time to add a Board member both for any kind of government-related things and then just honestly, with some reasonable balance and expenses and others. So I appreciate it, John.

We'll take our next question from Geoff Scott with Scott Asset Management.

First question. You added a new sales rep in, I guess, German base to cover the European account. How long do you think it will take to get some sense as to whether or not that is working out? And precisely, what kind of metrics will you be looking at to determine whether or not it was a good move? Is that number of new customers? Is it dollar volume that they're able to generate? Please help me out.

Okay. Well, a couple of things there. I mean, certainly, early on -- and I, with David and so did Vernon, made several trips and had customer calls with them. And I was really pleased with the level of -- I guess, the number of quality customers and the levels within those customers they were able to get to. And the last time we were there was, I think, February or March. One of the things that definitely has impacted us has been some of the international travel. I think Ken kind of alluded to it, the expense controls. It's not very hard to have expense controls right now. So we've been doing some pretty creative things with our reps and with -- remember, we have employees around the world to ensure that it's not limiting our capabilities for installations and support of customers. But HTT, who's out of Germany and covers our Northern Europe, has actually been a good start. I do expect them to move from great customer calls to orders, both in terms of volume, quality and eventually, dollars as well. And those are expectations that we would have starting this year as well as reps in Southern Europe and we are working to close on a rep or 2 in Japan right now. We've already been in discussions, but we didn't formalize anything with them, and looking at some other things. There's absolutely people that are really good at some of these nonsilicon application customers around silicon carbide, in particular, but also silicon photonics that we're trying to bring on. So I'm hoping and expecting -- and Vernon has metrics around getting more sales to those reps as well.

Okay. Next question. You have been working on engineering for a more fully automated FOX system. Where are you on that engineering progress?

That is a system that is still in development. We haven't talked and given customers exactly what the integration and lead time is due to some specific competitive and other reasons, but that is in the process. I'm just going to leave it at that for now.

Sure. Okay. Last question. I'll have to go back and kind of parse the statements made about the Tier 1 customers, Tier 2 customers, things like that. But my gut instinct is that if you add up the revenue guidance for fiscal '21, that virtually all of that is coming from further penetration of existing customers and no need for any real new customers. Is that fair?

That is fair. But I also want to just point out that's not because we think we are going to win new customers. So if you want to take that from how conservative we are, it's like, guys, I'm not starting off this year thinking that if we can just win that one big guy, I can make my numbers. That is not the case. We can build up that guidance entirely with current customers and applications.

What my sense was any new customer would represent an upside from that guide range that you gave us. Is that good?

Yes, that is true. And to be balanced, it obviously creates some potential for derisking, but yes.

Yes. Okay. So the guidance is really going into production from existing customers as opposed to a hope lift that you're going to give -- get -- sign up any large new customers.

That's fair.

We'll take our next question from Tom Diffely with D.A. Davidson.

Yes, quick question on the balance sheet. Assuming that you do get a couple of customers that happen to come at the same time, what can you say in terms of working capital or inventory builds and the balance sheet?

All right. So in terms of the balance sheet and inventory builds and capitalization, we have $8 million in inventory as of the end of May 31, $6.5 million of that is in our FOX-P product. And included in that is about $1.7 million in what we call our demo lab. This is turnkey, so it allows for quick turns on that. And the benefit of that is we can turn quickly, and we do not need to add inventory. We're in a position where we don't expect a tremendous increase in inventory to meet our goals during the period and don't expect a whole lot of additional capitalization to be able to fund that.

And Tom, also, just to put it in perspective, we had -- and it's interesting. I think I talked about this the last quarter and didn't do in this. I certainly had enough content already. But this last year, one of the other big things that we did, we just did our end-of-year plan, is we significantly lowered our lead times for our WaferPaks and increased capacity. So we're able to do short turn, quick turns on fully custom WaferPaks and DiePaks. And what's important about that is we don't need any new material around for. And given that half of our business is DiePaks and WaferPaks, you could say, oh, wow, that's it. But we really -- in most cases, we're being paid by our customers by the time we pay our vendors on those things. So -- and then lastly, actually, we didn't talk about it because we actually didn't use it. We did put in place a line of credit this last quarter. I don't think -- do you want to cover that a little bit, Ken?

Sure. It actually was prior to last quarter, but with our banker, Silicon Valley Bank, we have a $4 million line of credit that's available to borrow for domestic AR. And we have not borrowed any of those funds that are available to us through the bank. So we have that ability. Plus, we also have customers that also allow to factor any open AR that's actually at a rate that approximate prime. So it's very favorable with these Tier 1 customers, in fact, one of our lead customers. So there's many avenues that we have to really build our cash position as needed.