AEM Holdings Ltd (SGX: AWX) had some positive news to share this morning.
The test solutions provider announced that its next-generation Automated Burn-in (ABI) test system has been selected by a major fabless provider for high-performance compute (HPC) and artificial intelligence (AI) semiconductor chips.
Deliveries are expected to commence later this year.
The news could not come sooner as shares had fallen by a third over the past year and recently touched a 52-week low of S$2.09.
Does the group see any light at the end of the tunnel?
A downbeat set of earnings
AEM’s 2023 results were in line with the downturn in the semiconductor sector.
Revenue tumbled 45% year on year to S$481.3 million as more customers held back on testing as budgets were cut.
Operating profit plunged by 91% year on year to S$13.8 million.
The group incurred a net loss of S$1.2 million for 2023, a sharp reversal from the net profit of S$126.8 million a year ago.
Two exceptional items impacted AEM’s net profit – the settlement of a confidential arbitration amounting to around S$26.7 million, and an inventory shortfall that resulted in a S$21.1 million write-down.
Excluding these two items, profit before tax would have been S$38.3 million, still significantly lower than the S$158.7 million registered in the prior year.
Fortunately, the group generated a positive free cash flow of S$14.9 million for 2023.
AEM has decided not to pay out a final dividend but has, instead, declared a bonus issue of one share for every 100 owned.
Continuing with investments and customer engagement
Despite last year’s weak results, management has continued to drive investments in the business and has also reduced selling, general and administrative costs by 31% year on year for 2023.
Management made investments in critical research and development areas such as active thermal control.
These investments further expanded the group’s patent portfolio with nine new patents awarded.
Meanwhile, AEM has maintained strong customer engagement.
Before today’s announcement, it was expecting a ramp-up in production later this year, based on its customers’ product release schedules.
Sector demand remains strong
AEM is thrilled to secure the new orders.
Previously, the management team pointed out that the rapid adoption of artificial intelligence (AI) at the edge will drive further test demand.
In its latest earnings release, AEM said that the large electronic players are slated to release the initial batch of edge AI devices in the second half of 2024 to early 2025.
More importantly, there are various test challenges for these new devices.
These include increased power requirements, factory automation, increased device complexity, and increased test coverage requirements.
Hence, AEM’s latest win is a validation of the opportunity it sees.
The Singapore company’s core competence in AI chip testing means the group remains at the forefront of such technology and will be chosen as one of the key players as more new products are rolled out.
The optimistic scenario is for new test insertion wins to drive a more than fivefold revenue increase from 2023 to hit triple-digit millions by 2025.
The industry will eventually turn around
Based on today’s announcement, it seems that it is a matter of time before the semiconductor industry turns around.
According to management, inventory levels have normalised with end-customer demand for personal computers and smartphones expected to recover from 2023’s lows.
AEM believes it is well-positioned for the AI inflexion point as it shifts from the data centre to the edge later this year and beyond.
CEO Chandran Nair believes that the group’s core competencies have placed it in a strong position to capitalise on the upturn as the new batch of AI devices is released.
Today’s announcement is one step in that direction.
Get Smart: No update to the forecast for 1H 2024
During its latest earnings release, AEM issued its guidance for the first half of 2024 (1H 2024) with revenue coming in between S$170 million to S$200 million.
There was no update to its forecast in today’s announcement.
Meanwhile, the group opted not to provide a full-year forecast because of the uncertainty in product ramp-up timings from its multiple customers.
As it stands, the current revenue projection for 1H 2024 implies a 27% to 38% year-on-year decline in revenue.
Based on what management has provided and the trajectory of release for new AI devices, AEM looks set to see things get worse before the recovery kicks in.
Investors may need more patience for the semiconductor recovery to take place.
However, once it gets kick-started, AEM may see its revenue and profits shoot up once again.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
