AXT Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 2, 2023

There are 5 speakers on the call.

Operator

Good afternoon, everyone, and welcome to AXT's Third Quarter 2023 Financial Conference Call. Leading the call today is Doctor. Morris Young, Chief Executive Officer and Gary Fisher, Chief Financial Officer. My name is Christina, and I will be your coordinator today. At this time, all participants are in a listen only mode.

Operator

Later, we will conduct a question and answer Thank you. I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Speaker 1

Thank you, Christina, and good afternoon, everyone. Before we begin, I would like to remind you that during the course of this conference call, including comments made in response We will provide projections or make other forward looking statements regarding, among other things, the future financial performance of the company, market conditions and trends, including expected growth in the markets we serve, emerging applications using chips or devices fabricated on our substrates, our product mix, our ability to increase orders in succeeding quarters, to control costs and expenses, to move manufacturing yields and efficiency, and to utilize our manufacturing capacity, the growing environmental, health and safety and chemical industry regulations in China as well as global economic and political conditions, including trade tariffs restrictions. We wish to caution you that such statements due with future events, are based on management's current expectations and are subject to risks and uncertainties that could cause actual events or results to differ materially. These uncertainties and risks Include, but are not limited to, overall conditions in the markets in which the company competes, global financial conditions and uncertainties, COVID-nineteen and other outbreaks of contagious disease, potential tariffs and trade restrictions, increased environmental regulations in China, the financial performance of our partially owned supply chain company and the impact of delays by our customers on the timing of sales and their products.

Speaker 1

In addition to the factors that may be discussed on this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission. From our current expectations. This conference call will be available on our website ataxt.com through November 2, 2024.

Speaker 2

Also before

Speaker 1

we begin, I want to note that shortly following the close of market today, we issued a press release reporting financial results for the Q3 of 2023. This information is available on the Investor Relations portion of our website ataxt.com. I would now like to turn the call over to Gary Fischer for a review of our Q3 results. Gary?

Speaker 3

Thank you, Leslie. Good afternoon to everyone. Revenue for the Q3 of 2023 was $17,400,000 down from $18,600,000 in the Q2 of 2023 and down from $35,200,000 in the Q3 of 2022. To break down our Q3 'twenty three revenue for you by product line, indium phosphide came in at $4,900,000 reflecting a stabilizing market with modest improvement in data center applications. Gallium arsenide was $4,200,000 We are pleased to obtain our first permits to ship gallium arsenide substrates during the quarter We continue to work through that process on behalf of a growing number of our Gallium arsenide customers.

Speaker 3

Germanium substrates were $1,200,000 up from the prior quarter also reflecting our progress in obtaining permits on behalf of our customers. Finally, revenue from our 2 consolidated raw material joint venture companies in Q3 was $7,000,000 In the Q3 of 2023, revenue from Asia Pacific was 82%, Europe was 14% and North America was 4%. The top five customers generated approximately 31% of total revenue and no customers over the 10% level. Non GAAP gross margin in the 3rd quarter was 11.3% compared with 9.8% in Q2 and 42.2 percent in Q3 of 2022. For those who prefer to track results on a GAAP basis, Gross margin in the 3rd quarter was 10.7% compared with 9.2% in Q2 and 42.0% in Q3 of 2022.

Speaker 3

The primary drivers affecting our corporate gross margin in Q3 were volume, product mix and an improvement in our raw material business gross margin. Beyond the near term, we remain confident that we can get back to the mid-thirty percent range as the environment strengthens through higher overall volume, more favorable product mix and the benefits of our recycling programs along with continued efficiency improvements throughout our business. Moving to our operating expenses, with the reduction in overall revenue, we have maintained spending discipline in our operating expenses to align with the current environment. Total non GAAP operating expense in Q3 was $7,800,000 consistent with our results in Q2 2023 and down from $9,200,000 in Q3 of 2022. On a GAAP basis, total operating expenses in Q3 was 8,600,000 consistent with our results in Q2 of 2023 and down from $10,200,000 in Q3 of 2022.

Speaker 3

Our non GAAP operating income for the Q3 of 2023 was a loss of $5,800,000 compared with the non GAAP operating loss in Q2 of 2023

Speaker 2

of $5,900,000 and the non

Speaker 3

GAAP operating profit of $5,600,000 in Q3 of 2022. For reference, our GAAP operating line for the Q3 of 2023 was a loss of $6,700,000 compared with an operating loss of $6,800,000 in Q2 and an operating profit of $4,600,000 in Q3 of 2022. Non operating other income and expense and other items below the operating line for the Q3 of 2023 was a net gain of 900,000 The details can be seen in the P and L included in our press release today. For Q3 2023, We had a non GAAP net loss of $4,900,000 or $0.12 per share compared with a non GAAP net loss of $4,200,000 or $0.10 per share in the Q2 of 2023. Non GAAP net income in Q3 2022 was $6,800,000 or $0.16 per share.

Speaker 3

On a GAAP basis, net loss in Q3 was $5,800,000 or $0.14 per share. By comparison, net loss was $5,100,000 or $0.12 per share in the Q2 of 2023. GAAP net income in Q3 twenty $2,000,000 was $5,800,000 or $0.13 per share. The weighted average basic shares outstanding in Q3 was 42,600,000. Cash, cash equivalents and investments were $43,600,000 as of September 30.

Speaker 3

By comparison at June 30, it was 49,600,000 The reduction in cash was primarily due to net cash generated by operating activities. Although last quarter that was positive in Q3, It was negative this quarter. Depreciation and amortization in the Q3 was $2,200,000 and CapEx was about 4,000,000 Total stock comp was $900,000 As I mentioned, net inventory came down by $700,000 to $86,400,000 at September 30, 41% of the inventory is raw materials and WIP is 55%. Finished goods makes up only approximately 4%. Okay.

Speaker 3

This concludes the report on our quarterly financial results. Turning to our plan to list our subsidiary Tongmei in China on the star market in Shanghai. We do need to resolve one open item. Morris is in China as we speak and is working on this matter. Although it is moving slower than we expected, We are making progress and we are confident that Tongmei remains an excellent candidate for a listing and will be approved to proceed.

Speaker 3

With that, I'll now turn the call over to Doctor. Morris Young for a review of our business and markets. Morris, welcome from China.

Speaker 2

Thank you, Gary, and good morning, everybody. Well, this is China here in the morning. The demand environment in Q3 remains stable, and we were pleased to see some encouraging early signs of improvement in the data center market, resulting in modest higher indium phosphide revenues. We still believe The inventory delay production across our markets will continue through the end of the year and in some cases May persist into 2024. But we believe the worst of the declines are behind us, and we're looking forward to the New Year with optimism.

Speaker 2

We've worked diligently throughout 2023 to advance our innovation in large diameter substrates and to support and make new emerging opportunities across our portfolio. In indium phosphide, as the data center market prepares To move to 800 gig data rates, we are seeing increased development around next generation silicon photonics devices an Electro Absorption Modulating Lasers, or EML, for high speed datacenter transceivers. The growing adoption of AI technology is providing a strong catalyst for the industry transition to higher speed, and we are excited to be engaging with customers for new opportunities as the market expands. Our proven performance in optical devices for the data center coupled with our success in developing 6 inches indium phosphide substrates is putting us in a solid position for both current and future generation of data center optical devices. We're also seeing positive development activities in both consumer and healthcare applications for indium phosphide.

Speaker 2

This further reinforces our conviction that we are in a very early stage in the adoption of this material across a multitude of emerging applications. Our early success not only validates indium phosphide as a material of strategic importance, It validates AXT as a world class supplier to Tier 1 Companies. We believe that the next 2 years will see the further expansion into these and other areas. Now in gallium arsenide, we're pleased to announce in September that Tongmei, our subsidiary in China, received its initial export line permits and was able to resume shipping gallium arsenide substrates and germanium substrates in the second half of September to a number of our customers. We made good progress in filling customer orders and minimizing disruptions.

Speaker 2

We're very proud of the way our team has responded quickly Effectively, and we're grateful for the partnership of our customers in working with us through this process. Like indium phosphide, the market for gallium arsenide remains weak, but stable. With inventory digestion likely to continue into 2024. That said, we are actively It's coming with a new wave of innovation in our markets. We're pleased by the progress we're making in our 8 inches gallium arsenide for customers.

Speaker 2

This consumer high end display and automotive applications for microLEDs, Today, our customers work for application specifications for microLEDs are exponentially more stranger than they were when our A inch development began. And yet, we have been able to meet these requirements, delivering outstanding T Card Density results in volume. We feel very confident in our ability to serve this emerging market. We believe that there will be a growing number of use cases in development. Our expectation is that product development Multiple customers is likely to run throughout 2044 with the first microLED product coming to market in 2035 and beyond.

Speaker 2

In Q3, we saw A modest increase in our germanium substrate revenue, Tongmei received the 1st export permits for germanium substrate customers during the quarter and was able to ship accordingly. Overall, the solar cell satellite market is navigating similar cyclical headwinds as the other markets. But we are confident that this area of our business will recover as the market strengthens. Finally, sales from our raw material business trended down slightly in the quarter, but gross margin improved from Q2. Overall, the pricing environment remains relatively stable, and we don't expect any major changes for Q4.

Speaker 2

In closing, we're looking forward to the new year with renewed optimism. While inventory rationalization may persist into the New Year, we're pleased to be seeing the early signs that we can make a positive change for 2024. We believe that the trend That has been driven our revenue and customer expansion remain very much intact. Further, We have executed well in our development of large diameter substrates that will pave the way for our opportunities in the acceleration devices, spending from data center, consumer and other markets. As we navigate the near term environment, we continue to prioritize our cost savings and efficiency.

Speaker 2

And we are focused on accelerating our return to profitability. I will now turn the call back to Gary for our Q4 guidance. Gary?

Speaker 3

Thank you, Morris. In keeping with our comments today, we expect Q4 revenue to be between $16,000,000 19,000,000 We expect our non GAAP net loss will be in the range of $0.13 to $0.15 and GAAP net loss will be in the range of $0.15 to $0.17 Share count will be approximately 42,600,000 shares. Okay. This concludes our prepared comments. Morris and I would be glad to answer your questions now.

Speaker 3

Christine, operator?

Operator

Yes. And we'll pause for just a moment to compile the Q and A roster. Okay. And your first question comes from the line of Richard Shannon from Craig Hallum. Your line is open.

Speaker 4

Well, hi, Morris and Gary. Thanks for taking my questions. And Morris, thanks for getting up so early in China this morning. Let's ask a question on the guidance here for the quarter just to kind of get the assumptions built in here. Obviously, the midpoint Roughly flat with the Q3, which makes sense giving your comments about stabilization.

Speaker 4

Are there any unusual trends within the Substrate buckets as well as raw materials to get to that point, are they all roughly similar to flat sequentially?

Speaker 3

I don't think there's much ripples or nuances. It's kind of business as usual, frankly. So, you know, yes, I don't have a lot of other color to add. So

Speaker 2

Yes. I think the only thing we yes, the only thing I may add is, Gallium Asset is We're still working through how many permits can we get. So I mean the more the permits we can get and Perhaps we can increase that slightly, but it's not a very significant increase.

Speaker 4

Okay. And then I guess basically I want to ask on indium phosphide given the importance of that revenue stream here. You're talking about the strength in data center, but hadn't mentioned anything about consumer telecom or some of the other markets there. So maybe you're going to kind of delineate Young. By the submarkets there are driving that in the Q4, you're still expecting data center to grow.

Speaker 4

And I guess specifically I want to touch on the fact that I think your large Customer in that area has transferred that transceiver business to another buyer. And so I want to get a sense of the degree to which that business will sustain.

Speaker 2

Gary, you want to take that? Or so let

Speaker 3

me Sure. I guess I can start and you can join if you want. So, data center is a strong sector for indium phosphide. Our business development guy, Tim Beddles, is kind of upbeat about it, frankly. So that's positive.

Speaker 3

The JBL transaction, we talked about this with Tim today and he actually feels it's a good decision. So basically, It will allow Intel to heat in his view, okay, to focus on their core strengths, and It shouldn't detract at all from our revenue stream to Intel. And if they grow and improve, it will increase. So Jabil becomes basically a systems integrator or that's what they do is assemble stuff. So and Tim thinks it's a good shift in the business model.

Speaker 3

But of course, it's our opinion from AXT and clearly it's Intel's decision. So we don't see it as a negative at all. We see it as a positive, so.

Speaker 4

Okay, fair enough. Maybe just a last topic on Indian Flash 5 here. Just want to get a sense of continued traction with consumer electronics applications, whether it's your big historical customer and any new ones coming in here, just Some thoughts on how you expect that to go over the next few quarters?

Speaker 2

Yes. We continue to work with our Customers, although it is still early, but we have sent samples to at least 2 customers Who potentially is going to decide how much the ramp and what's the timing for ramping. But we are In the early stage of qualification, but that application I understand is for consumer applications and is scheduled to launch, He will be successful in Q3 of 2024. So I think that activity is still I believe it's still I mean given the market is so dire, I think it's active and people are planning for Next generation application for indium

Speaker 4

phosphide. Okay, fair enough. Two more questions for me. I'll jump out of line. First one, just following up on the Comments on MicroLED, I may have missed something in there with a spotty line here.

Speaker 4

But I guess my General question here is, how is the environment here and the importance of this to your certain customers out there relative to last quarter? Are things holding in there in terms of timeframe and size or there is is there more uncertainty here in the as the macro certainly seem to get worse over the last 90 days?

Speaker 2

Well, I think the intention for customers to proceed It's firming up. I do believe they're coming. I think the only question I have What's the volume is going to be and how fast it's going to ramp up to the next phase, etcetera. I mean, given The initial ramp up volume production, I think, is somewhere around mid-twenty 25. And of course, she's going to ramp gradually from next year onwards and Into the first stage of production is 2025, I think.

Speaker 2

But I think that timing, Although it slipped from early predictions, but nevertheless, I think the customer is committed to go ahead with it.

Speaker 4

Okay. And last question for Gary is on cash flow. I think you Last quarter you were talking about trying to generate some positive working capital here and I see inventories are down slightly, but Perhaps you're expecting or hoping for a little bit more. What's your general thought here as we look on operating cash flow and working capital benefits this quarter and into the near future?

Speaker 3

Well, first of all, in terms of inventory, I've gone back With my coworkers sort of looked at some historic inventory levels when maybe we're doing $25,000,000 a quarter, dollars 30,000,000 a quarter. So It illustrates to me that we should be able to take inventory down. So I'm still targeting To do that, I think at a minimum, we should shrink it by at least $10,000,000 It's Reciprocally, it's easy to do that if our run rates are high and it's harder to do that when our run rates are so frankly modest right now. So I feel confident that we can do it and that we will do it. So it's In terms of and if you look at our overall like I was looking at the cash generated from operating activities in our internal cash flow thing.

Speaker 3

It's negative $280,000 for the 1st 9 months of this year. So because you're adding back depreciation, you're adding back Stock comp and there are some low hanging fruit items on the balance sheet. Inventory is 1, Accounts receivable is 1. Especially in China, we have Pretty long day sales outstanding, so I'd like to bring that in. So yes, I think it's okay.

Speaker 3

And I will of course be delighted to bank the IPO money, but in the meantime, I think we're safe.

Speaker 4

Okay. Fair enough. That is all for me guys. I will jump out of line.

Speaker 3

Thanks, Richard. Christina, any more questions?

Operator

Yes, so there are no further questions at this time. So I will turn the floor back over to Doctor. Morris Young.

Speaker 2

Thank you for your participation in our conference call. We will be presenting at the Needham Growth Conference in January and looking forward to see many of you there. As always, feel free to contact me, Gary Fisher or Leslie Green directly if you would like to set up a call with us. We look forward to speaking with you In the near

Speaker 3

future. Thanks, Morris.

Speaker 1

Thank you all.

Operator

Thank you. And this does conclude today's conference call. You may now disconnect.

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Earnings Conference Call
AXT Q3 2023
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