AXT Q3 2024 Earnings Call Transcript

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October 31, 2024

There are 6 speakers on the call.

Operator

Good afternoon, everyone, and welcome to AXT's Third Quarter 20 24 Financial Conference Call. Leading the call today from China is Doctor. Morris Young, Chief Executive Officer and Gary Fisher, Chief Financial Officer. In addition, Tim Beddles, AXT's Vice President of Business Development, will be participating in the Q and A portion of the call. My name is Christina, and I will be your conference coordinator today.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer And 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 to your questions, 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 emerging applications using chips or devices fabricated on our substrates our product mix global economic and political conditions, including trade tariffs and import and export restrictions our ability to increase orders and succeeding quarters, to control costs and expenses, to improve manufacturing yields and efficiencies, or to utilize our manufacturing capacity. We wish to caution you that such statements deal 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. In addition to the matters just listed, these uncertainties and risks include, but are not limited to, the financial performance of our partially owned supply chain companies, increased environmental regulations in China and COVID or other outbreaks of a contagious disease. In addition to the factors just mentioned or that may be discussed on this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission.

Speaker 1

These are available online by link from our site and contain additional information on risk factors that could cause actual results to differ materially from our expectations. The conference call will be available on our Web site at axt.com through October 31, 2025. I also want to note that shortly following the close of market today, we issued a press release reporting financial results for the Q3 of 2024. 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 2024 results.

Speaker 1

Gary?

Speaker 2

Thanks, Leslie, and good afternoon to everyone. Revenue for the Q3 of 2024 was $23,600,000 compared with $27,900,000 in the Q2 of 2024 and $17,400,000 in the Q3 of 2023. To break down our Q3 'twenty four revenue for you by product category, indium phosphide was $6,800,000 reflecting continued demand and data center applications, including AI, as well as passive optical networks. Gallium arsenide was $6,600,000 in line with the pullback we expected after the strong growth in Q2. Germanium substrates were $1,600,000 down from the prior quarter based on our decision to walk away from certain low margin business opportunities.

Speaker 2

Finally, revenue from our consolidated raw material joint venture companies in Q3 was $8,600,000 dollars based on continued healthy demand. In the Q3 of 2024, revenue from Asia Pacific was 77%, Europe 12% and North America 11%. The top 5 customers generated approximately 29.4 percent of total revenue and no customer was over the 10% level. Non GAAP gross margin in the 3rd quarter was 24.3% compared with 27.6% in Q2 2024 and 11.3% in Q3 of 2023. For those who prefer to track results on a GAAP basis, gross margin in the 3rd quarter was 24.0% compared with 27.4% in Q2 twenty twenty four and 10.7% in Q3 of 2023.

Speaker 2

On to operating expenses, total non GAAP operating expense in Q3 was $9,000,000 compared with $8,900,000 in Q2 of 2024 and $7,800,000 in Q3 of 2023. On a GAAP basis, total operating expense in Q3 of 2024 was $9,100,000 compared with $9,500,000 in Q2 $8,600,000 in Q3 of last year. We expect OpEx to be holding at approximately this level throughout the balance of 2024. Our non GAAP operating loss for the Q3 of 2024 was $2,600,000 compared with a non GAAP operating loss in Q2 of 1,200,000 dollars and a non GAAP operating loss of $5,800,000 in Q3 of 2023. For reference, our GAAP operating line for the Q3 of 2024 was a loss of $3,400,000 compared with an operating loss of $1,900,000 in Q2 of 2024 and an operating loss of $6,700,000 in Q3 of 2023.

Speaker 2

Non operating other income and expense and other items below the operating line for the Q3 of 2024 was a net gain of $469,000 The details can be seen in the P and L included in our press release today. For Q3, twenty twenty four, we had a non GAAP net loss of $2,100,000 or $0.05 per share compared to the non GAAP net loss of $800,000 or $0.02 per share in the Q2 of 2024. The non GAAP net loss of Q3 2023 was $4,900,000 or $0.12 per share. On a GAAP basis, net loss in Q3 was $2,900,000 or $0.07 per share. In comparison, net loss was $1,500,000 or $0.04 per share in the Q2 of 2024.

Speaker 2

GAAP net loss in Q3 of 2023 was $5,800,000 or $0.14 per share. The weighted average basic shares outstanding in Q3 of 2024 was 43,200,000. Dollars Cash, cash equivalents and investments decreased by $4,500,000 to $38,800,000 as of September 30. By comparison at June 30, it was $43,300,000 Depreciation and amortization in the 2nd quarter was 2,300,000 dollars Total stock comp was $800,000 Net inventory was up slightly in the 2nd quarter to $86,100,000 This includes inventory added through our recycling program. 36% of the inventory is raw materials and width is 61%.

Speaker 2

Finished goods makes up approximately 3%. Okay. This concludes the discussion of our quarterly financial results. Turning to our plan to list our subsidiary Tongmei in China on the STAR market in Shanghai, let me give you a brief update on the IPO status. We have continued to keep our application current.

Speaker 2

Last year and part of this year, the total value of the Shanghai Stock Exchange struggled as the China economy slowed and the real estate sector moved down significantly, this trend resulted in much fewer IPOs. It also led to weaker IPO applicants being removed from the in process category. We are encouraged that Tongmei was not one of those companies. We are still part of the in process group and it is a much more selective and smaller group than a few years ago. More recently, the substantive stimulus package in China has helped the economy and boosted the total value of the Shanghai Stock Exchange.

Speaker 2

And we believe these movements may be generating positive momentum for IPOs and for Tongmei. We have continued to lead the team with a diligent energy as we think that Tongmei is a good IPO candidate. We'll keep you informed and hope to have good news to deliver to you. With that, I'll turn it over to Doctor. Morris Young for a review of our business and markets.

Speaker 2

Morris?

Speaker 3

Thank you, Gary. Q3 came largely in line with our expectations. Coming off of a stronger than expected Q2, the primary difference from our guidance was our lower germanium substrate volume, which reflected our choice not to participate in certain low margin opportunities. Outside of this, data center related demand remains solid for our indium phosphide substrates and we are beginning to show to grow our market share in HPT devices for wireless handsets. Looking individually at our product lines, in indium phosphide, datacenter high speed optical connectivity and AI continues to be our strongest drivers.

Speaker 3

In particular, growth in demand for high speed VCSELs of 100 gig or faster per line is opening a greenfield market opportunity for indium phosphide based photodetectors in 408 100 gig multimodeopticalinterconnects for short distances. We saw indium phosphide orders related to 800 gig applications in Q1 and Q2 and have received a follow on order in Q4, which puts us on track for healthy growth in 2025. In addition to photodetector applications, we know that indium phosphide will be a necessary material for high speed lasers as the industry moves through 800 gig and 1.60 pluggable transceivers for medium to longer distance transmission beginning in 2025. We're working with a number of customers and are already seeing exciting opportunities with next generation silicon photonics devices and electro absorption modulated lasers or EMLs. For example, we're seeing growth in demand with increased orders in Q3 and Q4 from 1 of our larger silicon photonics customers for optical transceivers.

Speaker 3

In addition, we have developed a new indium phosphide product, targeting silicate catalysts and EMLs. We have our 1st design win with our leading customer and multiple ongoing qualifications with additional customers. Our gallium arsenide revenue pulled back in Q3 as expected after growing more than 20% in Q2. Overall, the market recovery is somewhat lumpy, particularly given the weak economic conditions in China. But new fiscal stimulus in China announced in September could provide a catalyst for an improving market environment.

Speaker 3

This will benefit demand across a broad base of applications, including power amplifiers, HCT applications for wireless switches, high speed power industrial lasers and LEDs. We continue to be encouraged by our relatively new traction in HBT applications by bringing the learnings from our product as advancing in our 8 inches gallium arsenide development to our 6 inches gallium arsenide wafer production. We believe we can improve our cost structure and provide a highly competitive solution to a market where our penetration historically is slow. Initial shipment into our leading customers gives a confidence that we can be successful in gaining additional share. We expect our revenue from these applications to grow in 2035 as we continue to ramp.

Speaker 3

In addition, our gallium arsenide recycling effort continue to be successful. We're now fully licensed and processing material that we have collected over time, but did not have the capability to recycle. This is visible to the investment community in both of our revenue and gross margin SG and A, one of our raw material joint venture companies. These efforts also advance our ESG commitment and drive meaningful efficiency in our manufacturing. Turning to germanium sector.

Speaker 3

With the rapid rise in germanium raw material pricing, which negatively affect our gross margins, We are being highly selective in the opportunity we choose to participate in. This impacted our revenue in Q3 and will bring our germanium revenue down meaningfully again in Q4. We expect that they will govern in Q4 with limited overall contribution so that they will no longer be a headwind to our growth as we expand in other areas of our business. We do believe that the market for low office satellite shows promise in the coming quarters and we will participate in those opportunities where we can derive corporate level business values. And finally, our raw material business grew again in Q3, increasing demand, stable gallon prices and the success of our recycling assets.

Speaker 3

Our portfolio of joint ventures of raw material companies continue to be a strategy value to our business and continually to contribute positively to our results. In closing, we are optimistic about the growth and expansion of our business over the coming quarters. Data center represents a great opportunity for us in our indium phosphide business And we see further tailwinds in 2025 with recovery of telecom and CapEx spending for power and backhaul applications. Our Jiangnan On-site business is poised to benefit from the growth in XBT applications and we believe a strengthening of the economy in China in 2035 is likely to be positive catalyst for improvement in wide variety of applications, including industrial lasers and LED. We remain highly focused accelerating our return to profitability and look forward to reporting to you our progress.

Speaker 3

With that, I'll turn the call back to Gary for our Q4 guidance. Gary?

Speaker 2

Thanks, Morris. In keeping with our comments today, we expect Q4 revenue to be slightly improved, coming in between $23,000,000 $25,000,000 This takes into consideration growth in our indium phosphide substrates, driven by data center applications as well as approximately consistent contribution from our gallium arsenide substrates and stronger raw material revenues. Growth in these areas is expected to be partially offset by a decrease in germanium revenues, which are likely to bottom out in Q4. We are pleased by the growth in the most strategic parts of our business and we believe we are positioning ourselves strongly for 2025. In terms of the rest of our guidance, with the expectation of contingent healthy gross margin performance, we expect our non GAAP net loss will be in the range of $0.03 to $0.05 and GAAP net loss will be in the range of $0.05 to $0.07 Share count will be approximately 43,100,000 shares.

Speaker 2

Okay. This concludes our prepared comments. We'd be glad to answer your questions. Christina, operator?

Operator

Yes. Thank you. And at this time, just a reminder, if you do have a question Thank you. Your first question comes from the line of Richard Shannon from Craig Hallum. Your line is open.

Speaker 4

Hi, Morris and Gary. Thanks for taking my questions here. I Guess there's a number of them that seem important to ask here. Let me just look back into the Q3 here real briefly and understand the dynamics relative to the Germanium business here. How big of a surprise was this of the, I would assume, is a difficult pricing environment?

Speaker 4

Is this a business you expect to hope to continue and compete in and generate revenues like you have in the past? Or is this a serially lower level of revenues you expect in this business over time?

Speaker 3

Yes. I think germanium raw material price more than doubled during the Q3. And

Speaker 5

as you

Speaker 3

know, it's difficult to increase price to our customers because most of our customers are satellite, hotel builders and so they have their own budget. So we opted not to quote those not very attractive margins. So we're going to decline some more business in Q4. So that will reduce our expectation of germanium. However, the germanium substrate business, I believe still has a we have a solid footing in that business, other than the fact that it's very much dependent on the cost of raw material.

Speaker 3

But what I see is our competitors will have the same problem as we are. So we think as the market settles down and everybody starts to come, we believe we're highly competitive. So as the market settles out, we will come back to the market. As you know that low office satellite business is booming and is scheduled to have, I think Elon Musk is to have 40,000 low satellite, low attitude satellite and China is going to launch a number of satellite up there as well. So I think that market eventually will come back, but we will see how the pricing structure evolves.

Speaker 4

Okay. That's helpful and good to know. Thanks for that Morris. Let's touch a question or 2 on Indian Fireflies, probably your most strategic business here. I guess wanted to get the sense of the drivers here you're talking about for growth here.

Speaker 4

I mentioned data centers, this mean, photo detectors or silicon photonics or maybe just be more clear on what's the growth drivers there?

Speaker 5

Yes. So Yes. I can take that.

Speaker 3

Yes. Go ahead.

Speaker 5

Sorry. Go ahead. Thanks for your question. This is Tim. We believe that AI and data center revenues will be strong growth for us.

Speaker 5

And we think we're seeing the beginnings of that right now. We've seen some good increases in demand in Q3 and Q4. So what we're really looking at here is we're looking at indium phosphide based high speed photodetectors that go into a VCSEL photodetector pair for a multimode transceiver. So we all know that the short distance multimode transceiver market is growing quickly at the moment. And as the speeds of the VCSELs go to 100 gig per line and higher, There's a need to move to an ingas photogener.

Speaker 5

So we're seeing quite a lot of increase in that and we're participating well in that. So we believe that's a greenfield opportunity for us that is only set to grow through the rest of this year and then into next. We're also participating strongly. We've chosen to focus on the silicon photonics and the EML applications, Where are substrate benefits really, really count to these devices? So we penetrated some key silicon photonics customers and also some EML customers and we're seeing growth in there as well.

Speaker 4

Okay. And Tim, just to follow-up on this, just to be clear on this last topic here, silicon photonics, these are these are specifically for lasers and not photo detectors, is that correct?

Speaker 5

Yes, that's correct. It's predominantly CW DFB lasers or other lasers that go into that silicon photonics business, correct.

Speaker 4

Okay. Fair enough, Harry. And how would you characterize the breadth of engagements and visibility into that growth? Do we have wins in place? We have forecasts in place?

Speaker 4

How do we think about the kind of general trajectory here? And what could this be for AXT over the next say 1 to 2 years?

Speaker 5

Right. So yes, we're definitely participating heavily in that. I think we're in a number of the key customers in this space. And what we're seeing so far is we're seeing growth in our silicon photonics sector over the next 1 to 3 years as being one of the largest sectors of the data center business and specifically at this time for the transceiver product. We are, as I say, participating heavily with a number of customers in that market already for their lasers.

Speaker 5

We've still got some more work to do. We've still got some other customers that we need to get qualified with. But as Morris said in the discussion, we have a design win with a new product that we've launched specifically for silicon photonics and EML, and we're qualifying a number of other customers. So we see the opportunities there of being really big.

Speaker 4

Okay, wonderful. Thanks for that detail, Tim. Maybe one last question, I'll jump out of line. Morris, you had mentioned in your prepared remarks about some opportunities here with HBTs, noting as I think most of us know that it's been a market you've been underpenetrated for quite some time. Maybe talk to where and how you're getting design wins?

Speaker 4

What kind of again, what kind of visibility you're seeing here? What kind of share is possible in this market? Again, it's one where you haven't been. And I would imagine the incumbents here might be might resist losing share here. So I just want to get a sense of how big we can see this market getting over time?

Speaker 3

Yes. This market size is about $80,000,000 to $100,000,000 and it's a sort of a steady business depending upon how much more 5 gs phone are built because they require more HPTs per phone. And I think the interest in our participation in the HPT market really comes from a number of China customers who worried about because of the gallon restrictions from exporting out of China. So they want a diversified supplier. So we've got sort of that door opening for us.

Speaker 3

And we believe we spend a lot of development effort into the age development. We think that was very successful. We have been able to improve our yield as well as our characteristic of the age. But unfortunately, that age program has slowed, but we find that what we learned on the age, we can just easily apply into the 6 inches program, so that we should be able to reduce our cost, improving our yield. And with the newer demand for the HPT for 6 inches I think we're highly competitive because I think right now we have approximately 10% of their market share.

Speaker 3

And as you know, there are only 3 players in this competitive landscape. So we believe that we have plenty of opportunity to increase our share.

Speaker 4

Okay. Appreciate those details. I will jump at the line guys. Thank

Operator

Okay. And we do have another question from Richard Shannon from Craig Hallum. Your line is open.

Speaker 4

Well, great. I'm not sure if I got out of line, but thanks for another opportunity here. Maybe just one or two quick ones guys. Morris, you had talked about stimulus opportunity in China. Maybe you can talk to which product or product line or lines you expect to see impact, how fast that might happen?

Speaker 4

And then if we're trying to judge you on your China based revenues over, say, the next couple of quarters, how should we think about where that can go?

Speaker 3

Yes. I think our indium phosphide opportunity are mainly our direct customers, we believe are mainly Western customers, although we sell into active customers, but where do they go? They probably go through 1 or 2 layers of device makers, but they could then go into the hypersenters in United States. And although China data center, I believe the speed is slower, but definitely they will also enjoy that market when they expand. I mean, China market really, I think from what we know, the laser market, high power laser market is really very sensitive to the economic activities.

Speaker 3

As you know, that lasers are mainly used for high power cutting tools. And so both in battery manufacturing as well as the automobile manufacturing, when the economy slows a bit, their demand dries up. And LED is the other example. And if you make a whole lot more cars, I think the LED demand is going to go up. So is cell phones.

Speaker 3

As you know that cell phones was sort of having a recovery sometime early this year, coming from a really low selling volume during COVID. But I think the economy in China right now, especially second half of the year, is not really strong. So we believe that anything related to consumer, industrial activities and cell phone in particular, I think if they go up, they should help us. So I think the stimulus package will not only help us in terms of our product offering activities, but also I believe will positively impact us to help us to grow IPO because the Shanghai Stock Exchange, the index has moved from the bottom. Last I saw was almost like 30% up.

Speaker 3

So I think that if the momentum builds, I think that should clear the way for us to go public in China.

Speaker 4

Okay. That is helpful. Thanks for that, Morris. I'm going to touch on my last question related to that in a second, but just want to touch on again, I think you made a brief comment relative to the telecom market, which we haven't heard about in a little while here. It sounds like you're seeing some signs of visibility in that market.

Speaker 4

I assume again that's, to be clear, excluding the PON market, if you can if that's the case, please be clear on that one. But are you getting any sense of visibility in terms of orders or other things that indicate telecoms can be an improvement next

Speaker 3

year? Richard, I think right now, I think it's steady. But it's not going down. I mean, it's not like last year. Last year, it's almost all dried up.

Speaker 3

Everybody said they got too much inventory. But right now, we gauge that by looking at our Palms market activity. They are, if I would say, the boom time is 100, the low was maybe 20, we're around 30. Okay. All

Speaker 4

right. That's fair. One last question here, just kind of hitting on the topic of China as it relates to the potential star listing. You mentioned the market regulator whatever winnowing out some of the weaker opportunities there and AXT has been left in here. I guess maybe if there's any positive signs or interactions you can suggest that we're seeing some progress moving forward.

Speaker 4

Obviously, you've been talking about this for more than a couple of years and want to get a sense of if there's any positive signals here rather than just a lack of negatives.

Speaker 3

Yes, Richard. That's it's a good question, but it's a hard question for me. I think one of the difficulty, I mean, I think when we first applied, we were fairly opportunistic because at that time, China's stock exchange was approving something like 3 to 4 company going public per week, okay. But ever since early 2020, but we got some questions with the China Stock Exchange. They go through each of the companies all the way from executive personal finances, they look very thoroughly on your account payable, receivable as well as your inventory and who you sell to.

Speaker 3

And they do, I would say, 100% more due diligence on everything what you do. But ever since COVID happened and the market collapsed, especially in real estate, and that drives up all the Shanghai Stock Exchange public market activities. So they start to blame and say, hey, don't bring any more public company public unless they are stellar in performance as well as they are needed for the to drive the economic advancement, especially in high technology. I think we sit on the latter bill. But however, with the

Speaker 5

revenue

Speaker 3

rundown for us for the last 2 years definitely didn't help. But I think our revenue is coming back and the Shanghai Stock Exchange because of the stimulus package is coming back a bit as well as we have resolved that we're seeing a major issue with one of their concerns in the last quarter or so. And hopefully that we are seeing the light at the end of the tunnel here.

Speaker 4

Fair enough, appreciate it.

Speaker 3

I think, I'm sort of dancing a little bit because I although I think I'm fairly optimistic, but it's really very much up to them. They have to check all the boxes. They have to approve everything before they let us go.

Speaker 4

Right. Okay. Well, I appreciate all that detail, Morris. I will jump at the line again. Thank you.

Operator

Thank you. And with no further questions, I'll turn the floor back over to Doctor. Morris Young.

Speaker 3

Thank you for your participation in our conference call. Before we report earnings to you again, We will be participating in the Needham Growth Conference. We hope to see you many of you there. As always, please feel free to contact me, Gary Fisher or Leslie Green if you would like to set up a call with us. We look forward to speaking with you in the near future.

Operator

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

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