AXT Inc (AXTI) 2002 Q4 法說會逐字稿

Good day to all if you need any assistance press star and zero. Welcome to AXT fourth quarter conference call with us is Dr. Morris Young. Please go ahead sir.

Hello welcome to AXT fourth quarter 2003 conference call. Thank you for taking the time for being with us this afternoon. I am president and CEO of AXT. With us today is Donald L. Tatzin our CFO. Donald will give you a detailed financial review of the fourth quarter and the full year. Following that I will comment on the quarter and current market conditions. Then I will close our prepared comments with forward-looking financial guidance. We will then open the call for questions and answers. Don.

Thank you Morris. Before we begin I would like to remind you during the course of this conference call we will make projections or other forward looks statements regarding among other things market conditions and trends, the future financial performance of the company, new products and the companies ability to bring them to market.

We wish to caution you that these statements are just prediction and actual events or results may differ materially. We refer you to the company S3, 10K and 10Q filings made with the Securities and Exchange Commission for additional information on risk factors that could cause actual results to differ materially from our current expectations.

Now, on to the results for the quarter. Revenue for the fourth quarter of 2002 was $12.3 million compared with $14.9 million in third quarter of 2002 and $15.4 in the fourth quarter of 2001. Revenue from our substrate division, which represents 69,& of total revenue for fourth quarter of 2002 was $8.5 million compared with $11.7 in the third quarter of 2002 with $11.5 in fourth quarter of 2001. Total subset revenue was $6.5 million for the fourth quarter of 2002 compared with $9 million in the third quarter 2002 and $6.8 million in the fourth quarter of 2001. Five and 6-inch diameter galley arsenate substrate revenue was $1.2 for the fourth quarter of 2002 compared with $3 million in the third quarter of 2002 and $1 million in the fourth quarter of 2001.

In the revenue 700,000 fourth quarter of 2002 compared with $1.1 million in the third quarter of 2002 and $3.3 million of fourth quarter of 2001. Revenue for out bill electronics division represented 31 percent of total revenue of the fourth quarter of 2002 with $3.8 million compared with $3.2 million in the third quarter of 2002 and compared with $3.9 million for the first quarter of 2001.

Revenues from our high brightness light emitting diodes $3.2 million in the fourth quarter of 2002 compared with $2.5 million in the third quarter 2002 and with $3.3 million in fourth quarter 2001. Revenue from laser products was $500,000 in the fourth quarter of 2002 compared with $700,000 in the third quarter of 2002 and was $600,000 in the fourth quarter of 2001.

In the fourth quarter of 2002, North America revenue was 36 percent, Asia Pacific was 51 percent and Europe was 13 percent of total revenue. By comparison, in the fourth quarter of 2001, North America revenue was 51 percent Asia Pacific was 37 percent and Europe was 12 percent of total revenue. One costumer for our light emitting diodes generated 10% of our revenue for this year. No other customer comprised more than 10 percent of our revenue for the quarter or for the full year. Gross margin was negative 85.9 percent of revenue for the fourth quarter of 2002 compared with negative 23.7% for the third quarter of 2002 and with negative 3.4 percent for the fourth quarter of 2001.

The reduction compared with the third quarter of 2002 is attributable to the charge of $9.7 million taken to reserve excess substrate inga and wafer inventory that we project will not be used when it reaches its reserve date in 2003. Without that charge, gross margin for the fourth quarter would have been negative 6.4 percent for the corporation. Gross margin at the substrate division was negative 114.6 % in the fourth quarter of 2002 inclusive of the charge described above. Without the inventory reserve charge gross margin was zero percent for the fourth quarter compared with negative 9.9% in the third quarter of 2002 and 0.9 percent in the fourth quarter of 2001.

Selling, general and administrative expenses were $3.8 million for the fourth quarter of 2002 compared with $5 million for the third quarter of 2002 and $4.4 million for the fourth quarter of 2001. The Decrease in SG&A compared with our costs in the third quarter of 2002 reflect further cost reduction efforts and a lower charge for uncollected accounts receivable.

Research and development costs were $1.1 million for the fourth quarter of 2002 compared with $1.3 million for the third quarter of 2002, and $1.4 million for the fourth quarter of 2001. As a percent of revenue R&D is similar to that record in the third quarter of 2002 and fourth quarter of 2001. Interest expense for the fourth quarter 2002 was $212,000 compared with $364,000 in the third quarter of 2002 and $444,000 in the fourth quarter of 2001.

Our reduced cost for interest expense results from having a lower amount of debt outstanding and lower rates for our variable rate debt. As previously announced we took a nine cash charge to write down the value of our buildings that we are holding for sale for $3.1 million. We also incurred a nine cash write down of the December 31, 2002 market value of the company's investment in Finisar corporation common stock of $1.7 million. During the fourth quarter we recorded a tax provision benefit of $2.6 million due to revised tack accrual estimates.

GAAP net loss is 17.5 million or 78 cents per share for the fourth quarter of 2002 compared with a net loss of $28.7 million or a $1.28 cents per share for the third quarter of 2002 and with a loss of $13.8 million or 62 cents per share for the fourth quarter of 2001.

On the fourth quarter loss, 14.5 million was contributed by nine cash charges for inventory reserves, reductions in the value of buildings held for sale, and write down to market value of shares of Finisar Corporation. For the full year ending December 31, 2002, revenue was $63.2 million compared with revenue of $119.5 million in 2001. Loss of operations for the year ending December 31, 2002 was $73.5 million compared with income from operations of $7.6 million for 2001. Exclusive of charges impairment assets of the optical electronics and substrate division in the fourth quarter inventory reserve charge in the substrate division loss from operations was $24.6 million.

Net loss for the year ending December 31, 2002 of $81.2 million or $3.62 cents per diluted share compared with a net loss of $5 million or 22 cents per share for 2001. Let's now turn to the cash flow and the statement in the balance sheet. Net cash flow provided by operating activities was $4.7 million for the quarter end December 31, 2002 compared with net cash used of $5 million for the quarter ending December 30, 2002. Total cash flow was $2 million for the quarter ended December 31, compared with a cash loss of $16.8 million for the quarter ending September 30.

For the year, net cash flow provided by operating activities was $742,000. Cash and cash equivalent with maturities of less than three months, short term investments and other investments in high debt rate securities with maturities of less than two years includes restricted deposits was $35.7 million as of December 31, 2002, compared with $36.3 million as of September 30, 2002.

Accounts receivable that are reserved $7.2 million at December 31, 2002 compared with $11.9 million in the prior quarter. We saw a decrease in accounting receivables in $4.7 million and day sales outstanding declined to 65 as of December 31, 2002 compared to 73 as of September 30, 2002. Net inventory decreased $13 million from $50.6 million as of September 30, 2002 to $37.6 million on December 31, 2002. Excluding the inventory reserve charge of the substrate division, net inventory declined by $3.2 million. Are total reductions of net income since June 30, 2002 exclusive of reserve charges was $5 million.

Accounts payable accrued liability decreased from $2.4 million from the third to fourth quarter as we spend less on acquiring inventory and services. Capital expenditures in the quarter were $3.8 million and depreciation was 2 million. Capitol expenditure was higher then anticipated as we made earlier than anticipated final payment on previously ordered equipment. Total PP&D expenditures for 2002 were $14.2 million compared with $25.8 million during 2001. During the quarter we received a loan from the Bank of China for $3.3 million. The loan is secured by our assets in China and bears an interest rate of approximately 5.5 percent and has a two-year term. During the quarter we paid $1.3 million in capital lease principle and $232,000 in long-term debt principle. At the end of December 31, 2002 we had 1306 employees in total of which 125 worked in production compared with 1626 employees in total of whom 397 worked in production at September 30 2002. At the end of December 31, 2002, 317 employees worked in U.S. and 989 are aboard. This concludes our revue of our recent financial performance. Now back to Morris.

At the beginning of the fourth quarter we said our primary focus would be to manage our cash reserves. Our performance in that regard was substantially better than forecast. Even excluding the new loans we received in China, our cash and equivalent balances declined by only 1.1 million during the fourth quarter. Compared with our initial forecast of 6.4 million reductions. In addition, we saw the beginning of a turn around in our LED business that we believe can eventually return to profitability.

Furthermore while revenue declined compared with the recent quarters our gross margin and net operating loss exclusive of the inventory reserve charges both improved. This reflects positively on the success of our cost reduction assets while the outlook for 2003 remains uncertain we believe we are positioned to improve our performance during the year. As Don mentioned, September 31st our cash and cash equivalent balance including restricted deposits was $35.7 million. Compared with $33.6 at September 30 and compared with our initial forecast for December 31 of $27.2 million. We reduced our cash burn to full primary action.

First, our operating loss exclusive of the inventory reserve charge was $5.7 million compared with the forecast loss of $7.4 to $7.8 million, which resulted from a series of aggressive cost reduction assets we carried out during the quarter. Second, we reduced our inventory at our substrate division alternate $3.2 million exclusive of the reserve charge and therefore are able to reduce purchase of new materials. Next we drove our daily sales outstanding down from 73 days at September 30 to 65 days at December 31 and in so doing reduced our net receivables by 4.7 million.

Finally we secured a $3.3 million two-year loan from Bank of China and also made payments of $1.7 million of previously ordered equipment and reduced our outstanding capital expenditure commitments for 2003. Cash cultivation will be a key component of our strategy for 2003. I will explain some of the additional steps we're taking in a few minute. Turning to LED business. We have experienced a significant improvement in performance during the fourth quarter even without making shipments to our previous largest customer.

LED revenue increase from $2.6 million in Q3 to $3.2 million in Q4. By December, we had regained a positive growth margin for LED business and believe this can be sustained. In the directions of our new optical electronic division executive the division has made substantial gains across many areas. Let me highlight a few.

First manufacturing process improved and matured. For example we developed a new chip that boasts the brightness of our LED's by 40 percent for surface model installations. Our model is typically used for backlighting wireless handsets. Wireless handset makers have said approximately half of their hand sets sold during 2003 will have color displays. We resolved issues with wafer breakage that plagued our prior version of the mirror chip.

We began shipping this product in volume in January. We also obtained 25 percent improvement in post yield by making changes to wafer and die-fabrication processing. We have customer and product diversity. We shipped more than $3.2 million to LED products to the customers that had collectively only purchased $1.9 million in product during Q2. Furthermore we shifted more of our sales into high priced green sales during the fourth quarter. More than 2/3rd of our revenue came from green SIN products during the third and fourth quarter compared with approximately 1/3rd during the second quarter.

Increasingly we find our reputation for producing LED that are highly reliable and having long life allows us to qualify for premium applications such as outboard displays where prices are higher and competition is less intense. This results in more sustained demand and less prize compression. Our improvement in product performance and yield enables us to qualify our new chips with previous customers as we resume shipping products to them in January.

In addition to making progress in revenue and customer reps we eliminated cost as LED business dramatically. In October we reduced our staff and now our staff is in better line with our current revenue. For example our direct and indirect labor cost declined by 39 percent from q3 levels. Outside production support services compared with Q3. Looking ahead, we have launched several key initiatives for 2003. Our first goal is to return our LED operation to profitability. Our current position, which increase revenue and output with relatively low increases in labor and material costs and minimal equipment purchases. With increase in revenue we believe we is take the business profitable during 2003. As our production process matures we plan to transfer more of our backend manufacturing to China where our costs are lower. Currently we spend approximately three sends per LED to perform the processes that are manly tested and comprise approximately 1/3rd of our direct manufacturing costs. As we demonstrated with our existing China facility we can reduce our cost by approximately 50 percent by moving them to China. The facilities required to make this transition are already in place. Small amounts of production will be shifted to China during the first half of this year and the bulk of transfer will happen during the second half. We'll continue to diversify LED customer base. We are very pleased to begin shipping product again to our former large customer but don't want to become reliant on single customer as we were during the first half of 2002. We anticipate that we will have more customers during 2003 than anytime in the history of our LED business. As our production level expands we intend to pursue new customers and customer concentration. We will strengthen our LED by making further improvement in fragment, reliability and other factors. We also believe that the latest generation of power chip will attraction attention.

We cut our budget more regarding packaging and pricing than the market leader and believe that these features will enable to become a major competitor for this product. AXT has produced some of the brightest LED available. Total revenue we will continue to focus on production resources and bright LEDs and customer applications.

The fourth quarter was more challenging than we originally anticipated, we made progress during the quarter to improve performance and position. . After years of working to gain technology we now find that BGF is the dominant method. Other results companies that could not manufacture BGF have largely left the market leaving three primary competitors.

Each of us now offers products using BGS or comparable methodology. We are a Pioneer of BGF technology and having the largest capacity in industry exactly for 16-inch product we are well positioned to benefit from more customers switching to 6-inch slide then from any company in industry. In addition, we're seeing little incursion from competing material.

Market conditions however remain challenging. First only two of our end use markets, the wireless handsets and LED are showing meaningful growth. Either of our other end-use markets high-speed electronic devices and telecommunication laser are expected to grow significantly this year. The lack of demand for telecommunication lasers is significantly demand, which drops to less 10 percent of H P level necessary 2001. Second, while we are only three competitors for BGF or equivalent technology our combined technology will exceed industry demand. As a result prices remain under pressure. The average price of a substrate is 30 percent lower than 2001 one peak. We believe that 2003 will see additional price reductions.

First, the demand for customers by customer for 6-inch substrate is also declined compared with third quarter. We experienced similar decline last year and know one of our major customers shed manufacturing facility for extended period of time late in first quarter. Finally our custody reallocated.

The dependence of any product for their applications employ these factors combined to cause a reduction in revenue and shipment volume during the fourth quarter. Revenue for the gallium arsenate was to their lowest level increase. During the quarter we committed much of our research and development effort to include the surface characteristics of our substrate.

Given the current industries over supply situation, customers are rejecting pre-approved products with high yields. Our current improvement do increase customers yields and some customers are increasing their order from us beginning in the first quarter. We will respond to our customers need and are committed to further reduce already low prices. Despite the decrease in revenue we saw improvements in results compared with the third quarter. Exclusive of inventory reserve charge gross margin improved by 10 percent. Benefiting from our latest round of cost reduction initiatives including reduction in staff at Fremont facility, additional controls of purchases of goods and services. Our China joint ventures are now beginning to sell product directly to third parties in addition to providing us with low cost raw material.

For example we believe that the gallium joint venture is now among the world's lowest cost gallium producer. It has potential to produce 40 tons of gallium annually and is already profitable. We owe 51 percent and our investment has been approximately $1.6 million. We believe the market will improve in 2003.

Money for our customers while cautious about their first quarter predicting growth in the second half. Furthermore we predicted our costs would continue to decline during 2003. More customers confer with our China production and first customer has now qualified our China grown. We anticipate that as more customers qualify we will also face manufacturing in the coming months. AXT is the only LED maker in China and we have low cost vertical integration in critical raw materials includes gallium and germanium that will increase over time.

In addition we begin to qualify for our latest products to these firms beginning in the late part of the second quarter. This product will be entirely manufactured in China. We will also continue to keep our cash preservation strategy in place by reducing capital expenditures to meet customer demand and keeping receivables under control.

Overall, we believe that the first quarter will show improved performance over the fourth quarter and subsequent quarters can show further improvement. Our LED business should continue to improve with the market percent and our substrate business is expected to resolve during the second half. Our cost control assets result in continual improvement in gross operating margin. We also believe that the combination of improved operating results selective sales of assets and anticipated tax refunds will enable our cash balances to remain healthy. Now back to Don for more forward-looking guidance.

Thank.

Thank you Morris. We anticipate revenue for the third quarter will be between $11.8 and $12.7 million. We expect increase in sales in LED product while substrate revenue being expected to be relatively flat. Consolidated gross margins are expected to be between 0 and percent and negative 6 percent. Consolidated S&G is expected to be approximately 3.8 million. Consolidated R&D expense is expected to be $1.1 million. Consolidated net loss is expected to be between 5.7 and 6.7 million or between 25 and 30 cents per diluted share. Capital expenditures during 2003 will be below 2002 levels. We have the funding to meet our requirements beyond 2003. This concludes our prepared comments we are now able to answer your questions.

If you would like to register your phone line for a question you may press star and one on your phone. Again, to ask a question press star then the one on your phone. First question is from Earl Lum CIBC World Markets.

Morris or Dan, can you spend more time on the pricing situation you're seeing now. What type of declines did you see during Q4? What do you expect for Q1 in 2003?

We think on the substrate side, the price competition as we said being our statement I think was severe during 2002, but we think the decline is moderating right now. Although customers are always interested in lower price products and but we think the decline is moderating. Going to 2003. That's not a lot you can give.

Do you think it will still be in the general area of that 30 percent decline in 2002.

No we don't think so.

Much better then that?

Yes.

Okay, what type of inventory situation do you see from manufacturers right now.

We think we see selectively some of our customers in their ordering pattern it does show inventory is tight because when they want product they want it almost like immediately or two weeks delivery and the industry normally two to three weeks. So I think inventory short. However, I cannot exclude some of the -- during the boom times some customer they have purchased excess product and if they don't tell us then it's hard to estimate how much they have. We think the major manufacture don't have a lot of inventory overhead.

Do you think your seeing a price increase on the 6-inch wafers?

Relatively speaking we think 4-inch pricing probably declined more dramatically in 2002. 6-inch probably haven't seen as much but probably the next wave of potential become if the ball were to pick up dramatically.

One last question. Can you give more update on what's going on with Adulent? It looks like your shipping now in January. How do you think that will run?

We're shipping -- the volumes we're shipping to Adulent is level.

You don't want to give an idea how it will ramp this quarter, next quarter.

Well, the order is about a quarter's worth and we're not making any predictions. We think they possibly increase but we're not making that prediction.

Okay thank you very much.

Next question is from Pierre Maccagno of Needham &Co.

The substrates going through ADD?

Excuse me what was your question.

The substrates, what percent of them were for ADD customers and what were for wireless customers.

I'd estimate a little over 60 percent were for wireless customers and 25 for others, those are rough numbers it's hard for us to tell.

Okay now what is the revenue for EPS.

We estimate over all around 18 million combined revenue for electronics and substrates.

Could you break that down in substrates also.

Around six for optic and 6 for substrates.

Okay. And in terms of Agilent, are these LED's going into a new product line, any more color on that?

We believe this product is for color displays, which demand much higher brightness and intensity. Instead of the keypads that were previously delivered to them.

So thee are for the white LED's.

Well, we deliver to certain specification, this is blue LED, which is certain wave length range and brightness requirement. These brightness requirements far exceed what we delivered to them before in such that the vertigo dimension of this device is much shorter so they can fit into a slim color cell phone employ the new style phones are slim and they need a good dimension to be sure.

Okay finally, the turns, what percent revenue for the quarter.

For who.

For- in the last quarter you just reported. How much percentage of revenue was turns?

Estimating around 65%.

Okay well thank you very much.

Thank you.

Next question from John Lau of RBC, please go ahead.

Basically a couple questions. I missed the geographic break down what was it?

North America was 36, Europe was 13, and Asia Pacific was 51.

51?

Yeah.

Thanks and you said you looking for profitability business in LED is that fourth quarter, very specifically.

Yes.

Second half.

Second half. Okay. And gross margins for the first quarter you think are 0 to negative 6 percent. Any idea what this trend is going to be for the rest of 03, any idea where those margins will be?

We have to believe it's going to go up over time. We expect with continuing revenue and electronics business we will see substrate margins into the teens and maybe low 20's and also electronics margin that same range a bit higher.

Okay so total gross margin is like really..

We haven't given out a full year forecast yet. So in term was target we're talking about mid to high teens approximately.

Okay and then in terms of last quarter this quarter it's up what expect it to be in the same range as last quarter.

Coming in a little bit lower so the bookings high are for this quarter than they were last quarter.

Okay so 60 percent, would that be --

That's correct.

Thank you.

Next question have James Cue from Foreign Tech Researcher.

Good afternoon. Regards to your guidance, the total revenue do you have break down for LED or substrates?

We estimate that Optics to be about 3.8 to 4.2, which leaves substrate about eight to 8.5.

Okay and also in the costs side I noticed you have big cost reduction effort going on. But your guidance on SG&A and R&D on the first quarter looks flat, wouldn't be fourth quarter over last year. Do you want to give some color about that?

R &D was a critically important component of the substrate and electronics businesses. Its something we don't want to cut, we don't think its wise. With regards to the SG&A we think there may be some cuts possible below that number but this is also the time of year when we renew allot insurance policies and insurance is going up. So even though we cut back some of the fixed costs we have are increasing.

So are you going forward for this year should we keep this quarterly operating expense kind of like in this level.

I think during the course of the year we could reduce it again we haven't given guidance this full year.

And also your full year guidance for CAPEX also for the next quarter or two.

CAPEX for the first quarter will be around 2, 2 1/2 million and then full year probably around seven and the rest it was it's to be more back end loaded.

So for example like -- I know -- maybe can you give out recall where you are spending because some of the your equipment -- my understand is under its underutilized for the moment.

We're finishing off another building for substrate so that will be part of it. There's some equipment for the shipment that takes delivery on this year and we need to upgrade equipment for the LED business and toward the end of year.

I see so I mean minimum requirements for the CAPEX.

You -- if you took on the out those things I mentioned we're down to three to four 4 million right now.

We certainly have lower capacity in our substrate business. The reason we continue to spend some CAPEX is because we have to finish up the building that we started to build almost a year and-a-half ago. But with that building being finished, we have a lot of production custody.

But that's in the U.S. right.

No that's in China.

On the inventory side I noticed you have written down a few million dollars.

9.7.

So you think that level is safe? Should we expect anymore write off or is that about right about now.

We didn't anticipate any more write offs for inventory. We had a policy when inventory reaches a certain age we accelerated that policy somewhat in the fourth quarter, which represents this charge. We actually believe we're going to be able to continue to pull inventory down and particularly in the substrate division as we use it in production.

Okay. I think I will let other people ask question. Lead me come back later. Thank you.

Next question from Jason Sam from Seidler Companies.

Hi guys. I'd like to quick question. Don, for the restricted deposits, what is it for? Why is it restricted?

That is restricted to cover the obligation our bank has under the standby letter of credit and then a small amount we renegotiated our workers comp policy for this year and by putting out a letter of credit we get a much lower policy rate am. So we believe the combination safes us money instead of going for state money for workers comp.

Okay, now as far as your cash, are you in -- what type of deposit instruments are you in.

They're all very high grade, pretty restrictive cash investments philosophies. It's either in special cash equivalent or things like fanny May notes those kinds of quality.

And for the current quarter, I don't know if you touch on it or not but are you expected to be cash flow negative or positive.

If the building sale we announce in December closes this quarter we expected cash flow positive.

But we won't be.

So if it doesn't close you will be negative and if it does you will be positive.

Right

And how much are you expected to get from that sale.

Give me -- our net will be around -- in the excess of 5 million.

Okay and are you an active negotiation now. What is your visibility?

We have visible but who knows, the buyer may be listening.

Morris, can you talk about the industry capacity you said in terms of utilization rate, in general in the industry, what do you think the industry is at right now and then if you would like to comment on your own situation.

Well, we certainly think that 6-inch wireless production everybody builds up a lot of capacity. The peak of the cycle we had capability to deliver about $40 million worth of revenue. Right now if you look at revenues ASP is soft, so still I estimate our capacity utilization is probably in the range of 40 percent, 35 percent. So we certainly had had a lost capacity. I think our competitors on -- I heard one in Japan and one in Germany both had built for capacity, but I think what is advantageous for us is I believe our competitor caught up with in terms of practice and production. I believe 6-inch is that much more difficult to ramp up the custody and only AXT had extensive experience in running that capacity. So it remains to be seen in the working up. If you have 6-inch demand start to pick up where our competitor will be able to deliver the 6-inch BGF product as we can. We believe we have that advantage over our competitor.

Thank you.

Once again if you would like to ask a question press star and one on your phone again to ask a question press star and one on your phone. Okay it appears we have no territory questions at this time.

Thank you for participating in our conference call. We look forward to speaking with you again.