AXT Inc (AXTI) 2003 Q1 法說會逐字稿

Good afternoon on conference line on listening only mode, Should anyone need assistance at any time, please do not hesitate to press star zero and a coordinator will assist you. I would like to turn the call over to Mr. Morris Young. Go ahead please.

Hello. Welcome to AXT first quarter 2003 conference call. I'd like to thank you for taking the time to be with us this afternoon. I am Morris Young president and CEO of AXT. With me is John Tatzin our Chief Financial Officer. Now, I would give a detail financial view of the first quarter following that I would comment on the quarter and current market condition. And I will close our prepared comments with finish status and then we'll open up the call with questions and answers. John?

Thank you, Morris. Before we begin I would like to remind you that during the course of the conference call including comments made to response to your questions, we make projections or other forward look statements regarding among other things market conditions and trends, the future financial performance as a touch, new products and the company's ability to bring them to market. We wish to caution you that such statements deals with the future and so it is subject to risks and uncertainties and that actually the results may differ materially. In addition to the factors that may be discussed in this call, we refer you to the company's AK, 10K and 10Q filings made with the secretion exchange commission and available on-line by link of our website. For additional information of risk factors to actual results to differ materially from our current expectation, this conference call will be available on the website which is AXT.com. Now, onto the results for the quarter.

Revenue for the first quarter of 2003 was 12.7m compared with 12.3m in 2002 and 16.8m in 2002. Revenue from our sub straight division which represent 67% for total revenue for the first quarter of 2003 with 8.5m compared with 8.5m in 2002 and 11.8m in the first quarter of 2002. Total value market on subsidiary is 7 m for the first quarter of 2003 compared with 6.5m in the first quarter of 2002 and 7.6m in the first quarter of 2002. Five and six inch diameter deadlines is 1.3m in the first quarter of 2003 compared with 1.2m in fourth quarter of 2002. The increase in total value on revenue compared with the fourth quarter was largely the additional demands and customers of the LED market.

The subsidiary area revenue is 564,000 in the first quarter of 2003 compared with 732,000 in the fourth quarter 2002 and 3m in first quarter of the 2002. In the [inaudible] revenue remains dependent on the fiber optics business. Sale and raw materials is 1m in the first quarter of 2003 compare to 1.3m in the first quarter of 2002 and 1m in the first quarter of 2002. Revenues from the electronics division which represented 33% of total revenue first quarter of 2003 was 4.1m compared to 3.8m first quarter 2002 and compared with 5m in the first quarter of 2002. [inaudible] group was 5% compared with the fourth quarter and contributed more than 82% of division revenue. Revenue from sales later tied to 734,000. In the first quarter of 2003 North America revenue 35% Asia Pacific was 55% and Europe was 10% of total revenue. By comparison in the first quarter of 2002 North America 48% Asia Pacific was 46% and Europe was 6% of total revenue. One customers which is a distributor for our line is generated 17% of our revenue for the first quarter.

Growth margin is -2% of revenue for the first quarter of 2003 compared with -85.9% in the fourth quarter of 2002 and 1.7% for the first quarter of 2002. As You may recall the low margin in the fourth quarter of 2002 was attributed in part in charge 9.7m taking in reserve [inaudible]in wavering inventory that we project will not be used by the time it reaches the reserved date. Without that charge growth margin for the fourth quarter would have been -6.4%. Growth margin in the division is 3.2% in the first quarter of 2003 compared with -114.6% in the fourth quarter 2002 and 1.7% in the first quarter 2002. Without the inventory reserve charges 9.7m to the subsidiary is area division was 0.05% for the first quarter. Growth margins of the electronics division was -13% in the first quarter compared to -21% in the fourth quarter of 2002. The major factor infecting growth margin were decline was a chip cost of 10% and it is partially offset by decline the average price of approximately 23%. In general, administrative expenses were 3.3m in first quarter of 2003 compared to 3.8m in fourth quarter 2002 and 5.2m the first quarter in 2002. Research and development cost were 744,000 for the first quarter of 2003 compared with 1.1m for the fourth quarter of 2002 and 1.4m the first quarter of 2002.

Interest expense for the first quarter of 2003 is 237,000 compared with 212,000 of the fourth quarter of 2003 and 385,000 in the first quarter of 2002. Our higher costs results from 3.6m we received from a bank in [inaudible] during December 2002. Net loss before taxes in the first quarter of 2003 was 4.3m compared to pre-taxed law of 20.1m for the fourth quarter 2002 and any pre-taxed law of 5.9m for the first quarter of 2002. Net loss for the first quarter of 2003 was 4.3m for share compared with 17.5m or 78 cents per diluted share of 2002. The fourth quarter loss 14.5 m was contributed non cash to inventory reserve reaction to the value of building health held for sale and right now through market value of the sales and the corporation. In the first quarter a year ago, the company posted a net loss of 3.6m or 16 cents per deluded share. let’s now turn Cash flow statement is in the balance sheet. Net cash flow provided by operating activities were 737,000 for the quarter ended March 31st 2003 compared to a net cash flow of 4.7m for the quarter ending December 31st 2002. Some cash flow is 4.5m for the quarter end in March 2003 compared with when the cash flow of 1.1m for the quarter ending in December 2002. [inaudible] cash flow include the 5.2m from the sales of real estate assets. Cash and cash [inaudible] with maturity of less than 3 months and short term investments and other investments and high desk securities were with maturity less than two years include restricted deposits but excluding our investment in [inaudible] was 39.4m at March 31st 2003 compare 35.7m at December 31st 2002. Accounts receivable net of reserve was 7.9m at March 31st 2003 compare to 7.2m in the prior quarter.[inaudible] outstanding 54at march 31 2003 compare to 70 at December 31 2002.

Net inventory decreased 3.1m to 37.6m on December 31, 2002 to 34.5m at March 31, 2003. our total reduction of net inventory since June 30 2002 is 17.8m have reached 10.1m and occur reserve charges. Our total reduction since June 30, 2002 was 17.8m have reached 10.1m it increases reserve charges. Account payable and accrued liabilities decreased by 914,000 from Q4 to Q1 to the time of payments and the ordinary time of business. Capital expenditures in the quarter 917,000 and appreciation 1.7m more. Capital expenditures consistent largely of final payments on equipment orders previously. We [inaudible] That is since 2003 be approximately 5 to 7 m. During the quarter we paid 1m in capital reprints will be 248,000 long-term principal. At the end of March 31, 2003, we had 1,313 employees total of whom 1,096 worked in production, compare to 1,306 employed total of whom 1,075 worked in production at December 31st 2002. at the end of March 31, 2003, 322 employees worked in the United States and 991 were abroad. This concludes our review of research financial performance. Let me turn the call over back to Morris.

Thank you, John. Our performance included during the first quarter increased critical areas. Cash balance increased sales of our two leading products and high sales with [inaudible]. In gRoth margin and operating margins were all above expectation. As we look towards the second quarter, we expect revenue from our full products and our joint venture will grow and our financial performance will improve. For the past two quarters, our primary focus has been managing our cash reserves. Our cash are equivalent short and long-term investments and restricted [inaudible] balance [inaudible] since the end of third quarter.

We have executed the key elements of our cash management strategy effectively by reducing expenditures and all levels and by raising additional funds to selling assets up to any new loans and reducing inventory and account receivables. Look forward, we expect to obtain a sufficient cash cushion throughout 2003. We project that we will be eligible for income tax refund of approximately $8m due the first quarter. Capital expenditure was at low levels for the rest of this year as we have adequate production capacity in place. In addition, our cost reduction asset to improve our operating income in the first quarter, for an example our net loss of $4.3m was no more than $5.6 to $6.8 m in cash. Let me turn over to the performance of our leading products.

[inaudible] revenue of $7m was the highest it has been since the third quarter of 2002. We experience a increase in demand from the purchases of two inch sub straights primarily for use in the red and yellow LEDs. This market continues to grow LEDs becoming the prefer lighten technology increasing number of applications. Revenues from galley subsidiary using application also grew , we believe that Galliani has advantages that secure its position in these and other key electronic device applications. We continue to see aggressive competition from other manufactures offering DGF subsidiary. I imagine during our last conference calls that even this current sub straight supply customers are rejecting previously approved sub straights if they have higher yields of price incentive from other suppliers. To offset the developments, we have committed most of our sub straight are indeed effort during the past two quarters to improve our customer yield. [inaudible] customers reported that our defect rates had declined during the last two quarters. [inaudible]It is in our cost reduction effort, we now Galliani and crystals using our [inaudible] technology in China.

Money large customers including the majority of our LED customers have already qualified our products using this crystals and our remain large customers of qualifying them. We believe that the combination of our defect wave reduction and our low cost manufacturing creates opportunity to gain market share during the company coming quarters. Galliani booking for the second quarter are ahead of where they were in a comparable time for both the fourth quarter of 2002 and first quarter of 2003. Recently, more than in so far, have been reported in China including a sum in Beijing. That's the site of our sub straight manufacturing facility. Today, we have no cases of Sars of our employees. We are following all guidelines issued by health authorities in China and the center for disease control in the United States to protect our employees and the business. We are restricting our employee travel to SARS affected areas to protect our staff and our monitoring the situation closely.

Turning to the LED business, LED revenue increased $2.3m in Q4 to $3.4m in Q1. The majority ever the growth came in January and February. In March, however, the market was up 40% price decline for the low end LEDs using consumer with what higher liability is not a critical requirement. This price decline head a reduce affect of higher quality products, the price for the products still decline 10 to 20%. Due to this price reduction, our LED revenue doing large was lower than in February. We have seen the price a reported result of our competitors. Competitors that focus on low end products are reporting reduce gRoth end margin while higher manufactures were less affect. As we are situated between the high and low end manufactures, the fact on AXT has been compress plex.

We have seen limited price reduction for high reliability [inaudible] LED user application including traffic signals and full color displays. We experience the greatest decline for some of the blue LEDs using consumer application. several of our actions help us mitigate the price of the decline. First, we include our process to produce a greater share of our high brightness product us which is facing last price competition. This is especially important for our green SIL LEDs which are more differentiates for competitors products than our blue LEDs. Second, we are aggressively reducing our costs.

Our current costs for chip is now 20% lower than during the third quarter of 2002. We have reduced costs by increasing yield enhancing production prophecies using this as a lake or more effective lees and negotiating on better terms with our vendors. We believe cost for chip would decline first as our project did mature, our hand capacity and more efficient incumbent were all during 2002 coming alive. Third, we are conducting sum up our manufacturing in China and expect to increase the share of back end manufacturing processing performed there. During the quarter, approximately 25% of our LED fabrication and [inaudible] will conducted China. We anticipate by the end of this year, most of all of these activities will grow in China.

Fabrication which are relatively labor tested comprise 40% of the manufacturing expense. Our cost of these profits are now approximately 50% lower in China compared to the United States. we believe that LED market is an inferior of the utility. The price decline is responsible for the monitor decline in gRoth margin recorded by our electronic division and may de lay achieve and profitability in this division. Looking forward with the opportunities to improve our performance in both of our businesses, on the basis I'm proved quality and cost we believe that our sub straight revenue will increase. if the revenue increases we will see improved financial performance.

So for [inaudible] sub straights customers have indicated that it will place larger orders during the second quarter than they have been during the previous six months. Those in demand with the outside product benefits our joint venture efforts. For example, in the past few months, our Galliani joint venture which is the largest and lowest cost of suppler have seen demand and price increase. While Electronic business faces significant price pressures with making -- steady progress of reducing costs. We have production effort to China and our[inaudible] cost should decline further. Simultaneously, we're working to achieve total increments in product performance. Our confident in accommodating prospects is evident by the [inaudible] we cheer repurchase up to $2m of shares. I will turn the call back over to John to give you forward looking status. John?

Thank you, Morris. At this time Our business has not been affected by SARS in the following outlook is predicated on the assumption that neither we nor major suppliers will be affected by SARS client related closure or other activities. We will update our guidance if necessary down the quarter. We anticipate the revenue in the second quarter will be between 12.4 and 13.2m. We will increase sales in electronic revenue is expected to be approximately flat compared to the first quarter. Consolidating gRoth main margins are expected to be -2% and -6%. Our administrative expenses are expected to be 3.4m and research is development expense will be approximately 800,000. Consolidated loss are taxes 0% is expected to be between 4.5 and 5m. It will be 20-23 cents per diluted share. Capital expenditures will be below the level during 2003. will be below the level recorded during 2002. We project the capital expenditures in the second quarter approximate 1m. We have sufficient cap reserves to meet the capital requirements beyond 2003. This concludes the prepared comments. We are now to happy to answer your questions.

At this time if you would like to register for a question you may do so by pressing star one. To withdraw your question, press the pound key at any time. We will take the first quarter from Earl Lum with CIBC World Market. Go ahead.

good afternoon gentlemen. Nice job in conserving cash for the quarter. Couple of quick questions with regard to the distributor that had 17% of your revenue for [inaudible]. Can you tell us who that is again?

It’s a company call Matarie in Taiwan.

Can you spell that, Morris?

M-A-T-A-R-I-E I believe.

Ok, of the 55% that the revenue came from Asia Pacific, do you have any detailed breakout of how many of that came from Japan?

Very little. I don’t have the breakout with me but its not very much.

Okay. And then at this point with 8.5m revenue coming from your gas, you had 0% gRoth margins. What is the ASP situation looking like as we go into Q2 for that particular division?

Actually, from the sub straight division, the margins were 3.2%.

3.2 Okay, Thank you.

ASP, I would think there were many different products LED products are relatively steady. Four inch products is relatively, I think The five, six inch products are coming down a bit.

And then with regards to the group, you said you have 20% plus percent decline in ASP in the quarter and most of that happened in March. Are you seeing that continued in April so far and are you expecting that Q2 is going to see similar ASP reductions?

Well we don't expect it to come down so rapidly. Most of the price of reduction is affecting the lower end products. Because of the price drop was so dramatic, [inaudible]the high end purchasers are withholding purchase decision too, I think. But Nevertheless, once the reliability requirement is there, people are not having such a price decrease and as we indicated, the price drop there is between 10 to 20% not the 20 to 40% we see in the low end product. We think at this time it is still too early to call whether we are seeing stop or not. We don’t think it will continue going towards the second quarter.

Morris, can you give us an idea as to what is between the blue which is on the low end versus the green and the sign you had in the first quarter?

We think the cyan is green is about 50% of our revenue now. And Not all of our cyan and green of course are all high end product. Some of the less bite products still go into with the lower end. However, they're still demanding a higher selling price there, the blue product. The blue LED is the lowest most competitive product cut-throat price product in the market place.

ok do you guys have a better idea now given what just happened in the first quarter as to what would potentially be the break even revenue for you guys for the LEDs if you have taken into account all of the pricing issues?

On the electronics division it is about 7m.

Okay. And then have the subsidiary division break even and maintained itself and what do you expect for overall corporate break even to number

well It would be about 12 and the remaining would be essentially stead. So total would be about 19.

Okay. Then one final house keeping question for the second quarter cash burn , john, what are we looking at in terms of that?

I didn't get a specific forecast. On the operating side, it should be okay. With payment repayments 1m or so I think it will be in the two, 3 m range.

Okay. Well, great. Thank you very much and again, a great job in conserving that cash.

Thank you.

Thank you.

We'll take the next question from the site of Apjit Sin Walia with RBC Capital.

First, can you comment on the conversion of the waivers?

You mean the [inaudible] on the four to six inch conversion, the waiver?

Yes.

Well, we see increasing number of customers they want to go from four to six inch. But giving the market condition, it is tough. We also see some customers take income with the four-inch products. But I know you may as well know that RSE sticking with the four-inch products, but I think you may as well know that our RND has made the commitment to go from four to six inch and digital has already committed to six inch. So on so has Agilent and also [inaudible] is committed to six-inch production. In areas of Japan, I think AEC has been using five inch and most of the Taiwanese manufactures if they are suppliers, they do most for six inch and then there are semi conductors Taiwan who is exclusively six inch production.

Can you give a comment on the high LED bond for the next quarter or so?

Well, we know right now the main thing or really comes from the price decline. We have a demand that continues to go up and we think that the price volatility is mostly affect the low-end product. But because of the more drastic reduction in price, it is sort of affecting the high end purchases division making of how much they want to buy so they have comrades so to speak getting a price bake. They are saying a price reduction too. But, you know, because they have to do those vigorous qualifications so the price decline there and they are less competition. If somebody wants to make a high price there, traffic sign, they can not risk their product reliability just because of a lower ASP. So we think the product will be differentiate on the basis whether a customer wants more higher reliability produces or they just want to buy the LED to make a light impact or flashlight. Have I answered your question?

Yes. That's fine. Thanks.

Thank you.

We'll take the next question from the site of David Kang with Roth Capital Partners. Go ahead please.

Thank you Let's see. What is your current quarterly break even point and after move moving to China by the end of this year what will be the new quarterly break even point and any plans to accelerate the down sizing effort. Thank you.

The question referred to optimal electronics.

Actually, overall.

It will be 19m of which 7 is [inaudible] electronics and it would move the back and operations do China during the course of this year for optimal electronics. That's how they reduce their cost by another million. So it will be about six at that current place. So about -- sub straight be around 12.

ok Any plans to explore that down sizing going forward?

You mean the move?

Or just cause, you know, reduction in general acRoth the board? That type.

Well, we think there is a benefit we can gain. We are looking to reduce the realities holdings. We will consolidate people into one building in Fremont instead of three buildings. You know, there are some utility costs we can say. Obviously, when all the manufacturing can be consolidated, all the customers has qualified our China production consolidating and it takes product directly from China, I believe we can reduce our break even point even further. Although, I think we are more reductant to give a number right now because we're not really -- I think there are probably two or three million dollars per year with cost reduction we can achieve which we reduce our head count further in Fremont.

Okay. Lastly. Do you have any credit facility right now?

We have an industrial revenue bond on our major manufacturing facility in Fremont. We also have a loan again or assets in China. We canceled our line of credit back in the third quarter of last year and we haven't been using it. So It wasn't worth continuing to pate cost.

And Lastly, I think you said Galto Mar bookings were ahead of fourth quarter. You can quantify a little bit and if that's the case, what do you expect the second quarter revenues to be kind of flattish?

Galley onsite is backing ahead of last quarter. Yes, we did say that. However, because of the -- [inaudible] they were not book solid for the quarter for sure. But as we indicated on our call, that the booking level in compared to the last two quarters were ahead. But Because we have not booked a whole quarter solidly. We're more optimistic about the prospect of the quarter, but we don't want to commit ourselves to much higher projective revenue. And John has given you the guidance for this quarter.

Okay. Just lastly, can you talk about the inventories in the area of your customers. Thank you. That's it.

Well, we believe again most of our LEDs for instance, I don't know think there is inventory in the challenge. I think most of our customers in the [inaudible] area is not much of a inventor tow speak of too. You know, by evidence of the customers, they are inquiring deliveries and really very much in short terms. They have given us two to four weeks delivery time. So we believe that the inventory in the channel is really short.

Next question from the site of Brandon Saft with FFBR. Go ahead please.

Hi, guys. Just a quick question. With the aggressive reduction as you saw in the current quarter, can you can give any color as to you'd expect to see through the rest of the year?

I guess you are talk become LEDs. I think I would say for the rest of the year, it is obviously difficult to say. But I think this is a one-time fact. At this point, we really would like it hold off the final order as we said before. Most of it is affecting the less demanding customers such as consumers. But because of the large price drop, it is affecting the economy of all buyers. We would like to see the buyer return are once the situation is stabilized a bit. So it is hard to say at this point. It is very volatile. But we definitely don't see the price drop during March and April.

Ok Can you give any color for sub straight specifically as to what you are seeing in your back log and the person that you have?

Sub straight pricing as we indicated in most of the sizes such as LEDs two inch Sub straight and 3 inch 4 inch sub straight they relatively stable, six inch pricing ask coming down a bits.

Okay. Thanks very much.

You're welcome.

You're welcome.

Next question from the site of Chang Kee with Foreign Technical Research. Go ahead please.

Good afternoon, Morris and Don.

Hi.

Hi.

Do you have any plan to spend off the LED division?

Well, obviously we're looking at all business opportunities arises and LED is a very exciting business we have achieved technical confident and so that we can really be good competitors in the field and also that application for LED is very exciting. However, we also realize with increasing and demand, we'll know the way to be a real competitors in the LED business. We need a lot committed capitals and increase of capacities and increasing RND effort. And We are believe we do have most of the requirements to be a player in that field. However, AXT has a cash conservation mode. So we're doing two things. We are not increase capacity in the LED area, but we have been able to find a partner to who is going to do an a joint effort to increase capacity the competitiveness in the LED areas. We are definitely contemplating the business proposal.

Okay. Just a clarification. What's your capital expenditure for the first quarter?

917,000.

917,000 and Then cash flow from operation?

737,000.

737,000. Okay. Thanks.

Thank you.

Once again, to register your question, you may do so by pressing star 1 on your touch tone phone. Next question from the site of Jason Sam with Seidler Company.

Hi. Just quick question. Regarding the pricing environment and the sub straight business, you had mentioned that pricing for the 2 to 4 inch stabilized and there is still pricing measure pressure on the five and six inch. On the smaller diameter sub straight, do you think it is more of a demand issue in which demand have increased and therefore, you know, the price of approval, you think the price had lit hit bottom and your competitors are not willing to be aggressive, anymore?

Jason that, ask hard to say. It is probably correct all above. Although what percentage of either one is difficult to say. But what we do see pricing in the smaller sub straight.

As far capacity is concern What are you going asking in terms of usage rate right now?

That Jason I think we're still way below our utility capacity utilization. We can easily double and triple the amount of material we can produce. That may be a problem.

Okay. And then on the five inch in terms of the price declining over the next quarter, what do you think will be up from current level?

Well, I think the price has already declined. You know, we think of more and more customers migrate from your four to six inch, the volume will increase and the price will decrease. But that's a more of a dynamic situation. We're already seeing the price decline a lot the last quarter by 10%.

It was more this quarter.

Yeah. We see this more price reduction down in the six inch larger part in sub straight. And per square inch wise, the allergy diameter has higher LSP than the smaller one. So there is more loom room too.

You have seen any customers restock any of their moth wall five inch or six inch line?

Jason, I think that is hard to say. I would say it is the wafer starts which is affecting them all. I don't think nobody is shutting down the alliance. Maybe some customers have Christmas shutdowns or holiday shutdowns. I don't think anybody has completely shutdown their line and restart. People can go from 500 wait week to 1,000 wait week with their stocks.

Thank you.

We will take follow-up questions from the site of Chang Kee with Foreign Tech Research. Go ahead please.

I just wonder if all this steps are for the [inaudible] manufacturing are all the steps qualified for the China community or when you move the host to China?

we know what’s weird We are qualifying our China facility with our major customers. All of our customers should accept product completely manufactured in China; however, our Fremont facility is a qualified site with our customers to begin with. So obviously, China has a lower manufacturing cost. So when a customer as approved our China production, obviously it is the advantage for us as well as our customers to accept China manufactured products.

So right now in the first quarter, you sat on part of the [inaudible] with a ship from U.S. or a ship from China [inaudible]?

That's correct. Also in other products like some customers because we have qualified our China process wafer. In other words, the wafer is growing in Fremont and they get them shipped to China to have them fly, polished and cleaned. You can see we are now qualifying even the crystal [inaudible] facility to be manufacturing China that was proceeding that process. That is to most customers.

How do you think the qualification process will take?

We should be able to do that before -- between July to September.

So in the third quarter of this year?

Yes.

Which means we should see a more -- it is sure to be lower by that time.

Well, I think so.

Okay. Thanks.

Sure.

We'll take a follow-up question from the site of David Kang from Roth Capital Partners. Go ahead, please.

Let's see. First of all, what is the status on your share by that program and secondly, do you still expect to receive 8 m dollars tax refund by the end of this year?

What our window would best be and we still expect them to refer the 8 and a half million dollars by the end of fourth quarter.

How much of your inventory to you plan to work down forward?

We are reducing by two and a half million dollars by the end of quarter for next year. Right

Thank you.

You're welcome.

once again to register your question, please press star one. We have a question from Jason Sam.

Just real quick. Aside from Mataria Are there Any other 10% customers?

No.

No.

And Mataria is 17% is not the total revenue, not just [inaudible] correct?

Correct.

Thank You.

Correct.

Once again to register for the site question, press star 1 on your touch tone phone. Allright. It appears we have no further questions at this time, I will turn the conference back over to the moderators.

Thank you for participating on the conference call. We'll be seeing you during the quarter. We will have more events to report to you.

This concludes today's teleconference. You may disconnect at any time.