AXT Inc (AXTI) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the AXT first quarter 2008 earnings release.

I would now like to turn the meeting over to Dr. Phil Yin, Chairman and Chief Executive Officer. Please go ahead Dr. Yin.

Thank you. Good afternoon, everyone, and welcome to AXT's first quarter 2008 conference call. I am Phil Yin, Chairman and Chief Executive Officer. I would like to thank you for taking the time to be with us. With me today is Wilson Cheung, our Chief Financial Officer. Wilson will take you through a detailed financial overview of our first quarter results, and then I will give you my perspective on our markets and future opportunity. Following the conclusion of my comments, Wilson will provide forward-looking guidance, and then we will open up the call to your questions. Wilson?

Thank you, Phil. 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 and our ability to maintain profitability, control costs and improve efficiency, the impact of customer qualification of our products, growth in our customer base and expansion of our addressable market, increasing market share, industry trends that are driving increasing demand for our products, our expansion into complementary technologies, which allows us to increase our product portfolio, as well as market conditions and trends. We wish to caution you that such statements deal with future events are based upon 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 factors that may be discussed in this call, we refer you to the Company's periodic reports filed with the Securities and Exchange Commission and available online by link from our website for additional information on risk factors that could cause actual results to differ materially from our current expectations.

This conference call will be available on our website at axt.com through April 30th, 2009. Also before we begin, I want to note that shortly following the close of market today, we issued a press release reporting financial results for the first quarter. This press release can be accessed from the investor relations section of AXT's website at axt.com.

Now turning to our financial results. Revenue for the first quarter of 2008 was $19.6 million an 11% increase from $17.6 million in the fourth quarter of 2007. Gallium arsenide substrate revenue was $13.7 million for the first quarter of 2008 compared with $12.2 million in the fourth quarter of 2007. Specifically, 6-inch diameter wafer sales were $5.9 million for the first quarter compared with $4.3 million in the fourth quarter of 2007. Indium phosphide substrate revenue was $477,000 for the first quarter of 2008 compared with $330,000 in fourth quarter of 2007. Germanium substrate revenue was $1.4 million, nearly doubled the $747,000 in the fourth quarter of 2007, as we get increasing orders from existing European and Chinese customers. Finally, sales of raw materials, primarily 99.99% pure gallium were $4 million in the first quarter of 2008 compared with $4.3 million in the fourth quarter of 2007. In the first quarter of 2008, revenue from North America was 26%, Asia/Pacific was 60% and Europe was 14% of total revenue. No customers generated more than 10% of our revenue during the first quarter, while the top five customers generated 33% of our first quarter revenue.

Gross margin was 31.7% of revenue for the first quarter of 2008. This included a benefit from the sale of approximately $620,000 in fully reserved wafers, which positively affected the quarterly gross margin by 3.2 percentage points. By comparison, gross margin in the fourth quarter of 2007 was 30.1%. This included a benefit from the sales of approximately $466,000 in fully reserved wafers, which positively affected fourth quarter gross margin by 2.7 percentage points. We may continue to experience pressure on gross margins in 2008 as raw material prices are projected to increase, our depreciation expenses are higher and average selling prices may fall slightly. However, as Phil will explain later, our plan to increase overall manufacturing capacity, plus the ongoing cost reduction programs will likely offset some of the margin pressure.

Excluding stock compensation expenses, selling, general and administrative expenses were $3.5 million for the first quarter of 2008 compared with $3.1 million in the fourth quarter of 2007. The increase was primarily due to overall salary adjustments for the new fiscal year and increased travel expenses (inaudible) customers. Also excluding stock compensation expenses, research and development costs were $472,000 for the first quarter of 2008 compared with $481,000 for the fourth quarter of 2007. Total stock compensation expense was $170,000 for the first quarter of 2008, of which $16,000 in cost of revenues, $122,000 in SG&A and $32,000 in R&D.

Income from operations for the first quarter of 2008 was $2 million compared to $1.6 million in the prior quarter. Net interest and other income for the first quarter of 2008 was $552,000, compared with net interest and other income of $608,000 for the fourth quarter of 2007. Our first quarter 2008 other income of $552,000, included a gain on sale of investments of $459,000, while our fourth quarter 2007 other income of $608,000 included a gain on sale of investments of $1.1 million.

As we move into 2008, our tax holidays on China export qualification and reinvestment of retained earnings have ceased. Accordingly, our tax provision for the first quarter of 2008 was $560,000 compared with $302,000 for the fourth quarter of 2007. We expect quarterly tax provisions to be in the $500,000 range for the remainder of 2008. Net income in the first quarter of 2008 was $2 million or $0.06 per diluted share. By comparison in the fourth quarter of 2007, we reported net income of $1.9 million or $0.06 per diluted share, which again included a $1.1 million gain on sale of investments, which made up $0.03 of our Q4 EPS.

Let's now look at our cash on the balance sheet. Cash and cash equivalence with maturities of less than three months, short-term investments and other investments in high-grade debt securities with maturities of less than two years including restrictive deposits, were $4.6 million at March 31st, 2008 compared with $45.9 million at December 31st, 2007. On March 28th, 2008, we completed the sale of our Fremont, California property and received cash proceeds of approximately $5.1 million. We are in the process of notifying bond holders to pay down the entire balance of $6.6 million currently scheduled for July 1st, 2008. Once the bond redemption is complete, we will literally have no debt on our balance sheet, and our restricted cash of $6.6 million will be released.

Accounts receivable and other reserves were $16.7 million at March 1st, 2008, compared with $12.1 million at December 31st, 2007. Day sales outstanding was at 77 days for the first quarter compared with 64 days in the prior quarter. Net inventory increased to $29.1 million at March 31st, 2008 from $24.8 million at December 31st, 2007. This increase is the result of several factors. One, our building inventory of raw materials in anticipation of some interruption in transporting raw materials to our manufacturing facilities in Beijing, as a result of the Chinese government moratorium on the transportation of goods around Beijing leading up to and during the summer Olympics. Two, increase in work in process for increased production based on higher sales forecasts for the remainder of 2008. And three, increase in finished goods as we shipped out more to customers on consignment. Accordingly, our cash used in operations for the first quarter was approximately $4.6 million.

Depreciation in the first quarter was $463,000 and capital expenditures were $1.6 million. As of March 31st, 2008, the Company including our consolidated joint ventures had 1,118 employees of whom 917 worked in production. This concludes our financial review. Let me now turn the call back to Phil.

Thanks, Wilson. We are very pleased to report another solid quarter of growth, including strong increases in revenue from strategically important areas of our business, such as 6-inch gallium arsenide and germanium substrates. Much of our increases are coming from market share gains as key qualifications are beginning to generate revenue. Further, our customer engagement and qualification activity is very high and we are pleased to see progression from a number of key companies in our space as a result of significant competitive differentiators.

To begin, we experienced strong growth at our gallium arsenide revenues in the first quarter, particularly in 6-inch semi-insulating substrates, which increased by more than 37% from the prior quarter. This substantial growth was the result of increases from a number of our customers, and in particular IQE, that awarded us a large order during the fourth quarter for their 2008 requirements. We believe that much of the increased diversity is the result of market share gains, as we continue to demonstrate high quality and consistency, the ability to scale our business according to demand and our access to critical raw materials. Our sales team is also making meaningful progress with several high-priority accounts that have not done business with AXT in quite some time. We are pleased and honored by their renewed interest in AXT and view our discussions as an indication of our success in delivering on our mission statement.

We also continue to be encouraged by the demand for gallium arsenide substrates, which we believe is being driven by the low-cost handset application, particularly in emerging markets, such as India, China and other developing countries. We believe that this application holds tremendous potential, and we are excited to see companies, such as ANADIGICS, Skyworks and TriQuint focusing on it as a priority. Further, the continued strong growth in the video and smart phone market is fueling solid performance in the replacement handset market as well as driving gallium arsenide content as a result of the increasing feature sets and functionality of these devices. All of these trends bode well for AXT, and though we remain cautious about semi-- the near-term macroeconomic conditions, we're very encouraged by the growth potential in our market. We are preparing for the continued increase in demand for semi-insulating gallium arsenide with another 27% increase in our 6-inch gallium arsenite capacity.

Demand also continues to be strong on the semiconducting gallium arsenide side of our business servicing the LED market. The efficiencies of LEDs is driving a tremendous proliferation of these devices in a multitude of residential, commercial and industrial applications. In 2007, the high-brightness LED market grew 10% to $4.6 billion thanks to increased penetration of products such as digital cameras, notebook PCs, backlights and automotive applications, and in addition to its continued success in mobile device backlighting. Further, there continues to be a strong push towards LED usage in general lighting as companies are viewing this market as a significant catalyst for growth. In fact, the Taiwan government has drafted an energy saving strategy to totally eliminate the use of incandescent lamps and phase in LED lightbulbs by 2012.

However, due to competitive pressure, the margins can be very low. Therefore, we have adopted a policy of selectively accepting only the business opportunities that meet our corporate margin and strategic goals. And as in the case of semi-insulating gallium arsenide, we're having renewed success with tier 1 customers that supply significant portions of the market. As we have discussed, our priority in this area of our business is to develop our ability to provide liquid encapsulation Czochralski crystal growth, where this process technology for producing small diameter substrates will open up new markets for our products and will allow us to further improve our cost structure.

Now turning to germanium where we service the solar market, our plan to develop Czochralski crystal growth process will become increasingly important, as it will allow us greater flexibility to supply the optimal product for each application and allow us to improve our cost structure. We believe that these capabilities will be essential as the solar market gains significant momentum. We are very pleased, though, by the attractions that we are having in this emerging space. During the first quarter, we nearly doubled our revenue as a result of orders from new customers and the volume ramp of current customers. While we are somewhat limited in how we can publicize our customer base, I can tell you that I am very pleased to be working with the caliber of customers that we have and are very encouraged by our progress and the qualification of several others. We continue to experience strong qualification activity in Europe, in particular, and are currently in the pre-production stage with two out of the five qualifying customers.

Europe continues to out pace the world in investment into solar technology. For example, AMCOR recently announced that it was awarded a $4.6 million follow-on production order for solar cell receiver assemblies from Concentrator Solar La Mancha of Menzera, Spain. The receivers will be incorporated into CS La Mancha's 500X concentrated full tank system and will be deployed throughout Spain and other locations. Shipments are scheduled to begin in the September quarter and complete in early 2009.

We're also encouraged that CPV-related companies, such as SolFocus, AMCOR, Spectrolab and others are joining forces by creating a CPV consortium in order to raise the visibility of gallium arsenide based solar cell as a viable and efficient material for solar energy creation. This consortium will be officially launched in May at the IEEE Photovoltaic Specialty Conference in San Diego, in order to provide data supporting the sufficiency of CPV and to more effectively communicate CPV efficiency achievement with policy and standard-setting organizations. We believe that this is a very good step toward CPV related companies achieving greater penetration in the solar market.

We're also very pleased by the recent announcement by AMCOR and Spectrolab that they are converting to 6-inch germanium substrate from 4-inch for their manufacturing processes. This is a significant step forward for the industry, because it will allow CPV solar cells to become more cost-effective as there is more dye per unit area. This has also been official for AXT as we have developed a process more than a year ago to manufacture a 6-inch germanium substrates in anticipation of an industry shift in this direction.

Turning to raw materials, we are once again seeing an increase in market prices of raw materials. Further underscoring the importance of our joint ventures as a competitive differentiator. While an increase in market also means an increase in our costs, we benefit from the additional revenue and what is sold to joint venture customers other than AXT. For example, on a year-over-year basis, 4 9's gallium metal has gone from about $330 per kilogram to about $550 per kilogram, a 37% increase. Arsenic has also gone from about $130 per kilogram to about $165 per kilogram, a 22% increase. Germanium is forecasted to increase to about $1,800 per kilogram, having been at approximately $600 a kilogram a year ago and currently at about $1,350 per kilogram, which is a 44% increase.

While we expect that the prices of 4 9's gallium and arsenic will stabilize in the coming quarters, germanium could continue to go up. While sharp rises in raw material pricing is detrimental to the margins of every company in our space, our joint venture agreements allow us to offset much of the impact through our ability to sell some materials on the open market. And most importantly, these agreements protect our own ability to supply our needs as availability of these materials become tighter.

On a separate note, we are currently building some inventory of raw materials in order to protect ourselves from the likelihood that we may not be able to transport raw materials from our joint ventures to our manufacturing facilities just before and during the summer Olympics. We believe that these precautions will be sufficient to ensure a smooth shipment schedule of our products during that time.

In closing, we are very pleased to share with you continued strong growth. The trends in our businesses are encouraging, and I am very proud of the way that the Company has executed to it's strategy. We're seeing revenue growth in the most strategically important areas of our businesses, and are making excellent progress in continuing to develop our customer base and our market share with new and existing customers. We believe that this is a great time for AXT, and we look forward to sharing our progress with you over the coming quarters. Wilson?

Thank you, Phil. We estimate our revenue for the second quarter will increase to between $19.7 million and $20 million. Also we estimate our net income per diluted share will be between $0.04 and $0.06. Bear in mind our first quarter diluted EPS included a gain on sale of investments of $459,000, which made up $0.015 of our EPS. Our second quarter EPS guidance also takes into account our diluted weighted average share count of approximately 31.6 million shares. This concludes our prepared comments. We are now happy to answer your questions.

Thank you. (OPERATOR INSTRUCTIONS) The first question is from Pierre Maccagno from Needham & Company. Please go ahead.

Congratulations on the quarter, Phil and Wilson.

Thank you.

Thank you.

So regarding your germanium that increased quite dramatically and do you expect going forward at this point similar sales as what you had in the first quarter?

Well, I think I've said it starting last quarter, I guess, fourth quarter, we expect our germanium sales to ramp up significant starting in the second half of this year. Slowly ramp as qualifications become more completed with our customers.

So can you give us an indication will it be much more than 1.4 per quarter or-- ?

Well it's going to ramp up. It's hard to quantify exactly how much, because it's going to be based on the qualification time, our performance of our product obviously in the line as compared to our competitors. Obviously the customers are going to start us out slow, a slow ramp. And based on our quality, our device performance, hopefully they'll ramp us up even higher and higher as we go forward.

And then the 6-inch germanium, when do you expect to have that product selling?

Well as I've mentioned we've already shown capabilities to produce that product over a year ago. I think it would all depend on when our customers would want samples. We're ready to support them.

Okay. And then, regarding your expansion plans for 6-inch, is that still on track to increase 16% by the third quarter?

27% increase.

Oh, 27%?

Right.

Okay. And so this quarter, for example, what was your capacity utilization?

Oh, shoot this quarter is probably up in the 90s.

Okay. And regarding gross margins, they should be somewhat flat next quarter, right?

My anticipation that it is going to be between 30% to 31%.

Okay. That guidance you gave is including the benefit, correct?

Yes, but like I said in the past, because the fully reserved wafers, most of the desirable ones are already sold, so we only built in about 250,000 a quarter.

Okay. Okay. Thanks.

Thank you.

Thank you.

Thank you. The next question is from Avinash Kant from Broadpoint Capital. Please go ahead.

Good afternoon, Phil and Wilson.

Hi Ash.

Quick question. You might have given this, but I missed it. Did you break up-- break out your 6-inch gallium arsenide number, and could you break out semiconductor-- semiconducting and semi-insulating in that?

Sure. As far as 6-inch is concerned, basically we have $5.9 million for Q1, and then-- I'm sorry $5.3 million for 6-inch. And then for the Q1 semi-insulating is 55% and semiconducting is 45%.

Conducting is 45%. All right. Now you said June gross margins we should be modeling roughly 30% to 31%. How about OpEx, should it change much?

Well, I think that you should expect the total operating expenses to be between $4 million to $4.5 million a quarter.

Okay. In terms of the germanium question, I just wanted to follow-up on that. Your germanium revenues went up significantly. Was it because some of the customers that you've been working with now are taking this to production, or it's just that they're just doing more and more testing?

Two reasons, Avinash. One is our current customers have ramped up their volumes even more. And secondly, some of our European customers, we went into pre-production mode instead of -- in other words, the qualifications have been completed and we're in pre-production, so that was the reason for the ramp.

And I think you were in qualification at five European customers, so you added two in pre-production now?

That's correct.

Okay. And one thing I didn't understand -- so Wilson was just talking with the $0.015 impact. What is that for the quarter?

I'm sorry. Can you repeat your question?

The $0.015 impact on the EPS you just talked about in the last quarter. What was that from?

The 1. -- the $0.015 EPS, that was due to the gain on sale of investments.

Sale of investments. And which line item do you have?

That was actually in other -- other income. In the other income line.

Okay. So that won't be the case in the -- in the June guidance, do you have anything?

No. No, we don't. And Avinash, let me get back to you. I take back the number of the 6-inch, (inaudible) was actually $5.9 million. I was reading the Q4 '07 column, which was 5.-- which was 4.3.

So $5.9 million was the number in the current quarter?

Yes, $5.9 million was the current quarter.

Okay. And did you talk-- should we expect any changes in share count going forward? Not much, right?

My expectation is going to be about 31.6 diluted.

Okay. And any -- any traction in terms of your germanium rate for customers in the United States? (Inaudible)

No. It's still ongoing.

They still appear to be farther than European customers at this point?

What do you mean by "farther"?

In terms of your -- your ability to penetrate at these customers--

We're still -- we're still in the qualifications stage. Yeah, we're not in production.

All right. Okay. Perfect. Thank you.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) The next question is from Ankur Wadhawan from Roth Capital Partners. Please go ahead.

Hi, Phil, hi, Wilson. Just on you guidance, you gave the guidance as 19.7 to 20. That's flat from Q1. Can you highlight what's going on there as to -- yeah, on that? Can you hear me?

Yes. I can tell you that we expect the majority of that increase would come from the 6-inch again.

Six-inch.

But, again, just so you know that we are very cautious in sort of projecting our business and really because that given the current volatile economic environment, we just want to be very cautious in the way that we forecast our business.

So the 6-inch gallium arsenide is that--?

There's the 6-inch-- we feel bullish about our business, because the long-term trends do support our market position. So we do expect a very solid results for the 6-inch.

Could you, could you give some color, because Nokia and Motorola came up with low handset sales, so -- and then Chinese mobile market wasn't that great either earlier. So can you -- I mean, it's -- I mean, have you seen any change, or what's going on there?

Yeah. However, if you listen to ANADIGICS, Skyworks and TriQuint, which are all making C-hemps and HPCs, their results were stellar.

Okay.

And we support those customers.

Okay.

And a lot of our growth also comes from market share gains.

Right.

Okay. Then, on DSOs did you mention it was 77 days, and it went up from 64 days.

Yes. It did went up from 64 to 77. But I think that in Q4 of '07, the DSO was, in fact, pretty low as we approach the year end and we beefed up on the collections. Normally our DSOs are in the high 60s and low 70s. So I the do expect the DSO to return to the normal range next quarter.

Okay. And then on an entry ramp, do you have -- can you give us some color as to how much you're expecting to ramp, like on an entry?

Well, I mean, that's a pretty difficult thing to predict. I can tell you that just -- just in Q1, the reason why we're, we're ramping up in inventory, more than half of them was the raw materials increase, because we want to basically stockpile it, given the restrictions on the transportation. And the remaining inventory increase really split between the width and the finished goods, because the consignment is also increasing.

Okay.

So if the demand continues, we should expect some increases particularly on the consignment side.

Okay. Got it. And then, germanium increased because of new customers also and volume ramp.

Germanium is all existing customers.

Okay. So the qualification was at 5 to 2, there you said they haven't-- you haven't started shipment. Is that what it is, or -- ?

No that was pre-production.

That was pre-production, okay. Got it.

5 to 2, right.

Okay. Got it. All right. Thanks.

Thank you.

Thank you. There are no further questions registered at this time. I'd like to return the meeting back to Dr. Yin.

Well, thank you, everyone, and thank you for participating in our conference call. During the second quarter, we will be presenting at the AEA conference in Monterey, and the American Technology Research LED Conference in New York as well as visiting investors in several cities around the country. And we look forward to seeing you again next quarter. So thanks very much.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.