AXT Inc (AXTI) 2009 Q1 法說會逐字稿

Good afternoon. Thanks for holding, and welcome to AXT's first quarter 2009 conference call. Leading the call today is Wilson Cheung, Chief Financial Officer, and Bob Ochrym, Vice President of Business Development. I'll be your coordinator for today. A quick note that today's call is being recorded. With that, I'd like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Kevin, and good afternoon, everyone. Before we begin, I would like to remind you that during the course 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 control costs and improve efficiency, increasing orders in succeeding quarters, utilization of excess inventory and the improvement of our competitive position as the market improves, as well as other 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.

These uncertainties and risks include, but are not limited to, overall conditions in the markets in which the Company competes, global financial conditions and uncertainties, market acceptance and demand for the Company's products, and the impact of delays by our customers on the timing of sales and products. 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 links from our web site. For additional information on the risk factors that could cause actual results to differ materially from our current expectations. This call will be available on our web site at AXT. com through April 29, 2010.

Also before we begin, I want to note that shortly following the close of the market today, we issued a press release reporting financial results for the first quarter of 2009. This press release can be accessed from the investor relations section of AXT's web site, at AXT.com.

I will now turn the call over to Wilson Cheung to discuss the first-quarter results and market updates. Wilson?

Thank you, Leslie. Revenue for the first quarter of 2009 was $7.7 million, compared with $15.6 million in the fourth quarter of 2008. Gallium arsenide substrate revenue was $5 million for the first quarter of 2009 compared with $9.1 million in the fourth quarter of 2008. Indium phosphide substrate revenue was $490,000 for the first quarter of 2009, compared with $473,000 in the fourth quarter of 2008. Germanium substrate revenue was $622,000 for the first quarter of 2009, compared with $684,000 in the fourth quarter of 2008.

Sales of raw materials, primarily 99.99% pure gallium, were $1.5 million in the first quarter of 2009 compared with $5.3 million in the fourth quarter of 2008. In the first quarter of 2009, revenue from North America was 23%, Asia-Pacific was 48%, and Europe was 29% of total revenue. Two greater than 10% customers generated 14.2% and 11.2% of our revenue during the first quarter, while the top five customers generated 41.5% of our first-quarter revenue. Gross margin was negative 3.1% of revenue for the first quarter of 2009. This included a benefit from the sale of approximately 414,000 in fully reserved wafers, which positively affected the quarterly gross margin by 5.4% points. By comparison, gross margin in the fourth quarter was 4.8%. This included a benefit from the sales of approximately 703,000 in fully reserved wafers which positively affected fourth-quarter gross margin by 4.5% points.

Gross margin in Q1 came in below our expectations, primarily the result of several factors. First, our capacity utilization was low as a result of low revenue expectations due to the excess inventory both at our customers and at the device manufacturing level. Second, we experienced low gross margins on our raw material sales as a result of fulfilling orders from finished raw materials that we purchased from a third-party supplier in the fourth quarter. In addition to a lesser extent, a deterioration in pricing across all of our product lines as a result of the persistent weakened market demand environment as well as some delay in implementing some cost-cutting measures also negatively impacted our gross margins for the first quarter. These cost-cutting measures have been implemented in full, and we will see the benefits beginning the second quarter.

Selling, general, and administrative expenses were $4 million for the first quarter of 2009, compared with $3.6 million in the fourth quarter of 2008. Our SG&A expense included approximately $340,000 in severance accruals for our former Chief Executive Officer, as well as $350,000 in additional legal and professional fees as a result of matters relating to the change in management in March 2009. Research and development costs were $460,000 for the first quarter of 2009, compared with $529,000 for the fourth quarter of 2008. Total stock compensation expense was $458,000 for the first quarter of 2009, of which $13,000 was in cost of revenues, $418,000 in SG&A, which included our former CEO stock option acceleration charges, and $27,000 in R&D.

During the first quarter of 2009, we further reduced the work force at our Fremont and Beijing facilities by approximately 11 positions that are no longer required to support certain production and administrative operations. Accordingly, we recorded a restructuring charge of $507,000 in March 2009, related to the reduction in force for severance-related expenses from this reduction in force, all of which will be cash expenditures. We anticipate that the majority of cash outflow from this charge to be incurred in the second quarter of 2009. And we expect to save approximately $1.3 million annually in payroll and related expenses. Loss from operations for the first quarter of 2009 was $5.2 million, compared with loss from operations of $3.4 million in the prior quarter. Net interest and other loss for the first quarter of 2009 was $302,000, which included an unrealized foreign exchange loss of $409,000, compared with net interest and other income of $656,000 for the fourth quarter of 2008, which included an unrealized foreign exchange gain of $505,000.

Our tax provision for the first quarter of 2009 was $4,000 compared with a tax benefit of $349,000 for the first quarter of 2008. Net loss in the first quarter of 2009 was $5.5 million or $0.18 per diluted share. By comparison, in the fourth quarter of 2008, we reported net loss of $2.4 million or $0.08 per diluted share. Let's now look at our cash in the balance sheet. Cash and cash equivalents 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 restricted deposits, were $32.5 million at March 31, 2009, compared with $34.3 million at December 31, 2008. The decrease in cash was the result of timing of customer payments while we paid down our accounts payable. Accounts receivable net of reserves were $8.4 million at March 31, 2009, compared with $11.5 million at December 31, 2008. Day sales outstanding was at 99 days for the first quarter, compared with 68 days for the fourth quarter of 2008. Net inventory was $33.5 million at March 31, 2009, compared with $35.1 million at December 31, 2008. Depreciation and amortization in the first quarter was $800,000, and capital expenditures were $117,000. As of March 31, 2009, the Company, including our consolidated joint ventures, had 1,051 employees, of whom 845 worked in production.

Now turning to our review of the market. The first quarter continued to be a difficult quarter for our industry. Across the board, our customers continued to work down their own inventory and made good progress in the quarter, but not as quickly as we had hoped. We had expected that the bulk of the excess inventory situation would be resolved in Q4 of 2008, with some overhang to the first quarter. However, excess inventory at the raw materials, substrates, and device level cost continue weakness throughout the quarter and had a significant effect on our industry. While we began to see an uptick in orders for our substrates, it came much later than expected. In particular, we continued to experience pushed out of orders, particularly for six-inch semi-insulating substrates into the balance of the year. As a result our factory operated at about 45% of capacity in the first quarter, although that level is increasing because of stronger ordering patterns particularly for our six-inch semi-insulating substrates.

As we look into the second quarter, we expect that stronger sales and a more favorable product mix may help to improve our gross margins. Our largest customers have gone releasing orders for the first time since late last year, albeit, at modest levels. We believe that this is an indication that the inventory situation in our industry is improving some what, although end-market demand is still soft. At this point in the year, we are planning for a slow increase in sales of the larger diameter substrates throughout 2009 as a result of improved an inventory situation and growth in certain cellular handset segments such as 3G-enabled phones and smart phones that utilize our larger diameter substrates. We believe that this segment will continue to perform well as investment in 3G networks worldwide and the proliferation of applications for the smart phone draw new subscribers and a lengthy upgrade cycle.

AXT continues to be a leader in large diameter substrates and we supply directly or indirectly to nearly every foundry and device manufacturer in the market, positioning us for growth when the economy improves. Turning to semi-conducting gallium arsenide substrates, sales of four-inch semi-conduction gallium arsenide substrates continue to be weak in the first quart as a result of softness in the automotive market. Therefore, a greater portion of our revenue in this category came from the smaller diameter substrates that are used in such applications as novelty products, indicator lamps, and general purpose LEDs. Going forward, we believe that this market has tremendous potential and that the high volumes create great opportunity, despite the somewhat lower margins. Therefore, we're aggressively pursuing areas of new market opportunity, and expect to see increasing sales of these products beginning in the third quarter.

Turning to germanium, as you know, we recently qualified with a large European [CPV] solar cells company for space applications with further qualifications continuing for terrestrial applications. We are expecting our first order from this qualification to come in the second quarter. Also, we are pleased to report that we have just qualified with another European company that is a leader in the testing of certification of electromechanical equipment and power systems studies. This is another exciting qualification for us as it demonstrates both the growing market for germanium for solar applications, and also AXT's ability to service leading providers in this market. We are pleased to report that we will receive our first releases from there contract in the second quarter.

In terms of raw materials business, our revenues in the first quarter were down as a result of weakened end-market demand and excess inventory at the substrate level, particularly gallium arsenide in the channel. Further, as we told you last quarter, the weakened demand and price of aluminum in the fourth quarter caused a shutdown of the aluminum plant that houses our gallium joint venture, [GIA]. As a result, GIA made purchases of refined gallium to order to fulfill contractual obligations of product for its customers. It continued to fill orders in the first quarter of 2009, using the material that it had purchased in the fourth quarter as weakened demand for raw materials meant that this inventory of third-party products extended through the first quarter. This material carries a much lower gross margin than materials produced at GIA. We continue to expect to see softness in this area of our business in the second quarter as a reflection of the general worldwide economic conditions. However, all of our joint ventures are poised to respond to increasing demand, and we expect to see improvement in the second half of 2009.

As a new development in the competitive landscape for raw materials, GIA is in discussion with its third-party producers to distribute a certain amount of its product on a go-forward basis. This provider has a substantial share of the available gallium and is interested in partnering with GIA to leverage its distribution capabilities. This potential partnership would allow GIA to have additional capacity . Should GIA formalize an agreement, our raw materials gross margin would be negatively impacted. However, GIA believes the benefits of additional capacity and stronger competitive positioning would make the arranged agreement compelling.

Now before we close, I wanted to update you on the status of our CEO search. We have retained an executive search for them to assist us, and the Board expects to begin reviewing candidates very soon. No other senior management changes have occurred, and the Company remains focused on executing its strategy through this economic environment. Therefore, while this has undoubtedly been one of most challenging quarters that we have seen in recent times, the inventory situation has improved to a level that we are beginning to see customer releases and now once again voting consignment inventory in anticipation of stronger demand. Our efforts to build and diversify our customer base have been successful, and we now supply substrates either directly or indirectly to nearly every major customer in our market. We are a fundamentally solid Company with a strong competitive position, solid balance sheet, and little debt. Our key areas of focus continue to be research and development of advanced products and technologies, customer support, quality control, new customer qualifications, and expense management. We believe that a strong focus in these strategic areas will allow us to emerge in a competitively solid position when the market improves. Therefore, turning to our guidance for the second quarter, we expect total revenues of between $10 million and $11 million. This takes into account a modest improvement in gallium arsenide substrate and germanium substrate sales and a modest increase in raw materials. Therefore, we're expecting a net loss in the second quarter of between $0.06 and $0.09 based on approximately 30.5 million common shares outstanding. This concludes our prepared comments. We are now happy to answer your questions.

(Operator Instructions). First up in the roster, we have a question from Richard Shannon, Northland Securities.

Hey, Wilson. How are you?

Good. Yourself?

Not too bad. Thanks. I guess first question, on the gross margins in the first quarter, kind of wondering about the impact that came from having to purchase some raw materials externally. And also any thoughts on when that impact might end?

Well, we have already made the announcement beginning in Q4. We have been buying the finished products from this third party -- third-party supplier, and we continue to see this coming into the first quarter because our GR operations first of all, they have not been getting back into full capacity until sometime in late Q1. So the impact you're probably talking about -- 4% to 5% points for the quarter in gross margins. But as I've said earlier in my prepared comments, GIA right now is actually thinking about to have an agreement with this third-party supplier on a go-forward basis. That way we can capture the -- have a consistent capacity so that we can make sure that we fulfill the obligations for our customers.

Okay. So does that -- does that mean if that contract gets signed, does that mean we're going to see increased raw materials sales, or --

We haven't signed the contract yet. This is still in talks with the third-party supplier. But it they do, then you will see that our raw materials model to have a low gross margin going forward.

Okay. So does that change your -- kind of your operating break-even model? You talked about that in the last call. I think if I remember the numbers, about $3.4 million OpEx, gross margins in the low to mid-20s range and break-even revenues at $15 million.

Right. I think if that happens, you are probably looking at closer to $16 million. For quarterly revenues.

Okay. And the gross margin, does that --

The margins, you're still looking at the mid-20% range. And as far as the operating expenses, I think given what has been done with the restructuring -- our operating expense model right now, you are probably looking at between $3.5 million to $3.75 million per quarter versus $4 million to $4.5 million in prior year.

Okay. What's your expectation for cash flow in the second quarter? And how does -- specifically how does inventory play into that forecast for you?

Well, let's first talk about the cash flows. Originally, we were expecting cash flow break even or even generating cash for the first quarter. But because we have some delays in customer payment and we were paying down a little of our AP, that's why we had a little cash burn of about $1.9 million in the first quarter. We have always expected a little cash burn in the second quarter anyways. But I think this could be offset by some of the late payments that would come in Q1 that would grow into the second quarter. But because in Q1 we have a lower amount of accounts receivable given the lower revenue coming in in the first quarter, that would also offset against the payment we expect to receive. So we should -- there would be slight cash burn, maybe even -- or cash flow neutral in the second quarter. It's hard to say right now.

Okay.

And then in terms of inventory, I think I would refer that to Bob to talk about where you see in terms of the customers' inventory levels.

Yes, Richard, our customers are burning the inventory, okay. Their business right now is moderate and steady. And they have better visibility, and we are now starting to replace their consignment inventories. So things are getting better.

Okay. Great. I will step out of line. Thank you.

Thanks, Richard.

(Operator Instructions). We have a question now from [Rusty Canon] at [RKC Capital].

I had a question for Bob. Could you give a little more color on sales efforts overall with Phil's departure. Have there been any negative effects, positive effects, no effects, or can you give a little more color on how that's gone down.

There has been no effect. Our business model continues forward. Our qualifications continue. We just got a new qualification through on a new blanket order from a European germanium house. Things are still positive. Certainly the economy, the way it is right now, certainly it's a tough time for one and all. We go ahead with all of our programs. And there has been no change.

I see. So is it too early to see any visibility even into the third quarter yet? Or any thoughts further out?

Well, going into the third quarter we certainly see movement on the positive side. And again, the second quarter we see an increase in sales for our substrates, and we see that going into the third quarter.

Okay. Thank you.

(Operator Instructions). Mr.Cheung, it appear that we have no other questions at this time. I'll turn things back over to you.

Thank you for participating in our conference call today. As always, feel free to contact me or Leslie Green directly if you would like to meet with us. We look forward to speaking with you in the near future.

Thanks, again, for joining everyone. That will conclude today's conference call. Have a good day.