AXT Inc (AXTI) 2010 Q3 法說會逐字稿

Please stand by. Well, good afternoon, everyone, and welcome to the AXT third quarter 2010 financial conference call. Leading today's conference is Dr. Morris Young, Chief Executive Officer; and Raymond Low, Chief Financial Officer.

My name is Kelsey and I will be your coordinator today. Today's conference is also being recorded. And now, it is my pleasure to turn the conference over to Ms. Leslie Green, Investor Relations for AXT. Please go ahead, Ms. Green.

Thank you, Kelsey, and good afternoon, everyone. Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or other forward-looking statements regarding, among other things, the future financial performance of the Company and our ability to control costs and improve efficiency, increase orders in succeeding quarters, improve 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 and are based on management's current expectations. They are subject to risks and uncertainties that could cause actual results to differ materially. These uncertainties and risks include, but are not limited to, overall conditions in the market 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 these factors that may be discussed in the 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.

The conference call will be available on our website at axt.com through October 28, 2011.

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 third quarter of 2010. This press release can be accessed from the Investor Relations section of AXT's website at axt.com.

I would like to now turn the call over to Raymond Low for a review of the third quarter results. Raymond.

Thank you, Leslie. Revenue for the third quarter of 2010 was $26.8 million, compared with $23.2 million in the second quarter of 2010. Total gallium arsenide substrate revenue was $19.2 million for the third quarter of 2010, compared with $16.2 million in the second quarter of 2010.

Indium phosphide substrate revenue was $955,000 for the third quarter of 2010, compared with $1.1 million in the second quarter of 2010. Germanium substrate revenue was $2.3 million for the third quarter of 2010, compared with $1.6 million in the second quarter of 2010. Raw material sales were $4.4 million for the third quarter of 2010, up from $4.2 million in the second quarter of 2010.

In the third quarter of 2010, revenue from North America was 19.5%, Asia-Pacific was 59% and Europe was 21.5% of total revenue. Only one customer generated more than 10% of our revenue during the third quarter, while the top five customers generated 42.6% of our third quarter revenue.

Gross margin was 39.3% of revenue for the third quarter of 2010. By comparison, gross margin in the second quarter of 2010 was 36.8% of revenue. Selling, general and administrative expenses were $3.3 million for the third quarter of 2010 compared with $3 million in the second quarter of 2010.

Research and development costs were $462,000 for the third quarter of 2010, compared with $515,000 for the second quarter of 2010. Total stock compensation expense was $181,000 for the third quarter of 2010, of which $6,000 was included in cost of revenues, $159,000 in SG&A and $16,000 in R&D.

Income from operations for the third quarter of 2010 was $6.7 million, compared with income from operations of $5 million in the second quarter of 2010. Net interest and other income for the third quarter of 2010 was $442,000. Net income in the third quarter of 2010 was $5.6 million or $0.17 per diluted share. This compares with net income of $5.5 million or $0.17 per diluted share in the second quarter of 2010, which included a $1.2 million sales tax refund.

Let's now look at our cash and 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, were $41 million at September 2010, compared with $38.9 million at June 30, 2010.

Accounts receivables net of reserves were $19 million at September 2010, compared with $18.6 million at June 30, 2010. Days sales outstanding were 65 days for the third quarter, compared with 73 days for the second quarter of 2010. Net inventory was $33.2 million at September 30, 2010, compared with $27.2 million at June 30, 2010. The increase in inventory is primarily the result of our purchasing raw materials to support increased purchase commitments from our customers, as well as expected increasing demand.

Depreciation and amortization in the third quarter was $711,000 and capital expenditures were $3.1 million. As of September 30, 2010, the Company, including our consolidated joint ventures, had 1,261 employees, of whom 1,004 worked in production.

This concludes our review of the results for the third quarter. I will now turn the call over to Morris. Morris.

Thank you, Raymond. Q3 was another strong quarter for AXT. Solid demand in all of our key end markets coupled with great execution across our organization allowed us to deliver outstanding financial results and continued increases in our market share and customer penetration. Not only did we exceed our revenue expectations, our gross margin performance was the -- one of the highest it has been in many years.

We're seeing growing momentum in the long-term secular trends that are fueling our growth, including the adoption of smartphones and other intelligent wireless devices, the proliferation of LED applications and the expansion of photovoltaics technology. These trends are opening up exciting opportunities for our businesses that we believe will extend for many years to come.

In semi-insulating gallium arsenide, strong sales of smartphones and other wireless devices continued to drive our revenue growth in this segment. We are benefiting from the upgrade cycle for 3G-enabled phones, which also require a heavy content of gallium arsenide to support the enhanced performance and feature sets. We believe that this cycle will continue for quite some time as the worldwide rollout of 3G and 3G+ networks is still ongoing and there are key emerging markets, such as India, that has not yet begun.

Further, wireless carriers [such as] Verizon and NTT DoCoMo will begin the rollout of their LTE networks this year with many other carriers scheduled to launch in 2011 and 2012. These rollouts are expected to begin another upgrade cycle to 4G-enabled phones that will have even greater functionality and gallium arsenide content than the previous generation.

Our semi-insulating customers are telling us that they are experiencing a positive demand environment as several of them are in the process of increasing their capacity in order to meet expected demand. As a result, one of the most frequent discussions we have with them is regarding our own capacity. Customers are very appreciative of our ability to scale as needed to supply their increasing requirements.

During the third quarter, we add another 20% in crystal growth, supporting both our semi-insulating and semi-conducting gallium arsenide business. And we are planning to add another 20% by the end of the year. We will also add additional wafer processing capabilities over the next two quarters. Currently, AXT has 30,000 square feet of space in our Beijing plant that is being facilitized and we plan to build another 80,000 square foot building in 2011.

The flexibility of our China-based manufacturing and our ability to build our own proprietary crystal growth furnaces allow us to quickly and cost-effectively scale our business as needed. This capability is very strategically important as growth accelerates in the end market that we serve.

For example, our semi-conducting business grew by more than 30% in the third quarter, following 21% growth in Q2. This is coming from strong demand from our traditional markets such as automotive and display, as well as from emerging market such as direct-lit LED TVs and general illumination. Current generation of LED TVs and LED light bulbs use a small number of red LEDs but subsequent generations that have increased content of red LEDs built on gallium arsenide substrates are just beginning to come to market and will ramp over the coming years.

Turning to indium phosphide, we continue to see renewed demand for these substrates as investment in high-speed optical communications is increasing worldwide. While our revenue are relatively small, we believe that this could be a positive market for AXT as the competitive landscape is fairly limited. We are very focused our engineering efforts in this area and believe that it will provide an interesting opportunity for future growth.

In germanium, we are very excited about several positive developments in this quarter. As expected, we saw a strong growth in our sales in the third quarter, driven by shipment of germanium substrates into the European Space Agency's Galileo program. Our qualification for this program adds another major geography to our addressable market. We also secured a sizable order from another major germanium customer. This order significantly increases our market share and further demonstrate our ability to support large-volume shipments.

Finally, we are very pleased to report that we have received our first commercial order for six-inch germanium substrates. This development of this product has been a strong focus of our R&D effort over the past year. I'm extremely proud of our engineering and manufacturing team who successfully worked through very difficult technical challenges of developing large-diameter germanium substrates. Our VGF technology is ideally suited for these applications as it produces substrates with higher mechanical strength than the competing technology. The migration to six-inch germanium is a critical part of making terrestrial CPV commercially viable. And we view these orders as an important indicator that the terrestrial market is taking shape.

We continue to be encouraged by a steady flow of news on the use of terrestrial CPV. For example, the Chinese government recently announced that it is planning a 280-megawatt solar energy plant in six Western regions of China. These will be among the largest in the world.

New installations are also occurring in Spain and other parts of Europe which continues to lead the world in CPV deployment. In total, the solar cell market holds tremendous promise. We are excited about the current growth in our business for satellite applications and we hope to see terrestrial CPV market beginning to gain meaningful traction by the end of 2011, creating exciting opportunity for our future growth.

Finally, we have another quarter of strong revenue from raw materials. A major benefit of our joint ventures is that they give us valuable visibility into the changing market conditions in raw materials so that we can anticipate pricing and supply dynamics and plan our business accordingly. This is helping us greatly to control our cost structure as prices rise and ensure that we have adequate supply.

We expect that our gallium, arsenic and pBN joint ventures will all be increasing capacity in the coming quarters in order to keep up with market requirements. Looking forward, we expect to continue to expand our raw material capability through expansion with our joint ventures as well as the addition of new joint ventures that build on our current portfolio.

As we look into 2011 and beyond, we see tremendous opportunity for our substrate business, both from growth in our own market as well as market share gains. Our joint venture agreement will help to ensure that we will have adequate raw material supply to meet our customer requirements as our substrate sales continue to increase.

In conclusion, this is a great time for AXT. The secular trend driving our growth shows long-term sustainability and we are excited about many new opportunities that will gather steam over the coming year. We continue to experience solid demand for our products as a result of new and expanded relationships with our customers and growth in our market share. We've also executed very well on operational efficiencies that have enhanced our positive financial performance. We believe that we are well positioned for continued strong revenue growth in 2011.

I'll now turn the call back to Raymond to discuss our forward-looking guidance. Raymond.

Thank you, Morris. As Morris mentioned, we are expecting to see continued growth in our substrate revenues in the fourth quarter. Therefore, we expect total revenues of between $28 million and $29 million. We are expecting net income in the fourth quarter of between $0.15 and $0.17 per share based on approx. 32.4 million common shares outstanding.

This concludes our prepared comments. We are now happy to answer your questions.

Thank you, Mr. Low. (Operator Instructions). We will go first to Richard Shannon with Northland Capital.

Morris and Raymond, good afternoon and congratulations on some very nice numbers again.

Thank you, Richard.

Thank you.

I guess the first thing is, on gross margins, you continue to perform very well as you have for the last several quarters. And in this case, it's very surprising in the fact that your germanium went up, which I understand is a lower than average business for you. Raw materials didn't grow as much, I'm kind of curious what was going on there. Did you -- were you able to reduce or improve the operational efficiency of your facility or did you have better-than-expected costs on the raw materials side? Or can you explain how you got -- continue to do so well in gross margins and also, can that keep up going forward?

Well, actually, I don't think they are connected. I think germanium, our revenue grew because we are already advising -- give everybody a heads-up; in our last conference call, we said we are going to get into the Galileo program and we did deliver, and we are winning yet another contract with a major germanium customer. So, we would see germanium revenue picking up.

And as far as our gross margin is concerned, I think we are shaping up our operation fairly nicely. I think we are picking up a lot of the efficiency improvements, yields in terms of longer crystals, higher yields, you name it. And plus, the revenue expansion also reduced our fixed overhead share of each product we deliver.

Okay. Morris, is there a lot more headroom in terms of gaining more efficiencies? I know it's through things like longer crystals and lower [glass and saws] and things like that. But how much more headroom is left here because obviously, these gross margins are very good and hoping that they're not --?

Absolutely, Richard. And I'm excited about coming back to our factory and I'm picking up a lot of efficiency improvement. I mean, we are doing very well. In fact, I don't think it's the end yet. But of course, we do target our gross margin to be in the mid 30s. That's because we want to expand our market share strategically, but because we are doing very well, so we are picking up the extra gross margins for our shareholders.

Okay. Well, you should be congratulated on that. Those are very nice numbers. In terms of the third quarter numbers, you mentioned the growth rate for semi-conducting gallium arsenide. What was the -- I didn't catch you saying any number for semi-insulating. What was that growth rate?

Mid-teens -- mid-single digits.

Mid-single digits. Okay. How did your six-inch business do in the third quarter, gallium arsenide specifically?

We did okay, but we have one customer who had an issue with a China customer who had a delayed shipment. And they promised to picking up in the fourth quarter; in fact, we are seeing the demand from that customer picking up again. And yet, we have another customer who had a machine problem and so they are refueling -- recharging off their machines. So that should be finished up as well. So, we should start to see the six-inch demand going up in the fourth quarter.

Okay. So in terms of your fourth quarter guidance, do you expect the semi-insulator or semi-conducting to grow faster, relatively speaking?

Well, we think both of them will grow. I mean, we were trying to pick which one is going to grow faster. Each one has its own dynamics. I think the semi-insulating is fueled by the wireless and the -- but the semi-conducting is not a pushover either. I mean, it has a very strong growth component of it and then we do see opportunity for both of them to grow.

Okay. And then specifically, on the semi-conducting, you've done very well for at least a couple of quarters in a row. I think we are aware of a supplier in this market seems to have been exiting, has that been helping you thus far? Is that still to come and do you see opportunities for continued semi-conducting market share gains going forward?

Yes, you pointed out correctly. There's some market realignment. [As far as] -- there's a lot of MOCVD to be delivered in China as well as Taiwan, and we are just starting to see those installed base MOCVD are starting to take substrates from us. So, we believe there are more to come.

Okay. Maybe just the last couple of quick questions and I'll jump out of line. Do you have an expectation for CapEx for 2011?

Raymond.

Richard, we are estimating this at this point to be about $10 million.

$10 million, okay. And then finally, kind of a big-picture question, Morris, based on your comments on your prepared remarks regarding joint ventures. You mentioned across the board capacity expansions. You also referenced possibility of gaining new or creating more joint ventures. Anything in more detail you can provide there? I know we've been talking about that for the last several quarters, but anymore detailed update on that?

We are very excited about the possibility of getting more joint ventures, but none has come to the stage that we can sign on the dotted line. So, we cannot disclose anything, but we are very excited about our substrate revenue going forward and especially 2011 and 2012 and so we are making all of this preparation to make sure if LED and smartphone were to grow and expected growth -- or even accelerated growth, our raw material supply will not hinder its growth.

Okay. Appreciate those thoughts and once again, congratulations on good numbers, I'll get [on line].

Thank you, Richard.

(Operator Instructions). We'll move on to Michael Bertz with Kennedy Capital.

Good afternoon, gentlemen.

Hi, Michael.

So just a couple of quick questions to follow up with. So on the thoughts around sort of able to -- seen some market realignments and taking some share, give me a sense about sort of what you think you've gained, let's say, over the last 12 months or so in terms of share [line] in a broader market or if you want to segment it out any, that's fine for me.

Well, I think in semi-insulating -- I mean overall, our revenue grew almost like 70%. We don't believe that although we think we are in all very, very exciting market, but we don't believe the market is growing 70%. So perhaps my estimation is perhaps the market was growing around 30%, 35%. So the rest of the 40% is probably taking market share away from gaining market share.

Okay. And then, on the inventory that you've built sort of ahead a little bit in terms of having some purchase commitments and planning for the demand, there have been hiccups in the past where you've sort of built ahead a little bit and carried a little extra and I'm not necessarily worried about that given the demand that looks like it's out there, but just kind of out of curiosity, what level if I was to think about it in terms of like coverage across an inventory, do you have for purchase commitments or let's say, this quarter's forecasted demand?

Well, Michael, the inventory went up mainly in raw materials into work in process and finished goods particularly flat. And that was really as a result of timing of purchase at opportunistic prices and also in anticipation of increased production. Yes. In fact, if you were to look at our inventory efficiency, our inventory turns actually has improved. We have increased our revenue as I said in the last year by 70%. In fact, our inventory went from $28 million -- I mean, when we started, it was around $34 million; it came down to $28 million and is picking up this quarter but mainly in the raw material as Raymond explained is purchase commitment because we have received large contract we have to buy those material in case the raw material price pick up, we're protected.

Okay. I understand. I'm just trying to look at the push and some pulls and you guys have done a good job, bringing the inventory down. So that's good. Last question in terms of utilization now you're talking about sort of bringing up capacity by 20%, maybe another 20%, where are you at sort of utilization right now?

We are pretty full with that 20% just came in -- come online. Had we not had that 20%, we probably cannot grow in fourth quarter. So, I mean we did very much in time expansion of that [crystal glass] capacity and as we look at it and we had to make another 20% expansion again for the first quarter of next year, just in case the market doesn't just want to stop.

Okay.

We don't believe there is any indication will.

Okay. Fair enough. And the last question, the $10 million CapEx you talked about for next year, Raymond, if you were obviously -- depending on what you spend it for, give you some indication of what capacity you could get out of that. But if I was to think about how much more capacity that might let you generate, what's a good round number to think about there?

All right. It's been a hard and fast number that measures exactly how much CapEx relates to capacity because we're also expanding the plant for facilities just to increase clean rooms, put on additional space, it doesn't always necessarily mean additional output. It's a very difficult question to answer.

Well, let me answer it this way, we are looking at a good 30% growth next year.

Okay. Fair enough. Thanks, guys.

Thank you.

There are no further questions at this time. So, Dr. Young, I will turn things back to you, sir, for closing or additional remarks.

Thank you for participating in our conference call. We will be presenting at the TechAmerica AeA Classic next month in San Diego and the Needham Conference in New York in January. We look forward to seeing many of you there. As always, feel free to contact me, Raymond or Leslie Green directly if you would like to meet with us. We look forward to speaking with you in the near future.

Thank you. Again, ladies and gentlemen, that does conclude our conference for today. We do thank you all for your participation. Enjoy the rest of your day.