AXT Inc (AXTI) 2013 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to AXT's first quarter 2013 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Raymond Low, Chief Financial Officer. My name is Deanna, and I will be your coordinator today. (Operator Instructions.)

I would now like to turn the call to Leslie Green, Investor Relations for AXT. Please go ahead.

Thank you, Deanna, 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 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, 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, are based on management's current expectations, and 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 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 of product.

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 May 1, 2014.

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 of 2013. This press release can be accessed from the Investor Relations section of AXT's website at AXT.com.

I would now like to turn the call over to Raymond Low for a review of the first quarter 2013 results. Raymond?

Thank you, Leslie. Revenue for the first quarter of 2013 was $22.4 million compared with $18.9 million in the fourth quarter of 2012. Total gallium arsenide substrate revenue was $11.7 million for the first quarter of 2013 compared with $11.4 million in the fourth quarter of 2012.

Indium phosphide substrate revenue was $1.8 million for the first quarter of 2013 compared with $1.6 million in the fourth quarter of 2012. Germanium substrate revenue was $2.6 million for the first quarter of 2013 compared with $1.7 million in the fourth quarter of 2012.

Raw material sales were $6.3 million for the first quarter of 2013 compared with $4.3 million in the fourth quarter of 2012.

In the first quarter of 2013, revenue from North America was 15.5%, Asia-Pacific was 63.5%, and Europe was 21% of total revenue. No customer generated more than 10% of our revenue during this first quarter. The top five customers generated 33.9% of our first quarter revenue.

Gross margin in the first quarter was 15.6% compared with 19.5% of revenue for the fourth quarter of 2012. The drop in gross margin in the first quarter of 2013 was expected, as announced in our last earnings projection.

Selling, general, and administrative expenses were $3.9 million for the first quarter of 2013 compared with $3.7 million in the fourth quarter of 2012. Research and development costs were $827,000 for the first quarter of 2013 compared with $875,000 for the fourth quarter of 2012. Total stock compensation expense was $332,000 for the first quarter of 2013, of which $6,000 was included in cost of revenues, $284,000 in SG&A, and $42,000 in R&D.

Loss from operations for the first quarter of 2013 was $1.3 million compared with loss from operations of $900,000 in the fourth quarter of 2012. Net interest and other expense for the first quarter of 2013 was $512,000. Net loss in the first quarter of 2013 was $2.4 million, or a loss of $0.08 per diluted share. This compares with a net loss of $756,000, or a loss of $0.02 per diluted share, in the fourth quarter of 2012.

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 decreased by $725,000 to $49.4 million at March 31, 2013.

Accounts receivables net of reserves were $17 million at March 31, 2013, compared with $17.9 million at December 31, 2012. Days sales outstanding were at 68 days for the first quarter compared with 87 days for the fourth quarter of 2012. Net inventory was $38.8 million at March 31, 2013, compared with $40.4 million at December 31, 2012. Of this, approximately 49% is raw materials, 39% is work in progress, and 12% is finished goods.

Depreciation and amortization in the first quarter was $1.3 million, and capital expenditures were $1.6 million. As of March 31, 2013, the Company, including our consolidated joint ventures, had 1,264 total employees, of whom 1,053 worked in production.

This concludes our review of the results. I'll now turn the call over to Morris. Morris?

Thank you, Raymond. Revenue trends in the first quarter came in largely as expected in each of our product categories, although our performance in germanium substrates and raw material outperformed our plan. With our industry continuing to evolve, both in terms of the customer landscape and technology trends, we experienced a continuation of the softness in semi-insulating gallium arsenide substrates that we began to see in the second half of 2012. However, we are seeing renewed growth in our semiconducting gallium arsenide substrates as well as improving demand for our indium phosphide substrates. Germanium substrates, too, were seeing a very good growth, as well as raw material.

While the changes to the wireless side of our business have been challenging, we remain optimistic that new opportunities, coupled with improving market conditions in other product lines, will allow us to drive improved results in 2013. As expected, we saw a decline in our wireless revenue in Q1, as is seen seasonally normal, and also in keeping up with the customer behavior, who we have been monitoring over the past few quarters.

For the first time in many years, no customer represented 10% or greater of our revenue in Q1. However, we were pleased to see solid performance from a returning customer and better revenue diversification in this area of our business.

As we discussed last quarter, the customer base for wireless RF devices is undergoing major changes in its consolidation. We have been very focused on working with customers to complete ongoing qualifications and position AXT for greater penetration in strategic accounts. We are pleased by our performance in customer qualifications, where our substrates have had some key successes, but continue to work through the business impediments that have limited our sales to this point.

In addition to the landscape change, the wireless industry is undergoing some technology transitions that are also having an impact on near-term demand. We're seeing adoption of BiHEMT technology that combines pHEMT and HBT devices into one package that offers both cost and space savings for the customer. We've made adjustments in our own substrate manufacturing process that are allowing us to perform quite well in the qualification of our substrates for these new devices and believe that this could present additional opportunity for us as this technology becomes more widely adopted.

Now turning to semiconducting substrate business, we saw a nice pickup in our revenue in Q1, although coming off a low base in the fourth quarter of 2012. Regionally, Taiwan saw the most growth, but we also experienced stronger sales out of Europe. China continues to be somewhat soft. The applications driving our sales continue to be signage, display, and automotive uses such as taillights and panel illuminations.

To that end, we were very pleased to report during the first quarter that we have successfully been certified as having met the International ISO's Automotive Standards, currently the most stringent quality management system standard for the worldwide automotive industry. This certification is a demonstration of AXT's commitment to serving our automotive customers with the highest level of excellence, and it is important for our continuing penetration of strategic automotive applications.

Turning to germanium substrates, as expected, we saw a healthy increase in our revenue in the first quarter. Satellite solar cells continued to make up the majority of our demand, but other applications also performed well. Regionally, we saw strengthening demand from customers in Europe and China, and expect that these regions will continue to generate healthy demand in the coming quarters.

In terms of other applications, we also are beginning to see a ramp in the CPV activity. While this application is still nascent, terrestrial solar installation are growing in both size and number, and we are monitoring this opportunity with interest.

Raw material sales were also a strong contributor to our revenue increase in Q1. While prices have been increased modestly, volume has picked up meaningfully, with our sales increasing 45% from the fourth quarter. The additional volume at historical low prices negatively impacted our gross margin in Q1. However, if the demand continues to rise as prices recover, we should see a healthy recovery in our overall gross margin.

Over the past year we have continued to build our portfolio of raw material joint ventures, which now total nine. We recently added an additional joint venture, and two more were added by our joint ventures. This portfolio has tremendous value in terms of our cost structure and supply, and it's a unique benefit of our China-based operation and relationships.

In closing, while the wireless market remains challenging as the customer and technology shifts continue, the rest of our business is showing signs of improvement. We are hopeful that the LED device market will strengthen over the course of the year and that we will continue to see growth in indium phosphide and germanium substrates as well as raw materials.

In the meantime, we are tightly controlling our expenses and are continuing to drive efficiency improvements throughout our operations. Further, the window for our stock repurchasing program will open in early May, and we believe that will be representing another opportunity for us to improve our shareholders' value in the quarters that come.

I will now turn the call back to Raymond to discuss our forward-looking guidance. Raymond?

Thank you, Morris. In the second quarter, we are expecting to see total revenues of between $22 million and $24 million. We are expecting net loss in the second quarter of between $0.05 to $0.07 per share, based on approximately 32.4 million common shares outstanding.

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

(Operator Instructions.) Edwin Mok, Needham and Company.

So the first question I have is regarding your comment, Morris, on semi-insulating gas substrates, and you mentioned customers are changing technology. Are you referring to customer or end customer as they adopt more silicon-based wireless front end? Or are you talking about this BiHEMT change? I'm just trying to do a replay on that.

I think it's both. Actually, there's a lot of shifting technology. I think there's no denial that SOIs is encroaching the gallium arsenide space, and we're taking a very close look at that. And also, they are, I think, BiHEMT is good technology counterpunch from GaAs to SOI, I believe. And so I think the battle is not over, definitely, and we are seeing the changes.

So we have heard some of our front-end guys talk about BiHEMT for a while, and haven't seen a lot of adoption. Is this something that you start to see change in here? And my understanding BiHEMTs do use a gas substrate, right, so that should actually benefit you, right, if that gets adopted, right, yes?

Yes, that would actually save the day for pHEMT, because it uses gallium arsenide. And this is also we hear from our customers. They use the same substrate, by the way, whether they're building pHEMT or HBT or BiHEMT. BiHEMT is just a combination of pHEMT and HBT. But the good thing for us is that they need a slight adjustment for our substrate surface, but basically, it's a six-inch substrate. They can use whatever the technology they use.

Great, yes, thanks for clarifying that. So just to replay it all, on BiHEMT, I thought that technical product has been out for a while, right? Has it just finally got to a point where you start to see adoption in the customer, or at the end customer side?

That's what we hear. That's what we hear from our customers. They are saying that it's growing very nicely, although we need to see more confirmation. But we do hear there's some activities in there, and it's growing in demand and performance.

That's great. And then just quickly on the semiconducting, you mentioned that you guys had a nice pickup. Is it possible for you to give us some breakdown into just how much your revenue was semiconducting versus semi-insulating for the first quarter? And do you expect that trend to continue into the second quarter and into the second half as well?

Edwin, it was actually a 50/50 split this Q1. And the prior quarter, because we had such a low base on semiconducting, it was 44% to 56%.

So the trend going forward, I think semi-insulating probably is going to see some softness in Q2, but we expect it to recover in the second half, although famously speaking, we don't have very good visibility two quarters out. But we hear from our customers' customers that they're seeing a ramp-up in demand in the second half.

Are you talking about semi-insulating or semiconducting, just to be really clear?

Semi-insulating. But I think we're modeling growth for our semiconducting.

I see, great.

You probably have a little bit better visibility into semi-insulating, because the customers are fairly vocal on their forecast of their business conditions.

Right. That's great. A few more questions and I'll jump back in the queue. So the first one, based on the guidance, it implied that your gross line in OpEx is still running around the same level that you did in the first quarter. Did I hear that correctly, and as you look longer term, do you see room to either reduce on OpEx or improve in --- on gross margin?

I think, Edwin, we're expecting just a slight increase in gross margin in Q2.

You know, Edwin, I think the question is that it definitely depends upon the product mix, that's for one. And we're modeling off, obviously, a very low raw material cost, that's another. And volume definitely drives our fixed costs and depreciation costs. So I think if we were to see continued revenue growth, then I think we should improve.

Okay, that's helpful. And then the last question, just on raw material. You mentioned that you're trying to expand your portfolio of raw material joint venture. I was wondering, are those new investments already contributing to the revenue line, or should we expect some kind of ramp coming from those new investments? And then are those the same type of material that you guys are using, like GaAs, germanium, et cetera, or is it some other type of materials? Thank you.

They're basically the same raw material we supply into our substrate-making line. Are they new investments? I don't think we expect to put more money in. They're already in our joint venture. We established them. But as you noticed, too, we have now three joint ventures, our joint ventures' joint ventures. So they're already established, and they already put that investment in. And mainly, they are improving their joint ventures operation by having another joint venture to cut their costs down. So that's the joint ventures' joint ventures.

Yes, Edwin, just let me expand on that. You know, we have three joint ventures that we consolidate. Those are still the same three. The others are the unconsolidated joint ventures that we expanded some time ago, and they are -- you'll find that in the other income line. So that's not part of the total consolidated revenue line.

So that explains why your equity in earnings of unconsolidated joint venture increased this quarter?

Sorry, Edwin, just repeat that, please?

Yes, so because you have more of those not consolidated joint ventures, right, that explains why the equity earnings that you reported this quarter has increased? Is that correct?

No, it actually decreased this quarter.

Decreased. I see. I see. Okay, great. That's all I have. Thank you.

Avinash Kant, D.A. Davidson and Company.

A few questions. So if you could give us some clarity about the guidance that you're giving on revenue terms is sequentially up from Q1. So how should we think of various businesses? Do you think materials will be up meaningfully, or semiconducting, semi-insulating? Where is the growth coming from?

The revenue of Q2 is probably mimicking what we did in Q1. In other words, a healthy increase we expect from germanium, some increase in indium phosphide. Raw material, I think we had a very nice increase in Q1 already, so we are expecting to stay flat. And semiconducting, I think it should grow a little bit, but I think semi-insulating, we may see some decline because of the changes we encountered in Q1. That should continue for yet another quarter.

Another quarter. Okay. And now in terms of on the semi-insulating side, in terms of the inventory of your wafers at the customers, how is it right now?

Most of our customers are on consignment, so we don't have any inventory to speak of. I think if you mention inventories, probably our customers' customers probably have inventory.

Right. So do you have some visibility into that?

We don't. We just know that they're not ordering right now.

Still? Okay. And in terms of cash burn, how much was the cash burn during the quarter, and where do you think is your breakeven at current levels, or as you cut costs?

The cash burn was only $725,000. It was a small decrease from the prior quarter.

And what's the EPS breakeven at this point?

I actually don't have a calculation for that one, Avinash, but I can take this offline with you when I do have that calculation.

We did some calculation. I think the breakeven is somewhere around $25 million, given if mix of product doesn't change a whole lot and raw materials stays at this point.

Yes, it would be at roughly $25 million, just at that level. We'd hope, then, that gross margin would improve and everything else lines up with the joint ventures and minorities and foreign exchange to get onto a breakeven EPS.

And in the EPS guidance for Q2, you assumed some share count. What was that? I didn't get it right.

32.4 million.

32.4 million. Okay. And any trends on the raw material? It looks like you have seen some improvement in raw material pricing. Could you give us some idea in terms of the magnitude of that and what do you see it going on to this quarter?

Well, in fact, in the beginning of the quarter, it continued to decline until about the last two or three weeks of the quarter, and the price started firm. I think the other good sign, I believe, is the volume. You see, the volume has just increased tremendously. So we don't have any inventory at our joint ventures. So I think that's a good sign. I think, whether it's going to -- well, I hope it's going to firm up.

But whether it's going to go up from this point now, I can't really tell, because it's always a function of how much demand that there is and how much capacity there is. I keep on saying that same thing. I believe the silver lining out of all this is that we have a low-cost manufacturing, so we're still making money, even at this low price level. And second is that I think the demand is fairly healthy. You can see that the volume that we're selling now compared to a year or a year and a half ago is almost doubling. Actually, it's more than doubling. So hopefully -- well, I think that says that demand is definitely growing, growing very nicely.

So then that makes the question more is that if you're seeing a ramp in volumes lately and you don't expect prices to go down, what makes you think that material sales will be flat on a sequential basis in Q2?

You want to be conservative. I don't want to assume that it's going to go up in price. That would be nice. But then, on the other hand, I'm not going to assume the price is going to go down further.

Okay, thank you.

Richard Shannon, Craig-Hallum.

I guess there's just a few questions from me. Most of mine have been answered here. Maybe I'll ask a couple of different ways on a few already asked here, but just talking about gallium pricing again. Maybe I'll just ask you directly, Morris, just like I did last quarter. Any timeframe by which you might expect to see pricing materially improve from the levels we've seen here around the $300 per kilogram level? And anything that drives that could happen?

I don't know. I really don't know. I think we can analyze this thing to death, because there's a lot of moving parts, Richard. You've got to count down how many speculators there are, and I think the good news is that -- I've been checking. We've been mostly selling to real customers from our joint ventures, we think. So I think the demand is really firm, although there are speculators out there. And when they start to jump in, that's going to firm up the price and drive up the demand.

Okay. Are you seeing any sources of supply coming, taking capacity offline? It seems like pricing at this level for this long would have forced that off, but I haven't been able to detect any. Are you seeing any movement for less industry capacity?

Oh, absolutely, Richard. I think you just don't know about it, because we know we have a competitor in China that took quite a substantial capacity offline, because they cannot make money. I think their cost is somewhere around $350. That's roughly 15 tons. But they just go sort of quietly on the sideline, because it doesn't make any sense for them to produce any more when their cost is -- you know. And also, this gallium-producing factory is such that if they shut it down, it doesn't take them a whole lot more to restart it. So it's easy for them to shut it down. So I think it's already happening, but when it's going to reach equilibrium, I don't know.

Okay. Fair enough on that. Appreciate your thoughts, Morris. Next couple of questions on gross margins. How do the gross margins for the raw materials business compare to the corporate average?

It's currently below the corporate average.

Okay. And do you expect that to cross over any time soon here?

That's the same question you asked about the raw materials pricing.

A little bit, yes. Okay.

Yes, it's simple math. Right now it's selling for $280, and if it sells for $400, gee, that's 40% margin.

Okay. I guess this last question, Morris, you alluded to qualifications in the last couple of calls. On the wireless side there, I want to get your sense of any further progress there. Were there any decisions made or they're still outstanding, just your overall thought process there.

I think, unfortunately, my answer has to be the same as I said last time. I think we're still working on it. Although we have some good news, some parts I believe that we're qualified, and yet it's a business decision. There are other things that we've got to negotiate it out before they -- they have to convince their customer to use our wafers. So it's a long-drawn process, and I hope that eventually our customers and our customers' customers will see the value of using AXT's good-quality wafer with competitive pricing where he can work on.

Okay, fair enough. I think that's all the questions for me, guys. Thank you.

Tom Sepenzis, Northland Securities.

I just want to clarify. I believe you said that the semiconducting business was going to be flat, the semi-insulating would be down, and materials flat in the June quarter. Was that correct?

No, semiconducting is going to improve slightly in our model. Raw materials, we think, is going to be flat. And I think germanium and indium phosphide should improve.

Should improve?

Yes.

Okay, all right. So I definitely got that wrong. And just in terms of the raw materials business, given that you've seen some signs that the market is turning, and even in Q1, why would you sell so much and increase the volumes to such a degree with the gross margins where they are? Why not just hold back?

Oh, yes, hold back? Well, first of all it's our joint venture. We have other business partners. They make the decision on their own business. We cannot really tell them to shut down. And second of all, they still make money. I think that's a good answer. And I think that's probably it, and they don't manipulate the market.

Is there a price point where they can't make money themselves? We've got gallium arsenide --

Right, yes. But, well, fortunately or unfortunately, they are one of the low-cost manufacturing leaders, so they are really tough.

Great. Thanks very much.

Edwin Mok, Needham and Company.

Yes, just costs, quickly go over the numbers. If you take your first quarter numbers, which you did, your joint venture did a payout on the dividend, right, which actually had an impact on your earnings in the first quarter. If I back that out, you actually had a loss of around $0.05 per my calculation. But your guidance, you guide in the midpoint for a loss of $0.06, even though you're guiding for higher revenue. Am I missing something there?

You mean going forward?

Yes, I mean basically, if I take the first quarter numbers and back out the joint venture dividend, you would have lost just $0.05. But in the second quarter, you guide for higher revenue, but you're guiding in the midpoint a loss of $0.06, which is a higher loss, right? So that would imply that you either have lower gross margin or higher OpEx, right? Or there's some other one-time item that I'm not aware of. Can you help us out in terms of reconciling those two?

Yes, I think, you know, for Q1 we made a loss of $0.08. The difference in that dividend and that withholding tax is only $0.01. It's like $314,000. So then it would just take you to $0.07.

I see, I see. Okay, thanks. That's all I have, actually.

Richard Shannon, Craig-Hallum.

Just one quick follow-up. You mentioned a share purchase window opening up here later this quarter. Can you tell us how many shares you bought back last quarter, and then what are you thinking about in terms of the buyback for this quarter? What kind of size? What would you commit to?

Richard, the program's only going to start opening up next week, Monday, May the 6th. So Q1, we actually didn't have a purchase program in place. It had to start on the beginning of this open-window period.

Okay. Any thoughts on how much you're going to commit to the program?

I think the Board authorized, what, $6 million?

$6 million total.

And management has the discretion of making, because we're doing it in open window, so we're going to make a judgment whether the price is too low, we're going to do aggressive buying, and if it is okay, then we obviously don't want to chase the price and compete with some of the shareholders buying the stock. But I think it's the Board's decision that they believe that there's solid value in AXT's business, so that's the main purpose of the share price repurchasing.

Okay, perfect. That's what I wanted to know. Thank you, Morris.

And at this time, I show there are no further questions. I'd like to turn the call over to Dr. Young for closing remarks.

Thank you for participating in our conference call. This quarter we'll be presenting at the Jefferies conference in New York and the D.A. Davidson conference in Minneapolis. We do 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. And we look forward to speaking with you in the near future.

This does conclude today's conference. We thank you for your participation. You may now disconnect.