AXT Inc (AXTI) 2013 Q4 法說會逐字稿

Good afternoon, everyone and welcome to AXT's fourth quarter and fiscal year 2013 financial conference call. Leading the call today is Dr. Morris Young, CEO. Also joining the question-and-answer session is May Wu, Controller for AXT. My name is Kelsey, and I will be your coordinator today. I will turn the call over to Ms. Leslie Green, IR 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 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 events or 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 of products.

In addition to the factors that may be discussed in this call, we refer you to the Company's periodic report filed with the Securities and Exchange Commission and available on-line by link from our website for additional information on risk factors that could cause actual results to difficult materially from our current expectations.

This conference call will be available on our website at AXT.com through February 25, 2015.

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 fourth quarter and fiscal year 2013. In addition, while we will discuss highlights of our fourth quarter results on today's conference call, we refer to you our press release and financial summary as well as SEC filings for a complete discussion of our fourth quarter and fiscal year results. This information is available on the investor relations portion of our website at AXT.com.

I would now like to turn the call over to Morris Young for a brief review of the fourth quarter results as well as a full market update. Morris?

Thank you, Leslie. Revenue for the fourth quarter of 2013 was $18.6 million. Of this, total gallium arsenide substrate revenue was $8.9 million, indium phosphide substrate was $1.8 million, germanium substrate revenue was $3.6 million, and raw material cells were $4.3 million. Gross margin in the fourth quarter increased to 15.1% from 11.9% of revenue in the third quarter of 2013.

The increasing quarter was primarily the result of favorable sales mix. Net loss in the fourth quarter of 2013 was $1.2 million, or a loss of $0.04 cents per diluted share.

During the quarter we repurchased approximately 182,000 shares of AXT common stock at an average price of $2.36 per share.

And finally, cash and cash equivalent at December 31, 2013 was $47.6 million, down from $48.4 million at September 30, 2013.

We are highly focused on cash management and we are pleased that despite the challenging year, our December 31, 2013 cash balance was down only $2.5 million from December 31, 2012.

Now, let's turn to our view of our market. 2013 was a tough year for our semi-insulating substrate business. With customers, consolidations and technology transition we saw a sizable decline in our revenue from PM devices. As SOI encroached on many of the designs that we sell into.

As we enter into 2014, we are focusing significant effort on ramping up our market presence in HPT devices. These designs have mostly been unaffected by SOI and represent new opportunities for us. We hope to see revenue growth from this application in 2014.

I'm pleased to report that we have resolved the technical issue with one of our larger customers that also impacted our sales in 2013. And I'm hopeful that we're beginning to build back our revenue base this year.

Despite the challenging year in 2013, we continue to view the RF device market as positive opportunity. According to IDC, smartphone shipments are expected to grow by 20% in 2014 with sub $200 handsets making up a meaningful part of this increase.

At Mobile World Congress, a number of device manufacturers announcing new midrange devices to address the growing demand in this area of the market. In particular, we continue to see notable new offerings from Chinese device makers such as Xiaomi, Huawei, and others. This trend, towards growth in the mid-range market means that component prices will continue to be under pressure.

AXT's advantage of low cost manufacturing is allowing us to work within our customers' increasingly difficult cost constraints. And we believe that this will position us well for new opportunities in 2014. While the March quarter was typically seasonably lower for us, we are hopeful that we will see growth in this area of our business this year.

Turning to semi conducting gallium arsenide substrates. Competitive landscape changes and general weakness in certain geographic markets continue to be a headwind for us and we don't expect much of a change in the first quarter. However, our strategy is to aggressively go after the lower end of the market which will represent new opportunity for AXT. They are also a variety of applications in the lower end of the market that we have not historically targeted, and our cost structure allows us to offer a compelling solution.

We are also actively qualifying into some sizable customers in which we have little or no business risk currently. We expect additional revenue from both of these catalysts in 2014.

Turning to germanium substrates, our revenue decreased in the fourth quarter, following several strong quarters of sales. Geographically we are seeing solid demand across several regions, particularly Europe. We discontinued increasing raw material costs remain a concern for us, and we are working with our customers to help offset some of the burden of these price increases. Our customer relationships are strong. Even despite the challenging pricing environment, we are well positioned for growth in 2014.

Turning to indium phosphate substrates, fiber optic application has continued to dominate our revenue, as our technology is well suited for this application. During the quarter we saw a rebound in our revenue from one of our larger customers that had declined in the September quarter as a result of inventory digestion. In addition to fiber optic applications, we are also watching developments in the area of silicon photonics, a technology that is reported to see adoption in data centers and high performance computing.

During the first quarter, Fujitsu demonstrated the first optical PIC express based server leveraging Intel silicon photonics inter-connection technology. This solution offers faster data transfer and increased bandwidth as well as lower heat generation and energy consumption. While widespread adoption of the silicon photonics technology may be a ways off yet, its benefit in the data center could be potentially significant.

Finally our raw material revenue was down a bit in the quarter, but our joint venture continue to be nicely profitable. The capacity expansion that each joint venture put in place in the last 18 months have resulted in a steady run rate of between $4 million to $5 million per quarter.

Gallium raw material prices have stabilized and we are hopeful that they will begin to rebound in the coming quarters. In total, and given the trend in our business and in our current revenue run rate, we are taking steps to scale back our operation in order to keep up our cost structure in line with demand. This will include a reduction in force at our manufacturing facility in Beijing as well as salary cuts for top executives including myself.

We are implementing a series of cost-cutting measures across our organization which is expected to further reduce our operating expenditure. We believe that these steps will allow us to deliver improved earnings while we are working to build our revenue back to our previous levels.

In closing, although 2013 was among our most difficult years with a significant technology transition, market consolidations and customer specific technical issues, we are focusing our effort and growing our market presence in strategic areas and leveraging our low cost manufacturing as a competitive advantage.

In the meantime, we are sizing our operations to be more in line with the demand environment and we are implementing a number of programs to improve our margins and to lower our operating expenses. We continue to focus on cash management and we are committed to deliver -- driving increased value for our shareholders.

Now, turning to guidance for the first quarter, at this time in accordance with normal seasonality, we are expecting each of our substrate businesses to be down a bit from the first quarter with approximately flat revenue in raw materials. As a result, we are expecting to see total revenue of between $16.5 to $18 million. In connection with our reduction in force, we are expecting to take a charge in the first quarter of approximately $900,000.

Therefore, our net loss for the first quarter of 2014 is projected to be between $0.11 cents to $0.13 cents per share based on approximately $32.6 million common shares outstanding.

This concludes my prepared comments. May and I will be glad to answer your questions. Operator?

(Operator Instructions). The first question will come from Richard Shannon with Craig-Hallum.

Hi, Morris, how are you doing?

Good.

Excellent. I guess just a few questions from me. First of all, you talked about the potential of getting new qualifications with HBT customers. Curious what are the odds of that? When it might happen, and whether there is an impact coming from the proposed combination of TriQuint and RFMD?

Yes, I think I also took great interest in the big news happen to the RF industry yesterday, the combination of these two large companies. We are working obviously, on trying to get back into the HBT market. As you know, that we have resolved the issue with our largest customer, IQE, in the last year. That should open up some doors for us. But unfortunately for AXT, that traditionally, we have been strong in the PM market in the previous product offering. So for HBT, it is a bit new for us. We have to work through quite a few qualification hurdles. And I believe we are working on both of these accounts and I hope we can have good news to report to you later on in the year.

So you think it is a possibility, even a strong possibility, of happening in this calendar year?

It is a possibility, yes.

Okay. Fair enough. The second question, if you could help us quantitatively understand the resizing of your operations here. What the cost structure looks like and getting into how we should think about constructing a model where you break even at some point in terms of revenues, not in terms of time frame, but in terms of revenues?

Sure. I think I do need a lot of help from May. Although I am officially the CFO, but my numbers are not that great. We prepared this with May and May has told me that with this force reduction and the yield improvement we are looking for and the cost reduction, we should be able to gain somewhere around 3 percentage in gross margin and reduce our operation expenses by 5%. So, our model we should look for is somewhere around 20% gross margin and $25 million in revenue, and we are modeling we can achieve that by the end of the year.

Maybe I will follow-up with a question on that. So you are guiding for $16.5 million to $18 million in the current quarter and hoping to get to $25 million exiting year. I guess I'm kind of curious where you're expecting to see the growth? Sounds like you are expecting improvement from your largest customer in semi insulating. Maybe you can give us a sense of where the other incremental revenue adders come from.

I think the semi insulating -- we hope we have hit the bottom in 2013. We should be able to improve that despite -- the first quarter was a down quarter seasonally. As we start to get into qualification with our major customers we should improve our revenue. But that is provided we have successfully done that in the second or third quarter. We are also seeing quite a few good possibilities for semi-conducting which is feeding into LED. LED is seeing fairly healthy market growth. We believe that with our cost advantage or competitors in our operating costs we should be able to penetrate that market.

Indium phosphide is a growth market. Last year we grew around 19%. The year prior to that we grew almost 30%. And this year we believe that is another growth year.

For germanium, I'm cautiously optimistic because the raw material costs are so high and there is no relief. If we cannot negotiate a successful solid increase with our customers' price offering then we may not be able to aggressively seek revenue growth in those areas. For raw materials, I believe that does depend upon whether the gallium price should improve or not. Which I think it's very much -- in our model we don't expect the raw material price to improve substantially. So we are projecting flat to slightly up.

That's very helpful. I think maybe I will jump out of line and let others go ahead. Thanks a lot, Morris.

Thank you.

Our next question will come from Avinash Kant with D.A. Davidson & Co.

Good afternoon, Morris and May.

Hi.

So the first question, of course, in the past you've talked about the pricing environment in gallium and your material says we're a bit low in the quarter despite gallium prices kind of being stable. Could you give us some idea about the volumes that you sold in terms of materials and how do you see it growing from here?

First quarter the volume of gallium delivery was down a bit but I believe that was because toward the end of the year customers didn't want to take too much inventory. I think that should resume its normal growth revenue for this quarter. The gallium price as you can see it in the metal pages is still hovering in the neighborhood of $240, $250 a kilogram for 4N gallium.

And how do you see that trending? Do you have some idea about --

As I said, we don't model the gallium price to increase, for our own model, anyway. But as far as whether it is going to go up or not is everybody's guess. I think the price is obviously stabilized at the lower end now and I think the question is if the demand is going to pick up sufficiently so that it will drive the price of the metal up slightly. But I don't think it is going to be a big increase from this point on until later on as the demand goes up substantially.

I see. And as far as the competition is concerned, or the qualification, both on the HBT side that you are talking about, could you highlight what is your advantage over the competition? Are you able to be the lowest cost producer on the HBT side? What would be the advantage there?

Sure. As you know, gallium arsenide industry has gone through a very very turbulent year last year. There is a substantial erosion of the market opportunity for PM. SOI really eat our lunch so to speak. And every supplier in the gallium industry is probably being affected. AXT is probably being affected a little more because our market share in PM was much bigger than our competition.

But as you know that -- there is not a whole lot of suppliers. Namely, there are only three, one in Japan, one in Germany. We, although we are American company listed on NASDAQ, but our manufacturing is mainly done in China. So, I believe, and our customers are also telling us, that they view AXT as a competitive cost advantage over our competition. Right now it is just how do we work ourselves into this equation?

I will respect my competitor and their market is being squeezed in PM as well. So they are turning to be aggressive. Eventually it is who can offer the best combination of quality capacity and most importantly price to our ever demanding customers.

And the final question will be where are you on your CFO search process?

We are progressing well. We have retained a professional search firm to help us to look for a CFO but as you know that AXT's challenge ahead is we need to make our size the right size for our market. We have to cut our costs in such a way that we can be successful in the marketplace or offer the best product at the most affordable pricing. So I would say when we get the most fit CFO I will come back and report to you, but we are making quite a bit of progress in that front. We have not closed the search yet.

Thanks, Morris.

Thank you.

Moving on to Andrew Lee with Needham.

Hi, I am speaking for Edwin Mok today. Thanks for taking my question. Actually most of my questions have been answered by you and previous people asking. I just had one question about the germanium business. What do you see that trending towards for this quarter and also for the rest of the year?

I think this quarter will be down slightly. I think the trending for the rest of the year although we think the market opportunity should be there. I think there is a lot of interest in the CPV market and satellite market, as you know, is a very steady market, but the CPV market, depending upon how the government of China is having a new program for the CPV program, as well as French government is strongly supporting the CPV initiatives working with SOI. Not SOI, SoyTech. I believe that germanium's CPV terrestrial market is poised to grow, but I think we are very cautious about that market. The raw material price is so high that really squeezing both our competition as well as AXT and our customer to make a profitable business endeavor out of it. So I think although we are well positioned because we are one of the two major suppliers of this germanium substrates, but we have to work it out so it will become a profitable endeavor for both us as well as our customer.

So would it be fair to say that are you cautious against seeing an upwards trend for the rest of the year?

Yes, that's correct.

I see. That's all I have. Thank you.

Moving on to Dave Kang with B. Riley.

Thank you. Good afternoon. Morris, if I can get some numbers first, what were your depreciation and amortization and CapEx and also stock compensation?

May? CapEx is $1.6 million. Depreciation is $1.5 million.

And stock comp?

Stock comp is 300.

300. And I'm assuming they will be fairly comparable going forward?

Yes.

And then regarding your first quarter outlook, did you provide any color regarding gross margin as well as OpEx? And what should we use for tax rate?

Tax rate, 15% in China.

15%? Okay.

In China.

Anything on the gross margin or operating expense or OpEx line?

Gross margin, I don't think we can provide that, but I think you can probably work it out from the --

Work backwards?

Yes.

Okay. And then I'm assuming that loss of $0.11 to $0.13 includes the $900,000 charge, right?

Yes.

Okay. And then any other items besides stock compensation between GAAP and non-GAAP besides stock compensation?

I don't think there is any, right?

No.

No.

And then, just a couple more. So you talked about HBT a little bit. Just wondering if you can quantify the situation a little bit. Is it second quarter or third quarter? I think you told us way back maybe certainly a first half event. Just wondering has that been pushed out?

Dave, I think I am still hopeful we can have good results in the first quarter, yes.

I mean you have some qualifications going out right now?

No. We have things going on, but we don't have any substantial volume.

And what is the qualification cycle?

Usually around six months.

Then we're not going to see much HBT until the second half at the earliest or third quarter would be the earliest period, right?

(multiple speakers) It should be the third quarter.

Got it. You talked about silicon photonics. How will you benefit from this? Won't there be a cannibalization with existing platforms? Do you come out ahead, or actually is it negative for you?

No, I don't think there is any product of ours which is supplying into the silicon photonics except -- I think this is a new opportunity for us. As you know from what I understand is a silicon photonics is a silicon processing chip and piggy-backed onto it is a indium phosphide chip which generates lasers with fiber optic between different racks. I think that indium phosphide uses indium phosphide substrate material.

All right, thank you.

Yes, sir.

Tom Sepenzis, from Northland, has the next question.

Hi. Could you talk a little bit more about -- gross margins obviously were a little bit better in the quarter. What specifically was the driver there? I know you said product mix, but maybe if you could give us a little more color that would be helpful.

Sure. There are many things which goes into the gross margin. As I remember one of the factors which affect our gross margin was product mix for sure. We sold a little bit less germanium which has lower margin so the favorable mix helps us.

We had less of a amortization. By the fourth quarter we have consumed all of the higher cost material in our inventory. So that helped our gross margin a bit.

Normally, I would expect gross margin to improve substantially when our volume increases. As you know, the first quarter -- the volume did not increase. That definitely did not contribute. I think we have some other one-time item which I think is a royalty payment which was accrued and reversed that helped us on the gross margin.

It is a combination of effects. I will not celebrate grossly as of now. I think it is a good trend. At least it didn't deteriorate any further, but I think we have to work on it further to improve our gross margin. Namely the reduction in force should help us as well as some of the yield improvement I am looking forward for our engineering to work on as well as I'm looking forward to increase our revenue especially toward the second half of the year that should improve our gross margin.

So would you then expect them to be in the same range here in the March quarter, or do they take another dip before?

Well as I said we don't normally guide our gross margin, but you can work backwards from our loss per share guidance. As you know, our gross margin actually sometimes are affected one way or another in individual quarter. We have to have some room for us to move.

Great. I know that you like to buy inventory, raw materials at the lower prices, but you have been doing that for well over a year now, and the inventory has picked up again in the December quarter. Is there a point at which you decide maybe you should just let some of that go?

Yes, I think this quarter in particular, I think there is an inventory increase from our joint venture. Our joint venture has especially gallium facility has increased inventory because toward the end of the year customer don't usually want to take inventory because they say over capacity in gallium producing facility. So we didn't cause tremendously the inventory increase by our substrate division. And so I would expect the inventory to decrease in the first quarter as they deplete our joint ventures to gallium holding.

Great. Last question and then I will get back in queue. What are you hearing from your customers? There is still quite a bit of challenge with gallium arsenide as amplifiers are increasingly showing up, and CMOS -- that obviously had an impact on you in 2013. What gives you confidence that turns around toward even the second half of this year and doesn't continue to just deteriorate?

Yes, I think that is a very good question. I probably watch it as close as you do, and I think we are in -- constantly in contact with our customers. I think from what we hear although CMOS has developed quite a few interesting solutions for the low end markets especially 2G phones, but I think when you require not only the power efficiency, but also the size of the device as well as linearity, I think by far gallium arsenide is the king of the hill.

However, who am I? There are thousands and tens of thousands of people working on the CMOS device and there were announcements from you know who, from the CMOS -- new development of the HBT devices -- or no, they don't call it HBT, I think power amplifier devices. So it is definitely a threat to gallium arsenide, but I think whether the battle is done with -- I don't think so at all. So far as I know the fact is that gallium arsenide is still on top for the high end and even the midrange HBT still has the advantage of the CMOS.

Great, thank you very much.

Yes, sir.

Steve Lococo with Footprints Asset Management has the next question.

Thanks for taking my question. Being seventh or eighth on the list you get a lot of your questions answered for you. I don't have too many here. Morris, in your opening remarks you mentioned your focus was going to be optimizing cash management. Maybe this question should be answered by itself, but you haven't really purchased too much stock since you announced your repurchase program early last year. I'm just curious are you doing anything, or do you see anything that could cause ATX (sic) to change or be more aggressive? Or do you need to ride out the storm here?

We still have our stock purchasing plan in place, but as you know, we are trying to optimize both the safety of our AXT's operation and we've got to manage our cash very wisely to ride out the storm. We also see a tremendous value at this level that we are trading somewhere around 60% of book value. So I think it is a tradeoff.

Is there any particular metric or catalyst that might change your opinion near term to be more aggressive? Is it just too difficult at this point?

Obviously, if I see customers giving us big orders. But then we then need to horde the cash to plan for expansion and to buy inventory for the future business as well as account receivables which requires cash as well. So I think AXT's cash position, I'm very comfortable, I think we are very solid and if the value of the stock is really -- we think, it presents a compelling value proposition that we should defend the stock price. So I think those are the two factors.

Thank you.

Ladies and gentlemen, there are no further questions. I will turn the conference back to you for closing, or additional remarks.

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

And again, ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.