AXT Inc (AXTI) 2014 Q1 法說會逐字稿

Please stand by. Good afternoon, everyone and welcome to AXT's First Quarter Results conference call.

Today's call is being recorded. Leading the call today is Dr. Morris Young, Chief Executive Officer. My name is Vicky and I will be your coordinator today. I would now like to turn the call over to Leslie Green, Investor Relations with AXT Inc. Please go ahead, Ma'am.

Thank you, Vicky, and good afternoon everyone.

Before we begin, I would like to remind you that during the course of this conference 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 cost and approve -- improve efficiency, increase orders in succeeding quarters, improve our competitive position as the market improves, as well as other market conditions and trend.

We wish to caution you that such statements deal with future events are based on management's current expectations and are subject to risk 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 can seek global financial conditions and uncertainties, market exceptions, and demand for the Company's products, 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 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 result to differ materially from our current expectation.

This conference call will be available on our website at axt.com through April 30th, 2015. Also, before we begin I want to note that shortly following the closed of market today, we issued a press release reporting financial results for the first quarter of 2014.

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

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

Thank you Leslie. Revenue for the first quarter of 2014 was $19.3 million of this total gallium arsenide structural revenue was $8.5 million, indium phosphide structural revenue was $2.3 million, germanium structural revenue was $3.2 million, and raw materials sales were $5.4 million.

Gross margin in the first quarter decreased to 14.1%, around 15.1% revenue in the first quarter of 2013. The decrease in the quarter was primarily the results of sales mix. Net loss in the first quarter of 2014 was $2 million or a loss of 0.6 cents per (inaudible) this year. And finally, cash and cash equivalent at 2 -- at March 31st were 46.8 million down from 47.6 million at December 31st, 2013.

Cash management continues to be a priority for AXT, as we navigate through the current challenging environment.

Now, let's turn to a review of our markets. Calculating the effect of normal seasonality, we had expected our revenue to decline in the first quarter from the fourth quarter of 2013, however, our actual results came in better than expectations led by a higher than anticipated revenue in semi-conducting gallium arsenide and indium phosphide subsidy revenue, as well as the strains in the raw material sales.

In addition to revenue growth, we began to see a benefit of cost saving measures in the (inaudible) during the quarter which can attributed to the improvement in our earning per share. (Inaudible) in gallium arsenide revenue was down in the quarter as expected in keeping with normal seasonality in wireless market, still overall growth strategy in this market, particularly those for the mid-range headset market present incremental opportunity for AXT.

Technology transition to [SOI] will continue to be a headwind for us but we are hopeful that we will see growth in our business in 2014 over the prior year. In talking to customers, we believe that some easy leading gallium arsenide will continue to serve a portion of the switch market, as well as a important segment of the power amplifier market.

This is due to the power amp -- power efficiency and performance of gallium arsenide, as well as the fact that (inaudible) or SOI is a more difficult process to quickly adopt to multiple or rapidly changing product specification. While penetrating the HPT market is difficult for us, we believe our substrate are well suited for this application and we're continuing to make progress.

In addition, our recent restructuring is allowing us to allow to align our cost structure with current demand, contributing to improved efficiency in this area of our business. Change in semi conducting gallium arsenide substrates are for (inaudible) a weakness we saw nearly 19% growth in the revenue in the first quarter.

Competition in this market remains fierce but our strategy to aggressively target the lower end of the market where we have not historically had a succession presence is beginning to pay off. Our cost structure allows us to offer a compelling solution while our quality and our ability to meet a broad range of technical specifications makes our substrate a deal for a wide variety of new applications.

While we expect revenue to be lumpy throughout the year as is the nature of this area of our business, we believe we will see growth this year over 2013. More of the interesting trend in the market for semi-conducting gallium arsenide substrates is the industry recent move towards larger diameter wafers.

Historically, the market was dominated by two and three inch diameter of manufacturing processes. However, today multiple customers are migrating to foreign substrates and one major customers is moving to six inch diameter substrates. This migration to a larger diameter is driven by a greater manufacturing efficiency and cost savings that our customer can achieve.

Helping them to offset ASP reductions at the device level. It is great for AXT as well because larger diameter substrates are within our core competency. We believe that this trend could present the opportunity for manufactures like [JAT] to depreciate itself amongst the highly fragmented field of players in the semi-conducting gallium arsenide market.

As expected, our germanium substrate sales were down in the first quarter as one of our larger customers work off some excess inventory. We expect to see some continue decline in the second quarter related to this but hope to see -- to be positioned for growth going into the second half of the year.

On a positive note, germanium raw material pricing seems to be stabilizing albeit at the high level. Germanium raw material pricing has been a concern for us for quite some time as its rapid rate of increase has constraints margins in this area of our business. While germanium structure remain the material of choice for satellite (inaudible), it is worth noting that the players in the CPV market continue to evaluate a variety of materials to determine which offers the best cost, efficiency, and reliability for terrestrial solar cell.

Germanium remains at a forefront because of its efficiency and proven reliability over the years of testing. But the high cost of raw material could limit its usage long term. Germanium's biggest challenge is coming from semi-conducting gallium arsenide substrate which has (inaudible) hugely in efficiency over a relatively short period of time, and with further work may achieve the 50% efficiency milestone before the germanium can.

In fact, current studies for germanium put gallium arsenide solar cells at 44% efficiency surpassing the 43.3% efficiency that is currently the highest laboratory achieved efficiency for germanium based solar cells. In addition to the testing going on with those two materials there is also interest in developing any fast five base solar cells.

Indium phosphide offers potential efficiency that can compensate for its higher cost and could present the industry with the other choice. In total, the market for terrestrial solar cell is continue to develop. Utility scale and solar power plants are being built around the world demonstrating the reliability of terrestrial solar cells generations.

And significant investment is underway to lower cost and improve the efficiency of CPB technology. AXT is in great position to take advantage of growth in this market regardless of which material is ultimately successful as well as we are a major supplier of all three leading materials and have the ability to cost effectively scale production as demand requires.

Continuing to our indium phosphide business we saw a meaningful growth in our revenue in Q1 which has shown a healthy growth over the past several years. Despite a highly rigorous qualification process for indium phosphide applications, AXT has been quite successful over the past several years in qualifying our material with large customers in this space.

Fiber optics remain the leading application for this substrate but we continue to see interesting progress in the area of silicon photonics. Intel is developing the technology as a key part of its rock scale architecture for next generation data centers. Leveraging silicon photonics for connectivity those within and between racks.

This quarter, Intel announced that a number of leading players in the fiber optic industry have begun developing -- development on cabling products based on silicon photonics, thus expanding the ecosystem for this technology.

Finally, with regard to our raw material business, revenue came in higher than we expected. Raw gallium price remains approximately flat in the quarter and I mentioned raw germanium is also stabilized. We expect to see some improvement in our rate material gross margin in the coming quarters as several of our joint ventures are implementing their own cost saving initiatives.

In closing, though the business environment remains challenging, we're working hard to maximize our opportunity in the area in which industry evolution is working in our favor. In addition, we took meaningful steps in Q1 to align our organization to the current demand. Our goal is to improve in both our gross margin and our operating margins in the coming quarters as the full benefit of these measures take effect.

We're highly committed to returning the Company to profitability and believe that we can do so in 2014. Turning to guidance for the second quarter, we're expecting total revenue of between $18 and $19.5 million and therefore, our net loss for the second quarter of 2014 is projected to be between $0.04 to $0.06 per share based upon approximately 32.4 million common shares (inaudible).

This concludes my prepared comments. [Mae] and I will be glad to answer your questions, operator.

If you would like to ask a question, please signal by pressing star-one on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned of to allow your signal to return equipment. Again, press star-one to ask a question. And we'll pause for just a moment to allow everyone an opportunity to signal for questions.

We'll go first to [Avenish Kent] with D.A. Davidson & Company.

Good afternoon, Morris and [Mae].

Hi, [Avenish].

Just a few questions here, the first one about impact of the one-time item that you had in the quarter. Could you explain a little bit what was that about and what would have been the full stocks impact of this one EPS?

[Mae]. Yes, the $9,000, I think you are mentioning the one time item is our structuring charge.

OK. And what are the post-tax impact on that (inaudible) basically? If that was not the case, what would EPS have been?

Well, then basically you have to take off on the $0.3 or benefiting, right.

OK. Yes.

But however we had some effects benefiting effecting the last month.

And what is that?

In other words, we had a restructuring of our workforce in China, so we took a -- the $900,000 restructuring charge. But because of the lower labor cost and SG&A would get (inaudible) into the following month, so the March month's was the first month that we had benefit from that.

OK. So, let me put it this way, for the second quarter Morris, you are guiding pretty much to similar revenues, 18 to 19.5 million.

Yes.

Now, what is your assumption at that point on the SG&A for second quarter? The EPS guidance that you have for the second quarter, what's the SG&A assumption in that?

4.6.

4.6 million?

Yes.

OK.

Then average (inaudible) are (inaudible), so, yes basically we use that as a base to calculate that because we are not sure, you know. Our close saving print, you know, cost the impact of cost saving trend and we're just implementing in March. So, it's (inaudible) at a time we still don't know, so we actually put out, you know, a small conservative way to calculate to our model, so.

OK. So, in the Q2 guidance, the SG&A number that you have at the midpoint of the guidance is 4.6 million, right?

Oh, you mean Q2 guidance or you actually--

Yes, Q2 guidance.

Q2 guidance.

Q2 guidance, (inaudible) I can say, actually yes and I still don't know (inaudible) our cost savings in that number, so, yes.

So, is it--

So, (inaudible) we are estimating that cost saving maybe not around 250 (inaudible), so, but--

(inaudible)

-- actually in our (inaudible).

So, from third quarter onwards to 50 K?

Yes, savings, yes, that's in Q2--

Q3 onwards?

No, Q2. Staring on Q2.

Yes.

Onward.

OK. So, what I'm -- maybe I'm not getting my question across.

Yes, I don't (inaudible).

I am saying for Q2 numbers that you just guided to, 18 to 19.5 million in revenues and loss of 0.4 to 0.6 cents in earnings on 32.4 million shares, what's the assumption of SG&A in there?

4.5 million.

4.5 million, OK.

Yes.

OK, got it, got it, got it, got it. And Morris did you breakdown the semi-conducting and semi-insulating revenues in the quarter?

Yes, 43% and 57% for SP.

57% for semi-conducting and--

Semi-insulating 43%.

Yes, semi-insulating 43%.

OK, 57% at semi-conducting and semi-insulating 43%.

Right.

OK. And did you give CapEx and depreciation numbers?

Yes, 1.4 million for depreciation and 0.3 million CapEx. Yes, actually we control our capital expenditures and we do well.

So, 1.4 million for depreciation, right?

Yes.

Right.

And what was the CapEx number?

0.3, 0.3 million.

0.3 million, right?

Yes.

And what's your expectation for the full year in terms of CapEx, 2014 CapEx?

We are hoping that we can control it within $4 to $5 million, right, for the whole year.

For the whole year, that's, yes.

Yes.

4 to 5 million.

Yes.

Yes.

OK. And Morris you talked about, you know, higher material sales, now prices of gallium have been stable, do you see a positive momentum on the pricing too now or not?

Well, it's always difficult to predict that the pricing going forward, I mean I've been wrong I see in the past, so I really hated it to call it's going to go up. But I think the good thing that you can see, the fact is that the volume of this material obviously are fairly strong. We, especially our joint venture is being able to sell everything they can make.

However, the pricing you can see from the gallium quoted price is not going up yet. So, you know, we just have to wait patiently. As I've said in our conference call, we expect our gross margin to pick up slightly going forward, it's because all joint ventures have also implemented their own cost savings space.

So, hopefully we can do better because of that, but if raw material price pick up, that will be just -- we'll welcome that but we're not counting on it.

And the final question, any color you can give you on the qualification activity at the customer, especially now that you have had some time to look at the consolidation happening in your customer base?

Well, [Avenish], I think that the consolidation is actually throwing other monkey wrench into the works. I think, and you know, (inaudible) working our ass, so far as I know that our material has already qualify with the swing of the large device makers but they are just, you know, because of the consolidation deal working slow on taking all materially.

OK. Thank you so much.

All right.

Will go next to Richard Shannon with Craig Hallum.

Morris, how are you doing?

Very good, Richard.

Excellent, and hi to you [Mae] as well. Let's see, a couple of questions from me, I think on the last quarter's conference call you've talked about a breakeven level of roughly 25 million a quarter on the top line supported by a 20% gross margins. At the restructuring actions you have taken and you talked about some cost savings plans at JV's, have those -- if that change that break even model?

Yes.

What does that look like now?

I think [Mae] is telling that we can't -- our model is around 22.5 million revenue and 20% margins.

OK. And Morris you made a comment you expect to be profitable this year, is that meaning in any quarter this year or a year-end total?

No, I think it's towards the end of the year, we hope to break even.

OK, that's what I thought. OK, very helpful. Let's see here, can you characterize the margin profile in some of the semi-conducting business that you have been able to generate? I was a little bit worried that, that would be lower, that seem to have been a decent gross margin overall for the quarter given the strength there.

Can you give us a sense of what the incremental looks like as you continue to learn in more there?

Yes, you know, Richard I think in gallium arsenide business if the business is a very large scale customer whether a semi-insulating or semi-conducting, the margin is not good. I can tell you that.

Yes.

I mean, just about everything. You know, we are working so hard to get ourselves into HBT, but their margin is not good. However, it present a great opportunity to load up our factory. You know, our factory utilization right now is slow.

Yes.

So, we need a good business as well as the not so good business but with a very large volume. So, the same thing with semi-conducting business. You know, we have some business which is really great in margin, however, the volume is relatively small or that they are developing their volume.

But however, you know, that the large volume business then has a characteristics of a very low margin. So, you know, how can I say, I think what we need, I think as we are working very hard towards the model is, you know, if we could get a large customer to share some of the fixed overhead and variable overhead for us, we can breakeven quickly.

Or we can gain, you know, a higher price, a more niche market, however, you know, the margin is good for then the volume as well.

OK. Are you suggesting that you're in engagement and discussions with someone to help you share some of that at overhead in this business, maybe you can elaborate on that a little bit?

Oh, well we always do just like when we are trying to get into the some of the wireless large customer based, as well as some of the large customer in LED's. Those business, the prices is very low, very competitive, let's put it this way. So, we will not have a very good margin but because they come in this year, some of the fixed overhead and the variable overhead, that helps us overall.

I think our factory utilization as I've said is somewhere around 60, 65%. So, if we get up to utilization by 10%, 15%, that would really took us into a much better shape.

OK, that's fair enough. It makes sense. And maybe last question for me on the indium phosphide business, you talked a little bit about silicon photonics and this is not the first quarter that you have mentioned that. You mentioned Intel, are you implying or stating outright that your partnering somehow with Intel or in the ecosystem that Intel was driving silicon photonics or can you characterize who you are working with and when that might be more material?

Richard we don't usually comment (inaudible) customers but as we've said, you know, the silicon photonics, I just don't want to get everybody confused because a lot of -- some (inaudible) might think this silicon photonics means again is a silicon [eating combo] semi-conducting business.

But because it needs a 1.3 micron laser to connect that between rocks and within rocks, within data centers, it needs that 1.3 micron laser and AXT indium phosphide material gestures that 1.3 micron laser perfectly, so that we're participating in this market.

OK. Fair enough, I think that's all my questions for now, I'll jump out of the lines guys. Thank you.

We'll go next to [Edwin Mount] with (inaudible) and Company.

Hi. Thanks for taking my question. Congrats for a great quarter. So, Morris, the first question is (inaudible) your guidance in the fifth to mid-point, is actually down a little bit sequentially. But I -- can you help us all in understanding in which part of your business is declining and because it sounds like some of them are recovering like semi-insulating gas, right, so, (inaudible) directionally.

Well, you know, I think germanium substrate would definitely it's going to be down. As I've said, one of our major customers adjusting their inventory, so you know, going into second quarter they are still not going to buy a whole lot of material. Built they are still aligning out of all this is that germanium because of the high material cost is presenting a great margin pressure on us.

So, you know, if we have less than (inaudible), in fact our (inaudible) too much, you know. I think on some of the raw material we had a great quarter last quarter, Q1. So, we are positioned ourselves to be a bit more conservative on raw material sales. We are seeing substrate and we are hoping that the rest of the substrates will grow slightly in the second quarter, yes.

I see. Great. That's a good call for the quarterly direction. And then in terms of margin, you know, these are (inaudible), it sounds like some of the -- a restructuring is also helping gross margin line as well, right.

Yes.

So, do you and then all of this in low factory (inaudible) has the impact on your gross margin, right. Do you need to bring your revenue back to this call low $20 million range that you mentioned on a breakeven for your gross margin to get to 20%? Or if pricing remain right at this table on the raw material as you have suggested, do you think even at the current revenue which is 20 or below, you can actually get your gross margin back to that 20% range?

Well, [Edwin], you know, that's a great question, I think it's also depending about the product mix. You know, some of the product, you know, even with gallium arsenide, for instance, some customers because of the product mix that they may be paying a lower price and the other maybe paying a higher price because they're most stringent requirement for specifications.

So, the answer to that question is, yes, it's possible. But I think overall, I think we are modeling somewhere around, you know, $20, $21 million revenue to -- for us to get to 20% margin.

I--

And don't forget that, you know, as [Mae] said before, I think we are modeling a 3 percentage point gross margin improvement for the restructuring charge we took, right. So, you know, if you take 14%, we can improve by 3%, that would be 17 already. And so, I'm hoping for some more efficiency or a little bit better revenue would kick us at better gross margin as well.

So, I think, you know, our model somewhere around $20 million for a 20% or $22 million revenue for a 20% margin is a good assumption.

Yes.

Great. That's actually helpful (inaudible). The third question I have is on the semi-conducting gas business, right. So, this quarter you guys see some growth and recovery for the market, right. And I think you mentioned migration is a six inch away for as kind of a (inaudible) driver, right.

You know, as you look probably on this quarter, right--

Yes.

-- what, you know, beyond seasonality which we typically see some seasonal pick up at this point of the year anywhere, right. Do you see audit drivers that could be driving industrial end market? What are the (inaudible) is driving the growth in that area? Or is it mostly just migration? And then, also (inaudible) the timing of this migration, is it a long migration cycle site?

I think for some model application we have seen the migration site (inaudible) as long as one to two year period. How are you kind of seeing this kind of long migration cycle for the (inaudible)?

I don't think, well my estimation is that's going to be two years. I think is -- you are right about one year, I think they would take at least a year to migrate and -- but also that migration is dependent on how you're going to look at it, I mean, some of them and like I said, I'll moving from 2 inch to 4 and some at least (inaudible) is moving from 4 to 6.

So, I say, you know, you know, if you model in the next five quarters would be a good timeframe for it to migrate.

OK, great. Helpful. And then last on the raw material side, you talked about cost reduction on the raw material side--

Yes.

-- that is helping, and like you've said, pricing has been stabilizing, do you think the market (inaudible) especially for gallium, do you think the market can reach, you know, its near term (inaudible) supply and demand, and you know, typically when we get there, it was all mash (inaudible), at some point you start to see pricing actually improve, right.

Do, you see any time visibility for that?

I hope you're right. But you know, I certainly don't want you to go and buy that future of gallium price and you lose money and blame me for it. But I do see, you know, if you look at some of our, even our Chinese competitive, I know a factory just recently closed. They had a capacity of 20 tons and because they can't make it at this price level, and I know some of our competitors are positioning themselves to buy more aggressively on their future gallium.

So, I do think it's about reaching that point but, you know, you never know. I think and let's face it, one other important factor, I think is playing perhaps into this equation is the fact that the switch market, the PM market is having a devastating, you know, (inaudible) shrink Company to let's say 2012 or 2011.

So, that is negatively impacting it, but however, you know, the overall general economy is improving as well as, you know, LED is growing very, very robustly through general elimination, that all helps the utilization of gallium.

I see. Great. I think that's all I have. Thank you.

Thank you.

We have no further questions at this time, so I turn this call back over to our speakers for any additional or closing remarks.

OK. Thank you. Thank you for participating in our conference call. As always, please 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.

This does conclude today's conference. We thank you for your participation.