AXT Inc (AXTI) 2014 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to AXP's second-quarter 2014 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer. Also joining the question-and-answer session is May Wu, controller for AXT. My name is Jessica, and I will be a coordinator today.

I would now like to turn the call over to Leslie Green, investor relations for AXT.

Thank you, Jessica, 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 or events 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 products.

In addition to the factors that may be discussed in this call, we refer you to the Company's periodic reports filed with the Securities and Exchange Commission and available online by 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 July 31, 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 second quarter of 2014. In addition, we will discuss highlights of our second-quarter results on today's conference call. We refer you to our press release and financial summary as well as SEC filings for a complete discussion of our second-quarter results. This information is available on the investor relations portion of the website at AXT.com.

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

Thank you, Leslie. Revenue for the second quarter of 2014 was $21.4 million (inaudible) total gallium arsenide substrate revenue was $11.3 million, indium phosphide substrate revenue was $3 million, germanium substrate revenue was $1.7 million, and raw material sales were $5.4 million.

Gross margin in the second quarter increased to 19.4% from 14.1% of revenue in the first quarter of 2014. The increase in the quarter was primarily the result of increased revenue, sales mix, and cost-saving activities.

I'm very pleased to report that AXT generated a profit in the second quarter of 2014 of $319,000 (inaudible) per diluted share. And finally, cash and cash equivalent at June 30 were $49.4 million, up from $46.8 million at March 31, 2014.

Now let's turn to a review of our markets. Q2 was a positive quarter for AXT. Through a combination of higher revenues, positive sales mix, and the first full quarter of benefit from our cost-saving measures, we return the Company to profitability well ahead of our plan.

In addition, with continued focus on cash management, we drove improvement in our balance sheet, growing our cash position and reducing inventory.

While the business environment remains challenging, during the second quarter we experienced stronger demand in both of our semi-insulating and semi-conducting gallium arsenide substrates as well as continued strength in indium phosphide. As we head into the second half, we remain guardedly optimistic that we will be able to drive further growth in our business.

Turning to our market segments. Our semi-insulating gallium arsenide revenue grew by 60% in the second quarter, partly driven by an intentional inventory build at one of our customers. We do not view this growth as an indication of a turnaround in the market for semi-insulating substrates, as the full effective SOI has yet to be determined. However, we do think that we will see consistent revenue in the third quarter.

Further, we continue to work towards greater penetration in the HPT market while the semi-insulating gallium arsenide TEM has shrunk considerably in the last 18 months. We believe that gallium arsenide will continue to serve a portion of both the switch market and the power amplifier market for some time to come.

Wireless continue to grow in importance as the technology for the future, and the increasing functionality in the next-generation design may require the performance characteristics and adaptability that gallium arsenide offers.

Semiconductor gallium arsenide sales also came in ahead of expectations. Following strong growth in the first quarter, our sales increased by an additional 14% in Q2. The increase came across several geographies and a number of applications including some nontraditional areas such as CPV solar cells and solid-state lighting.

The semi-conducting gallium arsenide market as a whole continues to be fragmented, and the competitive landscape is fierce. However, we are seeing success in our effort to penetrate the lower end of (inaudible) market with volume higher, and we have the quality and technical specifications to meet a wide variety of requirements.

We would expect our results to be somewhat lumpy, as is the nature of the business, but we are on track to see growth this year over 2013.

Turning to our indium phosphide business, we saw 38% growth in our revenue in Q2. In fact, sales was up more than 34% year to date versus the same period last year. Lasers and detectors for fiber-optic communications remain the primary application for the substrates, but we continue to see exciting progress in other areas as well.

For example, there is a growing interest in testing of indium phosphide in CPV solar cells, as this material offers very high conversion efficiency similar to semiconducting gallium arsenide. Also, as we have mentioned in the past, indium phosphide is a key component in silica and photonics, a technology that is gaining interest in next-generation data center connectivity.

Turning to the germanium substrates, as we had expected, revenue were down in the second quarter as a few of our larger satellite solar cell customers work off of excess inventory. However, we are already beginning to see a rebound in ordering patterns and expect some improvement in the current quarter.

In addition, the CPV market, which uses germanium substrate for terrestrial solar cells, appears to have taken a pause following the completion of a number of sizable installations over the last 18 months. However, industry research group IHS is predicting strong growth in the coming years, with worldwide installations set to expand at double-digit percentages every year through 2020. This represents a 750% increase in total megawatt output between 2013 and 2020.

The primary driver for growth in the CPV market is continued improvement in conversion efficiency, making solar cells more cost-effective for practical use. With sizable ongoing investment, the industry is making major gains towards its stated goal of 50% efficiency.

Germanium substrates are more widely used than any other material and offer proven reliability over years of testing. However, the high cost of raw material [prohibit] its usage over long-term.

Alternatively, semiconducting gallium arsenide and indium phosphide appears to be gaining momentum, as both offers a more favorable cost of efficiency ratio. As I mentioned, CPV applications were a driver of our growth in both semiconducting and indium phosphide substrates in the second quarter.

The success of these materials in CPV applications will ultimately depend on their reliability and consistency over the time. AXT is in a great position to take advantage of growth in this market, regardless of which material is ultimately successful, as we are a major supplier of all three leading materials, and we have the ability to cost-effectively scale production as demand requires.

Finally, with regard to our raw material business, revenue came in higher than we expected. Raw gallium prices remain approximately flat in the quarter, and raw germanium is also stabilizing. We expect to see some improvement in our raw material gross margins in the coming quarters, as several of our joint ventures are implementing their own cost-savings initiatives.

In closing, though the business environment remains challenging, we see opportunities for improving our business. We are allocating our resources appropriately, concentrating our efforts on those strategic areas in which we are seeing the strongest demand for our products.

Our revenue base is diversified across a variety of materials and applications, allowing us to weather weakness in a given area while we develop incremental opportunities in another. In addition, we're pleased by the results of our cost-cutting measures that helped us to deliver solid profitability and by our asset management strategy that has further strengthened our balance sheet.

We believe that through all of these efforts we can drive improvement in our financial model and continue to enhance shareholder values.

Turning to guidance for the third quarter. We're expecting total revenue of between $20.5 million and $22.5 million. Therefore, our earnings per share for the third quarter of 2014 is projected to be $0.00 to $0.02 per share based on approximately 32.3 million shares outstanding.

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

(Operator Instructions) Avinash Kant, DA Davidson & Company.

You gave the percentage gains in semi-conducting and semi-insulating, but could you give us the exact revenue numbers the quarter?

51% and 49%.

Yes, 51% versus 49%.

Yes.

(multiple speakers) 51% semi-insulate -- no, 51% came from semi-insulating and 49% come from semi-conducting, and total revenue was 11.3%.

11.3%, I got it. I got that.

Yes, okay?

So 51% is semi-insulating and 49% is semi-conducting, right?

Correct.

So in the revenue guidance that you are providing for the next quarter, how are you thinking? Are you thinking germanium comes back some and raw material is also up?

No, I think in your model, we think -- yes, germanium will come back some. We didn't count raw material to be flat. I think gallium arsenide we think is going to be sort of flat. There are some certainties, as I said in the script, that could be lumpy. Indium phosphide probably will be up.

So the majority of the upside seems to be being driven by the indium phosphide and everything else seems to be kind of flattish. Is that how we should think of it?

No, as I said, germanium could be up bit too.

And within the gallium arsenide, while it may be kind of flattish, is there growth in one and not growth in the other one? Like conducting or insulating?

Well, semi-insulating this quarter in Q3 is going to be okay. We expect sort of flattish revenue.

Okay, okay. And clearly you had some benefit in the quarter below the operating line given some of the sale of the stock and everything else. So how should we think of the JV earnings going forward and then (inaudible) income?

I think they probably will trend about the same as last quarter.

Okay, but you won't have the benefit from the sale of the stock that you had and also the foreign exchange of course hard to predict.

Yes, that could be correct.

Okay. And then any clarity from one of the largest customers as they are going through the merger with another big player? Have you had any chance to talk to them and see what your position will be after this merger?

We're still in contact with them, and I think they are going to the merger. But they are also cautious by telling us -- check with us after -- I think the merger data sometime in October, correct?

Yes, okay. Perfect. Thank you so much.

All right.

Richard Shannon, Craig Hallum.

Good afternoon, Morris. Congratulations on nice revenues and getting to profitability. Good job. A few questions from me.

Let's see here. You talked about your semi-insulating doing well in the second quarter with an inventory build from a single customer. Can you help us understand what was going on there? Is this with a historical customer or a new one? Can you give us any details there, please?

It's an old customer. They told us that specifically they are building inventory. And so, just like we said, they have good inventory.

Okay. And do you have any 10% customers in the quarter and (multiple speakers) --

Not this quarter.

Okay. Can you give us a sense of how your historical 10% customer IQE has done -- did in the second quarter and how it might do in the second half?

It'll be below 10%.

Okay. Fair enough, then. Let's see here, you mentioned gallium arsenide semi-conducting to generally be lumpy. Is your comment about that based on a narrow customer base for just unsure ordering patterns? If you could give us a sense of why you call it lumpy?

Well, we have a very diversified customer base, but it's just that some of these customers -- we have good customers who gave us consistent orders, but there are large customers who may come in one quarter and then take the rest for the next quarter. I think that's the nature of the business for semi-insulating business, especially on lower end of the market.

Got it, okay. That certainly makes sense. A couple more questions for me and I'll jump out of line. You mentioned some cost reductions. Can you describe the nature of those? Were they manufacturing efficiencies or headcount cuts or salary cuts or anything like that? Can you give us a sense of what's going on there and how much of that is sustainable?

Well, Richard, I don't know if you are aware, we had a headcount cut by the end of Q1. And last quarter we experienced the benefit of it for the first quarter, and this quarter we are getting the full benefit of this cost efficiency drive. And then we also initiated some cost-cutting programs and bonus programs for our production workers to see wherever they can gain efficiency and earn extra bonus by the end of the year. I'm happy to say that actually we're spending more money on the remaining people who are still with us to earn more money while we have reduction in certain forces that we don't need.

Okay. Good -- thanks for that clarification. One last question for me, Morris. Taking the potential change in gallium pricing into the future, which obviously is very difficult to predict, is your outlook, is your crystal ball looking out couple of few quarters or so, would you generally expect to maintain your profitability or maintain your net income above zero? Is it staying profitable for few quarters? Or what's your general sense of the trend here going forward?

Well, as you know, we guided sort of flat. And for the next quarter, our revenue -- and if we think that that revenue would come in the same, we should expect that to be profitable in the second quarter again -- I mean third quarter. But we won't -- we don't give guidance for fourth quarter, as you know. Our business is such that we have short visibilities.

Right. Okay, that's fair enough. I think I'll jump back in line, guys. Thank you.

Dave Kang, B. Riley.

First of all, can I get a few numbers? Can I get stock compensation, depreciation, amortization, and CapEx, please?

CapEx I think is $0.6 million.

$0.6 million, okay. What do you think that's going to run second half?

Depreciation is $1.4 million.

Okay.

Stock compensation is $300,000.

$300,000.

Yes.

And then on CapEx question, do you think they are going to run around that level in the second half?

Yes, I think we're going to be tightfisted.

Okay. And then regarding -- going back to the guide, so what kind of a gross margin assumption are you making to get to that breakeven to positive $0.02?

Yes, you know we never guide gross margin, Dave. But you can see with the same revenue we still guide profitability. So it is sort of flat.

Okay, fair enough. So going back to the cost reductions, is there anything else left? Or are you guys pretty much done with cost reductions?

Well, obviously, we try to drive it. I think this is the first quarter we're very successful, and we like to see if we can get more momentum into the second half of the year.

Got it.

But I think the first quarter was a good experience we had.

Sure, sure. And then on the semi-insulating customer building inventories, if that is the case then should we expect some kind of a little bit of a falloff in the third quarter but you're expecting kind of flat?

We expect flat at least through the third quarter.

So you are assuming other customers will step up while the customer may come down little bit?

No, that customer is still building inventory, so we expect that customers to (inaudible).

Okay. Well, how long could they be building inventories? Maybe the rest of the year or just maybe third quarter?

Well, one quarter at a time.

Okay. And then lastly on the HPT, can you just give us an update how close are you as far as the visibility into that?

You know, we've been working hard on that, and I think we -- part of our customer-building inventory, part of it as I know it is to go into HPT. But we have not successfully penetrated major account -- you know who I'm talking about -- this quarter yet, and we're not making much of a headway into penetrating those big accounts.

But the merger of the two second-largest, the third-largest customers, we would need to see how do they behave after the merger is completed. And so we're still optimistic about that. But, again, we don't have anything major to report that we have penetrated big HPT account. But I think we are qualified with certain HPT accounts for sure as far as technology is concerned.

So as far as revenues are concerned, then, it sounds more like it's going to be 2015 even and not 2014?

Say it again? Oh, there are revenue coming for (multiple speakers). So as I said, that customer who are building inventory, part of it goes into (multiple speakers).

Okay, got it. Got it, okay. And then lastly on the indium phosphide, can you just talk about the visibility? Because optical component industry seems to be flat these days, and yet your business seems to be certainly growing much faster than your customers. So just wondering if there's any kind of an inventory build situation there as well.

Not that we know of. I don't think there's any inventory build per se. I think we are successful, I think because, again, we're using VGF and (multiple speakers) --

So you are displacing some -- so you're gaining market share, then?

I think so.

Okay, okay. All right, I think that was it. Thank you.

Andrew Lee, Needham and Company.

I'm speaking in for Edwin today from Needham. Congratulations on a good quarter. Actually, I have a question about your comment regarding second-half optimism for further growth. Could you guys clarify that? Because I think you guys are guiding the third quarter to be relatively flat. I know you guys don't want to talk about the fourth quarter. But any color on what you mean by optimism for further growth on the second half? Hello?

Yes, I'm thinking. You're right. In a way, we guided flat, and yet we're optimistic. But these two things perhaps don't conflict with each other. And as far as guidance is concerned, we definitely take it very seriously. If we guide it, then we would meet it. If we don't meet, then that's a big flop.

So we hope we can beat and nicely beat that guidance. So that's probably some of the optimism. I think in the business segment is concerned, indium phosphide is definitely a growth engine. Semi-conducting material, I think, is a fairly strong business segment although, as I said, it could be lumpy. So we don't want to commit ourselves by saying it's going to be growing so many percent. But we are guardedly optimistic. Okay?

Adding in Germanium, I think we experienced lower-than-expected revenue in the first quarter and second quarter. I think third quarter and fourth quarter, we should recover. So that if you take that as a sum, I think second half should be better than first half. That's our optimism.

Although, you know, I agree with you. We didn't guide up 10% in the third quarter.

I see. Thank you. Great color. Just another question about your cost-reduction program. Do you guys see any timeline in mind in terms of ending the cost-reduction program, or is this something you guys have just started and want to see how far it will go and how you guys will perform using it?

Well, the cost-cutting program and the efficiency drive will continue. Unless business is -- well, you know, we will reduce our workforce by almost 17% in China. And as business picks up, sure, we may really want to hire some back but then hopefully still with much better efficiency.

The other cost program in terms of trying to improve yield, improve efficiency, we are still driving that. As I said, the second quarter with the first quarter, we have very good success, and we will continue that definitely.

I see, okay. Thank you.

There are no further questions at this time. I will turn the conference back over for any 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. And we look forward to speaking with you in the near future.

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