AXT Inc (AXTI) 2023 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to AXT's First Quarter 2023 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer and Gary Fischer, Chief Financial Officer. My name is Abby, and I will be your coordinator today. (Operator Instructions)

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

Thank you, Abby, 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, market conditions and trends, including expected growth in the markets we serve, emerging applications using chips or devices fabricated on our substrates, our product mix, our ability to increase orders in succeeding quarters to control costs and expenses, to improve manufacturing yields and efficiencies, to utilize our manufacturing capacity, the growing environmental, health and safety and chemical industry regulations in China as well as global economic and political conditions, including trade tariffs and restrictions.

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 markets in which the company competes, global financial conditions and uncertainties, COVID-19 and other outbreaks of contagious disease, potential tariffs and trade restrictions, increased environmental regulations in China, the financial performance of our partially owned supply chain companies and the impact of delays by our customers on the timing of sales of their 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. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our expectations. This conference call will be available on our website at axt.com through April 27, 2024.

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 2023. 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 Gary Fischer for a review of our first quarter 2023 results. Gary?

Thank you, Leslie, and good afternoon to everyone. Revenue for the first quarter of 2023 was $19.4 million, down from $26.8 million in the fourth quarter of 2022 and down from $39.7 million in the first quarter of 2022. To break down our Q1 revenue for you by product category, indium phosphide came in at $7.1 million, reflecting market softening, particularly in data center, consumer, and telecommunications infrastructure. Gallium arsenide was $5.0 million, reflecting the overall slowdown across a number of applications, particularly in China. Germanium substrates were 1.4 million. Our germanium substrate revenue was up slightly from Q4, and we have resolved the payment issue we described in the past quarters. Finally, revenue from our 2 consolidated raw material joint venture companies in Q1 was $5.9 million. In the first quarter of 2023, revenue from Asia Pacific was 68%, Europe was 18%, North America was 14%.

The top 5 customers generated approximately 28% of total revenue and no customer was over 10%. Non-GAAP gross margin in the first quarter was 26.9% compared with 32.5% in Q4 and 33.8% in Q1 of 2022. For those who prefer to track results on a GAAP basis, gross margin in the first quarter was 26.3% compared with 32.1% in Q4 and 33.6% in Q1 of 2022. Total non-GAAP operating expense in Q1 was $8.7 million. This compares with $9.0 million in Q4 and was $8.6 million in Q1 of 2022.

On a GAAP basis, total operating expense in Q1 was $9.5 million, down slightly from $9.6 million in Q4 of 2022. For comparison, total GAAP operating expense was $9.6 million in Q1 of 2022. Our non-GAAP operating line for the first quarter of 2023 was a loss of $3.5 million compared to the non-GAAP operating loss in Q4 of $256,000 and a non-GAAP operating profit of $4.8 million in Q1 of 2022. For reference, our GAAP operating line for the first quarter of 2023 was a loss of $4.4 million compared with an operating loss of $1.0 million in Q4 2022 and an operating profit of $3.7 million in Q1 of 2022.

Nonoperating other income and expense and other items below the operating line for the first quarter was a net gain of $1.1 million. The details can be seen in the P&L included in our press release today. For Q1 of 2023, we had a non-GAAP net loss of $2.4 million or $0.06 per share compared with the non-GAAP net income of $2.1 million or $0.05 per share in the fourth quarter of 2022. Non-GAAP net income in Q1 of 2022 was $4.3 million or $0.10 per share. On a GAAP basis, net loss in Q1 was $3.3 million or $0.08 per share. By comparison net income was $1.3 million or $0.03 per share in the fourth quarter of 2022 and $3.2 million or $0.07 per share of profit in Q1 of 2022.

The average basic shares outstanding in Q1 was 42.5 million. Cash, cash equivalents and investments were $53.6 million as of March 31. By comparison at December 31, it was $52.8 million. Depreciation and amortization in the first quarter was $2.1 million and CapEx was $2.7 million. Most of this is facilities in indium phosphide equipment related. Total stock comp was $0.9 million for the quarter. Net inventory at March 31 was $91.7 million, 45% of the inventory is raw materials and WIP is 51%. Finished goods makes up approximately 3% of inventory.

We had a very successful quarter in our recycling efforts, which benefited our margins in our ESG efforts. But when we grow new ingots with recycled indium phosphide, it adds to the inventory. Almost half of the increase in inventory is still recycling. Inventory reduction remains a key focus for us this year, and we expect to bring it down as the demand environment improves. This concludes the discussion of our quarterly financial results, turning to our plan to list our subsidiary, Tongmei in China on the star market in Shanghai. Since the Chinese New Year, we have had active dialogue again with the China Securities Regulatory Commission or the CSRC. Their process is detailed and thorough, and they have asked us to respond to a couple of additional items. We are in the process of doing so now and remain optimistic that we will get CSRC approval in the coming months. We have posted a brief summary of the plan and the process on our website.

With that, I'll now turn the call over to Dr. Morris Young for a review of our business and markets. Morris?

Thank you, Gary, and good afternoon, everybody. Well, it’s good morning here in China. As expected, revenue took a step back in Q1 as the inventory correction that we began to see in gallium arsenide late last summer accelerated in indium phosphide applications. Despite lower revenue, we feel confident in our market position and strong customer relationships. We have continued to focus on manufacturing efficiencies, having increasing success in our recycling efforts, which benefited our gross margin performance in Q1. As we look forward, while the current demand environment remains dynamic, we are seeing positive signs that our revenue is stabilizing and that certain applications within gallium arsenide such as power amplifiers are beginning to show some improvement. This makes sense as these were among the first applications to experience weakness beginning in September of last year.

Now turning to our individual markets. Indium phosphide held fairly firm through January and then experienced a meaningful decline in February and March, most notably in the data center and consumer applications. We're not expecting an improvement in these applications in Q2, though they appear to be stabilizing. [Topical] applications, particularly in China, showed some improvement in Q1. And if China moves forward with a national stimulus as has been discussed, it would likely provide a catalyst or upgrade cycle in China telecommunication infrastructure. As I mentioned, gallium arsenide demand appeared to be improving modestly. Power-amplifier and power lasers showed some signs of recovery in Q1.

We also continue to be encouraged by the industry progress in micro LED as well as our own progress in preparing our business for this opportunity. We are already delivering 8-inch gallium arsenide wafers to customers and generating modest revenue, while 4 more applications -- qualifications, for the flagship program with our large customer won't occur until sometime in the second half of 2023, we have visibility into the likely technical specification that will be required. We feel good about our ability to meet it. In addition, our 8-inch line for gallium arsenide crystal growth is up and running at our Kazuo facility, and we are very excited by our progress in driving improved efficiency there.

Turning to germanium substrates. Following a resolution of the payment issue with one of our customers, we saw incremental growth in revenue, while the germanium substrate market has also been affected by the macro softness, we will be working towards sequential growth in the coming quarters. Finally, to our raw material joint ventures. Our revenue in Q1 was approximately flat with the fourth quarter and represent another area where we are seeing stabilization. Gallium raw material prices remain approximately flat this quarter and up from the low levels we saw in the fourth quarter of 2022.

In closing, though a softening of the macro environment will continue to impact growth near term, the trend that we have driven our revenue and customer expansion remains very much intact. We continue to excel in our technical capabilities, and we are ready for our business to support new applications that are likely to drive future growth. Further, we continue to work hard on improving our efficiency, and we are focusing on accelerating our return to profitability. I will now turn the call back to Gary for our second quarter guidance. Gary?

Thank you, Morris. Given the continuing inventory correction, we expect Q2 revenue to be between $19 million and $21 million. Product mix is likely to include growth in gallium arsenide substrates and continued weakness in indium phosphide. We expect our non-GAAP net loss will be in the range of $0.10 to $0.12, and our GAAP net loss will be in the range of $0.12 to $0.14. Share count will be approximately 42.7 million shares. This concludes our prepared comments. Morris and I will be glad to answer your questions now. Abby?

(Operator Instructions) Your first question comes from the line of Charles Shi from Needham.

I just want to understand how you think about the revenue progression through 2023. It's a downturn year, but I tried to see if we can find any historical precedent to try to get a sense of how this year is going to shape out. It looks like you're kind of guiding flattish revenue into second quarter of the year. Does it kind of make sense to you? Maybe the second half of the year, maybe you'll continue to bump along the bottom. That's my first part of this question. But the second half of this question is, I think historically, in a normal environment, Q3 tends to be slightly higher backing than Q1. Q3 tends be the peak quarter of the year. Would that be the case this year? Or you think maybe it's going to be a little bit different given the severity of the downturns?

Go ahead, Morris.

Let me take that. I think certainly, I agree with you, Charles. I think that's the normal pattern. But I think we certainly see that as consumer product and the data center for indium phosphide because it's just got into the inventory correction 2 months ago or 3 months ago. So, we expect it to continue. But we do see some activity, especially on HPT and power laser in China, especially. And so, they stabilized last quarter, and we are seeing revenue modestly going up a bit. And that perhaps is an encouraging sign, but how strong they're going to continue for the next quarter?

And how long this inventory digestion for indium phosphide consumer and data center will be it is hard to say because I think although everybody is expecting the inventory to be consumed, but I worry, I guess, about although how -- although the inventory may be down a bit, but how strong the recovery of the economy will be. In other words, will there be another leg to go if U.S. economy were to slip into a recession, and that could prolong the inventory on the demand recovery.

Yes. And Charles, I would say that we don't see revenue declining in Q3. And in fact, internally, I think it might start to tick up in Q3. And because the circumstances in the economy are so unusual right now, I would agree with Morris. It doesn't necessarily mean that Q4 will be below Q3. We don't know.

Got it. The other question I want to ask is on the cost side. Can you remind us again what was your CapEx for Q1? And can you also remind us what's the full year CapEx target for you in 2023?

CapEx in Q1 was $2.7 million. And I think for the whole year, it will be a low $5 million. So we’ve really sort of put a lid on things. There was some stuff already in the works that crossed over into Q1. But in general, Morris and Gary have become Dr. No and Dr. No, we're not going to do it.

Got it. Got it. So it sounds like you're going to further put a break on capital spending for the next 3 quarters of the year, given that in Q1, you already spent almost more than half of the budget you have for the year.

Yes. That's the goal. There are some things that we have to do to stay in compliance with the building codes and regulations. But in general, we're resisting. Yes.

Got it. Maybe the last question. I want to ask you about the consumer. Definitely, we recently did hear some rumors about maybe the premium electronics company, they may be having second thoughts whether to continue with under the display proximity sensor for handsets. It sounds like they may be thinking about reverting back to gallium arsenide-based solutions. Have you seen any of the signs that's really happening? And how should we think about that? I believe what I was talking about was the second consumer program, but any new data points for the third potential consumer program as of today?

Yes. On specific customers, you're talking about the proximity sensor. We hear the same thing. The (inaudible) is probably going to be switched back to gallium arsenide VCSEL but it's still up in the air whether the detector will use an indium phosphide detector or a gallium arsenide detector. As we understand it, indium phosphide detector is much more sensitive, so you can use a smaller area, thus maintaining the smaller notch of (inaudible) shaped window on the phone. But at this point, we really have no visibility at all. So, I think we should -- we are nervously waiting on the decision on what they will decide in the next few months.

We do have one other customer in Taiwan, although they are fairly secretive, and they are looking for something to [run] using indium phosphide semi-insulated wafers. We believe it's a detector for collision avoidance or not -- I mean, autonomous driving. But again, we're guessing what it is. But looking at the (inaudible) quality production they have purchased wafer so far and also the quotation we provided them for that application. I mean, it's still early. So those are probably the 2 consumer product that we're looking for. And obviously, I think micro LED, it's taking one step further into reality.

I think although it will be launching late, we believe, but nevertheless, it becomes a -- We believe it will come. As I said in the script that we are making very good progress in terms of preparing for it, although we’re not going to spend a whole lot of money, but we already build a line for them and so we’re ready to ramp up production for them sometimes in 2024, late 2024. Although samplings are already delivered to our major customers.

By the way, this major customer was giving us a facility tour in the last week or so and they are very pleased. We had a very, very good meeting.

Your next question comes from the line of Matt Bryson from Wedbush Securities.

First one is you’re guiding for flat to higher revenues but obviously you’re looking for that loss to increase a bit. Is that mix? Or what else is -- or where else is expense going up?

It's mix primarily. We hope to keep expenses flat. And -- there may be a little bit less contributed below the line, not sure yet.

And then I guess from a customer inventory perspective, everyone in the supply chain is struggling not just because the end demand is softer, but also because inventory is getting worked out of the system. Do you have any idea where your customers are in terms of that process? And how much do you think inventory rationalization versus lighter end demand is weighing on revenues right now?

Well, I think although gallium arsenide as we speak is giving us more order. Like in gallium arsenide, let's say, HPT or lasers, when we visit our customers in Q1 or early Q1, it was -- or even Q4 of last year, there was just new order. And for HPTs they’re starting to take thousands of wafers, but compared to tens of thousands of wafers, still only 20% of the peak, but at least it's a consistent order pattern. So, we feel reasonably comfortable it's coming. And if you read into their conference script, they're talking about second half of the year will be better than first half, although they are still running 30%, 40% of their peak level.

As far as power lasers are concerned, it's just starting. We got -- we used to deliver thousands of wafer per month. It's now in the hundreds. It's 110. But we've got to wait the other months or so to see how sustainable it is. And so, I think -- but it's difficult for us to tell is that everybody controls inventory because in this environment, probably everybody wants to squeeze the inventory and see if they can drive more cash out. And there's no fear because every supplier is more eager trying to get orders. So along with it, there are price pressure with that as well.

So -- but I think the long term, I mean, I'm looking at maybe a 2 or 3 quarter horizon. Micro LED definitely should be a driver. And I don't believe there's any reason why power laser for gallium arsenide because it's for industrial manufacturing. I think industrial manufacturing, the consumer market in China is coming back, I believe, because I see the streets are more traffic and more people. But I think when will it translate into industrial production, which I think uses a lot of gallium arsenide power lasers. I think from my perspective, it's hard for me to say. But I think the data center, although there is an inventory glut, I mean, our customers are telling us they just bought way too much last year. And although they are very happy with our performance, they just have to digest that inventory.

But also, by the way, about datacenter, I think that the AI application because it's going to use so much more computing power with the AI logic running. So, there is a projection saying in the next few years, if AI is in full bloom, it probably will consume almost 30% of the total energy of the whole society because it's so data-intensive. So, that should sound long-term good growth for us because if you need a datacenter to do more work and you need to access the information faster and you need to conserve energy for the datacenter, then there's more opportunity for silicon photonics and more opportunity for indium phosphide substrates. But that -- it allows a sustainable drive for long-term usage, but it probably -- it's not going to help us in the next quarter or 2.

Just to summarize Morris, I guess what you're seeing is you're starting to see signs that gallium arsenide, at least in the markets, you start -- there's demand and inventory has been worked down within indium phosphide, it’s still going to take a couple of quarters before you figure out exactly where demand is just because you've got so much inventory, or there is so much inventory in the system. Is that fair?

Yes. In a way, that's what I'm saying, Matt, but as I said again, as far as indium phosphide is concerned -- because there are 2 ways we can look at the opportunity for us. I mean one is the existing market where they recover, it should be a big drive for demand. I think there's another one that is the new applications. As I said, we have a Taiwanese customer. They are making inquiries and making (inaudible) runs on semi-insulating indium phosphide, but we don't know exactly what the application is. But from the looks of it, it's quite substantial in terms of volume. So, we're guessing it’s for autonomous vehicle, but we just have to wait and see where we are getting that monthly order. But the usual old customers, such as consumer products and datacenter, the traditional datacenter, yes, they are bogged down in inventory. We're not seeing the order yet.

Your next question comes from the line of Richard Shannon from Craig-Hallum.

Let me ask a couple of quick tactical questions here, probably for Gary, both for the first quarter results and your outlook for the second quarter here, can you describe what your -- or quantify what your China revenues did, not just Asia Pacific, but China only?

I'm happy to share it, but I don't have it in front of me. So maybe I can look it up and tell you I don't know…

If you want to look it up, I'll ask more of a question here. Morris, going to the topic of datacenter, you talked about in one of your previous answers here about a fair amount of inventory your customers admitted to here, it sounds like in the last quarter. Are you getting a sense of continued movements in that business and forward road map planning and stuff like that? Because I've heard of some potential reorganizations or something going on internally there. So, I just want to make sure that you expect that to be a continuing business after what looks like an inventory burn.

Richard, well, I think they are very enthusiastic about the future product. We’re engaging with them almost weekly on trying to solve their next-generation futuristic requirement, material requirement, as well as working with them. They are a very methodical and very good customer to work with. And so, we don't see any reduced activity with them at all. I don't think they're going to be dissolving anytime soon. Actually, we do see new product development. I think it's for higher power and higher speed. But from the materials level, it is very difficult to tell what they are saying for new products.

Thanks for that confirmation and thought process. That's good to hear. Morris, maybe if you can touch and add a little bit more detail of what you're seeing going on within micro LED. And I guess, when do you expect more larger orders coming here? And kind of what are the stages of progress to getting to what I think you referred to as potential high-volume production late in 2024.

Yes, I think we are skewed to get qualifications done in the next, I would say 3 to 4 months. In other words, we're ironing out all the specifications the customers are needing, how many ingots and how many wafers they need for qualification, and they just did a site visit for us. So, I think both parties are fairly happy. I mean, especially the customers are very impressed with our facility. I mean, I think -- I mean, one of the comments was interesting, although they’re saying, wow, you guys are doing so much 6S practice in manufacturing and all SBC and all the controls. And this looks like the European semiconductor manufacturing plant, but you are in China. So, I took it as a compliment. So, I think we are all happy. But as far as the volume ramp is concerned, yes, we always -- we were told it's going to ramp sometime late in 2024.

Okay. And in the context of the forecast, you're getting from this large customer or maybe large customers for 8-inch gallium arsenide for micro LED, you said you've got a pilot line set up already. If the forecast hold true to what you're hearing or seeing from them currently, when would you have to greenlight a second tranche of equipment to support higher volumes?

Well, I think it's -- you can maybe call it fortunately or unfortunately. I mean, I think we spent most of the money already. I think we're ready -- because I think our original planning was probably 2x the volume before. So -- and also, infrastructure build, you cannot do sort of smaller incremental build? So, we spent more money on building that's already done. But as far as the equipment is concerned, we feel fairly comfortable to fulfill their first tranche production in late 2024 starting without purchasing any further new equipment.

Okay. Fair enough. I'll ask a couple of questions and Gary and jump out of line here. First of all, Gary, were you able to find those numbers in China.

Yes, China was $8.1 million in Q3, Q1.

For Q1. Okay. And then is this expected to be no worse than flat in the second quarter?

I think it will be up a little bit in the second quarter.

Okay. Good to hear. Last question for you, Gary, is just thinking about your balance sheet here. And I think one of the messages you portrayed last quarter and kind of repeated here is about trying to squeeze some cash out of working capital. Obviously, inventory went up a little bit. You explained that about the recycling dynamic here. As you look throughout the year with the CapEx plan and other things here, how do we think about where cash goes directionally? Is this a year where that goes up directionally down, and this is obviously independent of whatever debt levels you have as well? How do you see that working out this year?

I think for the next couple of quarters, I would expect it to be relatively flat. It could move up or down a little bit. But typically, with our business model, when we're in a down cycle, we can rely on inventory, we tighten things up and so, the cash burn is not that high. When we grow a lot, when we grow quickly, that's when cash can be cash flow negative because we're investing so much in the growth process. So, yes, that would be my comment on that.

There are no further questions at this time. Dr. Morris Young, Chief Executive Officer, I turn the call back over to you.

Thank you for participating in our conference call. This quarter, we will be presenting at the 20th Annual Craig-Hallum Institutional Investors Conference in Minneapolis. As always, please feel free to contact me, Gary Fischer or Leslie Green directly if you would like to set up a call with us. We look forward to speaking with you in the near future. Bye.

This concludes today's conference call. You may now disconnect.