AXT Q4 2023 Earnings Call Transcript

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February 22, 2024

There are 6 speakers on the call.

Operator

Good afternoon, everyone, and welcome to AXT's 4th Quarter and Fiscal Year 2023 Financial Conference Call. Leading the call today is Doctor. Morris Young, Chief Executive Officer and Gary Fischer, Chief Financial Officer. My name is Eric, and I will be your coordinator today. After the speakers' remarks, there will be a question and answer session.

Operator

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

Speaker 1

Thank you, Eric, 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-nineteen 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 in their products.

Speaker 1

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 current expectations. This conference call will be available on our website ataxt.com through February 22, 2025. 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 Q4 of 2023. This information is available on the Investor Relations portion of our website ataxt.com.

Speaker 1

I would now like to turn the call over to Gary Fischer for a review of our Q4 2023 results. Gary?

Speaker 2

Thank you, Leslie, and good afternoon to everyone. Revenue for the Q4 of 2023 was $20,400,000 up from $17,400,000 in the Q3 of 2023 and down from $26,800,000 in the Q4 of 2022. To break down our Q4 'twenty three revenue for you by product category, indium phosphide increased sequentially to $5,400,000 reflecting a stabilizing market with continued improvement in artificial intelligence, ponds and data center applications. Gallium arsenide also grew to 6,000,000 dollars with excess inventory largely worked down and certain applications showing improvement. Germanium substrates were $1,100,000 down slightly from the prior quarter.

Speaker 2

Finally, revenue from our consolidated raw material joint venture companies in Q4 was $7,900,000 In the Q4 of 2023, revenue from Asia Pacific was 77%, Europe was 16% and North America was 7%. The top 5 customers generated approximately 28% of total revenue and no customer was over the 10% level. Non GAAP gross margin in the 4th quarter was 23.2% compared with 11.3% in Q3 of 2023 and 32.5% in Q4 of 2022. For those who prefer to track results on a GAAP basis, gross margin in the Q4 was 22.6% compared with 10.7% in Q3 of 2023 and 32.1% in Q4 of 2022. The primary drivers of the sequential improvement in our corporate gross margin in Q4 were higher additional volume, product mix and improved gross margins at both Jinmei and Boyu.

Speaker 2

Beyond the near term, we remain confident that we can get back to the mid-thirty percent range as the environment strengthens through higher overall volume, more favorable product mix and the benefits of our recycling programs along with continued efficiency improvements throughout our business. Moving to operating expenses. With the reduction in overall revenue, we have maintained spending discipline in our operating expenses to align with the current environment. Total non GAAP operating expense in Q4 was $7,500,000 down from $7,800,000 in Q3 of 2023 and down from $8,900,000 in Q4 of 2022. On a GAAP basis, total operating expense in Q4 of 2023 was $8,200,000 down from $8,600,000 in Q3 and down from $9,600,000 in Q4 of 2022.

Speaker 2

Our non GAAP operating income for the Q4 of 2023 was a loss of $2,700,000 compared with a non GAAP operating loss in Q3 of 2023 of 5,800,000 dollars and a non GAAP operating loss of $256,000 in Q4 of 2022. For reference, our GAAP operating line for the Q4 of 2023 was a loss of $3,600,000 compared with an operating loss of $6,700,000 in Q3 of 2023 and an operating loss of 1,000,000 dollars in Q4 of 2022. Non operating other income and expense and other items below the operating line for the Q4 of 2023 was a net loss of $62,000 The details can be seen in the P and L included in our press release today. For Q4 of 2023, we had a non GAAP net loss of $2,800,000 or $0.07 per share compared with a non GAAP net loss of $4,900,000 or $0.12 per share in the Q3 of 2023. Non GAAP net income in Q4 2022 was $2,000,000 or $0.05 per share.

Speaker 2

On a GAAP basis, net loss in Q4 was $3,600,000 or $0.09 per share. By comparison, net loss was $5,800,000 or $0.14 per share in the Q3 of 2023. GAAP net income in Q4 of 2022 was $1,300,000 or $0.03 per share. The weighted average basic shares outstanding in Q4 of 2023 was 42,900,000. Dollars Cash, cash equivalents and investments were $52,300,000 as of December 31.

Speaker 2

By comparison at September 30, it was 43,600,000 dollars Depreciation and amortization in the 4th quarter was $2,200,000 and capital investments was about $4,000,000 Total stock comp was about $800,000 Net inventory was flat quarter to quarter. 38% of the inventory is raw materials and WIP is 58%. Finished goods makes up approximately 4%. 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.

Speaker 2

In regards to the Tongmei IPO, we need to resolve one open item. Although it is moving slower than we expected, we are making progress and are confident that Tongme remains an excellent candidate for listing. With that, I'll now turn the call over to Doctor. Morris Young for a review of our business and markets. Morris?

Speaker 3

Thank you, Gary, and good afternoon, everybody. We believe that we are now beginning to see a recovery in our market. In Q4, we achieved 18% sequential growth in our revenue and a 43% sequential improvement in our non GAAP net income. While the overall demand environment remains soft somewhat soft, we are seeing increased orders for indium phosphide for both artificial intelligence and palm related applications. Further, the gallium arsenide market, which was the first of our market to go into a recorrection appears to have largely worked through excessive inventory.

Speaker 3

Looking individually at these product lines, our gallium arsenide revenue grew 42% sequentially in Q4, reflecting increasing strength in both wireless and LED applications, as well as depletion of excess inventory and our continued success in attending export permits for most of our customers. We're seeing new demand for HPT applications where we historically have had very little market share. We believe this is the result of both improving market conditions and the desire among customers to diversify their supply base. We also see improving demand geographically in China across a variety of applications including LEDs, wireless switches and high power lasers. As we look forward, the micro LED market continues to solidify.

Speaker 3

Several Tier 1 companies are driving this adoption and the new product could come to market as soon as next year. As many of you know, we have been investing in our 8 inches gallium arsenide technology in support of these applications. And we have recently made groundbreaking advancements in both our defect density and yields. This innovation positions us strongly to gain a leading share in the market, while efficiently supporting growing market demand. Now turning to indium phosphide.

Speaker 3

Sales grew 10% in the quarter with early signs of recovery in the palm market and brand new demand related to artificial intelligence. We view AI as an emerging new application for indium phosphide that will develop in exciting ways over the coming years. Today, AI applications are primarily using gallium arsenide VCSELs, which requires a relatively small amount of substrate material. But as the industry moves to 800 gig and then 1.6 terabyte speeds, we expect that there will be a necessary transition to indium phosphide. AI will drive up the need for massive data transfer requirements with increased bandwidth, low attenuation and low distortion.

Speaker 3

We believe this will result in increased demand for indium phosphide as the best platform for rapid data transfer. We already seeing development work happening today with next generation silicon photonics devices and electro absorption modulated lasers or EMLs for high speed datacenter transceivers. Early revenue from these applications contributed to our indium phosphide growth in Q4 and will help drive our expected growth in Q1. This interest in indium phosphide for AI applications is intensifying the market demand for 6 inches indium phosphide. The speed, signal clarity and long distance capability of indium phosphide are optimal for AI applications.

Speaker 3

And as market grows, customer wants the scale and cost benefit of large diameter substrates. We're excited by the progress we're making in our R and D effort and expect to continue to lead our industry with the best in class material. While consumer and healthcare applications for indium phosphide today contribute only modestly to our revenue, we continue to see positive development activities and believe there is a great potential on the horizon. We are very early in adoption of this material across a multiple way of emerging applications and our success in supporting Tier 1 customers proves our capability for large volume, high precision devices. Finally, sales from our raw material business grew 13% with continued gross margin improvement.

Speaker 3

Overall, the pricing environment remains relatively stable and we don't expect any major changes in Q1. In closing, we are looking forward to the coming year with optimism. We believe that the trend that we have driven our revenue and customer expansion remain very much intact with new catalysts such as AI providing strong incremental opportunity. In addition, I'm exceptionally proud of what AXT team accomplished in 2023, paving the way for exciting future. Not only did we successfully navigate export control license process on behalf of our customer, we delivered breakthrough innovation in the development of large diameter Gallium Austenide and indium phosphide substrates and we will set a new bar of excellence for our industry.

Speaker 3

In addition, we implemented a recycling program that both advances our ESG commitment and improves our efficiency. Finally, while the progress on our IPO may be less visible externally, I'm very grateful for the diligence of our team and confident that we can successfully bring it to fruition. In the meantime, we will continue to prioritize cost savings and efficiency and we are focused on accelerating our return to profitability. And thank you to our customers, our shareholders for their continued support. I will turn the call back to Gary for our Q1 guidance.

Speaker 3

Gary?

Speaker 2

Thank you, Morris. In keeping with our comments today, we expect Q1 revenue to be between $20,000,000 $22,000,000 We expect our non GAAP net loss will be in the range of $0.06 to 0 point 0 $8 and GAAP net loss will be in the range of $0.08 to 0 point 1 $0.10 Share count will be approximately 42,600,000 shares. This concludes our prepared comments. Morris and I would be glad to answer your questions now. Eric?

Operator

Your first question comes from the line of Richard Shannon with Craig Hallum. Please go ahead.

Speaker 4

Great. Thanks, Morris and Gary for taking my questions and congratulations on a good end to the year. I'm going to start with a question for Gary on your 4th quarter numbers here, specifically on gross margins. While obviously volume helps here, the fall through margin here was nothing short of excellent. I think it's about 90%, which seems unusual.

Speaker 4

Maybe you can delineate more of the dynamics here. Obviously mix helps, but I wonder if there was some increase in utilization or unusual pricing in raw materials that helped you do this and really want to get a sense of sustainability. I haven't had a chance to run your guidance for the Q1 through and see what that implies for gross margins, but I want to get a sense of the Q4 as it leads into the first.

Speaker 2

Okay. Well, as usual, the biggest items that contribute to these kinds of improvements are going to be product mix. Indium phosphide was up Q2Q and volume and volume was up over $3,000,000 There was better improvement from the 2 raw material companies and that also contributed. I think in terms of sustainability, we should be in about the same range in Q1, maybe plus or minus a little bit, but we'll see.

Speaker 5

And well, I think that's how

Speaker 2

I would respond. Go ahead, Morris.

Speaker 3

Yes. I'm not a finance guy, but I from what I know is that when we have a policy of writing all material, which we didn't sell for 12 months period of time. And when the revenue come down, then the write off for the excess inventory will start to impact us. But when we pick up the volume, not only the write off becomes less, but also we will have the opportunity to pick up those write off item to be on sale thus improving our gross margin. That could be an impact.

Speaker 4

Okay. That would certainly make sense. Thanks for that clarification. And maybe I'll follow-up here just on the guidance for the Q1 here. Obviously, a little bit of growth at the midpoint here.

Speaker 4

How would we think about the major segments that you report on whether they're meaningfully different than that kind of average growth at the midpoint?

Speaker 3

Yes, I think the significance is that indium phosphide will continue to grow. Gallium arsenide, I think will grow substantially again. Gumanium is actually stable or insignificant in a way to the overall revenue contribution. Actually raw material is going to decrease quite substantially quarter over quarter, not because their business is weak, but I think it's just that the raw material business had a great Q4 and the Q1, it didn't pick up the large volume opportunity in Q1. So overall, although the revenue growth is modest, but actually comes mostly from the contribution of indium phosphide and gallium arsenide.

Speaker 3

Correct.

Speaker 4

Okay, perfect. Thanks for that delineation. So let's jump into some of the product categories here in data center, meaning indium phosphide here sounds like it's got some opportunities here. Clearly, know this optical space where it seems like it's very nice here. Maybe you can talk about, I think you've been a little bit limited in the kind of a narrow customer base in your past.

Speaker 4

I think you have a one major customer there. Maybe you can talk about the efforts for diversification. And ultimately, how do we think about either data center growth this year versus last or maybe just the overall indium phosphide category? I

Speaker 3

don't know where did you get that idea from. We have a limited narrow customer base. I don't think we have a narrow customer base. I think we have a

Speaker 4

Don't you have don't you just have one larger a big contributor to data center and many other smaller ones or some number smaller ones in?

Speaker 3

Yes. Data center, silicon photonics specifically was sort of narrow. They didn't grow. They are poised to grow. They've been telling us it should grow substantially in Q in 2024, but we haven't seen that yet.

Speaker 3

I think they are incrementally better in Q1 than Q4, but they're telling us their visibility is still not good, but they overall they're telling us that 2024 should be substantially better than 2023. So I think from what we see in indium phosphide, the telecom business is not great. The data center actually still got some inventory to digest. Pounds market in China actually is picking up a bit, okay? But it's still not robust compared to the peak time, but it's better than Q3 for sure and is continue to be better in Q1 than Q4.

Speaker 3

And what I think is surprising to us, I think is the AI application. It first started something like 6 months ago and we thought it was well, 1st the customer wouldn't tell us it's AI. And then they come back again and they want more in Q4 and they now give us yet other bigger order in Q1. So accumulated delivery, Dave, it's in the 1,000,000 of dollars range. So and this time they also admit to us that it's AI related.

Speaker 3

So we are cautiously optimistic, although they are not giving us good visibility how much they're going to grow in Q2 and Q3, But at least, I think it's so far, it's a very good sign. And I believe this indium phosphide solution for AI will come. It's a matter of time, but I think I'm glad to see it's coming already through.

Speaker 4

Okay. Morris, some interesting detail there. It seems like you're splitting up, I guess, what I would call datacom that you're kind of splitting up between silicon photonics and AI and others here that perhaps there's more detail that we can take offline there, but that sounds good to hear here. Let's see here, maybe just touching on the other side of indium phosphide here, it sounds like you're incrementally more positive on consumer electronics and healthcare side here. Maybe just get a sense of where that's coming from and do you see any large customers kind of impacting your year this year?

Speaker 3

Well, Richard, cautiously optimistic they are requesting a fairly sizable quote and we're in qualification process for to launch later this year, but we don't have no signal it will become reality. I mean the volume is substantial. We know it's gone for consumers, but it's still into qualification process whether what they will launch and will they launch later on this year, we don't know. But we have at least, let me see, 2 customers requesting for the same volume, for the same type of material that they request. I mean from the volume of it, we know it's a consumer product.

Speaker 4

Okay, fair enough. Well, that's good to hear. Last question, I will jump out of line here. Just touching on the microLED topic here, I guess I want to get a sense of your visibility and confidence in this market taking off. I think you mentioned in your prepared remarks sometime in calendar '25 here, seems to be kind of a moving target in the space.

Speaker 4

I think it's largely due to yields on the pick and place here outside of your direct scope of your work here, but just want to get a sense of your level of confidence is that it can happen next year?

Speaker 3

Well, I think you probably know better than I do. I think from our end, our development of the 8 inches gallium arsenide progress supporting this, both in terms of capacity, our yield and our quality. Now we have made great advancement in the last quarter and we are now very confident. And we have customer visit, I think twice now and the 3rd attempt to visit us will happen next quarter and we will soon see the qualification process. So I think what we can tell you is our customer are telling us they are ready to launch sometime in 2025.

Speaker 3

And so that's what we can do. Whether it's going to I mean, right now, we're running hundreds of wafers per month, okay? And so we continue to deliver now. But so I guess they are in pilot line production. And so far so good.

Speaker 3

Our wafer performs very well. So I'm optimistic.

Speaker 4

Okay, fair enough. Thanks. That is all the questions from you guys. I'll jump on the line.

Speaker 2

Thanks, Richard.

Operator

Your next question comes from the line of Charles Hsieh with Needham and Company. Please go ahead.

Speaker 3

Yes, thanks.

Speaker 5

Maurice and Gary, congrats on the 4th quarter results. I want to ask you a little bit more details about the new opportunity you see in data center side. I believe you're referring to the datacom transceiver customers. So we're very bullish about believe it's one of your end customers. So we're very bullish about how much growth this part of the market is going to be.

Speaker 5

But for us, it's getting a little bit tough for us to think about how to translate their forecast of the 800 gig plus optical trans ceiver opportunity growth to your indium phosphide wafers. So have you guys tried to quantify how much of the PAM this part of the applications are going to drive for you guys? And the other related questions, based on your knowledge today, are you single sourced in a phosphide wafer supplier or do you think the end customer may be sourcing from your competitor as well? Thanks.

Speaker 3

Charles, that's a little bit tough question and it's a fairly long one. So let me say this, I think right now the data center, I do want to clarify one thing. There is it's very hot item is called optical cable project and we're not related to that project. And that is mainly using VCSEL using a plastic fiber. And I think there's a big company data center wants to change out coaxial cable with VCSEL with plastic fiber, we're not in that.

Speaker 3

Whether that optical cable will move from 400 gs, 100 gs to 800 gs or not because they can use parallel paths, we're not in that at all. And what we're talking about the 800 gs, 1.6 gigahertz terabyte, I think we're talking about potentially for a little bit longer distance perhaps and more power data transfer. So whether the customer is single source or not, so to answer your question, can we quantify and so if Coherent is going to grow X percent, are we going to grow with them? And so you have to take out, I mean, I believe Coherent is also doing VCSEL. The VCSEL, the problem with that market is it doesn't use a whole lot of gallium arsenide substrates.

Speaker 3

So the opportunity for us is much less than making the plastic fiber for VCSELs. So as far as single source or not is concerned, I believe we are still the largest, I believe also best in class in indium phosphide supplier. So we have multiple many, many customers and some of them use us in majority of their supply. And in fact, I think the artificial intelligence customer that we recently engaged, I think we're single source. But whether they're going to develop into multiple source or not, we don't know.

Speaker 3

And but we are also very looking for other people wanting to do participate in that development as well. So we have a very good position in the phosphide marketplace, but whether they are single source or not, it's difficult to tell.

Speaker 5

Got it. So maybe a follow-up question. It looks like for roughly two quarters, right, December last year, March this year, you are for business level is now, I mean, returned to that $20 plus 1,000,000 per quarter level. Looking out a little bit beyond the March quarter, what's your best assessment right now? Are you going to be maintained at the similar level?

Speaker 5

Are we going to revisit that high teens 1,000,000 per quarter, that kind of level? Or I mean, generally want to get a sense how you feel about the run rate going through the rest of the year? Thanks.

Speaker 3

Sure. I think for next quarter as I said, I think although we only guided modestly higher overall revenue for next quarter, but raw material is decreasing. So there is a substantial increase in substrate revenue to compensate for that. So I think for substrate revenue is going to continue to grow, both in terms of indium phosphide and gallium arsenide. And for raw material, I don't think it's going to drop off for the rest of the year.

Speaker 3

And we will have other joint venture joining in to contribute revenue contribution as well later on of the year. So I think this year it's going to be a continued growth year for 2034 compared to 2023. The question I think is how fast, how strong it's going to be. Whether we're going to reach $90,000,000 but I think it's probably better than 85

Speaker 5

Got it. Thanks. That will be all from me for now. Thanks.

Speaker 2

Thanks, Charles.

Operator

I will now turn the call back over to Doctor. Morris Young for closing remarks.

Speaker 3

Thank you for your participation in our conference call. As always, please feel free to contact me, Gary Fisher or Leslie Green, if you would like to set up a call. We look forward to speaking with you in the near future.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect your lines.

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Key Takeaways

  • AXT reported Q4 revenue of $20.4 million, up 17% sequentially but down from $26.8 million a year ago, with 77% of sales from Asia Pacific and its top five customers contributing 28% of total revenues.
  • Non-GAAP gross margin improved to 23.2% in Q4 from 11.3% in Q3, driven by higher volume, a better product mix and margin gains at Jinmei and Boyu, with a goal to return to the mid-30% range as volumes and efficiencies ramp.
  • The company maintained expense discipline, reducing non-GAAP operating expenses to $7.5 million and narrowing the non-GAAP operating loss to $2.7 million in Q4 versus a $5.8 million loss in Q3.
  • AXT sees early signs of recovery, with gallium arsenide demand stabilizing and indium phosphide orders growing 10% sequentially, fueled by emerging AI and data center applications and ongoing development in micro LED substrates.
  • For Q1 2024, AXT expects revenue between $20 million and $22 million, a non-GAAP net loss per share of $0.06–$0.08, and continued growth in indium phosphide and GaAs, offset by lower raw material joint-venture sales.
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Earnings Conference Call
AXT Q4 2023
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