AXT Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2025

There are 8 speakers on the call.

Operator

Good afternoon, everyone, and welcome to AXT's First Quarter twenty twenty five Financial Conference Call. Leading the call today is Doctor. Morris Young, Chief Executive Officer and Gary Fisher, Chief Financial Officer. In addition, Tim Bevels, VP of Business Development, will be participating in the Q and A portion of the call. My name is John, and I will be your coordinator today.

Operator

At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to Leslie Green, Investor Relations for AXP. Please go ahead.

Speaker 1

Thank you, John, 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, emerging applications using chips or devices fabricated on our substrates, our product mix, global economic and political conditions, including trade tariffs and export and import restrictions, our ability to increase orders in succeeding quarters, to control costs and expenses, to improve manufacturing yields and efficiencies, or to utilize our manufacturing capacity. 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. In addition to the matters just listed, these uncertainties and risks include, but are not limited to, the financial performance of our partially owned supply chain companies, increased environmental regulations in China, and COVID-nineteen and other outbreaks of contagious disease. In addition to the factors just mentioned or that may be discussed in this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission.

Speaker 1

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 on our website through 05/01/2026. I also want to note that shortly following the close of market today, we issued a press release reporting financial results for the first quarter and fiscal year twenty twenty five. This information is also available on the Investor Relations portion of our website. I would now like to turn the call over to Gary Fisher for a review of our first quarter twenty twenty five results.

Speaker 1

Gary?

Speaker 2

Thank you, Leslie, and good afternoon to everyone. Revenue for the first quarter of twenty twenty five was slightly above the midpoint of our guidance at $19,400,000 compared with $25,100,000 in the fourth quarter of twenty twenty four, dollars '20 '2 point '7 million in the first quarter of last year twenty twenty four. To break down our Q1 twenty twenty five revenue for you by product category, indium phosphide was $3,800,000 primarily from PON and data center applications. Gallium arsenide was $6,700,000 Germanium substrates were 600,000.0 Finally, revenue from our consolidated raw material joint venture companies in Q1 was $8,300,000 based on continued healthy demand. In the first quarter of twenty twenty five, revenue from the Asia Pacific region was 83%, Europe was 11% and North America was 6%.

Speaker 2

The top five customers generated approximately 35.9% of total revenue and no customer was over the 10% level. Non GAAP gross margin in the first quarter was a negative 6.1% compared with 17.9% in Q4 twenty twenty four and twenty seven point three percent in Q1 of twenty twenty four. For those who prefer to track results on a GAAP basis, gross margin in the first quarter was negative 6.4% compared with 17.6% in Q4 and 26.9% in Q1 of twenty twenty four. The magnitude of the decline in gross margin was a disappointment in the quarter and primarily the result of three factors. First, we had significant yield issues and our semi insulating gallium arsenide wafers as we worked quickly to scale our output for sizable wireless opportunity.

Speaker 2

I think the lesson for us is that while the opportunity is compelling, the sophistication of the product specs require us to move in a more measured way to ensure that we can execute cost efficiently. Revenue mix also played a role in our gross margin deficit due to the current trade restrictions, substrate sales were down meaningfully in the quarter and our joint venture sales were higher than normal as a percentage of our revenue. As a manufacturing company, this resulted in under absorbed factory overhead that was greater than expected. And finally, we were expecting to see a little bit higher gross margins across the board from our joint ventures from gallium arsenide and from germanium sales. Morris will talk more about gross margins and our plans for improvement shortly.

Speaker 2

Moving to operating expenses, we did better than expected in holding OpEx down in Q1. Total non GAAP operating expense in Q1 was $8,500,000 compared with 10,500,000 in Q4 of twenty twenty four and $8,700,000 in Q1 of twenty twenty four. On a GAAP basis, total operating expense in Q1 was $9,000,000 compared with $10,600,000 in Q4 of twenty twenty four and $9,400,000 in Q1 of twenty twenty four. Our non GAAP operating loss for the first quarter of twenty twenty five was $9,600,000 compared with a non GAAP operating loss in Q4 of twenty twenty four of $5,400,000 and a non GAAP operating loss of $2,500,000 in Q1 of twenty twenty four. For reference, our GAAP operating line for the first quarter of twenty twenty five was a loss of $10,300,000 compared with an operating loss of $6,200,000 in Q4 of twenty twenty four and an operating loss of $3,300,000 in Q1 of twenty twenty four.

Speaker 2

Non operating other income and expense and other items below the operating line for the first quarter was a net gain of 400,000.0 The details can be seen in the P and L included in our press release today. For Q1 of twenty twenty five, we had a non GAAP net loss of $8,200,000 or $0.19 per share compared to the non GAAP net loss of $4,300,000 or $0.10 per share in the fourth quarter of twenty twenty four. Non GAAP net loss in Q1 of twenty twenty four was $1,300,000 or $03 per share. On a GAAP basis, net loss in Q1 was $8,800,000 or $0.20 per share. By comparison, net loss was $5,100,000 or $0.12 per share in the fourth quarter and GAAP net loss in Q1 of twenty twenty four was 2,100,000.0 or $05 per share.

Speaker 2

The weighted average basic shares outstanding in Q1 of twenty twenty five was $43,600,000 Cash and cash equivalents and investments increased by 4,400,000.0 to $38,200,000 as of March 31. By comparison at December 31, it was $33,800,000 Depreciation and amortization in the first quarter was $2,200,000 Total stock comp was 600,000.0 Net inventory was down by approximately $4,700,000 in the first quarter to 80,400,000 This continues to

Speaker 3

be a focus for us and we expect to bring it down further in quarters to come.

Speaker 2

Okay, this concludes the brief discussion of quarterly financial results. Turning to our plan to list the subsidiary in China, Tongmei on the STAR Market. We continue to keep our IPO application current. Tang remains an in process category as part of a much more selective and smaller group of prospective listings than a few years ago. While we're not insensitive to the current political current geopolitical environment, Tongmei is considered a Chinese company and continues to be regarded in China as a good IPO candidate.

Speaker 2

We will keep you informed of any updates. Okay. 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. I want to begin with a update on the export restriction because I know that is top of mind for many of you. Then I will discuss current market opportunities and our plan for gross margin improvement. As many of you know, on February, the China government imposed trade restrictions on the export of indium phosphide material. Similar to 2023 restriction on gallium arsenide substrates, these regulations explicitly seek to restrict export of material used for military applications.

Speaker 3

Therefore, we are now undertaking an export permit process for indium phosphide similar to what we have done for gallium arsenide over the last two years. We were disappointed that the portal to accept export applications did not open until April. That said, we were well prepared when it did open, and we have submitted comprehensive applications on behalf of all major Indian phosphide customers outside of China. In our experience, we typically hear back initial applications within forty five business days and repeat applications are often processed faster. As such, we do not expect to be able to ship indium phosphide to customers outside of China before mid June at earliest.

Speaker 3

As we have mentioned previously, we do not believe that any of our indium phosphide sales go to military applications. So we feel that we are in a good position to realize a backlog of sales once we can navigate the permit process. While the current geopolitical environment present a near term headwind for our business, we are also discovering some unique opportunities. The cloud and data center connectivity market in China is accelerating. And in an effort to promote innovation and reduce dependency of foreign suppliers, we are seeing a significant effort to develop domestic source of EML and silicon photonics based lasers.

Speaker 3

We estimated that the Chinese data center optical interconnect market is currently around one third of the global market. However, most of the optical devices for these interconnects are sourced from outside of China and applications for indium phosphide within China remain focused on PON today. Further, laser manufacturers in China are developing an appreciation for the critical benefit of very low EPD material in high speed interconnect devices, both in the traditional PON market and in the new data center market. As a result, our sales of indium phosphide within China are increasing. The TAM for data center market remains small at this moment, but we do expect to see significant growth over the next few years as the power laser providers expand their portfolio of market to include EML and silicon photonics solutions.

Speaker 3

That said, in Q2, we expect healthy double digit growth for our revenue from data center applications in China of a Q1 level. We also have significant indium phosphide backlog from customers outside of China that is ready to ship. We are working diligently to support the need of our customers globally, and we are hopeful that Tongmei can begin to secure permits for initial geographies soon. Turning to gallium arsenide, we continue to see recovery, particularly in China and Taiwan across a number of applications like high power industrial lasers, wireless routers, and WiFi. We believe there is a sizable opportunity for our gallium arsenide substrate in HPT devices for the wireless market.

Speaker 3

This represents exciting potential for which we believe our technology and product are well suited for. With the cost of performance breakthroughs we achieved on our age product as well as strong relationship building with one of our largest Asian based epic provider, we're in a great position for growth. But this is a competitive and sophisticated market. We were excited in Q1 to have the opportunity to compete for a large share, but we stumbled in trying to scale too quickly. We continue to view this as an exciting space, but are taking a more measured approach to market to this market share expansion to ensure that we can execute effectively as we increase our production levels.

Speaker 3

We're also seeing a notable increase in design activities and qualification for Yaoi asset based LiDAR for the autonomous vehicle market in China. With the growing adoption of autonomous vehicles and high precision sensing technologies, gallium arsenide has become a critical material due to its superior electronic properties and ability to operate effectively in high frequency applications. Chinese manufacturers are increasingly investing in the development of LiDAR system for the EV market that leverage gallium arsenide, recognizing their potential to enhance resolution and accuracy in object detection and navigation over the competing camera based solutions. Similar to what we are seeing in the data center market, there seem to be a push in China towards reducing dependency on foreign suppliers and fostering domestic innovation. As a result, we believe that the demand for LiDAR is poised to grow and that this is a market in which our low EPD gallium arsenide substrates are showing tremendous value in device performance.

Speaker 3

Over the last twelve months, we have aggressively advanced the technology, technical capability of our material to help our global customer base solving complex next generation challenges. The material we supply are being used in highly sophisticated applications such as the ones that we have mentioned today where our breakthroughs in delivering extremely low EVD give us a distinct competitive advantage in both indium phosphide and gallium arsenide. I'm extremely proud of our team for the rapid progress we have made. For that reason, I cannot allow gross margin setbacks in our substrate business to cloud achievement that we're making in our technology. We strongly believe over the coming quarters, we can drive meaningful improvement in our gross margin.

Speaker 3

In the near term, we're taking a more measured approach in the HBG market to ensure that our gallium asset production and yield can ride themselves. This is now among the highest priority here in China and the top priority for our manufacturing leaderships. We expect to see improvement beginning this quarter and continue throughout the balance of 2025. This is an issue that is very much in our control and we are laser focused on fixing it. It is also worth noting that the decrease in substrate sales as a result of trade restriction has also impacted our gross margin performance as Gary noted.

Speaker 3

We feel good about our ability to begin secure indium phosphide permits, which should help our overall sales volume in the back half of the year and contribute to a healthy revenue and product mix. Both of these will help us in a gross margin lift for our business. Before I conclude, I want to say a few words about our raw material joint ventures. Sales in Q1 were strong, and we have been trending up over the past year. We continue to invest in expanding our capability and have built an impressive portfolio, which today include gallium, arsenic, PBN crucibles, quartz, indium, and germanium.

Speaker 3

The strategic value of this material is not only that we can more cost effectively supply all of our critical materials needed to manufacture our products, but we also benefit from the additional revenue stream generated by our joint ventures to sales of this product on the open market. The asset value of this portfolio has grown substantially over the last twenty years, and we will continue to expand our opportunity in 2025 through the development of new markets. There

Speaker 4

is

Speaker 3

a new and greater awareness of the importance of earth material, and we are ahead of the curve in developing this unique integrated supply chain. In summary, while the geopolitical environment is creating undeniable challenges, we are focusing our energies where we can drive positive return today. We're uniquely positioned to optimize growth opportunities in China, such as high speed data center connectivity and sensors for autonomous driving, and we're pursuing these and then other opportunities with success across key markets for indium phosphide, gallium arsenide and germanium substrates. We're also working tirelessly on behalf of our global customer base to ensure that we can continue to support their need across all our products. We recognize this is a challenging time for our customers, our investors, and our employees, and we are deeply committed to working diligently on your behalf.

Speaker 3

With that, I will turn the call back to Gary for our second quarter guidance. Gary?

Speaker 2

Thank you, Morris. In keeping with our comments today, we believe Q2 revenue will be in the range of $20,000,000 to $22,000,000 This guidance range excludes any contribution from indium phosphide for our customers outside of China in Q2. Once we do receive permits, we have several millions of dollars of indium phosphide backlog that we would be able to ship most likely in Q3. We do feel encouraged that even without these shipments, we are in a good position to grow our business sequentially. As Morris mentioned, this is due to our success in optimizing emerging opportunities to grow our business in China across all of our product categories.

Speaker 2

While we don't normally give gross margin guidance, we do believe that we can see a recovery on a gross margin to around 10% in Q2 based on manufacturing improvements. We also believe that production volume growth in the second half coupled with continued yield improvements this year will allow us to drive continued gross margin recovery for the rest of the year. Based on our revenue range, we believe our non GAAP net loss will be in the range of $0.12 to $0.14 in Q3 and GAAP net loss will be in the range in Q2 and GAAP will be a loss in the range of $04 to $0.16 Share count will be approximately 43,700,000.0 shares. Okay, this concludes our prepared comments and we'd be glad to answer your questions now. John, operator?

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Roscoe with Needham and Company. Please go ahead.

Speaker 5

Hi, and thank you for taking my question on behalf of Charles Hsu. I was wondering if you could maybe dive a little deeper into the yield issues you're seeing for the semi insulating gallium arsenide. And maybe, you know, when do you expect to see these yield issues resolved? And is there any change to your market opportunity as a result of this? Thank you.

Speaker 3

Sure. As we said, I think we were excited about the opportunity for HPT market for wireless because it's a existing market. And,

Speaker 2

you

Speaker 3

know, we have a good relationship with good customers in Asia. We can we thought we can penetrate that market with the indium phosphide permit restriction on our revenue. So we were taking on that market a bit too aggressively. So we we encountered a yield problem, but we think that is solvable. And we have been in manufacturing business for years, and we have a yield glitch.

Speaker 3

And we already find, to to solve some of the problem. As we as Gary mentioned that although, you know, this quarter's margin was negative 6%, but we do expect a very quick recovery to about 10% next quarter. So that that is a good sign. And I think, you know, we are we we we we get into this market a little bit more too aggressive. So that hurts our ability to to achieve a good margin.

Speaker 3

But we think we have the solution in hand, but we will take a more measured approach to this market. But this market is there, So, we will just approach it more carefully, but we we think the opportunity is there for us to, to get into, you know, once we get our yielding order and our manufacturing line more effectively producing this product.

Speaker 5

Great. Thank you. That was very helpful.

Operator

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

Speaker 6

Well, hi, guys. Thanks for letting me ask a question here as well. Since we just talked about yields, why don't I ask another question on this topic here? And I guess, Morris, guess I'm curious why it's going to take more than a quarter or two to fix the yields here. I mean, this an entirely new product?

Speaker 6

I guess I thought this was kind of an existing product that you could just go back to the way you were doing it before, maybe just at a slower pace if you could get back there fairly quickly or I'm misunderstanding the situation.

Speaker 3

Richard, you're you're correct. I mean, it it is a a product that we have worked on for many years. But as you know, when you are dealing with a commercial volume of tens of thousand I mean, thousands of wafer per month, and the customer specification from time to time will change. But if you're not laser focused into, you know, supplying them consistently, any little change can require a re recalibration of all production line without our customers' need. So I I think that is perhaps one of the reasons which hit our yield.

Speaker 3

And it's that we thought we we delivered this product to them for many years before we can this market so we can go quickly, you know, change our manufacturing slightly. But, you know, manufacturing is something which you don't change very, quickly. So I think we want we want to make sure that we are approaching this problem more measuredly so that we can protect our gross margin and our profitability. And and so we we can get back to the 10% gross margin from negative six in in the next quarter in q two. And also, you know, as Gary mentioned that the the the gross margin hit not only coming from the this manufacturing yield loss yield lower, but also is coming from the product mix as well as and with the third point, Gary, remind me what was the the third one.

Speaker 3

So it it's a mix product of, you know, for instance, phosphide for the first quarter, we have one month of indium phosphide revenue of January. You know, the restriction, comma, was coming on February, and that we cannot deliver any after that. And the q two guidance taking into account that we don't have any outside of China indium phosphide permit, and that will hit our margins as well compared to Q1. But if we can secure any permit or any cost, right, then that can improve our gross margin. But we're taking more conservative view of making that estimate of what our product mix will be in q two.

Speaker 6

Okay. Fair enough for that, Morris. Maybe let's touch on indium phosphide here. And I guess, as you said last quarter, with this permitting process, since you've already done it with gallium arsenide and it's been you know, other than the delay factor you had initially, seemed like it was mostly seamless here. Have you been given any assurances that you're expecting a a similar process here?

Speaker 6

Do you have any worries that we're going to have a delay beyond what I think you said is a mid June time frame to hopefully start shipping to the backlog you have there?

Speaker 3

Well, you know, to getting a permit is, dealing with, bureaucrats and, you know, bureaucracy is always very difficult to predict. But, but given that, you know, China announced that they want to make sure these are not for military applications, and none of our customers, we believe, are using any prospect for military applications. So we think that a permit is should be should have no restriction for our customers to get permits. But on the other hand, there are geopolitical struggles between countries. So, you know, it's hard to say, but I think in our prediction, we think we can get our permits soon.

Speaker 3

I mean, the normal forty five days state once we have submit the application into the Commerce Department of China.

Speaker 6

Okay. So playing this this this forward here, I think you said assuming you get the the permits here by the June, you could ship out I think your your words were several million dollars.

Speaker 7

I guess if we I guess maybe give us a

Speaker 6

little better quantification of what exactly that means. Is there any timing dynamics here would prevent all that, quote unquote, several million dollars being able to be shipped and recognized in the second quarter?

Speaker 3

Yes. We we are actually making, you know, especially large customer orders that we we're making them in our production line just ready for shipment. Or some of them, we make it into stages that we can finish up by the final clean or the final polish so that we don't lose the freshness of these wafers to our customers. So we do believe if we can get permits, we can ship this very quickly. And, you know, honestly, our customers waiting patiently for this product to to be delivered to them too.

Speaker 3

They they are giving us orders. So I I think we're confident we should be able to ship them within, let's say, a week to ten days after we get the permits.

Speaker 4

Okay.

Speaker 6

So again, related to any phosphide that's stretching out the time frame to calendar twenty five here. Going back to your last call, and I can't remember if it was you, Morris, that said this or maybe it was Tim. There's a question asked about what kind of growth do you expect from indium phosphide, and the answer given was something in the 20% growth range. Let's assume that the permitting process isn't onerous enough such that you can't get anything done this year, which hopefully will be the case where we got real big problems. But is that growth outlook still roughly intact here?

Speaker 3

So maybe I can give this question to Tim. Maybe Tim mentioned that 20%. Tim?

Speaker 4

Yes. I think that growth outlook is still there. The market dynamics are still pushing towards what we would see as a growth of 20%, given that obviously, we can ship bases outside of China. I just want to make a a quick comment about that too. You know, as I said, and Boris commented, we we feel like we're in a good position to get permits to ship outside of China, indium phosphide that is outside of China.

Speaker 4

But from a timing perspective, we see that the first permits come through end of Q2, as we've said. But for guidance perspective, we haven't included indium phosphide shipments outside of China in our Q2 numbers. And we believe it's better to be conservative until we have more clarity on this timing. So what you'll see is, you'll see we still see that market trend going, increasing to about 20. We believe we'll be able to capture that fully in 2026.

Speaker 6

In 2026? I think last core last conference call that is that was, related '25. So I just wanna make sure that we're citing the correct year here. Is that is that is that what you

Speaker 2

mean '10 2026?

Speaker 4

Sorry. Yes. So we're being more conservative on 2026 on 2025, sorry, just because of a timing perspective on these permits. So what we're looking at here is, let's say, Q2 numbers, we believe we've not included any of the permits. We still believe this market is growing at 20% in terms of indium phosphide, and we'll be able to capture that beyond Q2 in 2025, beyond Q2 second half and then into 2026.

Speaker 2

Okay.

Speaker 6

Perfect. I think that's all the question I have for now. I will jump out of line, guys. Thank you.

Operator

Your next question comes from the line of Matt Bryson with Wedbush Securities. Please go ahead.

Speaker 5

Hey, guys. Thanks for taking my questions. I'm going to kind of follow on Richard's other question. With indium phosphide, is there any risk at all that you're not being able to ship to customers end up with customers going with another supplier? Or some of this business doesn't come back to you?

Speaker 3

That's a good question. I think we are a major indium phosphide supplier. We believe we have perhaps good between 40% to 50% worldwide market. Any phosphide material is not the easiest material to make. We believe there are only two major I mean, two major competitor worldwide.

Speaker 3

And, you know, get any phosphide material to be qualified with a customer is takes very long time because they are lasers. They are, you know, the the the the device increasing in in terms of current density as well as the size of the lasers. So all that requires very careful qualification of the good low EPT material. So we believe that those shoes are not very easily to be filled. But, of course, I mean, with this market demand out there, we believe it's everybody wants to get more indium phosphide.

Speaker 3

Tim, maybe you can help. What do we hear from the marketplace? Is any of our loss order being taken by our competitors?

Speaker 4

Yeah. Thanks, Boris. Yeah. I I agree. We don't believe that it's the case so far.

Speaker 4

You know, we're we're still seeing orders coming in from all of our customers. We're building up a backlog within those orders or from those orders. And if we can begin to see permits late this quarter, early next, we're pretty much ready to ship through q three, q '4. This market is growing too fast. And Morris said, we're a major supplier into this market.

Speaker 4

The the other players both cannot keep up with capacity nor can they meet our quality performance that our customers are starting demand to demand from us now. So at the moment, we're we're really not seeing people move away, but we're seeing people kinda hang in there, continue to place orders, and wait for permits to get approved.

Speaker 5

Got it. So then then best guess is that once you get your permits, approved, that your customers end up resuming orders, there's there's inventory refill, and you possibly see almost a period of over shipment versus end demand just as customers catch back up. Is that is that fair?

Speaker 4

That's absolutely fair. Yes. We would we would see see a rebuild of inventory as those permits come through. So we we should we should see a a pretty healthy bump. Yes.

Speaker 5

Got it. Next question, I I think, Gary, when you were talking about the factors weighing on gross margin, it was lower in the phosphide shipments, the problems with the the HPT. And then I think the third factor was just lower gross margins on on a couple products.

Speaker 7

Can you just

Speaker 2

Well, yeah. When when we made our our plan for the you know, once we learned about the the February 4 announcement from China, you know, we knew that that was gonna hurt both our top line and our gross margin line. But but we had we had expected maybe that the rest of the product lines, including raw materials, would have some at least mitigating lifting effect. And had a little bit of that, but it wasn't probably wasn't quite as robust as I as I had hoped. But but that was the third factor.

Speaker 5

Got it. So it's it's it's more you didn't see a lift as opposed to the there was lower pricing or or anything else going on the other Yeah.

Speaker 2

No. There's no not really an ASP issue in this story. The real the real story is is is, you know, indium phosphide dropped in revenue. And at the same time, we're trying to make up for that revenue drop by accelerating some gallium arsenide work. And as Morris said, maybe we're a little bit too aggressive there.

Speaker 2

And so those are that's our understanding. Yeah.

Speaker 5

Got it. But there's nothing there's nothing going on with pricing across across all the markets or

Speaker 2

No. There's no There's always price.

Speaker 4

And then just

Speaker 2

Go ahead.

Speaker 5

Sorry. Okay. Just with the, with the the material shipping to China, if there's more material shipping in China, does that have any impact on on pricing at all?

Speaker 2

I'll let Tim take that one.

Speaker 4

Some of the traditional yes. Hello? So, yes, some of the traditional BON markets are seeing some price pressures as we go into that and we see some growth this year into those markets. But generally, as we as we see looking we look at other markets, of course, we're always we're always under some kind of price pressure, but we're not seeing anything out of the ordinary that I would say at this moment in time.

Speaker 5

Got it. And then I I last one for me. Just I I don't think you shipped a lot of product in North America, but, can you just talk to any ramifications from the substantial tariffs that The U. S. Is placing on China?

Speaker 5

Is it affecting your business at all?

Speaker 2

You're good, Tim.

Speaker 4

Yep. So for context, revenues to The U. S. In 2024 were about 8%. They'll probably be less in 2025 as a result of these trade risk recruits and the timing of the permitting process.

Speaker 4

But anything that we ship to The US will likely have a tariff on it. The amount of this tariff is still a little unclear, and it still seems to be under discussion between The US and China. So yes, we expect that we're going to have to to deal with this tariff. Again, revenues in 2024 are about 8%. So it's not something that gives gives us real great heartburn at the moment.

Speaker 5

Got it. Thank you so much.

Speaker 2

Thanks, Matt.

Operator

Next question comes from the line of Dave Kang with B. Riley. Please go ahead.

Speaker 7

Yes. Thank you. Good afternoon. My question is regarding that last statement about your sales to U. S.

Speaker 7

My understanding is that semis are exempt. So your products, would wouldn't they wouldn't they be exempt as well?

Speaker 4

Yeah. They're they're exempt from the reciprocal tariff, but then not fully exempt from all tariffs at the moment. But as we say, this tariff situation is still under discussion. There still seems to be some negotiation going on between The US and China. So I think once the permit process opens up and we start shipping again, we'll get a clearer understanding of what our position is in terms of tariffs.

Speaker 7

So what happened in first quarter, I mean, can you just tell us the facts like how much was how much showed if you can quantify tariffs? And you didn't mention that in your three factors regarding gross margin, but then tariffs didn't impact your gross margin as well?

Speaker 4

You know, again Boris, did you wanna comment?

Speaker 3

Yeah. I I I think perhaps Dave's question is, our gross margin impact from tariffs since in Q1, have shipped at least one month in January. I think our product shipped in January did pay tariff. Okay? But that was the old tariff.

Speaker 3

What was the percentage, Tim? I think it's around 25%. Correct?

Speaker 4

Yeah. Correct. The section three zero one tariff is 25 And

Speaker 3

now it's it has changed. So, you know, what percentage of tariff is gonna be? I think we're watching very intensely how it's gonna be resolved. And as you mentioned,

Speaker 7

it could be

Speaker 3

exempt. And I also heard China on the web, actually, China is gonna exempt some of the imports from United States, certain material that China wants to import from United States, such as semiconductors. So could that play into, you know, reciprocal tariff from United States? You know, these indium phosphide products, none of them can be made in United States anyway, and our customers in United States needs this material. So, you know, we don't know at this point.

Speaker 3

I mean but, you know, let's get the permit problem solved first. But we believe that the tariff issue can be navigated. We have a plan to resolve this tariff issue. Right, Tim?

Speaker 4

Correct. We do have some plans to navigate around this. It's too early to say anything about them yet, though.

Speaker 7

You know, some some of the component vendors told me that their customers, not all, but some customers are willing to pick up tariffs at least temporarily. I mean but it sounds like you guys are paying the tariffs, not your customers.

Speaker 4

Well, we've been faced with this situation before, and there's no easy answer to it. Right? Some customers will pick up the tariff. Some customers will pick up some of the tariff. We take we've we've dealt with it with gallium arsenide for the past eighteen months, and we'll deal with with the tariffs as we go case by case.

Speaker 4

I'm sorry. We deal with it with indium phosphide for the past eighteen months. And we'll deal with this for the case by case basis as we move forward.

Speaker 7

And we have to get

Speaker 4

a better understanding of what this tariff really means.

Speaker 7

Got it. And my last question is regarding the wireless HPT, the one with yield issues. Just wondering if you got that business, I mean, can you kind of quantify as far as the revenue? And is it because of your stumble, is it a lost opportunity? Or are you still in the derby, I guess?

Speaker 7

And is it just one customer or two customers?

Speaker 3

Well, it's one specific customer. It's a fairly large customer, and I think we have not lost the opportunity. I mean, we we we're still working on it. And I as I said, we will take a little bit more measured approach to trying to gain more market share. But, I mean, once we got our you know?

Speaker 3

Actually, it's not a yield issue per se, but it's a matching of specification from what we can make and the customer demand. Once we got it sorted out, I think we should be able to get back to it. And as I said Morris,

Speaker 7

can you kind of quantify?

Speaker 3

Let's see. It's probably around $2,000,000.

Speaker 7

Per per quarter?

Speaker 3

No. A little more than $1,000,000 per quarter. Yes, for

Speaker 7

the quarter. And

Operator

it seems that we have no further questions today. I would now like to turn the call over back to Doctor. Morris Young for closing remarks.

Speaker 3

Thank you for participating in our conference call. Later this month, will be participating in the B. Riley Securities twenty twenty five Annual Investor Conference. As always, please feel free to contact me, Gary Fisher or Leslie Green, if you would like to set up a call. We do look forward to speaking with you in the near future.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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Key Takeaways

  • Q1 revenue was $19.4 M, slightly above guidance, but non-GAAP gross margin fell to negative 6.1% due to GaAs yield issues, a trade-driven shift to joint-venture sales, and underabsorbed overhead.
  • China’s export restrictions on indium phosphide halted shipments outside China in February, but the company expects to secure permits by mid-June and rapidly ship several million dollars of backlog.
  • Domestic demand for indium phosphide in China is rising as cloud and data center optical interconnect markets adopt low-defect EML and silicon photonics, with double-digit Q2 growth in data center applications anticipated.
  • Gallium arsenide substrate sales are rebounding in China and Taiwan for industrial lasers, wireless high-power transistors (HPT), and emerging LiDAR for autonomous vehicles, though the company will take a measured pace to resolve yield challenges.
  • Joint ventures generated $8.3 M in Q1 raw-material revenue and provide a strategic advantage through an integrated supply chain of critical materials such as gallium, arsenic, indium, and germanium.
A.I. generated. May contain errors.
Earnings Conference Call
AXT Q1 2025
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