Q1 2020 Earnings Call
She chief Executive Officer, and Gary Fischer Chief.
Chief Financial Officer, My name is victory and I'll be your coordinator today.
At this time all participant lines on the listen only mode. After the speaker presentation. There will be a question and answer session to ask the question. During the session you need to press star one on your telephone.
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He was for any further assistance. Please press star zero when I like to turn the call over to Leslie Green Investor Relations for a XT.
Thank you Victor 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 grew.
Rose 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 schedule and timeliness.
Regarding our relocation the growing environmental health and safety and chemical industry regulations in China, as well as global economic and political conditions, including trade terrorists and restrictions we wish to caution you that such statements deal with future events and are based on management's current expectations and are subject to risks and.
Certainties that could cause actual results to differ materially.
These uncertainties and risks include but are not limited overall conditions in the market in which the company competes global financial conditions, and uncertainties Cobot 19, and other outbreaks of a contagious disease potential terrorists and trade restrictions increased environmental regulations in China market.
Acceptance and demand for the company's products the financial performance of our partially owned a supply chain companies and the impact of delays on 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 on line 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 at X T Dot com through April 22nd 2021.
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 2020. This information is available on the Investor Relations portion of our web site at X T. Dotcom I would now like to turn the call over to Gary Fischer for a review of our first quarter results Gary.
Yes.
Thank you Leslie good afternoon, everyone.
Total revenue for the first quarter 2020.
It was 20.7 million by comparison revenue in the fourth quarter of 2019 was 18.4 million and revenue in the first quarter of 2019 was 20.2 million.
Oh for total revenue substrate sales were 16.9 million.
Compared with 14.5 million in the prior quarter.
18.7 million in Q1 of 2019.
Revenue from where raw material joint ventures was 3.8 million in Q1.
Proximately flat from Q4 and up from 3.4 million in Q1 or 2019.
In the first quarter of 2020 revenue from Asia Pacific was 62%.
Europe was 30% in North America was nine.
In the first quarter two customers reached 10% of revenue in the top five customers generated approximately 49% of total revenue.
Gross margin in the first quarter was 27% up from 21% in the prior quarter.
The improvement in gross margin was primarily due to product mix and volume as well as incremental improvements in manufacturing efficiency.
Total operating expenses in Q1 were 6.2 million down from 6.7 million in the prior quarter.
Total stock compensation expense for the first quarter of 2020 was $643000.
Operating loss for the first quarter of 2020.
Was 634000 compared with an operating loss of 2.8 million in the previous quarter.
And an operating income of 626000 for Q1 of 2019.
Other income net for the first quarter of 2020 is a gain of 1.2 million.
Includes a net loss of 120 came from the partially owned companies in H.T. supply chain accounted for under the equity method.
Foreign exchange loss of 43 Kay.
And the net loss of 29 cane interest income and other.
And other income of 1.4 million.
From a provincial government agency Grant has an award for relocating to their province, and Moore's can give a little color about that when he speaks.
Income tax for the first quarter of 2020 was a charge of 360 6K compared with the benefit of 214 came in Q4.
Our Q1 results included approximately 190, K and tariffs as a result, with the 25% tariff charge on importing wafers into the United States from China.
For Q1, 2020, we had a net loss of $178000 or a loss of one cents per share.
By comparison, we had a net loss of 2.0 million or a loss of five cents per share in the fourth quarter of 2019.
Net loss of 1.1 million or three cents per share.
Q1 2019.
The basic and diluted share count in Q1 was 39.
0.81 3 million shares.
Cash cash equivalents and investments were 28.8 million as of March 31st.
Comparison at December 31st it was 36.3 million.
We did have a higher than expected accounts receivable.
And I estimate that we under collected by about $4 million, which would have brought ending cashing at about 33 million.
We do not view this 4 million to be impaired as a credit risk and we're confident we will collect we think it's the result of both Chinese new year and the Corona virus. Some companies are slowing down cash disbursements.
Due to work disruption and also being cautious and conservative.
This is probably especially noticeable with our customers in China.
We currently forecast that our net cash burn in 2020 will be similar to our cash burning 2019, which was only about $3 million.
So we feel we have a strong cash position, which is important in light of the uncertainties, resulting from cobot 19.
We also still have an untapped credit with Wells Fargo Bank.
The second bank in China is arranging in another line of credit force as we speak.
We do not anticipate tapping all of this but give us a prudent path for today's environment.
Depreciation and amortization in the first quarter was 1.0 million and capital expenditures were 2.1 billion.
Net inventory at March 31st decreased by 900000, 248.3 million compared with 49.2 million in inventory at December 30, Onest 2019.
Ending inventory consisted of approximately 43% in raw materials.
52% in work in progress.
And only 5% in finished goods.
Okay. This concludes our financial review.
I'll now turn the call over to Dr. Morris Young for a review of our business Morris.
Thank you Gary and good afternoon everybody.
I want to first say to all listener that I hope you and your family well and Mitch its global Datamyx.
I'm also grateful to report.
At ICSI employees and their families have remained healthy so far.
I'll begin today with a brief update on the impact of the Corona virus.
All three issues and then move on to all market conditions.
As we reported to you in February.
We have been talking taking strict protective measures in all facilities, you know coding, which best practices and local law.
The safety of our employees remain our number one concern.
Well most of the first quarter all manufacturing facilities in China were operating at reduced staffing levels to limit the risk exposures for our employees.
Well they did have a impact our productivity.
We were able to meet customer demand in the quarter posting revenue and earnings results that were slightly ahead of all our expectation.
In recent weeks the government mandate have evolved, allowing us to return to food staffing levels at all three manufacturing locations.
Other propitious, we implemented remain in place.
Including employee temperature screening protective gear, including face masks limited group meeting and changes.
I'd be curious coopervision among other precaution.
The biggest challenge.
Two productivity remain the limited travel between our three facilities in China, as well traveled to trade restrictions to and from China.
In addition.
Shipping and delivery has slope.
We trust implication is for obtaining parts and services needy fall manufacturing as well as our ability to ship rush orders to our customers.
Finally, like most companies, we prefer and find great value in face to face interactions with our customers.
Well online collaboration tools have been proven various useful particularly in the last several months.
We look forward to today, where we can start the dice and problem solved with our customers in person.
Oh, a positive no we're not experiencing any noticeable destruction in all its supply chain of raw materials required to maintain all <unk> substrate manufacturing.
Well also able to obtain everything we need [noise].
That's when entering into Q2.
Visibility remains limited.
As such we are ticking up appropriately conservative view of all markets.
However.
Demand for our substrate is holding fairly steady and missed it difficult global conditions, which pocket of strength across our portfolio.
Any botched why demand for datacenter connectivity and passive optical networks were stronger than anticipated in Q1.
Growing nearly 25% form the the prior quarter.
We believe this is due in part.
To the timing of orders from certain customers.
As such we're not expecting indium phosphide revenue to be a strong in Q2.
More broadly, though we continue to see a trend towards higher speed networks, and increasing bandwidth requirement that these likely to drive growth in both of these applications for years to come.
Customers all these applications, a providing positive straight signals about their demand requirements. Although it is difficult to predict how business conditions would evolve over the balance of the.
Gallium arsenide revenue increased in Q1 from the prior quarter.
Primarily driven by increasing L.E.D. application.
We move into Q2, we're expecting weakness in automotive applications.
Offset by strain the wireless application.
Lead time with some orders have been short.
But we had being able to adopt a responded quickly to support customer demand.
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With our new cultural and dishing facilities now you operation.
We are having a strong position to be able to support customer requirements across new and emerging applications.
During Q1, we were pleased to announce that one of our largest gallium arsenide customers.
Completed its qualification of our site for volume production.
An important milestone fall manufacturing relocation.
Over the balance of the year, we expect to ramp production from DC.
Turning to germanium substrate.
We have seen an uptick in demand in recent quarters, driven primarily by growth. He satellite so lets say obligations.
Oh revenue in Q1 reached its highest level since Q3 of 2018.
And we expect to see continued improvement in Q2.
And finally raw material revenue were essentially flat from our prior quarter, but these are expected to grow in Q2.
Most of our joint ventures, a back to full production following the reduced staffing precautions putting plays for employee safety early in the year.
In closing.
In the midst of a very difficult environment.
We will continue to prioritize.
Well being of our employees to support up all customers.
Separate accessibility to our investors.
No the business climate is challenging to predict.
Location, we serve that centers on connectivity and communication I'm more important than ever.
Further we have successfully transformed our business capability with the completion about relocation to highly scalable and state of the odds facilities.
Good job now ready to serve the need for our customers.
We believe XT has a healthy balance sheet and we will continue to emphasize strong fiscal discipline as we navigate these an unusual times.
And plan and prepare for better days ahead.
This concludes my prepared comments I will now turning to call back to carry forwards second quarter guidance Gary.
Thank you Morse.
As most discussed the demand environment for our products remains a steady to improving.
With a number of growth drivers intact.
However, given the macroeconomic uncertainty caused by the global pandemic, we're taking an appropriately modest view of Q2.
We're also widening or typical guidance range a bit to allow for unanticipated affects.
Corona virus.
Therefore, we expect to see revenue in Q2 of between 20.5 million to 22.5 million.
Also given the expected product mix shifts in Q2, we believed that the loss per share will be in the range of one to three cents based on 41 million shares outstanding.
Okay. So this concludes our prepared comments and Morse and let's see and I'll be glad to answer your questions now Victor you want to take it over for the Kuni.
Thank you as a reminder to ask a question do we need to press star one on your telephone.
To address your questions press the pound <unk>. Please standby when we compare the community roster.
[noise] once again that start one for questions.
And our first question I'm comfortable line.
Richard Shannon from Craig Hallum May begin.
Great. Thank you. Thanks for taking my questions Morris and Gary and ER guys Nice nice quarters start the year. What's your a few questions for me I guess first of all just on the guidance. So I wasn't able to run the numbers fast enough Gary but can you give us a sense of what you're thinking of for gross margins built in your second quarter guidance.
Yes.
That's good question.
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I think the margins will be in the mid Twentys again, so not much change.
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We are.
I'm expecting another award from the Government agency and that's probably you know if you're just running your straight model.
You won't get to one to three cents, but if you. If you roll then the award then you'd get to one of three cents.
Okay.
That's helpful. Thanks for that second.
Question is geared on your comments about cash burn for this you're expecting it to be a.
Burn of about 3 million same as last year I'm wondering if you could tell us your assumptions built into this first of all kind of topline view on overall growth for this year, which I think is necessary to understand that second of all how should we think about capex.
Yeah, so what what we've done as well.
Literally I prepared to columns.
Column, the first call them was 2019.
Key key elements that would go into a cash flows such as revenue Capex et cetera, and then.
You know, we don't give annual guidance for 2020.
But for that for this particular cash analysis.
I I made an assumption that revenue stayed the same.
We hope it improves but but we're not we don't gifts that far out looking so.
And Capex is lower for this year than last year.
And you know.
I don't remember some of the other key things that basically comes out.
It's frankly quite remarkable for me as a numbers guy the for it for us to accomplish what we did last year in terms of the relocation capital expenditures and stuff.
And then have the net burn be.
3.05, I think a 3.0 or 3.1 million is quite remarkable and I think our team did a good job at cash control and managing or things like that so I don't see any reason why we can't continue to do that this year I hope the numbers or even better that I'm, saying today.
But again, we don't give annual guidance, especially in this environment you know it would be I'm.
A little bit foolhardy, just think that we can see that clearing however, we remain pretty confident about this very competent back and.
That's how I kinda, that's kind of the background for how we did it. So if you just look at it for any of you that ought to do it just look at last years.
Beginning and ending cash and sort of see the stuff that goes in and out of that and we think this year. It would be at least the same but we hope is better.
Okay. That's helpful. I understand your assumptions built in there. Thanks Kerry So that's my last question for Morris.
My last question is for Morris about the kind of qualification of customers into your new facilities on your last call you talked about hopefully having at least a half of the revenue space from customers, who have qualified you announce something late last quarter about a top customer qualifying wouldn't be in kind of give us the broader update on on how the qualifications are gone and do you.
I'd like to hit a kind of the number you also said last quarter for June which is 80, 85%.
Sure.
I think oh progress in transferring a qualification in wafer processing dishing is going very well.
If we just said good that we have all the largest counting on site customer qualified not only the deposit from dishing, but also qualifying the site we are increasing.
As we speak.
Oh, the delivery portion from the new facility to our largest customer self now a we do have.
Quite a few I mean, most of the customers are getting qualification samples, but some of them or a few of them are still waiting for the site to be ISO 9000 qualified as well as the automobile Ts 14000, I handle and somebody qualified.
As well that may take a little bit longer, but as we said that we expect the D did the shift all the delivery of the product from the new site to continue for the rest of the year hopefully we can.
Mostly completed by the end of the.
Okay perfect that there is all for me I will jump at aligned guys. Thank you.
Thanks Richard.
And our next question comes line of Hi, Matt Carson from BMW Us financial maybe again.
So first off could you just talk about your receivables or are you in constant contact from your customers what kind of timing are you expecting as they extend out piece the terms on you.
Gary lets on that.
I'm glad to take that when it's on the front burner I was a bit surprised how it ended up.
But as I said, there you know during the prepared comments I think the combination of that the lunar new year, Chinese new year, and Corona virus and.
Work stoppages and things like that so.
Plus cast conservativism on the part of the customers that you know the why I want to underline again, what I said that I don't view this as a credit risk I view this as a collection opportunity. So we you know it.
Yes, if business trip, it's a business world was normal in Q1.
Then I think we would've had an extra $4 million collected so.
So.
What I would say that we're going we do have constant contact with the customer that's not the issue, but some customers are slow to pay.
And we need to figure out ways on each account make a plan for each each individual account based with a sales person that is in charge that account.
You know I may be involved in making some calls we're going to try some different experiments.
Worried about it but I think it's just it's just part of our job you know it's happening across the world right now people are slowing down on cash disbursements.
And we got to be the squeaky wheel and get some of that back into our bank account instead of their bank account, but I think we can do that so.
Yeah, I think I wanted to add also one more point I think it's our business model is such that.
These customers continue to need all product.
So if they don't pay with ownership and dot well interrupt their production as well and but you know this quarter you, yes things that did get extended out to bid and but those customers. The obviously all very large customers and I don't think there's any worry that they're going to go all the business ended continue.
The by product from us.
Scary explain to you know do but because of Corona virus and because of Chinese new year things got extended out a little bit we will collect us money it's a.
Q2 get we once we get into Q2.
Okay and I know.
Go ahead, Holistically, Oh, I was just going to ask as it was mostly sales towards the end look quarter or was it just is it really just regular course of extended terms.
No over 40% was in March because we had Chinese new year as you know and then the shutdowns in China. So even our own group, we were short staffed because of the the issues on the on the virus. So it was we don't like to be back end loaded it's never a good practice for manufacturing company to sort of.
At the hockey stick and Morrison I've always discouraged that.
We prefer to be like a horse race, we get out of the gate fast and then.
Yes, you can take it easy on the Bakken.
In this case, we didn't get out of the gave fast and we had run at the backend to to get everything delivered which we did but a significant portion was was in the Bakken, but the other coming I was going to make us a number of in terms of credit worthiness. Several of these customers that sets are behind our state owned company.
As in China.
And so there tends to be a culture to slow pay with state owned companies on the other end there basically back it'd be the equivalent being backed by the U.S. Treasury. So that's why I don't worry about the credit risk I, just viewed as a collection opportunity.
Okay.
Last question was a are you.
Managing the business on the head count So do you need to have everyone back to work given where revenue is right now and how you're managing that.
Yeah.
Well.
In the United States that we have a small group here just 25 people in and we're all working from home quite hard.
So the question really is should should we try and cutback in China.
Because that's where the.
We have over 700 people in China. So.
It's on the table, we talk about it but you know our sales are going up we're also in the process of handling a transition from relocation.
We've got people trained well you know more than half that the employees and causal our locals.
And there therefore, they're relatively new.
So.
They're not highly paid but it's I don't think in my view as we've discussed it internally is that it's it's not it's not wise to sort of messed with those People's minds, you know they got a new job from a company like XT and all the sudden you know.
The cut back so so it is we are considering at home and it's something that we you know and it's our fiduciary obligation to think through these things, but we're not ready to announce anything either to the employees or to the investment community.
Okay. Thank you.
You're welcome.
Good question.
And our next question comes from line of Dave Kang from B. Riley I feel you may begin.
Thank you good afternoon Morris during the February or earnings call you estimated the core the virus impact to be about mid single digit Oh. It was a mid single digit as you expected and are you expecting that to point to the current second quarter.
What do you say about a single digit corona bars, what impact does.
Yeah, I think during the February <unk> earnings call I think you estimated the corn the virus impact.
To be up mid single digit like 5% ish or was it.
The did it turned out to be that way or.
And you comment there.
Dave I, I'm, sorry, I actually forgot, but obviously, we deliver better than we expected revenue as follows.
Earning so in the first quarter. So whatever we expect we we were doing better.
ER and especially our any thoughts why I think the order was surprisingly strong we think it's mainly prompted by one we believe is the policies marketing, China and that could very much serve into the fiveg.
Without close substation.
And ER our based.
Data center activity or business actually it's sort of flattish.
So we do here some of our customers in Taiwan has been telling us they are.
Sort of over ordering a bit to build some inventory because they have a worry that maybe the.
They are worried about shortage all supply. So we do it we don't expect a second quarter albinia Pos by revenue to be a strong last Q1, but.
Good surprises that we think Bose dumanian I swear laws.
Wireless gallium arsenide, it's going to have a continues second yeah. It had a strong first quarter and there will continue I have a second quarter growing into second quarter ever and also our joint venture raw material business is gonna be better swell in Q2, So you know.
Local rather virus is it's giving us some reasonable way a good perspective, all business outcome in the in second quarter. However, you know, we still want to put that caution because of uncertainty. So we want a wide range of Ah expectations out there.
Got it so just to summarize regarding second quarter assumptions easier phosphate will be down.
Gallium arsenide for auto will be down, but then wireless who will be up germanium and then raw materials will be up so that provides a bought a 1 billion. One millionish type of a sequential growth is that is that correct correct. Yes. That's correct. Okay, alright, the yelling and just to be clear to David the gallium.
Arsenide lessees.
Wouldn't say, it's going to be down I'd say, it's about flat.
And my second comment it's just we can have a knock on wood feeling it at ICSI you know yeah, just like everybody else.
No.
We were nervous and we were uncertain.
I think we're fortunate that.
You know our numbers probably turned out better than we thought yeah. So on the revenue side. So.
So I actually one more question indium phosphide, because there are two drivers one is China and the other one is our data centers.
Major to get us into a U.S. data set of customers. So can you just talk about.
Regarding a indium phosphide being not as strong as first quarter can you provide more color as far as China versus U.S.
[noise] that data center connectivity I think data center, it's gonna have good quarters the call.
But perhaps they were ordering alluded to be more in the first quarter.
So they built some inventory, but no nowadays the other phenomena is sudden customers really give us a very short leach. They all expect you know if they get this order we should deliver in two weeks quickly go into some say business, it's very very difficult we normally ask for at least.
All week school ovary, but then you know doing good environment, everybody has a very short view.
But I think that particular overall order, we think it's happening in the China market, where people are worried about you know substrate supply.
But again you know the older powder is such that they don't show very strong.
Second quarter, but again, we're very short.
Order.
Lead time or anything Cantera very quickly.
Yes, let me add a couple of things.
We we use this weren't sometimes it's not a very technical word, but but it's it's it's one that Morse refers to and we all get it because it's the fact that indium phosphide, especially the order rate can be lumpy.
So it's hard to it's hard to discern David is is it is down a little bit because of the virus or something else specific or is it just sort of some some ups and downs that are lumpiness.
Second comment as in China, We do think that there's a lot of activity for the international scope of Fiveg and.
You know, we recently were advised to take a look at some studies and if any of US in people on this conference call is quite fascinating. If you. If you take a look at what's going on in Korea. That's a great case study for the benefits of Fiveg and I had to say I've always been a proponent of fiveg anyway because.
We're going to benefit from it but.
It's it's significantly I got more bells, and whistles and improvements and good things happening.
Than I expected so.
Some of the stuff and that's going on in China, It's going to go into Fiveg around the world. So.
Got it thank you.
Thank you and our next question will come from the line Gus Reashure from when you may begin.
Yes, thanks for taking the question just on the gallium arsenide Barkett you.
We refer to strengthen wireless it was just wondering is that infrastructure or is that handsets.
Gus again, you know it's difficult for hotel.
So we typically.
Strong in P. Hannan market, and you know and but then nevertheless, our customers are usually the epic wars and they don't really tell us with its infrastructure all handset, although I would guess it's more in the headsets.
Because of a you know the wife I.
But pleasantly surprised to see the strength we have.
Good quarter first quarter I would go to have another good quarter second quarter and I Hope we can continue and you know the P. M. It's you know a used to be making the switches and because of as to why coming and P. and lost a lot of business to that a you know upward.
Patient, however, I think thats, we going to Fiveg ER and as the frequency of operation gets higher higher a p. hadn't may have a comeback and I hope that.
Beginning over that cycle, but you know I'm not sure I mean, we what we need to wait another quarter or two or three before we can I make that conclusion.
You see Tri band Weifang handsets, requiring gas is my reading that right.
We don't think it's for switches, but we think you know for Wi Fi applications, yes, it could require gallium arsenide.
Got it and then in terms the inventory buildup and Indian Pos five you know exists a significant.
Overshoot it sounded like it was up 25% sequentially. You know do you see you know do you have a sense of how much inventory. Your customers have have built at this point is there's a couple of weeks or a couple of months or a couple of days.
Honestly, we don't know actually we'll put that dean because you'll second quarter. You know, we have a way or building our guidance and it collects all the information from the fall sales channel and and then see what second quarter looks like and Andy was lower than first.
Sure. So what's the reason I mean, we do have one customer in Taiwan in particular told us that dead that they did their pulling a lot of short term orders and they told US it's for inventory building, but that's full only for one customer and our large state.
That said no customer we don't think there's any we well at least we don't here. They have it you went to rebuild.
So I I.
I really don't think we'd really no, but you know because second quarters can be shorter.
Yes.
You know lower than could first quarter. So we think inventory build could be will have the reasons.
Got it okay. Thank you very much.
Thanks, guys.
And we are falls off in line or Richard Shannon from Craig Hallum, You may begin.
Hi, guys. My question was asked and answered I don't have any more thank you.
Thank you I'm not showing any further questions at this time I like to turn the call back over to Dr. Morris Young CEO for any closing remarks.
Thank you put the participating all conference call I'll be taking part aimed a virtual can take Alan institution conference.
And the B. Riley institutional Investor Conference call a conference in the second quarter.
In addition, given the turbulent conditions in the market, we've committed to being accessible to all investors as possible.
So that's always please feel free to contact me, Gary Fischer, Oh listen the green directly if he would like to set up a call. We look forward to speaking with you in the near future.
Thanks, everyone.
Stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating may now disconnect.
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