Q4 2021 AXT Inc Earnings Call
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Okay.
Good afternoon, everyone and welcome to Axt's fourth quarter and fiscal year 2021 financial conference call, leading the call today is Dr. Morris Young Chief Executive Officer, and Gary Fischer Chief Financial Officer.
My name is Justin and I will be recorded your coordinator for today.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that this call is being recorded.
Any further assistance. Please press star Zero I would now like to turn the call over to Leslie Green Investor Relations for <unk>.
Thank you Justin 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 substrate our product mix, our ability to increase orders in succeeding quarters to control costs and expenses to improve manufacturing yields and efficiencies to utilize our manufacturing capacity the growing environmental health.
And safety and chemical industry regulations in China, as well as global economic and political conditions, including trade tariffs and restrictions we wish to caution you that such statements deal with future events are based on management's current expectations and are subject to risks and uncertainties that could cause actual events or results.
To differ materially these uncertainties and risks include but are not limited to overall conditions in the markets in which the company competes global financial conditions, and uncertainties, COVID-19, and other outbreaks of contagious disease potential tariffs and trade restrictions increasing.
Environmental regulations in China market acceptance and demand for the company's products the financial performance of our partially owned supply chain companies and the impact of delays by our customers on the timing of sales of their products. In addition to the factors that may be discussed in this call. We refer you to the company's periodic reports filed with the securities.
And Exchange Commission. These are available online by link from our website and contain actual or 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 <unk> Dot Com through February 2023 also before we.
I want to note that shortly following the close of market today, we issued a press release reporting financial results for the fourth quarter and fiscal year of 2021. This information is available on the Investor Relations portion of our website at <unk> Dot com.
I would now like to turn the call over to Gary Fischer for a review of our fourth quarter and fiscal 2021 results Gary.
Thank you Leslie and good afternoon, everyone. As a reminder, in response to investor requests and to align with our peers as well as to provide better clarity on our operational and financial results, we will be providing both GAAP and non-GAAP financial results non-GAAP results exclude stock based compensation investors can find the GAAP to non-GAAP .
Reconciliation tables in our earnings announcement.
Today, we are pleased to report that total revenue for the fourth quarter of 2021 was $37 7 million up 9% from $34 6 million in the third quarter of 2021.
And up 40% from $27.0 million in the fourth quarter of 2022.
Q4 marks our eighth consecutive quarter of growth and highlights the market expansion, increasing demand for our indium phosphide and gallium arsenide substrates.
A breakdown of our Q4 'twenty one revenue for your by product category.
<unk> was $13 1 million gallium arsenide was 11, three germanium was $4 two and revenue from our two consolidated raw material joint venture companies was $9 one.
In the fourth quarter revenue from Asia Pacific was 74, 9% Europe was 16, 7% in North America was eight four.
Again in Q4, no customers reached 10% of revenue.
In the top five customers generated approximately 29% of total revenue.
Our continued revenue diversity demonstrates that our growth is not overly dependent on one large customer or application.
This is another factor contributing to our confidence that our growth has reached a point of sustainability and will continue throughout 2022.
non-GAAP gross margin in the fourth quarter was 32, 4% compared with $33 eight in Q3 of 2021 and $34 zero in Q4 of 2020.
For those who prefer to track results on a GAAP basis gross margin in the fourth quarter was 32, 2% compared to 33, 3% in Q3 of 21 and 33, 9% in Q4 of 2020.
Our gross margin came in slightly lower than slightly lower than the prior quarter contributing factors were increasing raw material costs within a constrained environment.
Demand.
Lower yields in some of our products and the decision to accept strategic lower margin business in order to position ourselves competitively.
In advantageous markets and customers.
These factors offset the improvements made to gross margin that Jimmy from expiring contracts as well as a new and promising raw materials recycling program that Morris will comment on shortly.
Gross margin improvement is a top priority for <unk> in 2022.
Businesses, we have seen a steady increase in cost relating to everything from wages to the materials required to manufacture our products.
Those increases will likely continue to create some near term offset in 2022.
However, we think we can get back to 35% range. This year improvement will come through growing volume favorable product mix better pricing and a strong focus on yield improvements and manufacturing efficiencies.
We also believe that we will see some incremental gross margin improvements as Jim May continues to work through some of the contracts that began creating a headwind in Q3.
Total non-GAAP operating expense in Q4 was $8 1 million. This compares with $7 7 million in Q3 of 2021 and was $6 six in Q4 of 2020 on.
On a GAAP basis total operating expense was sequentially flat at $9 1 million for comparison total GAAP operating expense was $7 two in Q4 of 2020.
R&D remains one of the primary drivers of the increase in our Opex with two major programs that are ongoing the development of six inch indium phosphide in the development of eight inch gallium arsenide.
non-GAAP operating profit for the fourth quarter of 2021 was $4 1 million compared with a non-GAAP operating profit of Q3 in $2024 1 million.
$2 6 million in Q4 of 2020.
For reference.
Okay.
For reference GAAP operating profit for the fourth quarter of 2021 was $3 1 million up from an operating profit of $2 4 million in Q3 of 2021, and an operating profit of $1 9 million in Q4 2020.
Non operating other income and expense for the fourth quarter of 2021 was a net loss of $100000. The full breakdown is in our press release.
For Q4 of 2021, we had a non-GAAP net income of $4 1 million or <unk> <unk> per share compared with $5 4 million.
Or <unk> 13 per share in the third quarter of 2021 keep in mind that the third quarter results included two local government grants totaling $1 million, which did not repeat in Q4.
non-GAAP net income in Q4 of 2020 was $2 8 million or <unk> <unk> per share on.
On a GAAP basis net income in Q4 was 3.0 million or <unk> <unk> per share.
By comparison net income was $3 8 million or <unk> 90 per share in the third quarter of 2021, and $2 1 million or <unk> <unk> per share in Q4 of 2020.
The weighted average diluted shares outstanding in Q4 of 2021 was $42 8 million.
Cash cash equivalents and investments were $51 8 million as of December 31 by.
By comparison at September 30, they were 56.0 minute.
Depreciation and amortization in the fourth quarter was 2.0 million and capital investments were $10 5 million total stock comp was $1 1 million.
Net inventory at December 31 was $65 9 million.
Okay. This concludes the discussion of the quarterly financial results now let me briefly highlight the total year of 2021, which is a fun part of my presentation, because a lot of good things happen for.
For the fiscal year 2021 revenue was $137 4 million.
Up more than 44% from $95 4 million in fiscal year 2020.
It is important to note that this growth is all organic driven by market expansion and market share gains in 2021, we grew in every revenue category across our portfolio without the help of price increases. This underscores the momentum we're seeing in our business with new applications coming to the market major technology trends and.
Our success in winning share strategic customers.
Gross margin for the fiscal year 2021 on again on a non-GAAP basis was 34, 8%.
Compared with a 31, 9% for fiscal year 2020.
GAAP gross margin for 2021 was 34, 5%.
Compared with 31, 7% of revenue for fiscal year 2020.
Net income for the fiscal year 2021 on a non-GAAP basis was $19 1 million or <unk> 44 cents per diluted share compared with a net income of $5 9 million or <unk> 14 per share for fiscal year 2020.
This represents a more than 350% improvement in profitability and underscores the significant shift in our business over the last 12 months.
GAAP net income for fiscal year, 2021 was $14 6 million or <unk> 34 per diluted share compared with a net income of $3 2 million or <unk> <unk> per share for fiscal year 2020.
I'll now give you a brief update on our plans to list our subsidiary tongue may in China on the star market in Shanghai.
We're very pleased to announce last month that tongue, we submitted a formal application to listed shares in initial public offering on the Shanghai stock exchange. The application was submitted in December and was formally accepted for review on January 10th.
The review of our application is now underway and we have received our initial comment later as we have discussed the process of going public on the star market includes several periods of review and therefore is a lengthy process for me does not expect to complete the IPO until the second half of 2022.
Okay that completes my comments.
Turn the call over now to Dr. Morris Young for a review of our business and markets Morris.
Thank you Gary and good afternoon everybody.
2020 , one marked a significant turning point.
As Gary mentioned, we grew 44% in a single year and more than 65% over our 2019 revenue results.
We believe we are hitting an inflection point in which application wins consider bleeding edge are now coming to market for more mainstream adoption.
Across our portfolio, we're working with customers for new innovations, helping to rethink what is possible and advancing space specialty materials into areas the market might not have.
<unk> of just a few years ago.
To prepare for this growth opportunity.
<unk> modernized <unk> into our supply.
Supplier capable of meeting.
Requirement of tier one customers.
Over the last four years, we successfully relocated and expanded our facilities with <unk>.
Low cost locations.
We upgraded our business and manufacturing systems and processes.
We grew our supply chain for critical materials.
And we invested in both our technology roadmap and our customers' success.
The growth Youre seeing in our business is the result, not just one or two quarter of success, but eight consecutive quarters of increasing revenue.
Historically low customer customer attrition.
In 2021, our indium phosphide business grew by 41%.
And is now our single largest revenue contributor.
Gallium arsenide substrates grew by 48% driven by a wide variety of applications.
And germanium substrate grew by 18%.
As Gary said, our increase in revenue is organic.
Comes from the expression of our markets.
From our own market share gains.
Strategic customer wins.
All of which have a long term growth opportunity still to come.
In 2022.
We expect continued momentum indium phosphide base optical applications for telecom and data center of monetization.
<unk> is a big driver.
Along side, a more general global investment in the infrastructure required to support massive increases in data aggregation and flow.
Indium phosphide based devices will play an increasingly important role in next generation infrastructure.
He is well placed to support it.
We also expect 2022 to be the year that indium phosphide comes to consumer applications.
Sequential way.
We were very pleased to begin ramping a design win in for a short wave infrared proximity sensor.
First as of this pipe.
Detect substances, such as water sugar and alcohol.
They typically can measure not only heart rate blood oxygen level, and also proximity to skiing and other surfaces.
In the future.
Sensors, despite maybe able to measure blood glucose.
And blood alcohol level and others.
As such we are.
We're excited about this design win and we believe.
It represented a gateway to other designs and applications in portable consumer devices.
This win also underscores the breadth of applications that indium phosphide enables and.
And we believe they are.
Suffer more new ways on horizon from.
From health monitoring to automotive sensors to the matter of fees.
We expect these applications will be driven by tier one players.
That emerges over time could dramatically increase the addressable market for indium phosphide.
It is okay. It is with current applications and design wins success. We believe we will grow our indium phosphide revenue in 2022 by 35% to 40%.
We also believe that significant groundwork.
We we made in 2022 for new applications and gallium arsenide.
We're already seeing healthy growth in high end Leds solid state industrial lasers, and Wi Fi for Iot applications.
Which we expect will continue.
Recently, we have also seen demand for gallium arsenide substrates for power amplifier.
Yes.
This is a new market for us.
And one that is opening up to etsy as a result of both the increased power amplifier comps in <unk> handsets as.
As well as the supply chain and our competitors to meet customer needs.
No. The gross margin profile on this application is lower than other areas of our business.
The volume opportunity is attractive and we believe we can drive healthy gross margin contribution.
Business model in the coming years.
In addition, we're seeing what feels like a record amount of development activities for new applications, ranging from health monitoring to laser based sensors and more.
And of course.
In the next several years micro Leds very well drive enough volume to reshape the gallium arsenide industry entirely.
As we look into the years ahead.
We have numerous applications that will continue to drive our results.
Not just coming.
Here.
And we are creating substantial.
Stable and profitable growth opportunities across our business.
With that in mind and top of our IV <unk> in 2022 is customer success.
We're highly focused on ensuring that we can keep pace with current and future customer requirements.
Given the constrained environment.
Most are more openly communicating their long term needs.
Providing us better visibility so that we can scale accordingly.
We believe that our ability to add capacity quickly and cost effectively.
It cost effectively.
Our other major competitive advantage for <unk>.
And it's a key reason.
Our design win success to date.
Yeah. The other top priority for me in 2000 company too.
Gross margin improvement.
As Gary mentioned.
There are numerous things that we're doing to drive lower cost.
Other yields.
Greater manufacturing efficiencies.
Well the program that holds longer term promise as a new recycling effort for indium phosphide.
Through our own internal research and development effort.
We invented the highly advanced process to recycle in signal Crystal indium phosphide material.
This is significant.
Our manufacturing process generate a fair amount of excess material that has to be.
That has real value, but until now.
Not being reusable.
Going forward, we will be able to reclaim this material groups, which will help us lower our cost.
Increases our supply.
And create a meaningful ESG program to reduce waste.
And finally in 2022, we're highly focused on driving Opdivo development of large diameter substrates.
These are major R&D efforts.
Our success is likely to enable considerable customer innovation across a number of high volume applications imposed gallium arsenide.
Phosphide material.
In 2021.
We deliver.
Pilot qualities of eight inch gallium arsenide to our customers generating hundreds of thousands of dollars in revenue.
We believe this revenue demonstrates our customer commitment to the next major step in technology advancement.
In 2022.
We will continue to work to expand our output.
Foreign technical specification is.
To meet customer requirements.
Now in closing.
Tony Tony one was a pivotal year for our business.
With substantial revenue growth and 350% increase in our profitability.
And we look if we look ahead, we believe our momentum will continue.
With our current market drivers, we believe we can deliver revenue growth in 2020 to 15% to 20%.
Our 2021 results.
This is expected to come from remark from market expression.
Share gains and customer wings.
Our investment in capacity R&D for large diameter substrate.
Our China IPO give us.
Competitive advantages in our ability to scale our business.
And meet the needs of tier one customers and emerging high volume applications.
We now have a strong foundation in place.
I believe that the stage is set for you.
The other year of meaningful growth in 2022.
I will now turn the call back to Gary for our first quarter guidance Gary.
Thank you Morris.
As Morris discussed the demand environment remains strong in Q1 coming off a very strong Q4 and fiscal year 'twenty, one we're expecting revenue to be between $38 million and $40 million in Q.
Q1 of this year.
In accordance with their commentary on gross margin, we believe that our non-GAAP net profit will be in the range of seven to nine and GAAP net profit will be in the range of five to seven.
Share count will be approximately $42 8 million shares.
This concludes our prepared comments Morris and I unless it would be glad to answer your questions now.
Operator.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby we compile the Q&A roster.
And our first question comes from Richard Shannon from Craig Hallum.
Your line is now open.
Well, Hi, Morris and Gary and Leslie Thanks for taking my questions.
Yeah, a couple of quick ones on the on the guidance here, obviously, a very very nice numbers on the topline, but let me focus on gross margins here first given the bottom line.
Profit numbers here and EPS. It would suggest that gross margins are going to be improving much sequentially. If at all how would you characterize.
That in all of the dynamics that hurt the gross margin in the second half of last year are they improving to a degree and then any effects of mix in there as well please.
Well I'll go first and Morris can follow up.
Actually we think gross margin will improve.
Quarterly to quarter. This year, we think.
This coming.
Q1 is probably the bottom.
And we will see things improve so.
I would say that.
The cost of running the business all the way from raw materials too.
Manufacturing consumables like polishing pads.
Labor.
They have gone up.
A surprising amount.
So I think.
St catch up as to how to handle that.
Now that we see the light we don't think it's going to get it magically turn back and get better. So we have to take other steps.
To handle that.
I think yield efficiencies can be improved.
We're certain that product mix will continue to lean towards indium phosphide.
We're certain about revenue growth.
Very confident there so all of those combine to.
To help the gross margin percent.
And as we move through the year.
We'll take a look perhaps at whether we should try and raise some asp's.
Yeah, Richard let me.
Tell you from my perspective.
Indeed.
Raw material plus electricity you name it everything has gone up in D C.
This one has not happened in the last what 15 years or so.
It's very strong.
And.
Internally, we are already talking among ourselves, we think it's time for us to ask our customers too.
Work with us.
We can do to some adjustment to bear part of the cost. So that's question number one.
We will be successful.
In certain areas, we definitely are starting to do that already.
The second is that as Gary said the SME.
Yeah.
Efficiency improvement that we need to do to ourselves and the overall cost and thirdly I think.
Last year, we started to get into some of the lower margin business just to get ourselves our foot into the door. Because we know that there is a shortage of the HPT market and this is quite a substantial amount of the shortage. So we took a lower margin business to get in there, but we see.
Inc.
We are getting to get qualified.
We should be able to get not only the volume increase but also into low margin.
As we go into a more formal delivery to that market.
Okay.
Some good stuff to think about there.
While I ponder that let me get to another question here Morris on on your growth outlook for this year reiterated your belief of 15% to 20% and you gave us a number for indium phosphide of 35% to 40%.
The first part of the question I'd like to ask is let's see health sensing applications, how much of how much of that application is contributing to that growth is a small amount medium amount and is this one customer or more than one customer contributing to that this year.
While we design, we talked about in our <unk>.
<unk> was one customer they.
Start to ramp in the fourth quarter.
The revenue is meaningful.
But I think it's more meaning it's even more exciting is I think there are two.
Two more products to be introduced sometime this year.
We believe one is coming.
Perhaps as early as Q3.
Okay.
So just to just to make sure you see this as a meaningful contributor to the growth profile of the Newpage side, this year or meaningful amount skus.
Yes.
Okay.
Excellent that's helpful.
Yes.
Maybe following up on the gross margin topic here again, Gary in your prepared remarks, you talked about.
Hoping to reach 35% do you require.
Pricing increases to make that a reality or is that something you can do just with yields and maybe <unk>.
Volumes and other things on the cost side.
I think we probably need some help on the pricing too.
Okay.
Okay.
Let's see here.
Gary I think you also mentioned a strategic customer.
It was I think you are getting some good pricing that hurt.
Gross margins a little bit.
Particularly referring to the health sensing application or is it something else.
No it was say HPT market.
<unk> okay. Okay. That's helpful.
I guess last one question for me and I'll jump out of line here Capex I think we spent 10 $5 million last quarter whats the outlook for this year when do we get to more of a normal run rate here, we still have heavy months of capacity and other investments to make here this year.
Yes, that's a good question.
Soft land some of the Capex stuff and wind it down but.
We really view this as an.
An investment time for that.
The market is red Hot.
So we need to.
We need to stay up with it so normally we would do.
$4 million to $6 million in equipment I think this year it could be between 7% and $9 million.
So that's the normal stuff will probably have to do some facility work for indium phosphide.
Which will be several millions of dollars.
Maybe as much as five.
But again, we view that as an investment.
The horizon looks very bright and.
We certainly have got the attention of the customer base.
Because we are the ones that can move the fastest.
And grown capacity so.
Uh huh.
Micro Leds being studied carefully.
Don't know for sure where that's going yet so if it if it heats up then we may do some capex in that category as well, but that's to be determined so.
We will keep you posted.
So that's kind of.
Our sense of that for that time.
Okay, perfect I think Thats all for me I will jump out of line. Thanks, guys.
Okay.
And thank you and if you have a question that is star one again, if you'd like to ask a question that is star one and our next question comes from Ahmed core sand from Dws financial Your line is now open.
Hi.
First off I, just wanted to see if you've usually in the historically not had so much clarity as far as growth is considered for throughout the year, what's giving you that clarity this year.
Yes.
It's a very good question I'm glad you noticed that.
Usually don't have visibility even to the next quarter, but.
But we had because of the <unk>.
Increasing demand and from what we know.
Quite a few of these product choices, let me give you example for indium phosphide.
We are certainly sold out.
We have expanded our.
Lead time, we normally call four to six weeks now it's up to that eight to 10 weeks, okay and.
Also about marketing check our competitor's lead times even longer okay.
And for the HPT for gallium arsenide.
The lead time is extremely long and that was the reason why we have exited that market for many years.
Now.
The customers are coming back to us and asking us if we can build some capacity for them we're in.
In close.
Discussion with them and see if we can't we want to get into that market. So we do have good visibility.
I mean, we also have good visibility in terms of micro OLED, however, because it's a new market. So we're not counting it in until we see clearly that there is going to come to fruition, but as you can see that we have already stopped started to gender generate revenue from may inch gallium.
Awesome.
So even that is keeping us better better visibility of how things will shape up.
So yes, you are right the visibility is better and in fact, I think we never thought.
In the past years, we can never say well this year, our indium phosphide will grow 35% to 40%.
We have high confidence it will grow that fast.
Okay, and then what Brett.
Actions or process or are you taking.
To prevent double ordering as far as your customers are concerned.
That's a good question I think maybe the confidence level some lessons that this way.
You see some of these.
Let's say the design win we had lost.
The fourth quarter of last year.
Work with this customer almost two and a half years.
We finally got it.
And.
Double ordering or whether they are building inventory.
That could also happen, but we're not seeing it we don't we don't see a big jump up on demand in fact.
Our indium phosphide capacity.
Now it's also without.
And.
That's why our lead time is getting up to 10 weeks.
And while we know our competitors even longer.
And I think our competitors.
More reluctant I believe.
To build capacity to build capacity. These days is not easy thing to do.
Especially indium phosphide vary.
Difficult process to establish and we believe that we have the advantage of building the capacity quickly for them.
Okay. My last question was.
Gary Whats the adequate level.
Thank you could preserve cash I mean.
We burned cash throughout this growth process when could we see a reversal of that.
Well I think it's directly linked to capex.
And.
I don't have a capex plan for 2023.
But I'm, hoping that.
We will see a slowdown so but I would say that I'm comfortable with our cash position.
Inventory took a big jump up during last year, So I don't see that.
And to go up a lot more.
And we're still looking at again until the IPO happens, we're looking at some bank borrowing in China.
<unk>.
Interesting note once our IPO application was accepted which was on January <unk>.
Okay.
Theres surprisingly a lot more interest from the banks for telling me two secured debt. So it's having maybe Morris can comment also but there's kind of a ripple effect of different organizations and.
China, China based institutions that.
Our are excited about <unk> excited about the IPO.
But yes, I don't think cash.
Sleepover cash, but we do watch it carefully.
It went down.
The 10-Q.
But I think we're okay.
Well I would I would add on to this I mean look 44, 44% growth takes a lot more equipment facilities and inventory accounts receivable.
I mean, I'm not a financial expert, but I know all of that requires cash.
But I think we are generating good cash flow Gary I mean, we did a cash flow analysis, we think we can handle it.
But I think going forward.
If you see.
Some.
So probably want to see the cash flow.
So down.
I think otherwise.
I think when we have cash flow our strongly that means our business is growing we need the cash to grow our business.
Since when we can get very close to $40 million a quarter.
And my goal is sometime this year, we're going to break $50 million a quarter, that's unthinkable, just a year or two ago.
And that all needs.
<unk>.
Better organization better Foundation, which we are building that all and each cash.
Great. Thank you.
Thanks Tommy.
And thank you and I am showing no further questions I would now like to turn the call back over to Dr. Morris Young for closing remarks.
Thank you for participating in our conference call as always.
Feel free to contact me, Gary Fischer or Leslie Green directly if you would like to set out the call I would like to forward.
It.
I, we're looking forward to speak with you in the near future.
Thank you everybody.
And thank you. This concludes this concludes today's conference call. Thank you for participating you may now disconnect.
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