AXT Inc. Q1 2023 Earnings Call
Good afternoon, everyone and welcome to Axt's first quarter 2023 financial conference call.
Leading the call today is Dr. Morris Young Chief Executive Officer, and Gary Fischer, Chief Financial Officer.
My name is Abby and I will be your coordinator today.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
He would like to ask a question. During this time simply press star followed by the number one on your telephone keypad if.
If you would like to withdraw your question again press Star one on your telephone keypad.
Thank you.
I would now like to turn the call over to Leslie Green Investor Relations for a XD.
Thank you Abby and good afternoon, everyone before we begin I would like to remind you that during the course of this conference call, including comments made in response to your questions. We will provide projections or make other forward looking statements regarding among other things the future financial performance of the company market conditions and trends, including <unk>.
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 environment.
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 <unk>.
For 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.
With 19, another outbreaks of contagious disease potential tariffs and trade restrictions increased environmental regulations in China. The financial performance of our partially owned supply chain companies and the impact of delays by our customers on the timing of sales of their products. In addition to the factors that may be discussed in this call we were.
For you to the company's periodic reports filed with the Securities and Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our expectations. This conference call will be available on our website at <unk> Dot com through April 20.
For the first quarter of 2023 was $19 4 million down from $26 8 million in the fourth quarter of 2022 and down from $39 7 million in the first quarter of 2022.
To break down our Q1 revenue for your by product category Indium phosphide came in at $7 1 million, reflecting market softening, particularly in datacenter consumer and telecommunications infrastructure.
Gallium arsenide was 5.0 million, reflecting the overall slowdown across a number of applications, particularly in China germanium substrates were $1 4 million, our germanium substrate revenue was up slightly from Q4, and we have solved resolved the payment issue. We described in the past quarters.
Finally revenue from our two consolidated raw material joint venture companies in Q1 was $5 9 million.
In the first quarter of 2023 revenue from Asia Pacific was 68% Europe was 18% North America was 14% the top five customers generated approximately 28% of total revenue and no customer was over 10%.
non-GAAP gross margin in the first quarter was 26, 9% compared with 32, 5% in Q4 and 33, 8% in Q1 of 2022.
For those who prefer to track results on a GAAP basis gross margin in the first quarter was 26, 3% compared with 32, 1% in Q4 and 33, 6% in Q1 of 2022.
Total non-GAAP operating expense in Q1 was $8 7 million. This compares with 9.0 million in Q4 and was $8 6 million in Q1 of 2022.
On a GAAP basis total operating expense in Q1 was $9 5 million down slightly from $9 6 million in Q4 of 2022 for comparison total GAAP operating expense was $9 6 million in Q1 of 2022.
Our non-GAAP operating line for the first quarter of 2023 was a loss of $3 5 million compared with a non-GAAP operating loss in Q4 of $256000 and a non-GAAP operating profit of $4 8 million in Q1 of 2022.
For reference our GAAP operating line for the first quarter of 2023 was the loss of $4 4 million compared with an operating loss of 1.0 in Q4, 2022, and an operating profit of $3 7 million in Q1 of 2022.
Non operating other income and expense and other items below the operating line for the first quarter was a net gain of $1 1 million. The details can be seen in the P&L included in our press release today.
For Q1 of 2023, we had a non-GAAP net loss of $2 4 million or <unk> <unk> per share compared with a non-GAAP net income.
$2 1 million or <unk> <unk> per share in the fourth quarter of 2020 non.
non-GAAP net income in Q1 of 2022 was $4 3 million or <unk> 10 per share.
On a GAAP basis net loss in Q1 was $3 3 million or <unk> <unk> per share by comparison net income was $1 3 million or <unk> <unk> per share in the fourth quarter of 2022, and $3 $2 million or <unk> <unk> per share profit in Q1 of 2022.
The weighted basic.
Basic shares outstanding in Q1 was $42 5 million.
Cash cash equivalents and investments were $53 6 million as of March 31.
By comparison at December 31 was $52 8 million dips.
Depreciation and amortization in the first quarter was $2 1 million and Capex was $2 seven.
Most of this is facilities in indium phosphide equipment related.
Total stock comp was nine zero point $9 million for the quarter.
Net inventory at March 31 was $91 7 million, 45% of the inventory is raw materials and with the 51% finished goods makes up approximately 3% of inventory.
We had a very successful quarter in our recycling efforts, which benefited our margins and our ESG efforts, but when we grow new England with recycled indium phosphide it adds.
So the inventory almost half of the increase in inventories from recycling.
Inventory reduction remains a key focus for us this year and we expect to bring it down as the demand environment improves.
This concludes the discussion of our quarterly financial results turning to our plan to list. Our subsidiary told me in China on the Star market Shanghai since the Chinese new year, we've had active dialogue again with the China Securities Regulatory Commission or the CSR.
Their process is detailed and thorough and they have asked us to respond to a couple of additional items. We are in the process of doing so now and remain optimistic that we will get <unk> approval in the coming months, we have posted a brief summary of the plan and the process on our website.
With that I'll now turn the call over to Dr. Morris Young for a review of our business and markets Morris.
Okay.
Okay. Thank.
Thank you Gary.
Good afternoon everybody.
Well, it's good morning, Gary China.
The expected revenue took a step back in Q1.
The inventory correction that we began to see in gallium arsenide late last summer.
Already in indium phosphide applications.
Despite lower revenue.
Confidence in our market position and strong customer relationships.
We have continued to focus on that.
New factory efficiencies.
Increasing success in our.
You recently efforts.
Which benefited our gross margin performance in Q1.
As we look forward, while the current demand environment remains dynamic.
We're seeing positive signs that our revenue is stabilizing and surgical applications, we didnt gallium arsenide.
Jason power amplifiers are beginning to show some improvement.
Makes sense.
These were among the first applications to experience weakness beginning in September of last year.
Now turning to our individual markets.
Indium phosphide daily.
Through January and then experienced a meaningful decline in February and March.
Most notably in the data Sanjay and consumer applications.
We're not expecting a <unk> application in Q2.
No.
<unk> appear to be stabilizing.
All obligations.
Particularly China.
So some improvement in Q1.
Is China moves forward with it.
National stimulus for web.
Has been discussed.
It would likely provide a calculus or upgrade cycle in China telecommunications infrastructure.
Is that an issue.
Gallium arsenide demand appear to be improving modestly.
Our amplifier and power lasers showed some signs of recovery in Q1.
We also continue to be encouraged by the industry product progress in micro OLED.
As well as our own progress in preparing our business for this opportunity.
We're already delivering H gallium arsenide wafer customers and generating modest revenue well formal obligation qualification for the flagship program.
Our large customer won't occur until sometime in the second half of 2023.
We have visibility into the likely technical specification that will be required.
Good.
Our ability to meet.
In addition.
Our eight inch line for gallium arsenide Crystal growth is up and running.
Our <unk> facility.
Second we're very excited.
Excited by our progress in driving improved efficiency here.
Turning to germanium substrates.
Following a resolution of the payment issue with one of our customers we saw incremental growth in revenue, while the germanium substrate market is also being affected by the macro softness.
We'll be working towards sequential growth in the coming quarters.
Finally to our raw material joint ventures.
Our revenue in Q1 was approximately flat.
The fourth quarter.
And then in.
The other area, where we're seeing stabilization.
Gallium raw material prices remained approximately flat.
This quarter and up from the low levels, we saw in the fourth quarter of 2022.
In closing.
Joe a softening of the micro environment will continue to impact growth near term.
We have driven.
Our revenue and customer expansion, we may have.
Very much intact.
We continue to excel in all the checking go out capabilities and we are ready for our business to support new obligations that are likely to drive future growth.
Further we continue to work hard.
Improving our efficiency.
And we are focusing our accelerating our return to profitability.
I will now call turn the call back to Gary before our second quarter guidance Gary.
Thank you Morris.
Given the continuing inventory correction, we expect Q2 revenue to be between $19 million and $21 million.
Mix is likely to include growth in gallium arsenide substrates and continued weakness in indium phosphide.
We expect our non-GAAP net loss will be in the range of 10 to 12.
And our GAAP net loss will be in the range of 12 to 14.
Share count will be approximately $42 7 million shares.
This concludes our prepared comments Morris and I will be glad to answer your questions now abbvie.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the question and answer roster.
Yes.
Hi, good afternoon.
Normal environment Q3 tends to be slightly higher.
Good afternoon, Thank you Juan <unk>.
Q3 tends to be the.
A key quarter of the year.
Would that be the case this year or do you think that maybe it's going to be a little bit different given the severity of the downturn.
Yeah.
Yeah.
Go ahead Morris.
<unk> take that.
Okay.
I think you know.
Certainly.
I agree with you Charles I think that's the normal pattern.
Hi.
Well, we certainly see that.
Well its consumer product.
And the datacenter floor.
Indium phosphide.
Because it just adding to the inventory correction.
Two months ago, three months ago, So we expect it to.
Continue, but we do see some activity.
Especially.
HPT and power lasers in China, especially.
No.
So a stabilized last quarter, and we're seeing a revenue modestly going up a bit and that perhaps.
Yes.
Encourage you sign but how strong is that they're going to continue for the next quarter.
This inventory digestion.
We don't see revenue declining in Q3.
And in fact.
Internally I think it might start to tick up Q3, and because of the circumstances in the economy are so unusual right now.
I would agree with Morris.
It doesn't necessarily mean that Q4 will be below Q3, we don't know so.
Yes.
Got it.
Other question.
I wanted to ask is on the on the cost side.
Can you can you remind us again what.
Capex for Q1.
But can you also remind us what's the what's the full year capex.
Pocket.
Great.
Yeah.
Capex in Q1.
Was.
Yes.
Okay.
$2 7 million.
And.
But in general.
We are resisting.
No.
Got it.
Maybe last question.
I wanted to ask you about the consumer.
Secondly, we recently did hear some some rumors about maybe.
The premium electronics company.
They may be having.
Second thought.
Whether to continue with the under the display a proximity sensor of headsets.
Okay.
It sounds like they may be thinking about reverting back to gallium arsenide.
<unk>.
Have you seen any of the signs that really happening and how should we think about that.
I believe what I was talking about was the second question the program.
Any new data points for the third potential consumer program as of today.
Okay.
Yeah, especially to the customer you're talking about the proximity sensor.
Indium phosphide detector is much more sensitive so you can't use it smaller area, that's maintaining the small smaller notch apio shape.
Window.
On the phone, but at this point, we really have no visibility at all.
I think we should wait nervously waiting.
As you know what they would decide whether in the next few months.
We do have.
Although they are fairly secretive and they are looking for something to learn using indium phosphide semi insulating wafers. We believe is a detector.
For collision avoidance.
I mean.
Thomas JV.
But again.
Jessie what avs what base.
Looking at the pilot quality production they had purchased wafer supply.
And also the quotation we provided them.
For that application.
I mean.
It's still early so those are probably the two.
Consumer product that we were.
We're looking for and obviously hygiene micro OLED.
It.
Taking one step further into reality I think although it will be launching late we believe but nevertheless, it becomes we believe it is it will come.
And as I said in the script that we have.
Thank you very good progress.
In terms of preparing for it although we're not going to spend a whole lot of money.
But we already built allowing for them.
And so we are ready to ramp up production for them sometime in 'twenty four.
24 auto sampling already.
Deliberative deliberate to all our major customers.
And by the way.
This major customer was giving us a.
Facility tour in the loss.
Week or so and.
They are very pleased we had a very very good meeting.
Got it. Thank you Morris Thank you Gary.
Youre welcome Josh.
Next question. Your next question comes from the line of Matt <unk> from Wedbush Securities. Your line is open.
Thanks for taking my question.
First one is.
You're guiding for flat to slightly higher revenues, but obviously youre looking for that for the last to increase a bit.
That mix or what else.
As the world is expense going up.
It's mix primarily.
We hope to keep expenses flat.
And.
There may be there may be a little bit less contributed the line so.
Not sure yet.
Yeah.
And then I guess from a customer inventory perspective.
And the supply chain is struggling not just.
Because end demand is softer, but also because of inventories getting worked out of the system.
Do you have any idea where your customers are in terms of that process.
And how much do you think inventory rationalization versus later on demand is weighing on.
Revenues right now.
Yes.
Hum.
Okay.
Well.
Yes.
I see.
Although gallium arsenide.
We see is giving us more harder.
Right.
Gallium arsenide, let's say HPT on lasers with visit to our customers.
In Q1.
Or early Q1, it was all or even Q4 of last year. There was just no order.
And for HPT DSD is starting to take.
Thousands of wafers.
But compared to tens of thousand wafers.
Only 20% of the peak, but at least it's a consistent order pattern. So we feel reasonably comfortable it's coming and I made you read into there.
Scripts.
They are talking about second half of the year will be better than first half, although they are still running.
30%, 40% of their team.
Level.
As far as power lasers concern is just starting.
We got you know we used to deliver thousands of wafer for months now.
In the 100.
Ted.
But we've got to weigh the other months or so to see how sustainable it is.
So I.
Thank you.
But it.
It's difficult for us to tell is that.
You know everybody controls inventory because your environment, probably everybody was too.
Squeeze inventory and Steve.
Drive more cash out and those there is no fear because every supplier is more either trying to get orders so along with it.
This pressure.
With that as well.
So.
But I think the long term.
I'm looking at.
Maybe.
Two or three quarter horizon, Michael micro Leds definitely it should be a driver.
I don't believe there's any reason why.
Why.
Power lasers for gallium arsenide, because he is.
Industrial manufacturing I think industrial manufacturing the consumer market in China is coming back I believe because I see the streets are.
More.
I think as more people.
But I think when will it translate into.
Industrial production.
I think uses a lot of.
Gallium arsenide.
Power lasers.
I think from my perspective, it's hard for me to say, but I think the datacenter. Although there is inventory glut I mean, our customers are telling us.
<unk> bought way too much last year and although they are very happy with our performance.
But they.
They just have to digest that inventory, but also by the way about data center I think that the.
I application because it's good to us so much more.
New computing power.
The.
AI logic.
Running so they they say any predictions and say in the next few years.
AI is in full bloom.
It probably will consume almost 30% of the total LNG of the whole society because it's so.
Data intensive so.
That should.
This.
Long term good growth for us because you need data Sanjay to do more work and you do you need to access information fastener and you'd need to conserve energy for the datacenter and that's more opportunity for silicon photonics and more.
Opportunity for indium phosphide substrates, but that.
No.
Yes.
It's allowing sustainable drives.
For long term usage, but it probably does that going to help us in the next quarter or two.
Just to summarize Morris I guess, what Youre, saying is youre starting to see signs that gallium arsenide at least in some markets.
You start there as there is demand and inventory has been worked down.
With indium phosphide.
It's still going to take a couple of quarters before you figure out exactly.
Where demand is just because you've got so much I mean, there is so much inventory in the system is that fair.
Okay.
Yeah Yeah.
That's what I am, saying, Matt, but as I said again.
As far as indium phosphide is concerned it's.
Because there are two ways, we can look at the opportunity for us I mean, one is the existing markets when they recover that should be a big deal.
The other one that is the new applications as I said, we have the Taiwanese customer.
We are making inquiries at making pilot line.
Iron dome semi insulating indium phosphide.
But we don't know exactly what the application is but from the looks a bit.
It's quite substantially in terms of volume.
So we were guessing it is for autonomous vehicle, but.
We just have to wait and see.
Well.
We are getting that monthly order, so, but the usual old customers such as consumer products.
And data center.
<unk> datacenter, yes.
Im bogged down inventory.
We're not seeing the order yet.
Got it thank you.
Thanks, Matt.
Your next question comes from the line of Richard Shannon from Craig Hallum. Your line is open.
Yeah.
Hi, guys. Thanks for taking my question as well and good morning to worse in China.
Let me ask a couple of quick tactical questions here, probably for Gary both for the first quarter results and Youre also looking to the second quarter here.
Can you describe what's your or quantify what your China.
China revenues did not just Asia Pacific, but China only.
Okay.
I'm happy to share it, but I don't have it in front of me.
So.
Maybe I can look it up and tell you.
Okay.
So yes.
Sure well look it up I'll ask Morris a question here Morris going to the topic of of data Center.
Talked about.
One of your previous answers here about a fair amount of inventory of your customer admitted to here it sounds like in the last quarter.
Are you getting sense of continued.
Movements in that business and forward roadmap planning and stuff like that because I've heard of some.
Potential reorganizations or something going on internally there.
So just wanted to make sure that you expect that to be a continuing business after what looks like an inventory burn.
Yes.
Hmm.
Richard I, well I think.
I think the algorithm.
Thank you Bob.
Future climate, we are.
Engaging with them almost weekly.
I'm trying to solve their next generation.
<unk>.
Futuristic requirement.
Material requirements as well.
Working with them.
They are a very methodical and very good customer workplace and so so we don't see any reduce activity.
At all I don't think theyre going to be dissolved.
So actually we do see new product development.
I think as we'll have higher power.
But you know the bond.
On the materials level, it's very difficult to tell.
But.
But they are saying.
Got it.
Okay.
Thanks for that confirmation of the thought process thats good to hear.
Morris, maybe if you can touch.
A little bit more detail on what youre seeing going on within micro led.
And I guess.
When do you expect more.
More larger orders coming here and kind of what are the stages of progress to getting to what I think you referred to as potential high volume production late in 'twenty four.
Yes.
I think we are.
Skewed.
Two.
To get qualification done in the next.
Oh, I would say three to four months.
Woods.
What we are.
Ironing out all the specification the customer needed.
How many England and how many wafers they need for qualification and they just did a site visit for us.
So I think both parties out really happy I mean, especially the customers are very impressed.
With our facility.
I mean, one of the comment was interesting Aldo.
They say Wow.
Guys are doing so much.
S.
Practice in manufacturing and all the SBC and all the controls.
Looked like the European semiconductor manufacturing plant.
In China, So I took it as a compliment.
So I think we all happy but as far as the volume ramp is concerned yes. We always we were told it's going to ramp sometime.
In 2024.
Okay.
And in the context of the forecast Youre getting from the.
This large customer or maybe large customers for eight inch gallium arsenide for micro led you said you've got a pilot lines set up already it's a <unk>.
Okay hold true to what Youre hearing or seeing from them. Currently what would you have to green light a second tranche of of equipment to support higher volumes.
Okay.
Well I think yes.
You can maybe call it Fortunately or unfortunately, I mean, we I think we spent most of the money already.
I think.
We're ready because I think.
Our original planning was full.
Probably two X the volume.
Before so and also.
Infrastructure build.
You cannot do solos.
Walter incremental build so we spent more money on building.
That's already done.
<unk> equipment is concerned.
Okay.
Are they comfortable to fulfill.
<unk> fulfills the first tranche.
Production in late 'twenty for Saudi.
Without purchasing any further.
New equipment.
Okay.
Fair enough I'll ask a couple of questions that Gary and jump out of line here first of all Gary did you were you able to find those numbers on China.
Yes, China was $8 1 million in Q3 Q1.
For Q1, Okay, and then is expected to be no worse than flat in the second quarter.
I think it'll be up a little bit in the second quarter.
Okay good to hear.
Last question for you Gary is just thinking about your balance sheet here and I think one of the messages you portrayed last quarter and kind of repeated here is about trying to squeeze some cash out of working capital.
Obviously inventory went up a little bit you explained that about recycling dynamic here as you look throughout the year.
With the Capex plan and and.
And other things here, how do we think about where cash.
Goes Directionally is this a quarters this year, where that goes up directionally.
Down and this is obviously independent of whatever debt levels, you have as well.
How do you see that have a working out this year.
I think for the next couple of quarters I would expect it to be relatively flat.
It could move up or down a little bit but.
Typically with our business model.
<unk>.
When we're in a down cycle.
We can rely on inventory, we tightened things up so.
The cash burn is not that high.
When we when we grow a lot when we grow quickly that's when cash.
Can be cash flow negative because.
We're investing so much in the growth process. So.
So.
Yes.
It would be my comment on that so.
Okay. That's fair enough, that's all I need to hear all.
All the questions from me guys. Thank you alright, thanks Richard.
Yeah.
There are no further questions at this time, Dr. Morris Young Chief Executive Officer, I turn the call back over to you.
Hi.
Thank you put the participating in our conference call this quarter.
We will be presenting at the 20th annual Craig Hallum Institutional investors conference in Minneapolis.
Please feel free to contact me, Gary Fischer or Leslie Green directly if you.
We'd like to set up a call with US we look forward to speaking with you in the near future.
Sure.
Yeah.
This concludes today's conference call you may now disconnect.
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Yeah.
Yes.
Okay.
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