Q3 2023 AXT Inc Earnings Call
Good afternoon, everyone and welcome to <unk> third quarter 2023 financial conference call, leading the call today is Doctor Morris Young Chief Executive Officer, and Gary Fischer Chief Financial Officer, My name is Christina and I'll be your coordinator today.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If 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, Please press star one.
I would now like to turn the call over to Leslie Green Investor Relations for XT.
Thank you Christina 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 <unk>.
<unk>, including expected growth in the markets. We serve emerging applications, you can chips or devices fabricated on our substrate our product mix, our ability to increase orders in succeeding quarters to control costs and expenses to move manufacturing yields and efficiency and 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 uncertainties.
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 increased environmental regulations in China, the financial performance of our.
Really owned supply chain companies and the impact of delays by our customers on the timing of sales and their product. In addition to the factors that may be discussed on this call. We refer you to the company's periodic reports filed with the Securities Exchange Commission. These are available online by link from our website and contain additional.
Information on risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at X T Dot com through November 2nd 'twenty 'twenty four.
Also before we begin I want to note that shortly shortly following the close of market today, we issued a press release reporting financial results for the third quarter of 2023. 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 third quarter results.
Gary Thank you Leslie and good afternoon to everyone. Our revenue for the third quarter of 2023 was $17 4 million.
Down from $18 6 million in the second quarter of 2023 and down from $35 2 million in the third quarter of 2022.
To break down our Q3 23 revenue for your by product line Indium phosphide came in at $4 9 million, reflecting a stabilizing market with modest improvement in data center applications.
Gallium arsenide was $4 2 million, we're pleased to obtain our first permitted to ship gallium arsenide substrates during the quarter. We continue to work through that process on behalf of a growing number of our gallium arsenide customers.
Germanium substrates for $1 2 million up from the prior quarter also reflecting our progress in obtaining permits on behalf of our customers.
Finally revenue from our two consolidated raw material joint venture companies in Q3 was 7.0 million.
In the third quarter of 2023 revenue from Asia Pacific was 82% Europe was 14% in North America was 4%.
The top five customers generated approximately 31% of total revenue and no customers over the 10% level.
non-GAAP gross margin in the third quarter was 11, 3% compared with nine 8% in Q2 and 42, 2% in Q3 of 2022.
For those who prefer to track results on a GAAP basis gross margin in the third quarter was 10, 7% compared with nine 2% in Q2 and 42.0% in Q3 of 2022.
Primary drivers were affecting our corporate gross margin in Q3, where volume.
Product mix and an improvement in our raw material business gross margin.
Beyond the near term, we remain confident that we can get back to the mid 30% range as the environment strengthens through higher overall volume more favorable product mix and the benefits of our recycling programs along with continued efficiency improvements throughout our business.
Moving to our operating expenses with a reduction in overall revenue with maintain spending discipline in our operating expenses to align with the current environment.
Total non-GAAP operating expense in Q3 was $7 8 million consistent with our results in Q2, 2023 and down from 9.2 in Q3 of 2022.
On a GAAP basis total operating expenses in Q3 was six was $8 6 million consistent with our results in Q2 of 2023 and down from $10 2 million in Q3 of 2022.
Our non-GAAP operating income for the third quarter of 2023 was a loss of $5 8 million compared with a non-GAAP operating loss in Q2 of 2023 of $5 9 million.
And the non-GAAP operating profit of $5 6 million in Q3 of 2022.
For reference our GAAP operating line for the third quarter of 2023 was a loss of $6 7 million compared with an operating loss of $6 8 million in Q2, and an operating profit of $4 6 million in Q3 of 2022.
Non operating other income and expense and other items below the operating line for the third quarter of 'twenty three.
2020 was a net gain of 0.9 million.
The details can be seen in the P&L included in our press release today.
For Q3, 2023, we had a non-GAAP net loss of $4 9 million or <unk> 12 per share compared with a non-GAAP net loss of $4 2 million or <unk> 10 per share in the second quarter of 2023.
non-GAAP net income in Q3, 2022 was $6 8 million or <unk> 16 per share.
On a GAAP basis net loss in Q3 was $5 8 million or <unk> 14 per share.
By comparison net loss was $5 1 million or 12 cents per share in the second quarter of 2023.
GAAP net income in Q3, 2022 was $5 8 million or <unk> 13 per share.
The weighted average basic shares outstanding in Q3 was $42 6 million.
Cash cash equivalents and investments were $43 6 million as of September 30th.
By comparison at June 30 was $49 6 million.
The reduction in cash was primarily due to net cash generated by operating activities. Although last quarter that was positive in Q3. It was negative this quarter.
Depreciation and amortization in the third quarter was $2 2 million and Capex was about $4 million total stock comp was 0.9 million.
As I mentioned net inventory came down by 700 came to $86 4 million at September 30th.
<unk> 41 per cent of the inventory is raw materials and whip is 55%.
Finished goods makes up only approximately 4%.
Okay. This concludes the report on our quarterly financial results turning to our plan to list our subsidiary tongue may in China on the star market in Shanghai.
We do need to resolve in one open item Morris is in China as we speak and is working on this matter. Although it is moving slower than we expected we are making progress and we're confident that tongue. They remains an excellent candidate for listing and we will be approved to proceed.
With that I'll now turn the call over to Dr. Morris Young for a review of our business and markets.
Morris welcome from China.
Thank you Gary.
Yes.
While it is in China.
Alright.
Hum.
He would remain stable.
And we were pleased to see some encouraging early signs.
In the data center market, resulting in modest buyer indium phosphide revenues.
We still believe that I'm going to read there.
Across our markets will continue.
The end of the year.
In some cases may persist.
Four.
But we believe the worst of the declines are behind us.
We're looking forward to the new year with optimism.
We worked diligently.
I'll talk a little history.
True advice.
<unk> large diameter substrates and to support.
Sure.
Mercury opportunities across our portfolio.
Indium phosphide is.
The data center market prepares to move to 800 gig data rates.
We're seeing increased development next generation Silicon photonics devices.
Actual absorption modulated lasers or email.
Well high speed data Center Transceivers.
The global adoption.
It's true providing a strong catalyst for the industry transition to ICD.
You too.
Beijing custom.
Customers for new opportunities as the market expands.
Oh proven performers optical devices for the data center, coupled with our success in developing six inch indium phosphide substrates is putting us in a solid position with both current and future generation of data center optical devices.
We're also seeing positive.
Activities in both consumer and health care education, as well of indium phosphide.
Please.
Reinforces our conviction that we.
We are very very early stage in the adoption of this material across their multiple multitude of emerging applications.
Our early success not only validates indium phosphide.
Material of strategic importance.
Validates edge T as a world class supplier, so tier one companies.
We believe that for next year.
Let's see the further exploration into these into these and other areas.
Now in gallium arsenide.
These two announced in September that told me.
Our subsidiary in China, We see D C mission export logs.
Was able to resume shipping gallium arsenide substrates germanium substrates in the second half of September.
The number of customers.
We made good progress.
Clearly customer orders and minimizing disruptions.
We're very proud of the way our team has responded quickly and effectively.
We're grateful for the partnership of our customers working with us through this process.
Like Amy Horsefly.
Thank you for gallium arsenide remains weak.
It's stable.
With the inventory digestion likely to continue into 'twenty 'twenty four.
That's sad.
We are actively Kennedy.
Innovation in all markets.
Please.
By the progress, we're making in our eight inch gallium arsenide.
<unk>.
Alright, this consumer high end display and automotive applications for micro Leds.
Today, our customers report vacation.
<unk> specifications for background <unk>.
Potentially more stringent than they were when our <unk> development.
And yes, we have been able to meet these requirements delivering outstanding defect densities results in volume.
We feel very confident.
Conservatives emerging market will.
We believe that there will be a growing number of use cases in development.
Our expectation is that product development, while multiple customer is likely to ramp throughout two four.
Mr. Horst micro OLED product coming to market in 2035 and beyond.
In Q3, we saw a modest increase in our germanium substrate revenue.
<unk> received the first excellent performance, while germanium substrate customers during the quarter.
<unk> was able to ship all Colby.
Overall.
So ourselves satellite market is <unk> similar silica.
Cyclical headwinds as the other markets.
But we are confident that this.
Business will recover as the market strengthens.
Finally.
Sales from our raw material business trending down slightly for the quarter, but gross margin improved from Q2.
Overall.
The pricing environment remains relatively stable.
And the major changes in Q4.
In closing we're looking forward.
So the new year.
These new opportunities.
While inventory rationalization.
Persist into the new year, we're pleased to be seeing the early signs that we can make.
On a positive change for 2024.
We believe that the.
Okay.
I've been driven our revenue and customer expansion.
Much intact.
Further we have executed well.
Large diameter substrates that will pave the way for all.
Opportunities in next generation devices.
Spending on data center.
It and other markets.
As we navigate the near term environment will continue to prioritize our cost savings and efficiency.
And we are focused.
Accelerating our return to profitability.
I'll turn now turn the call back to Gary for our fourth quarter guidance Gary.
Thank you Morris and keeping with our comments today, we expect Q4 revenue to be between $16 million and $19 million.
We expect our non-GAAP net loss will be in the range of 13% to 15.
And GAAP net loss will be in the range of 15% to 17.
Share count will be approximately $42 6 million shares.
Okay. This concludes our prepared comments Morris and I would be glad to answer your questions Christine operator.
Yes, and 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 again, if you do have a question. Please press Star then the number one on your telephone keypad and we'll pause for just a moment to compile the Q&A roster.
Okay and your first question comes from the line of Richard Shannon from Craig Hallum. Your line is open.
Well, Hi, Morris and Gary Thanks for taking my questions and Morris Thanks for getting up so early in China.
Okay.
Let's see let's ask a question on the guidance here for the quarter just to kind of get the assumptions built in here obviously the midpoint here is roughly.
Flat with the third quarter makes which makes sense given your comments about stabilization are there any unusual trends within the substrate buckets as well as raw materials to get to that point or are they all roughly similar to flat sequentially.
Yeah.
I don't think there's much.
Ripples Noire.
<unk>.
It's kind of business as usual frankly so.
Sure.
So.
Yeah, I don't have a lot of other color to add so.
Yes.
The thing.
Yeah, the only thing I may add.
That is a gallium.
Gallium arsenide steel, we're still working through.
The problem is can we get so I mean, the more the permits we could get.
Perhaps we can increase that slightly but it's not a very significant increase.
Okay.
And then I guess, specifically I wanted to ask on indium phosphide, given the importance of that that revenue stream here youre talking about the strength in data center, but hadn't mentioned anything about consumer telecom or some of the other markets. There. So maybe you can kind of delineate.
By the Submarkets that are driving that is it the fourth quarter, you're still expecting a datacenter to grow and I guess the.
Specifically I wanted to touch on the fact that I think your large customer in that area has the transferred that transceiver business to another buyer and so I wanted to get a sense of the degree to which that business will sustain.
Sure.
Gary you want to take that or so.
I guess.
I can start and you can join if you want so.
Data center is a strong sector for indium phosphide.
Our business development Guy Tim battles is.
Kind of upbeat about it frankly, so that's positive the jabil transact that we talked about this with Tim today.
And he actually feel that's a good decision so basically it.
It will allow Intel to heat and his view, okay to focus on their core strengths.
And it shouldn't.
It Shouldnt detract at all from our revenue stream to entail and then if they grow and improve it.
We'll increase so jabil becomes basically a systems integrator or.
That's what they do is assembled stuff so.
And.
Tim Thanks.
Shifting the business model, but of course, it's our opinion from X T.
Clearly, it's Intel's decision so that we don't see it as a negative at all and we see that as a positive sign.
Okay fair enough.
Just a last topic on indium phosphide here just wanted to get a sense of continued traction with the consumer electronics applications, whether it's your big hits.
Historical customer or any new ones coming in here just some some.
Thoughts on how that how do you expect that to go over the next few quarters.
Yeah.
Yeah, we can.
You need to work with our customers. Although this deal it is too early but we have sampled.
Two two at least two customers, who potentially is going to decide.
Decide how much the ramp and what's the timing for ramping.
But we are in the early stage of qualification, but that application I understand is when consumer applications.
And is scheduled to launch to be successful.
In Q3 of 2024.
So I think you know that.
That activity.
I believe you're still I mean, given the market is so dire I think it's accurate.
And people people are planning for next generation applications, where you can be in phosphate.
Okay Fair enough two more questions for me I'll jump out of line first one just following up on the comments and Mike really D.
I may have missed something in there with a spotty line here.
But I guess my my General question here is how is the environment here in the <unk>.
Importance of this to your certain customers out there relative to last quarter as our thing is holding in there in terms of timeframe in size or Theres is there more uncertainty here in the us.
As the macro is certainly seem to get worse over the last 90 days.
Well I think.
<unk>.
I think the.
The intention for customer to proceed.
It's it's firming up.
I do believe that the economy I think.
The only question I have is what's the volume is going to be.
And how fast it's going to ramp up to the next phase et cetera, where given the initial ramp up.
Volume production I think its somewhere around mid 2025.
And of course, it's going to ramp.
Gradually from.
Next year.
Words.
Into the first stage of production rates 25, I think but I think.
That timing, although it slipped from early predictions.
But.
Nevertheless, I think the customers committed to go ahead with it.
Okay.
Okay and last question for Gary is on cash flow I think last quarter you were talking about.
And I'm trying to generate some positive working capital here in <unk>.
Inventories were down slightly but perhaps you are expecting or hoping for a little bit more what's your general thought here as we look on.
Operating cash flow and working capital benefits this quarter and into the near future.
Well first of all in terms of inventory.
Yes.
I've gone back with my coworkers sort of looked at some historic inventory levels.
When maybe we're doing $25 million a quarter 30 million a quarter. So it illustrates to me that.
We should be able to take inventory down so I'm still targeting.
To do that.
I think at a minimum we should shrink it by at least $10 million.
It's.
Reciprocally, it's easy to do that if our run rates are high and it's harder to do that when our run rates or so.
Modest right now so.
I feel confident that we can do it and that we will do it so.
In terms of if you look at our overall like I was looking at the cash generated from operating activities in our internal cash flow thing.
It's a negative 280000 for the first nine months of this year.
So because you are adding back depreciation youre, adding back stock comp and.
There are some low hanging fruit items on the balance sheet inventories one.
Accounts receivable was one.
Especially and in China, we have.
Pretty long days sales outstanding so I'd like to bring that in so yeah.
Yes, I think so okay.
Yeah.
I will of course be delighted to bank the IPO money.
But in the meantime, I think we're we're safe.
Okay.
Okay Fair enough that is all from me guys I will jump out of line.
Thanks Richard.
Yeah.
Yes.
Kristina any more questions.
Yes. So there are no further questions at this time, so I will turn the floor back over to Dr. Morris Young.
Thank you for your participation in this call.
We will be presenting at the Needham growth conference in January and looking forward to see lending of you there as always Q free to contact me, Gary Fischer or Leslie Green directly if you would like to set up a call with us.
We look forward to speaking with you in that.
Near future.
Okay.
Thanks Morris.
Thank you. Thank you.
Thank you and this does conclude today's conference call you may now disconnect.
Okay.
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