Q2 2019 Earnings Call
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Good evening May I have your conference I'd number.
[laughter] 8685656.
The man spelling of your first and last name.
Our why end H.A.L. Eli.
And your company name.
Era they are.
Thank you I'll join you now.
Since then.
Uh huh.
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 and 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 additional information on risk factors that could cause actual results to differ materially from our expected.
Current expectations. This conference call will be available on our website at ICSI Dotcom through July 24th 2020 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 second quarter. This information is available on the Investor Relations portion of our website at ICSI Dot Com I would now like to turn the call over to Gary Fischer for a review of our second quarter results, Gary. Thank you Leslie and good afternoon, everyone.
Total revenue for the second quarter of 2019 increased by 23% to $24.8 million.
By comparison revenue in the first quarter of 2019 was 20.2.
In revenue in the second quarter of 18 was 27.1.
Of our total revenues substrate sales increased to 20.6 million from 16.8 million in the prior quarter.
Revenue from a raw material joint ventures was 4.2 million in Q2, compared with $3.4 million in Q1.
In the second quarter of 2019 revenue from North America was 6% Asia Pacific, 75% and Europe , 19%.
In the second quarter, two customers reached 10% of revenue and the top five customers generated approximately 48% of total revenue.
Gross margin in the second quarter was 34.3% up from 33.1% in the prior quarter.
This improvement was primarily the result of product mix.
Total operating expenses in Q2 were 6.2 million compared with $6.1 million in Q1.
Total stock compensation expense for the second quarter was $568000.
Operating income for the second quarter of 2019 was $2.3 million compared with 626000 in the previous quarter.
And 4.5 million for Q2 of 2018.
Interest and other income was a net loss of $3000 for the second quarter compared with a loss of $1.4 million in the first quarter of 2019 and a gain of 400000 for the second quarter of 2018.
Interest and other income net for the second quarter of 2019 included interest income of $80000, a foreign exchange loss and other expenses totaling $90000 and a net gain of $8000 from the partially owned companies in HD supply chain accounted for under the equity method.
Income tax for the second quarter of 2018 was a charge of 597 k. compared with a charge of 156 K. in Q1.
Our Q2 results included approximately 107000 in tariffs as a result of the tariff charge on importing wafers into the United States from China.
That rate by the way increased to 25% from 10% on may 10th.
For Q2, 2019, we had a net income of $1.5 million or profit of four cents per share.
By comparison, we had a net loss of $1.1 million or a loss of three cents per share in the first quarter of 2019.
And a net income of $3.9 million or profit of 10 cents per diluted share in Q2 2018.
The share count for Q2 was $40 million 123000 shares.
Cash and cash equivalents and investments increased to 37.5 million as of June thirtyth.
By comparison at March 31, it was $34.1 million.
Depreciation and amortization in the second quarter was $1.4 million and Capex was $5.5 million.
Accounts receivables net of reserves were $18.2 million at June thirtyth, compared with $19.5 million at March 30 Onest.
Net inventory at June Thirtyth decreased to $50.3 million.
Compared with $53.0 million in inventory at March 30 Onest.
Ending inventory consisted of approximately 48% in raw materials, 47% in work in progress and only 5% in finished goods.
As we noted previously the reduction in inventory as a focus for us in 2019.
Before I conclude on the numbers I want to provide an update on our use of cash in 2019 for the facility relocation.
Previously we estimated that we will use about 21 million of cash for the relocation in 2019.
That is still our estimate.
For the first half of 2019, we have now spent about $9 million and within the second half will be about $12 million.
We are operating cash flow positive for the first half of 2019 for approximately $5 million, which helps offset the off at the outflow.
We do have a $10 million line of credit with Wells Fargo Bank, which we have not utilized and we're setting up a bank loan and Chinese renminbi in China.
As another source of cash further we think the second half of 2019, we'll also be positive operating cash flow.
We are continuing to monitor cash and remain confident that we have sufficient resources.
As a reminder, the current facility in Beijing has considerable value that we will be able to monetize in the future.
Okay. This wraps it up for the financial review I'll now turn the call over to Dr. Morris Young for a review of the business Morse.
Thank you Gary.
And good afternoon everybody.
I missed a bedrock of turbulent geopolitical geopolitical and global economic conditions.
AMC posted a solid quarter.
Revenue came in just ahead of our expectations and our indium phosphide sales achieved an all time high.
Having surpassed gallium arsenide as the single largest revenue contributor again this quarter.
In addition.
With continued focus on manufacturing efficiency inventory reduction and cash management, we improved our gross margins and achieved positive cash flow.
We're continuing to execute on the relocation of our facility and believe that we are laying a solid foundation for the significant technology trends that are likely to drive growth.
Business overtime.
To begin.
Indium phosphide continues to emerge as a highly strategic material.
At the core of several major technology trends.
Still early in their development.
For example.
During the second quarter, we completed the shipment of the large order relating to Fiveg infrastructure.
We believe this order is evident is that a major infrastructure upgrade cycle for Fiveg is on the horizon.
In fact, a recent report published by the C.G.A.A. Wireless communication Trade Association.
They suggest that by 2020.
Approximately 80 operators in more than 40 countries worldwide will have made fiveg services available to their subscribers.
While the timing and market opportunity are difficult to predict.
We believe that indium phosphide will play an important role.
Critical junctures.
Of the Fiveg architecture.
We had a higher frequencies are required and latency will not be acceptable.
AMC is well position to supply into all of the major supply chain for this application.
And we believe that the quality of our materials offers a compelling value proposition.
For our customers.
In Q2, we also saw an increase in indium phosphide demand for the pounds markets.
Fiber connections for Pong.
Were among the first application to drive demand fall substrates.
And opportunity worldwide remains significant.
We believe it may strengthen further.
With the Fiveg Rolling 2020 and beyond.
In the near term.
It is typical for this market to be lumpy quarter over quarter.
So we are not expecting incremental grows from pounds in Q3.
We are however.
Pleased to see initial indication of the improvement in the datacenter connectivity market.
As we enter Q3.
As many of you have you know this market has been soft for several quarters as a result of a tickup difficult demand environment, coupled with excess inventory.
Indium phosphide by plays a critical role in emerging Silicon Photonics technology.
This technology is experiencing broader adoption.
Particularly in Hyperscale and large enterprise data centers.
Were high bandwidth.
Low latency as long reach all key requirements.
Silicon Photonics can also drive significant improvements in power efficiency, which is a major factor in large scale data centers.
With the expected growth in new data intensive services.
Data centers would need to be able to move large amounts of data through the network.
Resulting in greater performance requirements from Interconnects throughout the entire architecture.
As a result.
Our customers are expressing optimism about the transition over time to one hundredg and 400 gigabit Ethernet technologies.
For example.
Intel announced in April that it expects to reach volume production.
400, G. Silicon Photonics transceiver in Q4 of this year.
As the industry moves to a higher speed the architectural benefits of silicon photonics becomes increasingly compelling at the opportunity for indium phosphide is likely to be significant.
In short.
Yes petition of pounds.
Datacenter connectivity.
And telecommunication.
Contribute the vast majority of our revenue for indium phosphide.
And their potential is expanding.
Four years ago.
Onwards, the only meaningful driver volume in phosphate revenue.
Three years ago, we reported to you that the data center will begin adding to the demand for indium phosphide.
Earlier this year.
We saw telecom telecom beginning to contribute.
With exciting feature.
Correspondingly.
Over the past four years, our revenue from this material has grown for a million or two a quarter to more than $10 million.
As we look out further.
We believe in the past lie.
Could few other major applications.
Based on the development work being done right now.
These include health monitoring.
Advanced Fiveg wireless devices and lied are for the automotive industry.
Now turning to the gathering assets.
Our revenue for both wireless and Ltd applications have seeing setbacks in recent quarters.
While weakness is persisting in wireless applications. We're now pleased to see the beginning offer potentially Rubin LCD market for higher end applications as we enter into Q3.
Discussions with certain customers are taking a more positive tone.
They're in the previous quarters.
And we are seeing incremental stronger demand.
That said, we remain cautiously optimistic until we see a more widespread improvement across our customer base.
Overall.
2000, I team has seen a softer year for gallium arsenide market.
We have used this opportunity to execute a methodical and careful relocation of our gallium arsenide manufacturing.
I am grateful to the entire XT team and I'm proud of our success to date.
We see sizable undertake.
We are increasingly now focused on assisting our customers through the process of qualification shipment and shipment rent from the new facility.
Those efforts.
We will likely continue.
Through the balance of the year and into Q1.
Finally.
Before I hand over the call back to Gary for Q3 guidance I want to note.
That was the changes we made last quarter to our portfolio raw material companies were able to show improvement in the overall contribution to our results in Q2.
In particular, those we account for with equity method.
Heck it had a cumulative gain in this quarter.
This comes at a time, where the pricing environment for raw material is stabilizing and we are doing a better job and leveraging the benefit.
Of our portfolio in improving our substrate cost structure.
Now in closing.
Q2 was a quarter of positive progress on many fronts.
In a difficult.
Demand environment, we achieved solid financial results.
Including profitability expansion.
Cash generation.
Major emerging technology trends continue to gain momentum in strategic areas of our business.
Such as indium phosphide.
Laying a foundation for our growth.
Over the next several years.
In the meantime.
We are executing our move.
Focusing on manufacturing excellence.
And continue to invest.
In our technology.
We believe the market is showing early signs of improvement.
We are ready for the opportunity.
This concludes my prepared comments I will now turn the call back to Gary.
For our third quarter guidance, Gary Thank you Morris.
As we discussed we had a strong increase in our revenue in Q2 in part driven by a sizable order for indium phosphide side and that will not repeat in Q3.
However, as Morris noted, we're pleased to see indications of an improving demand environment for indium phosphide in the datacenter and for gallium arsenide in Lsds.
As such we expect to see revenue in Q3.
And up between 24.5 million to $26.0 million.
We believe our earnings per share in Q3 will be in the range of one to three cents based on 40.1 to 3 million diluted shares outstanding.
This concludes our prepared comments Morris and I will be glad to answer your questions now.
Howard.
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Our first question or comment comes from the line of Richard Shannon.
Your line is open.
Gary Thank you for taking my questions.
[noise] gave me a last question on the guidance from you here one I typically ask here given we only had a few seconds absorbed here wanted to get your take on how we should think about gross margins as we go from the second quarter to third obviously had a good number in the second quarter.
Seems like with a little bit I guess similar level some level those revenues, we should be in the similar range gross margins, but just want to make sure that we're reading the tea leaves right way here.
Well actually I think the gross margin will not be as good in Q3.
And that's primarily because the product mix is not quite as Richard for indium phosphide. So.
So I, probably knocking down a bit in your model.
Okay.
Well, let me ask about those those revenue segment movements here it seems like you're suggesting any inphi. So it will be down sequentially.
Is that a fair assessment.
Yes.
Okay, then how should we think about gallium arsenide seems like it would have to be up somewhat.
From your comments it sounds like wireless still maybe a little bit tepid, but LCD sounds.
Reasonably good.
So with gallium arsenide to be up then sequentially.
Yes.
Absolutely right.
He is showing signs of recovery.
Oh, and although one customer on telling us they are seeing better second house definitely than first half.
But yeah upcoming is not uniform at this time, so we have.
Good.
But so so as revenue from L.C.D. definitely will be up for Q3.
And second half will definitely be in Q1 as first half.
The first half okay.
And then would you expect any fast five to still be a higher than grow the gallium arsenide interested in third quarter.
Oh hang on let me just check some notes here.
It might be a tie or any prospects might be a bit lower.
Miller, Okay, well it gives us good perspective there.
Maybe a question or two on the new facility here.
Just wanted to get your any more thoughts on the on the state of the progress here I think last quarter, you talked about perhaps as much as 15% to 20% of the revenues have moved from the old facility to the new one wanted to get an update there and whether you still expect to be largely transferred over by the end of this year.
Yeah. That's a good question I think you know the the facilities ready you know we have done all the qualification work that none of them on turning that.
It's all good results. So far we see I think however, you know with the demand being solved I think there is not much of a oh just see from all customers Wassa transfer, especially that we are showing our customers that we <unk>, our Beijing facility kit.
He gets to support them. So I watched it made between you know.
Upper teens, 20% is coming from the new locations.
But we are we are working with our customers to encourage them to take more and more from that new facility as we progress into second half and as well as Q1 of next year.
Okay Fair enough I'll ask one more question and jump out of line and that's related to three D. Sensing we've seen a couple of companies.
And the three D sensing Fujian comp food chain comments here in the last several days.
And it seems like we're seeing a pickup in the Android space.
So maybe want to ask you kind of a twofold question, which is.
Any any comments you can give relative to.
Opportunities to qualify and B and B qualified vendor into Apple's three D sensing food chain and then what the what are you seeing in terms of the Android space Your qualifications.
Orders et cetera.
I think you know if you asked me, whether we have any potential order for volume production for the second half of the year. The answer is no.
We're still working with our customers to make sure that they would take all probably again, we do note that from several sources.
So well to keep sensing is still very much in the forefront of the girls perspective.
Money.
You know for the industry. That's a good news was however, I think that the expected volume production, we don't see it for the second half of this year and as we move.
A complete the move to our new factory, we see all perspective will become better.
[noise].
Okay Fair enough. That's all the questions for me guys. Thank you.
Thanks Richard.
Thank you.
Our next question or comment comes from the line of Quinn Bolton from Needham Your line is open.
He's worsen Gary congratulations on the nice second quarter results wanted to a follow up on your initial comments on the Fiveg demand specifically, hoping you could give us a little bit more color on what that application is I assume it's something in the optical front haul or backhaul, but just wondering if you could.
To provide a little bit more color on that opportunity. Thanks.
Sure.
Oh, you know usually when our customer older subsidy from US we don't know what the applications are so the way that we classify each one of these application is that you know some of these are so good size and from the demand of specification. The bus we sort of know what what is for data center as was Fiveg infrastructure is concerned.
This particular customer is a telecom manufacturer and they are launching a fiveg infrastructure build so we think is a yield for the fiveg infrastructure rollout.
Ah, but how big the market is how big opportunities, it's really very difficult for us to tell but as we see that a a especially this is a first order they sort of large order. They gave us. So we need just a little bit time to see how big it is and what the other manufacture of Fiveg infrastructure will give us orders to give us an indication of you know.
What's the perspective market and opportunity for us, but we think you know US. We also say that fiveg will not only give us the infrastructure build out and the front haul backhaul as a potential.
Business opportunity Boys 45, but also for data center as they need to get.
Hi speed connection that will also increase our opportunity as well as parts market every time that you make it optical connection you need Uh huh.
Hi, So I think overall the five key should be very good news. So as we said you know Paul is the first layer and data center. The second layer on and and then finally is a fiveg infrastructure build out I think it's all going to layer onto the opportunity for indium phosphide material.
Got it and then your comments on the data Center. You said you were starting to see a demand beginning to improve just wondering was that across multiple of the optical module or.
Data center laser companies or or was it driven by you know sort of just a small handful of customers. Just just kind of trying to get a sense of how broad based that the beginning to that demand uptick or.
Well, we have a customer that is most of these customer we have our IP cores and obviously they don't tell us what the error.
Customers are but when we listen to their conference call I'd also say.
The average diversified.
Customer base.
But.
They do seem to indicate they have a very large customer in particular, which they are supplying too, but they also diversifying to other customers.
Got it got it and then just the last question on that on the gas side of the business. Obviously, you said that you still have yet to see.
The smartphone demand picking up by I guess I would think seasonally as you go into the second half with New models. You know there were you know in a typical year be a seasonal uptick in that in that business. Do you think this year. It's just we're we continue to go through inventory digestion in the smartphone market or do you have some sense why that demand may may still be weak going into the second half.
Yeah, I would characterize our business I mean.
The last quarter of.
2019 was very particularly bad year, and everybody was trying to cut inventory and everybody was uncertain about the business perspective folks the future. So we saw a dollar revenue come down very dramatically as the quarter improve you know first quarter. We saw a sizable order for indium phosphide is that sort of second half of some for school.
First quarter, and second quarter, and we're definitely seeing things up better and overall second half seems to be better than first half.
But as far as what wireless but in particular is concerned that please.
You know second half will be better than first half.
But whether that is recovering to the 2017 18 level.
Ah I was to say its on the recovery mode, but they were not reached a 2017 or 18 and level.
Got it okay. Thank you very much.
Thanks Quinn.
Thank you.
Our next question or comment comes from the line of Gus for Shark from Northland. Your line is open.
Thanks for taking the question just quickly you didnt mention the.
Germanium business in your prepared remarks, any any comments around that that product line.
Yeah, what what Paolo Oh, you mean uranium germanium is as usual I mean, they don't we don't see a big uptick, but a decentralized ceiling.
Reasonably strong demand, we expect that business to actually improve as we enter into the second half of the year.
Okay, and then you mentioned only de was better and I think you said it was you're seeing some demand from the high end and I'm, assuming that's not just the.
Low and blue early days or any additional color around what parts of the only de market or are improving.
Yeah, we haven't one particular customer.
As a.
A strong signal their business reviews. It is recovering Oh, and we saw India wave side, the indicating near L.D. These are all high end for automobile as well as a driver alone is monitoring and seem to read and so they have fairly sizable customer, but however, we have a diversified customer and the L.C.D. Some of the medium size or smaller size also I am not showing the same recovery yet that's why we're hedging a little bit weak, but we think this large customer if they are indicator and I think you know we're seeing the beginning of the recovering of their leading industry for sure.
Okay. So will you be applications around the automotive market, primarily yes, yeah and.
Yeah, and Mike Hi, and signage to buy side in automotive is a key driver and the other big application is actually a printer heads.
Okay right.
Okay, all right perfect. Thank you so much.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our next question or comment comes from the line of Matt course on from B.W.S. Financial Your line is open.
So first off just want to ask you, what's the difficulty you're seeing or you're the feedback that you're getting from customers as far as this move to the new facilities was concerned that it seems like it's a ongoing issue now you're talking about Q1 of next year.
Yeah.
Let me take this Oh Morris year, I think you know it does depends upon the customers I mean so.
The most difficult customers are the people who deal with.
Telecommunications you know they have a very rigid and.
Qualification cycles in some of our cousins has told US what is your sense qualification samples they need 12 months.
Okay. So.
That you know given that we started the qualification process sometime you know first half of last year and they are just about ready to finish their qualification Wednesday.
Finished the qualification they will start.
Southern tip their toes into the water and order a patent lie and maybe shifting went through from the new factory and that they will evaluate how good the performance is down compared with the old factory. So it's not only the quantification, but also they need to be comfortable that we're delivering better quality facility and the second or perhaps use a hindrance I seems to be is that you know the market itself is not very robust so.
People are taking their time sweet time too.
Get through the process you know not only in the Lakers doesn't like to.
No.
And sometimes you need to encourage them to give them.
Nudge and say you know [laughter] and Unfortunately, you know we can you know thats our own fault. We also assured our customers that we can you supply them from all of old factory and normal it is yeah.
In keeping with the old factory I mean, we we don't want to see you know new things. So those are probably the factor and as I think the industry to recover a little bit and also is on the fact that we see we hear our customers said.
He's as well Mark told me he will win once you have 50% or 60% of customers to give them do you factor. It will start buying more from this things like well if everybody waits for that 50, 60% [laughter].
So I mean, well we do have good customers that we're working with and we hold their handset week highly encourage them and the business the opportunity improves a little bit and you know.
I think it will go yeah. This is Gary let me just summarize that and add one more thing but.
Yes, there there is not a huge sense of urgency on the customer's part because business is a little bit slow.
And and secondly, there is a little bit of gamesmanship going on.
Between the customer that where they they don't want to be.
On the first 20% you know through the tunnel so to speak.
But no one has had any complaints about what they've seen in terms of the wafers. Okay. So there's not an issue here about there's a problem with the wafers, it's really customer motivation and gamesmanship. So that you know we have our internal qual data, it's exactly what we always expected which is that you can't tell the difference between the site and that's what the customers are finding also so we just need to keep them motivated and you know we're working on that with our sales guys and we're confident will happen, but it's just taking longer than we normally one is it too.
How much of your revenue is coming from the new facility.
Oh, it fluctuates it probably I would say in the low twentys.
Okay, and then can you just talk about the tone that you had earlier in your comments why so much focus on the cash balances this quarter.
Seems like that's becoming a big priority, even though you have $36 million of cash in the balance sheet.
Well for one thing cash went out so I want to make sure people notice that [laughter], yeah that I'm not sure I noticed on that but you're also making those comments though.
Well, we we had comments last quarter too so.
Hey people are asking me you know please comment on cash so I'm I'm happy to accommodate that.
That's why we're doing it so.
Okay, great. Thank you.
You're welcome.
Thank you. Our next question or comment comes from the line of Mason MZ from Dougherty and company. Your line is open.
Related to the new facility I'm curious at what capacity are you operating there and then where are you in transit transitioning your customers to getting new orders out of all of the new facility.
Well you know by definition, the new facility will be able to.
Completely take over all the production you know told me facility. So if we say its a shipping out 20%. So is capacity utilization is only going to miss it.
Okay, and then as far as getting those customers certified to two deliver out of that new facility, where are you at in that transition.
Well as I said you know we were we were delivering a qualification samples at me. So far we have not heard any bad news, but it's a.
It depends upon what cycle they qualify and we ourselves are I'll keep on telling asking them I mean can you take more.
Oh wait for delivery from a new facility. So that's a interactive process, we're pushing it.
Okay.
And then in terms of the gallium arsenide.
Whats your viewpoint I'm looking for is done on some of those end market applications and if it is favorable.
Well could we expect any increases in opex going forward.
Well, our view about gallium arsenide going forward is that the.
There are definitely a expanding market, especially if you look at the the three D sensing opportunity.
We expect that to be a driver, but also industrial lasers are expanding and other other applications that that we sell into.
It it expansion of gallium arsenide revenue should not cost us a lot in terms of opex. So there's there's not a one to one correlation.
You know, we we our business model for sales relies on or direct sales primarily.
And we compensate our sales professionals not based on some mathematical formula if they get a big order is it it. It's so if they if if revenue goes up it doesn't necessarily mean that the selling costs go up.
So that there's other line of question, maybe I should comment is that do you see we're building the new factory based upon I think we estimate around 30% increase from our Beijing facility. So if you take our highest the gallium arsenide revenue per year and a time study to send them with the you know price price erosion over the next the euro too. So you know it should have plenty of capacity to expand too. So you know if you ask.
Gosh that business will do expanding market size, we will incur more.
Yes, the cost.
The answer is no.
Okay. Thank you.
You're welcome.
Thank you.
I'm showing no additional questions in the queue at this time I would like to turn the conference back over to Dr. Morris young for any closing remarks.
Thank you. Thank you for participating our conference call. During Q3, we will be participating in the 11th annual BW S. financial growth and values. This summer.
Investors see this in New York August 13th.
As well as the Jefferies 2019, semiconductor hardware and communications infrastructure summit in Chicago on August 27th.
And to your 2019, Doherty <unk> company institutional Investor Conference in Minneapolis on September to fit.
We look forward to seeing many of you there as always please feel free to contact me, Gary Fischer and Leslie Green directly if you would like to meet with US. We look forward to speaking with you in the new feature.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.