AXT Inc

Good afternoon, everyone, and welcome to AXT's third quarter 2020 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Mr. Gary Fischer, Chief Financial Officer. My name is Joanna, and I will be your coordinator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touch-tone telephone. Another reminder, this conference call may be recorded. I would now like to turn the call over to Ms. Nessie Green, Investor Relations for AXP. Ma'am, the floor is yours.

Thank you, Joanna, 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 substrates, our product mix, our ability to increase orders in succeeding quarters, to control costs and expenses, to improve manufacturing yields and efficiencies, to utilize our manufacturing capacity, the schedule and timeliness regarding our relocation, the growing environmental health and safety and chemical industry regulations in China, as well as global, economic, and political conditions, including trade 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 results or 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, Increased 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 in 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 current expectations. This conference call will be available on our website at AXT.com through October 28, 2021. Also, before we begin, I want to note that shortly following the close of market day, we issued a press release reporting financial results for the third quarter of 2020. This information is available on the investor relations portion of our website at AXT.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. As many of you are aware, Morris and I spend a considerable amount of time in China on behalf of AXT. But this year, because of the pandemic, we have been Zooming instead of flying. However, we are both currently in our Beijing offices, and it is about 4.30 in the morning. So we went through the mandatory 14-day quarantine when we arrived, which was a unique experience. And the whole thing of getting the visas and getting the required COVID tests and all the rest was stressful. but we want our shareholders to know that we are glad to do it because we're excited about what's happening and about the opportunities that we see for AXT. So it's been a good trip and we're not leaving yet, we're still here. Now let's turn to the results of Q3. Total revenue for the third quarter of 2020 was $25.5 million, an increase of more than 15% from $22.1 million in the second quarter of 2020 and more than 28% increase from $19.8 million in the third quarter of 2019. Of our total revenue, substrate sales were $20.3 million in Q3, compared with $16.9 million in the second quarter, and $16.0 million in Q3 of 2019. So that's a good step up. Revenue from our raw material joint ventures was $5.2 million in Q3, down slightly from $5.3 million in Q2, and up from $3.9 million in Q3 of 2019. In the third quarter of 2020, revenue from the Asia Pacific was 70%, Europe was 17% and North America was 13%. An interesting aspect of the Q3 revenue is that even though revenue grew 15% quarter to quarter, we had no customer that reached 10% of revenue in Q3, which speaks to the diversification of our revenue base. The top five customers generated approximately 29% of total revenue. Gross margin in the third quarter was 34.6%, up from 30.6% in the prior quarter, The improvement in gross margin was due to a combination of higher revenue, product mix, some improvements in manufacturing, as well as strong performance from one of the two consolidated raw material companies. By comparison, gross margin was 29.0% in Q3 of 2019. Total operating expenses in Q3 were $6.6 million, up from $6.3 million in the prior quarter. Over 100% of the increase over Q2 is connected to some of the development work that we are conducting. SG&A actually decreased in Q3 by 124,000 and R&D increased by 480,000. Total stock compensation for the third quarter was 648,000. Operating profit for the third quarter of 2020 was 2.2 million compared with an operating profit of 478,000 in the previous quarter. Operating loss in Q3 of 2019 was $478,000. Other income net for the third quarter of 2020 is a charge of $59K. This includes a net profit of $45K from the partially owned companies in AXT's supply chain, accounted for under the equity method. This is noteworthy because it means that collectively these joint ventures turned profitable in Q3. We had a foreign exchange loss of $135K, a net gain of $31K in net interest income and expenses. Income tax for the third quarter of 2020 was a charge of $637K compared with a charge of $920K in Q2. Our Q3 results included approximately $320K in tariffs as a result of the 25% tariff charge on importing wafers into the United States from China. For Q3 2020, we had a net profit of $991,000 or a net profit of $0.02 per diluted share. By comparison, we had a net profit of $361,000 or a profit of $0.01 per diluted share in the second quarter of 2020 and a net loss of $900,000 or a loss of $0.02 per share in Q3 2019. The share count in Q3 was 40.979 million shares. Let's look at the balance sheet briefly. Cash, cash equivalents and investments were $29.8 million as of September 30th. By comparison, at June 30th, it was $32.5 million. This is a decrease of $2.7 million, but actually operating cash increased by about $200K, and let me explain why. You may recall that last summer, we took out a $5.8 million bank loan in China. That loan has now been renewed, but the bank requires that we pay back the loan, and then they reissue it again. That's customary in China. So we paid the full amount back in Q3, but the bank issued half back in Q3 and the other half in October, which is our Q4. Our cash decrease would have been offset by the amount of 2.9 million that slipped into October and we would have been cash positive for the quarter. As a result, we continue to feel good about our cash management and our cash balance. Depreciation and amortization in the third quarter was 995K and CapEx was about 5.7 million. Net inventory at September 30th decreased by $1.2 million in the quarter and ended at $48.4 million. The decrease was the result of increased sales. Ending inventory consisted of approximately 48% in raw materials, 48% in work in progress, and 4% in finished goods. These portions stay fairly constant in our business model. Okay, I know I spoke fast, but this concludes our financial review, and now I'll turn the call over to Dr. Morris Young for a review of our business.