AXT Inc

Good afternoon, everyone, and welcome to AXD's fourth quarter and fiscal 2020 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Gary Fisher, Chief Financial Officer. My name is Buena, and I will be your coordinator today. At this time, all participants' lines are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to turn the call over to Leslie Green, Investor Relations for AXC. Thank you. Please go ahead, Matt.

Thank you, Boyan. 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 events or results to differ materially. These uncertainties and risks include, but are not limited to, overall conditions in the market 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 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 for materially from our current expectations. This conference call will be available on our website at aex.com. through February 18, 2022. 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 fourth quarter and fiscal year 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 Fisher with a review of our fourth quarter and fiscal year results. Gary?

Thank you, Leslie, and good afternoon, everyone. Total revenue for the fourth quarter of 2020 was $27.0 million, up 6% from $25.5 million in the third quarter of 2020, and up more than 46% from $18.4 million in the fourth quarter of 2019. Of our total revenue, substrate sales were $21.5 million in Q4, compared with $20.3 million in the third quarter, and $14.5 in the Q4 of 2019. Revenue from our raw material joint ventures was $5.5 million in Q4, up from $5.2 million in Q3, and up from $3.9 million in Q4. In the fourth quarter of 2020, revenue from Asia Pacific was 71%, Europe was 16%, and Taiwan was 13%, and North America was 13%. In the fourth quarter, two customers reached 10% of revenue, and the top five customers generated approximately 37% of total revenue. Gross margin in the fourth quarter was 33.9%, down slightly from 34.6% in the prior quarter. Given that in Q4 of 2019, the gross margin was 21%, the year-on-year comparison is very encouraging. This spread is a quick illustration of the leverage we get from higher revenue, and I think it is noteworthy in terms of evaluating our business model. Both Q3 of 2020 and the recent Q4 are much stronger. I think we can still achieve higher than the recent two quarters in terms of gross margin, and Morris and I will be watching for some specific items. One, of course, is product mix, another is overall revenue volume. A third is that we think there are still some gains to be made in yields and manufacturing efficiencies as the manufacturing teams settle into the new locations. Total operating expenses in Q4 were $7.2 million, up from $6.6 million in the prior quarter, and $6.7 million in Q4 of 2019. R&D is up $125K over Q3, as we are making good progress on some R&D programs. SG&A is up $460K, and that increase is driven by several factors. The largest contributor is year-end bonuses, totaling about $350K. About half of this was in the two consolidated raw material companies. We had a good year with a strong finish, and in Q4, it was nice to be able to reward our team. Second, we had a charge for bad debt of 50K, something that does not happen too often in our business model. We also had charges related to the private equity round and preparing for the IPO in China. And travel was up as a number of us, including Morris and me, went to China. Total stock compensation expense for the fourth quarter was $692,000. Operating profit for the fourth quarter was $1.9 million compared with an operating profit of $2.2 million in the previous quarter and an operating loss of $2.8 million in Q4 of 2019. Other income net for the fourth quarter of 2020 was a gain of almost $600K. This includes grants of almost $540K. Especially noteworthy is the net profit of $354K from the partially owned companies in the AXC supply chain accounted for under the equity method, so that's good news. It's nice to see that group be positive again. The market for raw materials has tightened up, and this is a good sign. We think this will hold in 2021. These gains were offset by foreign exchange loss of 300K and a net charge of 40K for interest, income, and expense. Income tax for the fourth quarter of 2020 was a charge of 108K compared with the charge of 673K in Q3. Our Q4 results included approximately 400K in tariffs as a result of the 25% tariff charge on importing wafers into the United States from China. For Q4 2020, we have a net profit of 2.1 million, or a profit of 5 cents per diluted share. By comparison, we had a net profit of 1.0 million, or a profit of 2 cents per diluted share in the third quarter of 2020, and a net loss of 2.0 million, or a loss of 5 cents per share in Q4 of 2019. The share count for Q4 was 42.042 million shares. Cash, cash equivalents and investments were 78.6 million as of December 31st. By comparison, at September 30th, it was 29.8 million. This increase is a result of the 48.8 million, this is, pardon me, this increase of 48.48 million is directly related to the IPO first steps of partnering with private equity firms in China. Without that, cash would have been flat. I'll give a brief update on the Star Market IPO project in a moment. Appreciation and amortization in the fourth quarter was $1.37 million, and investments were $5.3 million. Net inventory at December 31st increased by $3.2 million in the quarter and ended at $51.5 million. Ending inventory consisted of approximately 48% in raw materials, 47% for work in progress, and only 5% in finished goods. The largest increase was in raw materials, and this was deliberate on our part. Okay, this concludes the discussion of our quarterly financials. Let me just briefly highlight the fiscal year. For the fiscal year 2020, revenue was $95.4 million, up almost 15% from $83.3 million in fiscal 2020. year 2019. This represented growth in every revenue category across our portfolio and underscores the momentum we are seeing in major technology trends that drive demand for our compound semiconductor substrates. Gross margin for fiscal year 2020 was 31.7% of revenue, up from 29.8% of revenue for fiscal year 2019. Net income for the fiscal year 2020 was $3.2 million, or seven cents per diluted share, compared with a net loss of $2.6 million, or $0.07 per share, for fiscal year 2019. And now I'd like to give you a brief update and comments about our plan to list our company in China on the star market in Shanghai. And these comments also include some forward-looking statements. On November 16th, we announced a strategic plan to access China's capital markets and progress to an initial public offering and by our company, the formal name of Beijing Tongmei Crystal Technology Company, our wafer manufacturing company here in China, although the short name is Tongmei. The first major step in this process is engaging reputable private equity firms in China to invest funds in Tongmei. This went smoothly, was met with enthusiasm, and closed faster than we expected. In January, the final installment of $1.5 million in private equity funding came in. In total, we have banked approximately $49 million in and in aggregate sold approximately 7.28% of Tang Mei. Simultaneously, we've been working on some reorganization plans, which will make Tang Mei have broader product lines, more consolidated revenue, more customers, and in general strengthen this company and support the high valuation awarded by that investment community. One example is that we are moving our two crown jewel raw material companies, Boyu and Jin Mei, into the Tang Mei family. We did receive some very positive feedback from a number of shareholders when we announced this. Several of you described this as unlocking a hidden asset, and that resonates with Morris, Leslie, and me. Morris founded Tongli in 1998, and the management team has nurtured and steered that company now for over 22 years. Morris and I both spent over two months there in the fall of 2020, including the mandatory two-week quarantine. Especially with the relocation having gone so well, We agree that we are now unlocking a hidden asset in China. One of you also responded with an email that just said, wow, and that resonates for us too. We hope to file the application with the China Securities Regulatory Commission by the end of June. There's a lot to accomplish to achieve that goal, and it will be a busy four months for us. Okay, this concludes the financial review. I'll now turn the call over to Dr. Morris Young for a review of our business. Morris?