AXT Inc

Hello, everyone, and welcome to the AXT's first quarter 2021 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Gary Fisher, Chief Financial Officer. My name is Lori, and I will be your coordinator today. At this time, all participants are in a 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. And please be advised that today's conference is being recorded. And I would now like to turn the call over to Leslie Green, Investor Relations for AXP.

Thank you, Lori, 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 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 a contagious disease, potential tariffs and trade restrictions, increased environmental restrictions 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 to differ materially from our current expectations. This conference call will be available on our website at AXT.com through April 28, 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 first quarter of 2021. 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 for a review of our first quarter results. Gary?

Thank you, Leslie, and good afternoon, everyone. We are pleased to report that total revenue for the first quarter of 2021 was $31.4 million, up 16% from $27.0 million in the fourth quarter of 2020, and up 51% from the $20.7 million in the first quarter of 2020. As many of you know, we expected that the convergence of expanding markets such as 5G, moving past the relocation program, and overall growth in indium phosphide would push us past the $30 million mark, but we could not predict the exact quarter for this event. It is an exciting milestone, and Morris is already pushing the team towards new goals. Of our total revenue, substrate sales were $23.4 million, compared with $21.5 million in the fourth quarter of 2020 and $16.9 million in Q1 of 2020. Revenue from our two consolidated raw material joint venture companies was $8.0 million in Q1, up from $5.5 million in Q4 of 2020, and from $3.8 million in Q1 of 2020. In the first quarter of 2021, revenue from Asia Pacific was 73%, Europe was 17%, and North America was 10%. Also in the first quarter, no customers reached 10% of revenue, and the top five customers generated approximately 26% of total revenue. As you know, we normally read these statistics quickly and move on, but today I want to highlight them because they're important. Usually, we do have at least one 10% customer, and usually the top five customers contribute approximately 35 to 40% of total revenue. This quarter, when we achieved over $31 million in revenue, it was not because of one big order from one big customer. Further on this point, the top five customers made up a smaller percentage of our total revenue than normal. Together, these factors vividly portray an increasingly broad-based, diversified set of customers and applications. From a business perspective, it is significant in demonstrating the growing adoption of the materials we manufacture, as well as the repeatability of this quarter's success. Okay, moving on, gross margin in the first quarter was 36.8%, up 33.9% from Q4 of 2020. and up from Q1 of 2020, which was 26.6%. The increase was primarily driven by product mix and increasing revenue volume, and there was some tailwind for us from one of the consolidated raw material companies. Total operating expenses in Q1 were $8.0 million, up from $7.2 million in the prior quarter, and $6.2 million in Q1 of 2020. In comparing Q1 of 2020 to the recent Q1, The majority of the increase, 55%, in fact, is in R&D. Included in this are the development costs for 8-inch gallium arsenide wafers. Today, after the market closed, we released an announcement describing our success in developing and shipping 8-inch gallium arsenide wafers. Morris will give you some color on this in a moment, but it is a big step, and we believe our investment in this program could lead to sizable new opportunities. We are currently in development of six-inch Indian phosphide wafers. This is another R&D project that is expected to position us to participate in some exciting new applications for Indian phosphide. To put Q1 operating expense in perspective, total OPEX as a percent to revenue was 25.4% for the quarter. This is a bit lower than the 2020 quarterly average of 27.6%. We currently have a lot of exciting growth initiatives underway, which leads us to believe that we will be in this range over the next several quarters. Nevertheless, we will be drilling down more deeply to ensure controls and oversight are appropriate. Total stock comp expense for the first quarter was $816K. This is also part of the OpEx increase as it is up $125K over Q4 and a bit more than Q1 of 2020. Operating profit for the first quarter of 2021 is $3.6 million compared with an operating profit of $1.9 million in Q4 and an operating loss of $634K in Q1 of 2020. Other income and below the line items including tax provision for the first quarter of 2021 was a net gain of $204K. Especially noteworthy in Q1 is a net profit of $1.1 million from the partially owned companies in AXT supply chain accounted for under the equity method. The market for raw materials has tightened up and raw material pricing has increased. These gains were offset by a foreign exchange loss of 173K and a tax position of 746K. Our Q1 results included approximately 275K in tariffs as a result of the 25% tariff charged on importing wafers into the United States from China. For Q1 2021, we had a net profit of $3.4 million or a profit of $0.08 per diluted share. By comparison, we had a net profit of $2.1 million or a profit of $0.05 per diluted share in the fourth quarter of 2020 and a net loss of $178,000 or a loss of $0.01 per share in Q1 of 2020. The share count for this recent Q1 was 42.726 million shares. Cash, cash equivalents, and investments were 66.9 million as of March 31st. By comparison, at December 31st, it was 78.6 million. The decrease is primarily attributable to an increase in working capital accounts for accounts receivable, for inventory, and prepaids of 9.8 million, which was modestly offset by an increase in AP of 730,000 plus capex payments. To put this in context, revenue is up 4.3 million from the previous quarter, and accounts receivable is up 3.9 million. These two numbers are correlated, and this is especially true for Q1 because the early months of Q1 had the Chinese New Year, a week-long break, and as a result, our shipments were back in load for the quarter. Collections from these shipments will move into Q2, benefiting cash this quarter. We also use cash for inventory, which is up because of two reasons. First, the order rate is strong, which means we are needing more inventory. Secondly, raw material prices are moving up, and we're buying a little bit ahead of the market to keep our COGS lower. Finally, we use cash for prepaids, which are up as a result of the annual year payments that will be amortized over 12 months. An example of this is insurance premiums. This gives you a bit of color on cash utilization. Depreciation and amortization in the fourth quarter is $1.6 million, and capital investments were $5.6 million. Net inventory at March 31st increased by $3.2 million in the quarter and ended at $54.7. Ending inventory consisted of approximately 46% in raw materials, 48% in work in progress, and 6% in finished goods. All right, this concludes the discussion of our quarterly financials. Before Morris speaks, let me give you... a brief update and comments about our plan to list our company in China on the star market in Shanghai. As early as the fall of 2019, we were looking into this possibility and spent considerable time and effort in assessing the opportunity during all of 2020. We finally publicly announced it to all of you in November 2020, while Morris and I were still together in China. One of the things that became clear as we drilled down is that the process is more complicated than an IPO in the US and that it takes longer to accomplish. An interesting example is that prospective IPO company in China is required to have mandatory training in what it actually means to be a public company. What are the requirements and expectations placed upon a public company? Morris took AXT public in 1998, but even he is going to be required to take the training in China. We completed the private equity activity in January, and the rest of Q1 efforts included aligning our hidden assets in China beneath our main company in Beijing named Tang Mei. Tang Mei is also undergoing an audit conducted by Ernst & Young China, and here again it is more detailed and more complicated. Fortunately, we have a great team, and they are both patient and persistent. These sorts of steps will continue in Q2. We're hoping to submit our SEC application around June 30th. or in Q3. Overall, the process is going fine. We continue to think that our overall timing is good in terms of market opportunities on the horizon and accessing favorable capital markets in China. In conclusion, it has been a busy but good quarter, and this concludes our financial comments. I'll now turn the call over to Dr. Morris Young for the review of our business. Morris?