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spk04: And welcome to AXT's fourth quarter and fiscal year 2021 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Gary Fisher, Chief Financial Officer. My name is Justin, and I will be your coordinator for 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 this session, you'll need to press star 1 on your telephone. Please be advised that this call is being recorded. If you require any further assistance, please press star 0. I would now like to turn the call over to Leslie Greene, Investor Relations for AXT.
spk01: Thank you, Justin, 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 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 contagious disease, potential tariffs and trade restrictions, increasing 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 to differ materially from our current expectations. This conference call will be available on our website at AXT.com through February 2023. 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 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 fourth quarter and fiscal 2021 results. Gary.
spk06: Thank you, Leslie. And good afternoon, everyone. As a reminder, in response to investor requests and to align with our peers, as well as to provide better clarity on our operational financial results, we will be providing both GAAP and non-GAAP financial results. Non-GAAP results exclude stock-based compensation. Investors can find a GAAP to non-GAAP reconciliation tables in our earnings announcement. Today, we are pleased to report that total revenue for the fourth quarter of 2021 was $37.7 million. up 9% from 34.6 million in the third quarter of 2021, and up 40% from 27.0 million in the fourth quarter of 2020. Q4 marks our eighth consecutive quarter of growth and highlights the market expansion and increasing demand for our indium phosphide and gallium arsenide substrates. To break down our Q4 21 revenue for you by product category, indium phosphide was 13.1 million, gallium arsenide was 11.3, Germanium was 4.2, and revenue from our two consolidated raw material joint venture companies was 9.1. In the fourth quarter, revenue from Asia Pacific was 74.9 percent, Europe was 16.7, and North America was 8.4. Again, in Q4, no customers reached 10 percent of revenue, and the top five customers generated approximately 29 percent of total revenue. Our continued revenue diversity demonstrates that our growth is not overly dependent on one large customer or application. This is another factor contributing to our confidence that our growth has reached a point of sustainability and will continue throughout 2022. Non-GAAP growth margin in the fourth quarter was 32.4% compared with 33.8% in Q3 of 2021 and 34.0% in Q4 of 2020. For those who prefer to track results on a GAAP basis, gross margin in the fourth quarter was 32.2% compared to 33.3% in Q3 of 21 and 33.9% in Q4 of 2020. Our gross margin came in slightly lower than the prior quarter. Contributing factors were increasing raw material costs within a constrained environment of demand, lower yields in some of our products, and the decision to accept strategic lower margin business in order to position ourselves competitively in advantageous markets and customers. These factors offset the improvements made to gross margin at Gen May from expiring contracts, as well as a new and promising raw material recycling program that Morris will comment on shortly. Gross margin improvement is a top priority for AXT in 2022. Like most businesses, we have seen a steady increase in costs relating to everything from wages to the materials required to manufacture our products. Those increases will likely continue to create some near-term offset in 2022. However, we think we can get back to 35% range this year. Improvement will come through growing volume, favorable product mix, better pricing, and a strong focus on yield improvements and manufacturing efficiencies. We also believe that we will see some incremental gross margin improvements as GMA continues to work through some of the contracts that began creating a headwind in Q3. Total non-GAAP operating expense in Q4 was $8.1 million. This compares with $7.7 million in Q3 of 2021 and with $6.6 in Q4 of 2020. On a GAAP basis, total operating expense was sequentially flat at $9.1 million. For comparison, total GAAP operating expense was $7.2 in Q4 of 2020. R&D remains one of the primary drivers of the increase in our OpEx. We have two major programs that are ongoing, the development of 6-inch indium phosphide and the development of 8-inch gallium arsenide. Non-GAAP operating profit for the fourth quarter of 2021 was $4.1 million compared with the non-GAAP operating profit of Q3 in 2021 of $4.0 million and $2.6 million in Q4 of 2020. For reference, GAAP operating profit for the fourth quarter of 2021 was 3.0 million, up from an operating profit of 2.4 million in Q3 of 2021 and an operating profit of 1.9 million in Q4 of 2020. Non-operating other income and expense for the fourth quarter of 2021 was a net loss of $100,000. The full breakdown is in our press release. For Q4 of 2021, we had a non-GAAP net income of 4.1 million, or 9 cents per share, compared with 5.4 million, or 13 cents per share in the third quarter of 2021. Keep in mind that the third quarter results included two local government grants totaling $1 million, which did not repeat in Q4. Non-GAAP net income in Q4 of 2020 was 2.8 million, or 6 cents per share. On a GAAP basis, net income in Q4 was 3.0 million, or 7 cents per share. By comparison, net income was 3.8 million, or 9 cents per share in the third quarter of 2021, and $2.1 million, or $0.05 per share, in Q4 of 2020. The weighted average diluted shares outstanding in Q4 of 2021 was $42.8 million. Cash equivalents and investments were $51.8 million as of December 31st. By comparison, at September 30th, they were $56.0 million. Depreciation and amortization in the fourth quarter was $2.0 million, and capital investments were $10.5 million. Total stock comp was $1.1 million. Net inventory at December 31st was $65.9 million. Okay, this concludes the discussion of the quarterly financial results. Now, let me briefly highlight the total year of 2021, which is a fun part of my presentation because a lot of good things happen. For the fiscal year of 2021, revenue was $137.4 million, up more than 44% from $95.4 million in fiscal year 2020. It is important to note that this growth is all organic, driven by market expansion and market share gains. In 2021, we grew in every revenue category across our portfolio without the help of price increases. This underscores the momentum we are seeing in our business with new applications coming to the market, major technology trends, and our own success in winning share at strategic customers. Gross margin for the fiscal year 2021 on a non-GAAP basis was 34.8%. compared with a 31.9% for fiscal year 2020. GAAP gross margin for 2021 was 34.5%, compared with 31.7% of revenue for fiscal year 2020. Net income for the fiscal year 2021 on a non-GAAP basis was $19.1 million, or $0.44 per diluted share, compared with an net income of $5.9 million, or $0.14 per share for fiscal year 2020. This represents a more than 350% improvement in profitability and underscores the significant shift in our business over the last 12 months. GAAP net income for fiscal year 2021 was $14.6 million, or $0.34 per diluted share, compared with a net income of $3.2 million, or $0.07 per share, for fiscal year 2020. I'll now give you a brief update on our plan to list our subsidiary, Tong Mei, in China on the Star Market in Shanghai. We were very pleased to announce last month that Tongmei submitted a formal application to listed shares and initial public offering on the Shanghai Stock Exchange. The application was submitted in December and was formally accepted for review on January 10th. The review of our application is now underway and we have received our initial comment letter. As we have discussed, the process of going public on the Star Market includes several periods of review and therefore is a lengthy process. Tongmei does not expect to complete the IPO until the second half of 2022. Okay, that completes my comments, and I'd like to turn the call over now to Dr. Morris Young for a review of our business and markets. Morris?
spk02: Thank you, Gary, and good afternoon, everybody. 2021 marked a significant turning point in our business. As Gary mentioned, we grew 44% in a single year and more than 65% over our 2019 revenue results. We believe that we are hitting an inflection point in which applications that were once considered bleeding edge are now coming to market for more mainstream adoption. Across our portfolio, we're working with customers for new innovations, helping to rethink what is possible, and advancing specialty materials into areas the market might not have conceived of just a few years ago. To prepare for this growth in opportunity, we have modernized AXT into a supplier capable of meeting the requirement of Tier 1 customers. Over the last four years, we successfully relocated and expanded our facilities with three world-class locations. We upgraded our business and manufacturing systems and processes. We grew our supply chain for critical materials, and we invested in both our technology roadmap and our customer success. The growth you're seeing in our business is the result not just one or two quarter of success, but eight consecutive quarters of increasing revenue with historically low customer concentration. In 2021, our Indian phosphide business grew by 41 percent and is now our single largest revenue contributor. Gallium arsenide substrates grew by 38 percent, driven by a wide variety of applications, and germanium substrate grew by 18 percent. As Gary said, our increase in revenue is organic. It comes from an expansion of our markets, from our own market share gains, and strategic customer wins, all of which have a long-term growth opportunity still to come. In 2022, we expect continued momentum in the phosphide-based optical applications for telecom and data center modernization. 5G is a big driver alongside a more general global investment in the infrastructure required to support massive increases in data creation and flow. Any phosphate-based devices will play an increasingly important role in next-generation infrastructure, and AXC is well-placed to support it. We also expect 2022 to be the year that indiumphosphide comes to consumer applications in a consequential way. We were very pleased to begin ramping a design wing in for a shortwave infrared proximity sensor. Sensors of this type can detect substances such as water, sugar, and alcohol. They typically can measure not only heart rate, blood oxygen level, and also proximity to skin and other surfaces. In the future, sensors of this type may be able to measure blood glucose, blood lipid, and blood alcohol level and others. As such, we're excited about this design wing, and we believe it represented a gateway to other designs and applications in portable consumer devices. This wing also underscores the breadth of applications that Indian Phosphide enables, and we believe there are several more new ones on the horizon, from health monitoring to automotive sensors to the Metaphase. We expect these applications will be driven by Tier 1 players, and their emergence over time could dramatically increase the addressable market for indium phosphide. And as it is, with current applications and design success, we believe we will grow our indium phosphide revenue in 2022 by 35 to 40 percent. We also believe that significant groundwork will be laid in 2022 for new applications in gallium arsenide. We're already seeing healthy growth in high-end LEDs, solid-state industrial lasers, and Wi-Fi for IoT applications, which we expect will continue. Recently, we have also seen demand for gallium oxide substrate for power amplifier in 5G headsets. This is a new market for us and one that is opening up to AXC as a result of both the increased power implant by-counts in 5G handsets, as well as the supply constraint at our competitors to meet customer needs. Though the gross margin profile on this application is lower than other areas of our business, the volume opportunity is attractive, and we believe we can drive healthy gross margin contribution in our business model in the coming years. In addition, we're seeing what feels like a record amount of development activities for new applications ranging from health monitoring to laser-based sensors and more. And of course, in the next several years, micro-LEDs could very well drive enough volume to reshape the gallium oxide industry entirely. As we look into the years ahead, There are numerous applications that will continue to drive our results. They're not just coming, they're here. And we are creating substantial, sustainable, and profitable growth opportunities across our business. With that in mind, a top priority for AHT in 2022 is customer success. We're highly focused on ensuring that we can keep pace with current and future customer requirements. Given the constrained environment, customers are more openly communicating their long-term needs, providing us better visibility so that we can scale accordingly. We believe that our ability to add capacity quickly and cost effectively is a major competitive advantage for AXT. and is a key reason for our design wing success to date. Yet another top priority for me in 2022 is growth margin improvement. As Gary mentioned, there are numerous things that we are doing to drive lower cost, better yields, greater manufacturing efficiencies. One of the programs that holds longer-term promise is a new recycling effort for Indian phosphorus. Through our own internal research and development effort, we have invented a highly advanced process to recycle single crystal in the phosphide material. This is significant because our manufacturing process generate a fair amount of excess material that has real value, but until now has not been reusable. Going forward, we'll be able to reclaim this material, which will help us lower our costs, increases our supply, and create a meaningful ESG program to reduce waste. And finally, in 2022, we're highly focused on driving our development of large diameter substrates. These are major R&D efforts, and our success is likely to enable considerable customer innovation across a number of high-volume applications in both gallium arsenide and emic phosphide material. In 2021, we delivered pilot qualities of 8-inch gallium arsenide to our customers, generating hundreds of thousands of dollars in revenue. We believe this revenue demonstrates our customer commitment to the next major step in technology advancement. In 2022, we will continue to work to expand our output and refine technical specifications to meet customer requirements. Now in closing, 2021 was a pivotal year for our business. with substantial revenue growth and a 350% increase in our profitability. And we look, if we look ahead, we believe our momentum will continue. With our current market drivers, we believe we can deliver revenue growth in 2022 of 15 to 20% of our 2021 results. This is expected to come from market expansion share gains and customer wins. Our investment capacity R&D for large diameter substrate and our China IPO give us significant competitive advantages in our ability to scale our business and meet the need of tier one customers and emerging high volume applications. We now have a strong foundation in place and believe that the stage is set for yet another year of meaningful growth in 2022. I will now turn the call back to Gary for our first quarter guidance. Gary?
spk06: Thank you, Morse. As Morse discussed, the demand environment remains strong in Q1, coming off a very strong Q4 in fiscal year 21. We're expecting revenue to be between $38 million and $40 million in Q1 of this year. In accordance with our commentary on gross margin, we believe that our non-GAAP net profit will be in the range of $0.07 to $0.09, and GAAP net profit will be in the range of $0.05 to $0.07. Share count will be approximately 42.8 million shares. Okay, this concludes our prepared comments. Morris and I and Leslie will be glad to answer your questions now.
spk04: Operator? Thank you. As a reminder to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. please stand by as we compile the Q&A roster. And our first question comes from Richard Shannon from Craig Allum. Your line is now open.
spk05: Well, hi, Maurice, Gary, and Leslie. Thanks for taking my questions. Maybe a couple quick ones on the guidance here. Obviously, very nice numbers on the top line, but let me focus on gross margins here first, given the bottom line. profit numbers here in EPS, it would suggest that gross margins aren't going to be improving much sequentially, if at all. How would you characterize that and all the dynamics that hurt the gross margins in the second half of last year? Are they improving to a degree and then any effects of mix in there as well, please?
spk06: Well, I'll go first and Morris can follow. Actually, we think gross margin will improve quarterly to quarter this year we think this coming q1 is probably the bottom and we'll see things improve so I would say that the the costs of running the business all the way from raw materials to manufacturing consumables like polishing pads labor today have gone up a surprising amount. So I think we're playing catch up as to how to handle that. Now that we see the light, we don't think it's going to magically turn back and get better. So we have to take other steps to handle that. But I think yield efficiencies can be improved. We're certain that product mix will continue to lean towards India phosphide. We're certain about revenue growth. Very confident there. So all of those combine to help the gross margin percent. And as we move through the year, you know, we'll take a look perhaps at whether we should try and raise some ASPs.
spk02: Yeah, Richard, let me tell you from my perspective. Indeed, you know, raw material plus electricity, you name it, everything has gone up. And this one has not happened in the last, what, 15 years or so? So it's very strong. And internally, we are already talking among ourselves. We think it's time for us to ask our customers to work with us and see if we can do some adjustment. to bear part of the cost. So that's question number one. I think we will be successful in certain areas. We definitely are starting to do that already. And the second is that, as Gary said, there are some efficiency improvement that we need to do to ourselves to lower our costs. And thirdly, I think, you know, last year we started to get into some of the lower margin business just to get ourselves our foot into the door because we know that there's a shortage of the HPT market and this is quite substantial among the shortage. So we took a lower margin business to get in there, but we think as we're getting to get qualified, we should be able to get not only the volume increase, but also improve our margin as we go into a more formal delivery to that market.
spk05: Okay, some good stuff to think about there. While I ponder that, let me get to another question here, Morris, on your growth outlook for this year. You reiterated your belief of 15% to 20%, and you gave us a number for India, phosphide, of 35% to 40%. I guess the first part of the question I'd like to ask is with the health sensing applications, how much of that application is contributing to that growth? Is it a small amount, medium amount, and is this one customer or more than one customer contributing to that this year?
spk02: The design we talked about in our script was one customer, and they started ramp in the fourth quarter. The revenue is meaningful, but I think it's even more exciting. I think there are two more products to be introduced sometime this year, and we believe one is coming perhaps as early as Q3. Okay.
spk05: So just to make sure you see this as a meaningful contributor to the growth profile of Indian 55 this year, or a meaningful amount, excuse me. Yes. Okay. Excellent. That's helpful. Maybe following up on the gross margin topic here again, Gary, and you're prepared in March, you talked about hoping to reach 35%. Do you require pricing increases to make that a reality, or is that something you can do just with yields and maybe volumes and other things on the cost side?
spk06: I think we probably need some help on the pricing, too.
spk05: Okay.
spk00: Okay.
spk05: Let's see here. Okay. Gary, I think you also mentioned a strategic customer that was, I think you're giving some good pricing that hurt gross margins a little bit. Is that specifically referring to the health sensing application or is this something else?
spk02: No, it was the HPT market.
spk05: It was the HPT market. Okay. Okay. That's helpful. I guess the last one question for me, I will jump out of line here. CapEx, I think you spent $10.5 million last quarter. What's the outlook for CapEx? this year? When do we get to more of a normal run rate here? We still have heavy amounts of capacity and other investments to make here this year.
spk06: Yeah, that's a good question. We're trying to soft land some of the CapEx stuff and wind it down, but we really view this as an investment time. The market is red hot, and so we need to stay up with it. So Normally we would do, you know, four to six million in equipment. I think this year it could be between seven and nine million. So that's the normal stuff. We'll probably have to do some facility work for Indian phosphide, which will be several millions of dollars, maybe as much as five. But again, we do that as an investment. The horizon looks very bright and We certainly have got the attention of the customer base because we're the ones that can move the fastest and grow capacity. Micro-LED is being studied carefully. We don't know for sure where that's going yet. So if it heats up, then we may do some CapEx in that category as well, but that's to be determined. So we'll keep you posted. So that's kind of the sense. our sense of that for that time.
spk05: Okay, perfect. I think that's all for me. I will jump out of line. Thanks, guys.
spk04: And thank you. And if you have a question, it is star one. Again, if you'd like to ask a question, that is star one. And our next question comes from Hamed Korsand from BWS Financial. Your line is now open.
spk03: Hi. First off, I just wanted to See, you've usually historically not had so much clarity as far as growth is considered throughout the year. What's giving you that clarity this year?
spk02: Yeah, that's a very good question. I'm glad you noticed that. We usually don't have visibility even to the next quarter. But we have, because of the increasing demand and from what we know, Quite a few of these products, for instance, let me give you an example for indium phosphide. We are certainly sold out. We have extended our lead time. We normally quote four to six weeks. Now it's up to eight to ten weeks, okay? And also, upon our marketing check, our competitors' lead time is even longer, okay? And for the HPT, for gallium arsenide, the lead time is extremely long. And that was the reason why we have exited that market for many years. And now the customers are coming back to us and asking us if we can build some capacity for them. We're in close, you know, discussion with them and see if we want to get into their market. We do have good visibility. I mean, we also have good visibility in terms of micro-LED. However, because it's a new market, so we're not counting it in until we see clearly that it's going to come to fruition. But as you can see that we already started to generate revenue from May in Shikari-Asne. So even that is giving us better and better visibility of how things will shape up. So, yes, you're right. The visibility is better. And, in fact, I mean, we never thought, in the past years, we can never say, well, this year our inane phosphide will grow 35% to 40%. We think we have high confidence it will grow that fast.
spk03: Okay. And then what actions or process are you taking to to prevent double ordering as far as your customers are concerned?
spk02: That's a good question. I think maybe the confidence level from us is this way. You see some of this, let's say the design wing we had last fourth quarter of last year, We worked with this customer almost for two and a half years. We finally got it. And, you know, double ordering or whether they're building inventory, that could also happen. But we're not seeing it. We don't see a big jump up on demand. In fact, our Indian phosphide capacity as of now is all sold out. That's why our lead time is getting up to 10 weeks. And from what we know, our competitor is even longer. And I think our competitors are more reluctant, I believe, to build capacity. To build capacity these days is not an easy thing to do, especially in the phosphide. It's a very difficult process to establish. And we believe that we have an advantage of building the capacity quickly for them.
spk03: Okay. My last question was, Gary, what's the adequate level that you think you could preserve cash? I mean, you've continuously burned cash throughout this growth process. When could we see a reversal of that?
spk06: Well, I think it's directly linked to CapEx and I don't have a CapEx plan for 2023, but I'm hoping that, you know, we'll see it slope down. So, but I would say that I'm comfortable with our cash position. You know, inventory took a big jump up during last year, so I don't see that, you know, having to go up a lot more. And, you know, we're still looking again until the IPO happens. We're looking at some bank borrowing in China. You know, it's an interesting note. Once our IPO application was accepted, which was on January 10th, there's surprisingly a lot more interest from the banks for Tong Mei to secure debt. So it's having a – maybe Morris can comment also, but there's kind of a ripple effect of different organizations and, you know, China-based institutions that are – are excited about Tong Mei, are excited about the IPO. So, but yeah, I don't think cash, I'm not losing sleep over cash, but we do watch it carefully. And, you know, I know it went down in the Q2Q, but I think we're okay, so.
spk02: Well, I would add on to this. I mean, look, 44% growth takes a lot of more equipment, facilities, and inventory, account receivables, I mean, I'm not a financial expert, but I know all that requires cash. But I think we are generating good cash flow, Gary. I mean, we did a cash flow analysis. We think we can handle it. But I think, you know, going forward, you know, if you think some investor probably wants to see the cash flow, you know, slow down, I think otherwise. I think when we have cash flow outward strongly, that means our business is growing. We need the cash to grow our business. You know, since when we can get very close to $40 million a quarter and my goal is sometime this year we're going to break $50 million a quarter. That's unthinkable just a year or two ago. And that all means, you know, better organization, better foundation. which we're building. That all needs cash.
spk03: Great. Thank you.
spk06: Thanks, Harmon.
spk04: And thank you. And I am showing no further questions. I would now like to turn the call back over to Dr. Morris Young for closing remarks.
spk02: Thank you for participating in our conference call. As always, Feel free to contact me, Gary Fisher, or Leslie Green directly if you would like to set up a call. I would like to forward, I was looking forward to speak with you in the near future.
spk06: Thanks, everybody.
spk04: And thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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