AXT Inc

Good afternoon, everyone, and welcome to AXT's first quarter 2022 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Gary Fisher, Chief Financial Officer. My name is Kevin, and I'll 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. If you ask a question during the session, please press star 1 on your telephone. If you need any further assistance, please press star 0. I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Kevin, 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 result 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 relations 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 report 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 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 first quarter of 2022. 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 2022 results. Gary?

Okay. Thank you, Leslie, and good afternoon to everyone. I'm hearing a little bit of background noise, so Morris and Leslie, it might be good during this portion of the meeting that we go on mute if we're not speaking, so... By the way, to our group, we're in different locations today. Morris is at the middle of the night in China, so he's in China, and I'm in the Fremont office for AXT. And Leslie's here also in the Bay Area. Okay. Today we are pleased to report that total revenue for the first quarter of 2022 was $39.7 million. That's up 5% from $37.7 million in the fourth quarter of 2021 and up 26%. from 31.4 million in the first quarter of 2020. Q1 marks our ninth consecutive quarter of growth and highlights the market expansion and increasing demand for indium phosphide and gallium arsenide substrates. To break down our Q1-22 revenue for you by product category, indium phosphide was 15.5 million, gallium arsenide was 12.0 million, germanium substrates were 4.2 million, and revenue from our two consolidated raw material joint venture companies was $7.9 million. In the first quarter of 2022, revenue from Asia Pacific was 73%, Europe was 16%, North America was 11%. The top five customers generated approximately 29% of total revenue, one of which just inched over the 10% level. 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 we have reached a point of sustainability and can outpace market growth in 2022. Non-GAAP gross margin in the first quarter was 33.8%, compared with 32.4% in Q4 of 2021 and 36.9% in Q1 of 2021. For those who prefer to track results on a GAAP basis, gross margin in the first quarter was 33.6%, compared with 32.2% in Q4 of 2021 and 36.8% in Q1 of 2021. Improvement in gross margin came through growing volume, favorable product mix, and a strong focus on yield improvements and manufacturing efficiencies. We continue to believe that we can get back to the 35% range later this year. Total non-GAAP operating expense in Q1 was $8.6 million. This compares with $8.1 million in Q4 of 2021, and was $7.2 million in Q1 of 2021. On a GAAP basis, total operating expense in Q1 2022 was $9.6 million, compared with $9.1 million in Q4. For comparison, total GAAP operating expense was $8.0 million in Q1 of 2021. Non-GAAP operating profit for the first quarter of 2022 was $4.8 million, compared with non-GAAP operating profit in Q4 of 2021 of $4.1 million. and $4.4 million in Q1 of 2021. For reference, GAAP operating profit for the first quarter of 2022 was $3.7 million, up from an operating profit of $3.0 million in Q4 of 2021 and an operating profit of $3.6 million in Q1 of 2021. Non-operating other income and expense for the first quarter of 2022 was a net gain of $0.3 million. This includes a gain of $1.1 million from the unconsolidated raw material companies. The full breakdown is in our press release. For Q1 2022, we had a non-GAAP net income of $4.3 million or $0.10 per share, compared with $4.1 million or $0.09 per share in the fourth quarter of 2021. Non-GAAP net income in Q1 of 2021 was $4.2 million or $0.10 per share. On a GAAP basis, net income in Q1 was $3.2 million or $0.07 per share. By comparison, net income was $3.0 million or $0.07 per share in the fourth quarter of 2021 and $3.4 million or $0.08 per share in Q1 of 2021. The weighted average diluted shares outstanding in Q1 was 42.7 million. Cash, cash equivalents, and investments were 44.3 million as of March 31st. By comparison, at December 31st, that was 51.8 million. Depreciation and amortization in the first quarter was 2.0 million, and capital investments were 6.3 million. Total stock comp was 1.1 million. Net inventory at March 31st was 60.8 68.8 million. Okay, this concludes the review of our quarterly financial results. Turning to our plan to list our subsidiary, Tong Mei, in China on the star market in Shanghai, let me give you a quick update. So the review of our application is now underway and is proceeding according to our expectations. Tong Mei received a list of questions from the Shanghai Stock Exchange Review Board. This is similar to what we call a comment letter from the U.S. SEC. Our China advisors think the list was fair and reasonable, and we have provided a lengthy and detailed response. Our advisors tell us to expect another set of questions, as it is normal to have more than one round of comments. And indeed, we did earlier this week get the second set of questions. So that's positive. It was a very fast turnaround, and we're pleased with that. So 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 this year. Before I turn the call over to Morris, I want to take a moment to address the COVID restrictions in China, which have been in the news, of course. To date, we have not had any shutdowns of our operations in Beijing, Vingxing, or Kaozhou. We have experienced some supply chain disruption as a result of shipment delays and supplier shutdowns relating to products we use in our manufacturing process. However, so far we've been able to mitigate the impact with inventory on hand. We've also seen some pockets of softness where customers are on lockdown, but the demand for our products, coupled with the diversity of customers and applications that need them, have allowed us to shift our allocations to other customers or applications that remain in high demand. Like most companies, we're monitoring the situation closely, and with Morris and China, are managing through these issues with high-level attention. We remain in close contact with our customers to understand any changes in their demand expectations should those changes arise. Okay, with that, I'm going to turn the call over now to Dr. Morris Young for review of our business and markets. Morris?