AXT Inc

Good afternoon, everyone, and welcome to the second quarter 2022 financial conference call. Leading the call today is Dr. Morris Young, Chief Investor Officer, and Gary Fisher, Chief Financial Officer. My name is Kevin, and I'll be your operator today. At this time, all participants are on a list only. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you need to press star 1-1 on your telephone. I would now like to turn the call over to Leslie Green, Investor Related, for XT. You may begin.

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 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 or 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 these factors that may be discussed on 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 expectations. This conference call will be available on our website at AXT.com through July 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 second 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 second quarter results. Gary?

Thank you, Leslie, and good afternoon to everyone. We're very pleased and excited with the financial results in Q2. Let's walk through them and get Morris on stage. By the way, Morris just returned from four months in Beijing, so it's nice to have him back. So, okay, revenue for the second quarter of 2022 was $39.5 million, approximately comparable to $39.7 million in the first quarter of 2022, and up 17% from $33.7 million in the second quarter of 2021. For the first half of 2022, revenue was up 22% over the first half of last year. To break down our Q2 2022 revenue for you by product category, Indian Phosphide came in at 15.7 million, slightly over Q1, and again a new record. Gallium Arsenide was 12.2 million, and this is another positive number in the quarter. $12.2 million is the highest quarterly revenue for gallium arsenide since the third quarter of 2012. Germanium substrates were $3.9 million, and revenue from our two consolidated raw material joint venture companies was $7.8 million. In the second quarter of 2022, revenue from Asia Pacific was 74%, Europe was 13%, North America was 13%. The top five customers generated approximately 35% of total revenue. and one customer was over the 10% level. We continue to believe that revenue diversity demonstrates our growth is not overly dependent on any particular 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 second quarter was 39.4% compared with 33.8% in Q1 of 2022 and 36.4% in Q2 of 2021. For those who prefer to track results on a GAAP basis, gross margin in the second quarter was 39.1% compared with 33.6% in Q1 and 36.3% in Q2 of last year. As you can see, we made huge progress on gross margin in Q2. While there were many factors that contributed, improved yields, particularly in crystal growth, was one of the most significant ones. Morris conducted regular meetings on yields during his four months in Beijing, and part of our margin improvement has come as a result of this focus. Another contributing factor is that both Boyu and Jinmei, our two consolidated raw material companies, improved their gross margins. A third factor is that we developed a process technology that enables us to recycle remnants of Indian phosphide processing material. In addition to the gross margin benefit, this program is another step forward for us in our ESG commitment. A fourth factor is product mix. By comparison to the first quarter, the mix looks pretty similar. However, within each substrate product, the diameter mix can impact gross margin. So, product mix was more favorable in Q2. Moving on, total non-GAAP operating expense in Q2 was $9.1 million. This compares with 8.6 in Q1 and with 7.4 in Q2 of last year. On a GAAP basis, total operating expense in Q2 was $10.1 million compared with $9.6 million in Q1. For comparison, total GAAP operating expense was $8.3 million in Q2 of 2021. The totals for the current Q2 include a charge for bad debt of about $200K. We don't experience this very often, but we did this quarter. Non-GAAP operating profit for the second quarter of 2022 was $6.4 million compared with non-GAAP in Q1 of $4.8 million and $4.9 million in Q2 of last year. For reference, GAAP operating profit for the second quarter was $5.3 million up from an operating profit of $3.7 million in Q1 and an operating profit of $3.9 million in Q2 of last year. Non-operating other income and expense for the second quarter was a net gain of 2.3 million. This includes a gain of 2.2 million from the unconsolidated raw material companies. The full breakdown is in our press release. The contribution from the equity method raw material companies is higher than usual and reflects higher ASPs for the raw materials and more units sold. For Q2, we had a non-GAAP net income of 6.7 million, or 16 cents per share. compared with $4.3 million or $0.10 per share in the first quarter of 2022. Non-GAAP net income in Q2 of 2021 was $5.4 million or $0.12 per share. On a GAAP basis, net income in Q2 was $5.5 million or $0.13 per share. By comparison, net income was $3.2 million or $0.07 per share in Q1 and $4.4 million or $0.10 per share in Q2 of last year. The weighted average diluted shares outstanding in Q2 of 2022 was 42.5 million shares. Cash, cash equivalents and investments were 57.2 million as of June 30th. By comparison, at March 31st, it was 44.3 million. This is an increase of $12.9 million. We did get a bank loan in China for approximately $13.8 million during the quarter. If you eliminate that loan, then cash is basically unchanged for the quarter. Depreciation and amortization in the second quarter was 2 million, and capital investments were 16.8 million, of which about 14.8 million was construction. Most of this is facilities related and Indian Phosphate equipment related. Total stock comp was 1.1 million. Net inventory at June 30 was 77.3 million in light of the current supply constraint environment and to be locked and loaded when demand accelerates. We did buy ahead in Q2, but 50% of the inventory is raw materials and WIP is 46%. Finished goods actually declined in the quarter and makes up only 4% of inventory. This concludes the discussion of the quarterly financial results. Turning to our plan to list our subsidiary, Tang Mei and China on the star market in Shanghai, We did have a very big development recently, which is that the Shanghai Stock Exchange approved Tang Mei's application for the initial public offering. The application was approved on July 12th and will now be submitted to the China Securities Regulatory Commission for the next step in the review process. We consider this to be a major, major milestone in our effort to complete the Star Market IPO, as we are told that the Shanghai Stock Exchange review is the most detailed thorough and lengthy of the reviews. We still have more work to do, and we do not want to be overconfident, but the achievement of this milestone will hopefully mean that Tang Mei can complete the listing in this calendar year, most likely in Q4. We're very proud of the team for our progress and believe that our success further underscores our achievements in demonstrating AXT's world-class capabilities. Overall, the IPO is getting a lot of very positive visibility in China, and is affording Tang Mei a new level of respect and prestige. Before I turn the call over to Morris, I want to take a moment to address the COVID restrictions in China. To date, we have not had any shutdowns of our operations in Beijing, Dingjing, or Kaozhou. As we noted last quarter, we have experienced some supply chain disruption as a result of shipment delays and supplier shutdowns relating to products that 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 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 occur. Okay, well, with that, I'll now turn the call over to Dr. Morris Young for a review of our business and markets. Morris? Thank you, Gary.