AXT Inc

Good afternoon, everyone, and welcome to AXT's third 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 Andrea, 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 need to press R11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Leslie Green, Investor Relations for AXT. Please go ahead.

Thank you, Andrea, 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 market in which the company competes, global financial conditions and uncertainties, COVID-19 or outbreaks of other 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 and 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 October 27, 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 third 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 third quarter results. Gary.

Thank you, Leslie. And good afternoon to everyone. Revenue for the third quarter of 2022 was $35.2 million. That's down from $39.5 million in the second quarter of 2022. And it's up from $34.6 million in the third quarter of 2021 from last year. To break down our Q3 22 revenue, for you by product category, indium phosphide came in at $17.7 million. The allium arsenide was $8.1 million, down from Q2 by about $4 million, and reflects the overall slowdown in the marketplace. Germanium substrates were $1.1 million. Our germanium substrate revenue was down by about $2.7 million from Q2. Part of this is the general slowdown we observed, and part is due to the payment issue we described last quarter. We expect to resolve that situation in the near future. As of today, we are not shipping to the customers in question, so. Finally, revenue from the two consolidated raw material joint venture companies in Q3 was 8.3 million. In the third quarter of 2022, revenue from Asia Pacific was 67%, Europe 14%, North America 19%. The top five customers generated approximately 41% of total revenue, and one customer was over the 10% level. Non-GAAP gross margin in the third quarter was 42.2% compared with 39.4% in Q2 of 2022 and 33.8% in Q3 of 2021. For those who prefer to track results on a GAAP basis, gross margin in the third quarter was 42.0% compared with 39.1% in Q2 and 33.3% in Q3 of last year. As you can see, we continue to execute well on gross margin Despite lower volumes in Q3, our favorable product mix, improved yields, and new Indian Phosphide recycling program all contributed to strong results. Total non-GAAP operating expense in Q3 was $9.2 million. This compares with $9.1 million in Q2 and with $7.7 in Q3 of 2021. On a GAAP basis, total operating expense in Q3 of 2022 was $10.2 million compared with $10.1 million last quarter. For comparison, total GAAP operating expense was $9.1 million in Q3 of 2021. Non-GAAP operating profit for the third quarter of 2022 was $5.6 million compared with non-GAAP operating profit in Q2 of 2022 of $6.4 million and $4.0 million in Q3 of 2021. For reference, GAAP operating profit for the third quarter of 2022 was $4.6 million compared with an operating profit of $5.3 million in Q2 of 2022 and an operating profit of $2.4 million in Q3 of 2021. Non-operating other income and expense for the third quarter of 2022 was a net gain of $2.7 million. This includes a gain of $2.0 million from the unconsolidated raw material companies. The full breakdown is in our press release. For Q3 of 2022, we had a non-GAAP net income of $6.8 million, or 16 cents per share, compared with $6.7 million, or 16 cents per share in the second quarter of 2022. Non-GAAP net income in Q3 of 2021 was $5.4 million or $0.13 per share. On a GAAP basis, net income in Q3 was $5.8 million or $0.13 per share. By comparison, net income was $5.5 million or $0.13 per share in the second quarter of 2022 and $3.8 million or $0.09 per share in Q3 of 2021. The weighted average diluted shares outstanding in Q3 was $43.0 million. Cash, cash equivalents and investments were $48.2 million as of September 30th. By comparison, at June 30th, it was $57.2 million. Depreciation and amortization in the third quarter was $2.1 million. And capital investments were $4.7 million. Most of this is facilities related. Stock comp was $1.0 million. Net inventory at September 30th was $88.5 million. 50% of the inventory is raw materials. 46% is WIP, and finished goods makes up 4%. This concludes the discussion of our quarterly financial results. Turning to our plan to list our subsidiary, Tang Mei, in China on the star market in Shanghai, let me just give you a brief update. As previously reported, our IPO application was approved by the Shanghai Stock Exchange in July and was then submitted to the China Securities Regulatory Commission, often we refer to that as the CSRC, in August for the next step in the review process. We have had feedback from the CSRC in the form of questions, and our advisors believe the questions were normal and customary. We hope to get CSRC approval soon, and Tang Mei still hopes to accomplish the offering as early as Q4 2022. This has been a long process, but we remain very enthusiastic and optimistic. We have posted a brief summary of the plan and the process on our website. Before I turn the call over to Morris, I want to take a moment to address the topic of export control restrictions with China since some of you have asked. We have extensively studied the new restrictions and guidance, including consultation with our legal experts. As such, we and our attorneys have concluded that the new restrictions are not applicable to our products, equipment, or manufacturing process. We do not expect to experience disruption as a result. Okay, well, with that, let me call Dr. Morris Young for a review of our business and markets. Morris has been in China and is there right now, so he got up very early in the morning, and it still is early in the morning there. Morris, go ahead.