AXT Inc

Good afternoon, everyone, and welcome to AXT's fourth 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 Devin, and I will be your coordinator today. I would now like to turn the call over to Leslie Green of Investor in Relations.

Thank you, Devin, 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 results or events 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, increased environmental regulations in China, 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 the 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 16th 2024 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 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 fourth quarter 2022 results gary thank you leslie good afternoon to everyone revenue for the fourth quarter of 2022

was $26.8 million. That's down from $35.2 million in the third quarter of 2022 and down from $37.7 million in the fourth quarter of 2021. To break down our Q4 22 revenue for you by product category, Indian Phosphide came in at $14.0 million, reflecting market softening, particularly in the data center and telecommunications infrastructure. Gallium arsenide was $5.5 million, reflecting the overall slowdown across a number of applications, particularly in China. Germanium substrates were 1.3 million. Our germanium substrate revenue was up slightly from Q3, as we have resolved the payment issue that we described in the past quarters. Finally, revenue from our two consolidated raw material joint venture companies in Q4 was 6.0 million. In the fourth quarter of 2022, revenue from Asia Pacific was 70% of sales, Europe was 15% and North America was 15%. The top five customers generated approximately 41% of total revenue and one customer was over the 10% level. Non-GAAP gross margin in the fourth quarter was 32.5% compared with 42.2% in Q3 of 2022 and 32.4% in Q4 of 2021. This was below our expectations, and it is a result of significantly lower volume with revenue coming in at the lowest end of our guidance, more of an unfavorable shift in product mix than we had anticipated, and a significant drop in the price of raw gallium in Q4, which resulted in low margin contribution from our consolidated joint venture. For those who prefer to track results on a gap basis, gross margin in the fourth quarter was 32.1% compared with 42.0% in Q3 of 2022. and 32.2% in Q4 of 2021. Total non-GAAP operating expense in Q4 was 9.0 million. This compares with 9.2 million in Q3 of 2022 and with 8.1 in Q4 of 2021. On a GAAP basis, total operating expense in Q4 of 2022 was 9.6 million down from 10.2 million in Q3. For comparison, total GAAP operating expense was 9.1 million in Q4 of 2021. Our non-GAAP operating line for the fourth quarter of 2022 was a loss of $252,000 compared with a non-GAAP operating profit in Q3 of 2022 of $5.6 million and $4.1 million in Q4 of 2021. For reference, our GAAP operating line for the fourth quarter of 2022 was a loss of $1.0 million compared with an operating profit of $4.6 million in Q3 and an operating profit of 3.0 million in Q4 2021. Non-operating other income and expense and other items below the operating line for the fourth quarter of 22 was a net gain of 2.2 million. The full breakdown is in our press release. This included a government grant of 1.2 million and is a good example of the strength of our favorable reputation and positive regard for our presence in China. For Q4 of 2022, we had a non-GAAP net income of $2.0 million or $0.05 per share compared with $6.8 million or $0.16 per share in the third quarter of 2022. Non-GAAP net income in Q4 of 2021 was $4.1 million or $0.09 per share. On a GAAP basis, net income in Q4 was $1.2 million or $0.03 per share. By comparison, net income was $5.8 million or $0.13 per share in the third quarter of 2022. and 3.0 million, or 7 cents per share, in Q4 of 2021. The weighted average diluted outstanding shares in Q4 was 42.7 million. Cash equivalents and investments were 52.8 million as of December 31st. By comparison, at September 30th, it was 48.2 million. Depreciation and amortization in the fourth quarter was 2.1 million, and CapEx investments were 7.4 million. most of the capex was for facilities and any possible any phosphide equipment related matters total stock comp was 700k net inventory at december 31st was 89.6 million 52 percent of the inventory is raw materials and whip is 44 percent finished goods makes up approximately four percent of inventory inventory will be a key focus area for us in 2023 and our goal is to reduce it by approximately $10 to $15 million this year. This concludes the discussion 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 brief update. Since the Chinese New Year, we have had active dialogue again with the China Securities Regulatory Commission, also called the CSRC. Their process is detailed and thorough, and they have asked us to respond to a couple of additional items. We are in the process of doing so now and remain optimistic that we will get CSRC approval in the coming months. We have posted a brief summary of the plan and the process on our website. With that, I'll now turn the call over to Dr. Morris Young for a review of our business and market. Morris?