AXT Inc

Good afternoon, everyone, and welcome to AXT's second quarter 2023 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Gary Fisher, Chief Financial Officer. My name is Jessica, and I will be your operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the call over to Leslie Green, Investor Relations for AXP.

Thank you, Jessica, 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 the 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, 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 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 August 3rd, 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 second quarter of 2023. 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 2023 results. Gary?

Thank you, Leslie, and good afternoon to everyone. Revenue for the second quarter of 2023 was $18.6 million. down from $19.4 million in the first quarter of 2023, and down from $39.5 million in the second quarter of 2022. To break down our revenue in Q2 by product category, antiphosphide came in at $4.6 million, reflecting the expected market softening, particularly in data center, consumer, and telecommunications infrastructure. Gallium arsenide was $5.4 million, reflecting a modest improvement across a number of applications, particularly in China. Germanium substrates were $1.0 million. Finally, revenue from our two consolidated raw material joint venture companies in Q2 was $7.6 million, which is up from the prior quarter. In the second quarter of 2023, revenue from Asia Pacific was 75%, Europe was 16%, and North America was 9%. The top five customers generated approximately 24% of total revenue, and no customers over the 10% level. Non-GAAP gross margin in the second quarter was 9.8% compared with 26.9% in Q1 and 39.4% in Q2 of 2022. For those who prefer to track results on a GAAP basis, gross margin in the second quarter was 9.2% compared with 26.3% in Q1 of 2023 and 39.1% in Q2 of 2022. There are three key drivers affecting the gross margin. One is total volume. Last year's Q2 revenue was $39.5 million. The second key driver is mixed. Last year's Q2 indium phosphide was $15.7 million. This recent quarter, it was $4.6 million, which we believe is the bottom of the decline, by the way. The third key driver was that our raw material business had lower gross margins due to the fact that they were working through higher-priced inventory in Q2. This was especially impactful because raw material sales made up more than 40% of our total revenue. As we look ahead to the coming quarters, we believe we will see improvement in our gross margin as a result of several factors. In the near term, we expect to see improvement in the gross margin contribution from our raw material joint ventures, as they have worked through much of their higher-priced inventory. We're also pleased to report that we expect Gen May to begin production in Q3 on our new gallium arsenide recycling program, which, like our Indian phosphide recycling program, should have a positive impact on gross margin. Further, we believe that Indian phosphide revenues have bottomed out and should begin to recover over the coming quarters. Beyond the near term, we remain confident that we can get back to the mid-30% range as the environment strengthens through higher overall volume, a recovery in Indian phosphide mix, and the benefits of our recycling programs, along with continued efficiency improvements throughout the business. Moving to operating expense. With reduction in overall revenue, we have continued to take steps to reduce our operating expenses to align with the current environment. Total non-GAAP operating expense in Q2 was only $7.8 million. This compares with $8.7 million in Q1 of 2023 and with $9.1 in Q2 of 2022. On a GAAP basis, total operating expense in Q2 was $8.6 million, down from $9.5 million in Q1. For comparison, total gap operating expense was 10.1 million in Q2 of 2022. Our non-gap operating income for the second quarter of 2023 was a loss of 5.9 million compared with the non-gap operating loss in Q1 of 3.5 million and a non-gap operating profit of 6.4 million in Q2 of 2022. For reference, our gap operating line for the second quarter of 2023 was a loss of 6.8 million compared with an operating loss of $4.4 million in Q1 of 2023 and an operating profit of $5.3 million in Q2 of 2022. Non-operating other income and expense and other items below the operating line for the second quarter of 2023 was a net gain of $1.8 million. The details can be seen in the P&L included in our press release today. For Q2 2023, we had a non-GAAP net loss of $4.2 million or $0.10 per share compared with a non-GAAP net loss of $2.4 million or $0.06 per share in the first quarter of 2023. Non-GAAP net income in Q2 of 2022 was $6.7 million profit or $0.16 per share. On a GAAP basis, net loss in Q2 was $5.1 or $0.12 per share. By comparison, net loss was $3.3 million or $0.08 per share in the first quarter and gap net income in Q2 of last year was $5.5 million, or 13 cents per share. The weighted average basic shares outstanding in Q2 of 2023 was $42.6 million. Now let's look at the balance sheet, which favored in the trends were favorable in several areas. Cash and cash equivalents and investments were $49.6 million as of June 30th. By comparison, at March, it was $53.6 million. The reduction in cash was primarily due to a repayment of a bank loan totaling $7.2 million. This was offset by a favorable reduction in our inventory at $4.6 million. As such, several key working capital items trended favorable in Q2. Appreciation and amortization in the second quarter was $1.8 million, and CapEx was $750K. Our stock comp was $0.9 million. As I mentioned, net inventory came down by $4.6 million to $87.1 million at June 30th. 44% of the inventory is raw materials and WIP was 52%. Finished goods makes up approximately only 4% of inventory. We continue to do well on recycling of Indian phosphide and believe that this will be an important cost advantage for us as the market recovers. Okay, this concludes the discussion of our quarterly financial results. Let me turn to our plan to list our subsidiary Tongmei in China on the star market in Shanghai. We are making progress on the approval process with the China Securities Regulatory Commission, known as the CSRC. Shortly after Chinese New Year, we were asked to address two primary issues and we believe are close to a resolution with them. We remain optimistic that we will get CSRC approval in the coming months. We're excited to move into the next phase of the IPO process and believe that Tang Mei is an excellent candidate for this listing. With that, I'll now turn the call over to Dr. Morris Young for a review of our business and markets. Morris?