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spk01: Good afternoon everyone and welcome to AXT's fourth quarter and fiscal year 2023 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer, and Gary Fisher, Chief Financial Officer. My name is Eric and I will be your coordinator today. After the speakers 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 AXT.
spk02: Thank you Eric 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 and succeed in 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 in 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 February 22nd, 2025. 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 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 fourth quarter 2023 results. Gary?
spk04: Thank you, Leslie, and good afternoon to everyone. Revenue for the fourth quarter of 2023 was $20.4 million, up from $17.4 million in the third quarter of 2023, and down from $26.8 million in the fourth quarter of 2022. To break down our Q4-23 revenue for you by product category, Indian Phosphide increased sequentially to $5.4 million, reflecting a stabilizing market with continued improvement in artificial intelligence, ponds, and data center applications. Gallium arsenide also grew to $6.0 million, with excess inventory largely worked down and certain applications showing improvement. Germanium substrates were $1.1 million, down slightly from the prior quarter. Finally, revenue from our consolidated raw material joint venture companies in Q4 was $7.9 million. In the fourth quarter of 2023, revenue from Asia Pacific was 77%, Europe was 16%, and North America was 7%. The top five customers generated approximately 28% of total revenue, and no customer was over the 10% level. Non-GAAP gross margin in the fourth quarter was 23.2%, compared with .3% in Q3 of 2023, and .5% in Q4 of 2022. For those who prefer to track results on a GAAP basis, gross margin in the fourth quarter was 22.6%, compared with .7% in Q3 of 2023, and .1% in Q4 of 2022. The primary drivers of the sequential improvement in our corporate gross margin in Q4 were higher additional volume, product mix, and improved gross margins at both Jin Mei and Boyu. Beyond the near term, we remain confident that we can get back to the -30% range as the environment strengthens through higher overall volume, more favorable product mix, and the benefits of our recycling programs, along with continued efficiency improvements throughout our business. Moving to operating expenses. With a reduction in overall revenue, we have maintained spending discipline in our operating expenses to align with the current environment. Total non-GAAP operating expense in Q4 was 7.5 million, down from 7.8 million in Q3 of 2023, and down from 8.9 million in Q4 of 2022. On a GAAP basis, total operating expense in Q4 of 2023 was 8.2 million, down from 8.6 million in Q3, and down from 9.6 million in Q4 of 2022. Our non-GAAP operating income for the fourth quarter of 2023 was a loss of 2.7 million, compared with a non-GAAP operating loss in Q3 of 2023 of 5.8 million, and a non-GAAP operating loss of 256,000 in Q4 of 2022. For reference, our GAAP operating line for the fourth quarter of 2023 was a loss of 3.6 million, compared with an operating loss of 6.7 million in Q3 of 2023, and an operating loss of 1.0 million in Q4 of 2022. Non-operating other income and expense and other items below the operating line for the fourth quarter of 2023 was a net loss of 62,000. The details can be seen in the P&L included in our press release today. For Q4 of 2023, we had a non-GAAP net loss of 2.8 million, or 7 cents per share, compared with a non-GAAP net loss of 4.9 million, or 12 cents per share, in the third quarter of 2023. Non-GAAP net income in Q4 2022 was 2.0 million, or 5 cents per share. On a GAAP basis, net loss in Q4 was 3.6 million, or 9 cents per share. By comparison, net loss was 5.8 million, or 14 cents per share, in the third quarter of 2023. GAAP net income in Q4 2022 was 1.3 million, or 3 cents per share. The weighted average basic shares outstanding in Q4 of 2023 was 42.9 million. Cash, cash equivalents, and investments were 52.3 million as of December 31st. By comparison, at September 30th, it was 43.6 million. Appreciation and amortization in the fourth quarter was 2.2 million, and capital investments was about 4 million. Total stock comp was about 800k. Net inventory was flat quarter to quarter. 38% of the inventory is raw materials, and WIP is 58%. Spanish goods makes up approximately 4%. This concludes the discussion of our quarterly financial results. Turning to our plan to list our subsidiary, Tongmei in China, on the star market in Shanghai. In regards to the Tongmei IPO, we need to resolve one open item. Although it is moving slower than we expected, we are making progress and are confident that Tongmei remains an excellent candidate for listing. With that, I'll now turn the call over to Dr. Morris Young for a review of our business and markets. Morris?
spk05: Thank you, Gary. Good afternoon, everybody. We believe that we are now beginning to see a recovery in our market. In Q4, we achieved 18% sequential growth in our revenue and a 43% sequential improvement in our non-GAAP net income. While the overall demand environment remains somewhat soft, we are seeing increased orders for Indian phosphide for both artificial intelligence and POM-related applications. Further, the galling-osman market, which was the first of our market to go into a re-correction, appears to have largely worked through excessive inventory. Looking individually at these product lines, our galling-osman revenue grew 42% sequentially in Q4, reflecting increasing strength in both wireless and LED applications, as well as depletion of excess inventory and our continued success in attending export permits for most of our customers. We're seeing new demand for HPT applications, where we historically have had very little market share. We believe this is the result of both improving market conditions and the desire among customers to diversify their supply base. We're also seeing improving demand geographically in China across a variety of applications, including LEDs, wireless switches, and high-power lasers. As we look forward, the micro-LED market continues to solidify. Several tier 1 companies are driving this adoption, and a new product could come to market as soon as next year. As many of you know, we have been investing in our 8-inch galling-osman technology in support of these applications, and we have recently made groundbreaking advancements in both our defect density and yields. These innovations position us strongly to gain a leading share in the market, while efficiently supporting growing market demand. Now turning to Indian Phosphide. Sales grew 10% in the quarter, with early signs of recovery in the palm market and brand new demand related to artificial intelligence. We view AI as an emerging new application for Indian Phosphide that will develop in exciting ways over the coming years. Today, AI applications are primarily using galling-osman VIXOS, which requires a relatively small amount of substrate material. But as the industry moves to 800 gig and then 1.6 terabytes speeds, we expect that there will be a necessary transition to Indian Phosphide. AI will drive up the need for massive data transfer requirements with increased bandwidth, low attenuation, and low distortion. We believe this will result in increased demand for Indian Phosphide as the best platform for rapid data transfer. We are already seeing development work happening today with next generation silicon photonics devices and electro-absorption modulated lasers, or EMLs, for high-speed data center transceivers. Early revenue from these applications contributed to our Indian Phosphide growth in Q4 and will help drive our expected growth in Q1. This interest in Indian Phosphide for AI applications is intensifying the market demand for 6-inch Indian Phosphide. The speed, signal clarity, and long-distance capability of Indian Phosphide are optimal for AI applications. And as market grows, customers want the scale and cost benefit of large diameter substrate. We are excited by the progress we are making in our R&D effort and expect to continue to lead our industry with the best in-class material. While consumer and healthcare applications for Indian Phosphide today contribute only modestly to our revenue, we continue to see positive development activities and believe there is great potential on the horizon. We are very early in the adoption of this material across a multiple way of emerging applications and our success in supporting Tier 1 customers proves our capability for large volume, high precision devices. Finally, sales from our raw material business grew 13% with continued growth margin improvement. Overall, the pricing environment remains relatively stable and we don't expect any major changes in Q1. In closing, we are looking forward to the coming year with optimism. We believe that the trend that we have driven our revenue and customer expansion remain very much intact with new catalysts such as AI providing strong incremental opportunity. In addition, I'm exceptionally proud of what AXE team accomplished in 2023, paving the way for an exciting future. Not only did we successfully navigate export control license process on behalf of our customers, we delivered breakthrough innovation in the development of large diameter gallium arsenide and Indian phosphide substrates. And we will set a new bar of excellence for our industry. In addition, we implemented a recycling program that both advances our ESG commitment and improves our efficiency. Finally, while the progress on our IPO may be less visible externally, I'm very grateful for the diligence of our team and confident that we can successfully bring it to fruition. In the meantime, we will continue to prioritize cost savings and efficiency and we are focused on accelerating our return to profitability. And thank you to our customers, our shareholders for their continued support. I will turn to call back to Gary for our first quarter guidance. Gary?
spk04: Thank you, Morse. In keeping with our comments today, we expect Q1 revenue to be between 20 million and 22 million. We expect our non-GAAP net loss will be in the range of six to eight cents and GAAP net loss will be in the range of eight to ten cents. Share count will be approximately 42.6 million shares. This concludes our prepared comments. Morse and I would be glad to answer your questions now. Eric?
spk01: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Richard Shannon with Craig Hallam. Please go ahead.
spk03: Great. Thanks, Morse and Gary, for taking my questions and congratulations on a good end to the year. I'm going to start with a question for Gary on your fourth quarter numbers here, specifically on gross margins. Well, obviously volume helps here. The fall through margin here was nothing short of excellent. I think it's about 90%, which seems unusual. Maybe you can delineate more of the dynamics here. Obviously, mix helps, but I wonder if there was some increase in utilization or unusual pricing and raw materials that helped you do this and really want to get a sense of sustainability. I haven't had a chance to run your guides for the first quarter through and see what that implies for gross margins, but I want to get a sense of the fourth quarter as it leads into the first.
spk04: Okay. Well, as usual, the biggest items that contribute to these kinds of improvements are going to be product mix. You know, Indian Phosphide was up Q2Q and volume and volume was up over $3 million. There was a better improvement from the two raw material companies and that also contributed. I think in terms of sustainability, you know, we should be in about the same range in Q1, maybe plus or minus a little bit, but we'll see. And. Well, I think that's how I respond. You know,
spk05: I'm not a finance guy, but I know is that when we have a policy of writing all material, which we didn't say we don't sell for 12 months period time. And when the revenue come down, then the right off for the excess inventory will start to impact us. But when we pick up the volume, not only the right off becomes less, but also we will have the opportunity to pick up those right off items to be on sale, thus improving our gross margin. That could be a.
spk03: Okay, that would certainly make sense. Thanks for that clarification. And maybe I'll follow up here just on the guidance for the first quarter here. Obviously, a little bit of growth at the midpoint here. How would we think about the major segments that you report on, whether they're meaningfully different than that, you know, kind of average growth at the midpoint? I
spk05: think the significance is that any possible will continue to grow. Gally asked, I think we will grow substantially again. Geminian is actually stable or insignificant in a way to the overall revenue contribution. Actually, raw material is going to decrease quite substantially quarter over quarter. Not because their business is weak, but I think it's just that, you know, the raw material business had a great fourth quarter and the first quarter. It didn't pick up the large volume opportunity in Q1. So overall, although the revenue growth is modest, but actually come mostly from the contribution of Indian phosphide and gallium arsenide.
spk04: Correct.
spk03: OK, perfect. Thanks for that delineation. So let's jump into some of the product categories here in data center, meaning Indian phosphide here sounds like it's got some opportunities here. Clearly know this optical space where it seems like it's very nice here. Maybe you can talk about, you know, I think you've been a little bit limited in the kind of a narrow customer base in your past. I think you have one major customer there. Maybe you can talk about the efforts for diversification. And ultimately, how do we think about, you know, either data center growth this year versus last or maybe just the overall Indian phosphide category?
spk00: Hmm.
spk05: I don't know. Where did you get that idea from? We have a limited narrow customer base. I don't think we have a narrow customer base. I think we have a. Don't
spk03: you have don't you just have one larger big contributor to data center and many other smaller ones or some number of smaller ones?
spk05: And yeah, data center is silica photonics specifically was sort of narrow. They they didn't grow. They are poised to grow. They've been telling us it should grow substantially in Q in twenty twenty four. But we haven't seen that yet. I think they are incrementally better in Q1 than Q4. But they're telling us their visibility is still not good, but they overall they're telling us that Q2024 should be substantially better than 2023. So I think, you know, from what we see on Indian phosphide, the telecom business is not great. The data center actually still got some inventory to digest. Pond's market in China actually is picking up a bit. OK, but they're still not robust compared to the peak time, but it's better than Q3 for sure. And it's continued to be better in Q1 than Q4. And what I think is surprising to us, I think, is the AI application. You know, it first started something like six months ago, and we thought it was well, first the customer wouldn't tell us it's AI. And then they come back again and they want more in Q4. And they now give us yet another bigger order in Q1. So cumulative delivery, it's in the millions of dollars range. So and this time they also admit to us that it's AI related. So we are cautiously optimistic, although they are not giving us, you know, good visibility, how much they will grow in Q2 and Q3. But at least I think it's so far it's a very good sign. And I believe this, you know, Indian phosphide solution for AI will come as a matter of time. But I think I'm glad to see it's coming already through.
spk03: OK, more some interesting detail there. It seems like you're splitting up, I guess, what I would call data column that you're kind of splitting up between Silicon Vitonics and AI and others here. But perhaps there's more detail that we can take offline there. But that sounds sounds good to hear here. Let's see, maybe just touching on this side of Indian phosphide here. It sounds like you're really more positive on the consumer electronics and health care side here. Maybe just get a sense of where that's coming from. And do you see any large customers kind of impacting your year this year?
spk05: Well, Richard, we are we are cautiously optimistic. They are requesting a fairly sizable quote and we're in qualification process for to launch later this year. But we don't have no signal. It will become reality. I mean, the volume is substantial. We know it's good for consumers. But it's still into qualification process, whether what it will launch and will it launch later on this year, we don't know. But we have at least. Let me see two customers requesting for the same volume, for the same type of material that they request. I mean, from the volume of it, we know it's a consumer product.
spk03: OK, fair enough. Well, that's good to hear. Last question. I will jump out of line here. Just touching on the micro LED topic here. I guess I want to get a sense of your visibility and confidence in this market taking off. You know, I think you mentioned in your prepared remarks and sometime in calendar 25 here seems to be kind of a moving target in the space. I think it's largely due to yields on the pick and place here outside of your direct scope of your work here. But I just want to get a sense of your level of confidence that can happen next year.
spk05: Well, there I think you probably know better than I do. I think from our end, our development of the age, getting on that program, supporting this both in terms of capacity, our yield and our quality. Now we have we have made great advancement in the last quarter and we are now very confident and we have customer visit. I think twice now and the third attempt to visit us will happen next quarter and we will soon see the qualification process. So I think, you know, what we can tell you is our customers are telling us they are ready to launch sometime in 2025. And so that's what we can do. Whether it's good. I mean, right now we're running hundreds of waivers per month. OK, and so we continue to deliver now. But so I guess they are in pilot line production and so far so good. Our wafer performs very well. So I'm optimistic.
spk03: OK, fair enough. Thanks. That is all the questions from you guys. I'll jump out of line.
spk01: Thanks, Richard. Your next question comes from the line of Charles C with Needham and Company. Please go ahead.
spk06: Yeah, thanks. Morris and Gary, our congrats on the fourth quarter results. I want to ask you a little bit more details about the new opportunity you see in data center side. I believe you're referring to the data com transceiver market. 800 gig plus. Yeah, now based lasers. Obviously coherent. I believe it's one of your end customers were very bullish about how much growth this part of the market is going to be. But for us, it's getting a little bit tough for us to to think about how to translate their forecast of the 800 gig plus optical transceiver opportunity growth to your in-game phosphide wafers. So have you guys tried to quantify how much of the PM and this part of the applications are going to going to drive for you guys? Yeah, the other related questions based on your knowledge today. Are you single source? You know, as an Indian phosphide wafer supplier, or do you think the end customer may be sourcing from your competitor as well?
spk05: Thanks. Oh, that's a that's a little bit tough question, and it's a fairly long way. So so let me say this. I think right now the data center, I do want to clarify one thing. There is it's very hot item is called Optical. Cable project, and we're not really we're not related to that project. And that is mainly using Vixel using a plastic fiber. And I think there's a big company data center wants to change out coaxial cable with Vixel with plastic fiber. Whether that optical cable will move from 400G, 100G to 800G or not, because they can use parallel paths. We're not in that at all. And what we're talking about the 800G 1.6 gigahertz terabytes, I think we're talking about potentially for a little bit longer distance, perhaps, and more power data transfer. So whether the customer is single source or not. So to answer your question, are we can we quantify? And so, you know, if coherent is going to grow X percent, are we going to grow with them? And so you have to take out I mean, I believe coherent is also doing Vixel. The Vixel, the problem with that market is it doesn't use a whole lot of gallium substrates. So the opportunity for us is much less than, you know, making the correct the plastic fiber for Vixels. So as far as single source or not is concerned, I believe we are still the largest. I believe also best in class in any phosphide supplier. So we have multiple money, money customers, and some of them use a majority of their supply. And in fact, I think the artificial intelligence customers that we recently engaged, I think we're single source. But what are they going to develop into multiple source or not? We don't know. And but we are also very cautiously looking for other people wanting to do participating that development as well. So so, you know, we have a very good position in the phosphide marketplace. But, you know, whether they are single source or not, it's difficult to
spk06: tell. Got it. So maybe a follow up question. It looks like for roughly two quarters, right? December last year, March this year, you are for business levels now. I mean, return to that 20 plus million per quarter level. Looking out a little bit beyond the March quarter, what's your best assessment right now? Are you are you going to be maintained at a similar level? Are we going to revisit that high teams of millions per quarter, that kind of level? Or I mean, generally want to get a sense how you feel about the run rate going through the rest of the year. Next.
spk05: Sure. I think for next quarter, as I said, I think although we only guided modestly higher overall revenue for next quarter, but raw material is decreasing. So there's a substantial increase in substrate revenue to compensate for that. So so I think for substrate revenue is going to continue to grow both in terms of eating phosphide and gallium arsenide. And for raw material, I don't think it's going to drop off for the rest of the year. And we will have other joint venture joining in to contribute revenue contribution as well later on of the year. So I think this year it's going to be a continued growth year for for twenty to twenty four compared to twenty to twenty three. The question, I think, is how fast, how strong is going to be, whether we're going to reach 90 million. But I think it's probably better than eighty five.
spk06: Got it. Thanks. That'll be all for me. Next. Next, Charles.
spk01: I'll now turn the call back over to Dr. Morris Young for closing remarks.
spk05: Thank you for your participation in our conference call. As always, please free your fury to contact me, Gary Fisher or Leslie Green, if you would like to set up a call. We look forward to speaking with you in the near future.
spk01: Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect your lines.
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