AXT Inc

Good afternoon, everyone, and welcome to AXD's first quarter 2024 earnings call. Leading the call today is Dr. Maurice Young, Chief Executive Officer, and Garrett Fisher, Chief Financial Officer. My name is John, and I will be your coordinator for 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, Please press star 1 again. Thank you. I would now like to turn the call over to Ms. Leslie Green, Head of Investor Relations for AXP.

Thank you, John, 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 and 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 current expectations. This conference call will be available on our website at AXT.com through May 2, 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 first quarter of 2024. 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 first quarter 2024 results. Gary?

Thank you, Leslie, and good afternoon to everyone. Revenue for the first quarter of 2024 was $22.7 million. That's up from $20.4 million in the fourth quarter of 2023 and up from $19.4 million in the first quarter of 2023. To break down our Q1 2024 revenue for you by product category, indium phosphide increased sequentially to $8.1 million. That's reflecting strong growth from data center applications, including AI, and continued improvement in passive optical networks. Gallium arsenide also grew to 7.5 million, with broad-based improvement across a number of applications. Germanium substrates were 1.4 million, up from the prior quarter, with renewed strength in demand for satellite solar cells. Finally, as expected, revenue from our consolidated raw material joint venture companies in Q1 was 5.8 million, down from Q4 as we consumed a greater portion of their output for our growing substrate demand. In the first quarter of 2024, Revenue from Asia Pacific was 79%, Europe was 16%, and North America was 5%. The top five customers generated approximately 33% of total revenue, and one customer was over the 10% level. Non-GAAP gross margin in the first quarter was 27.3%, compared with 23.2% in Q4, and 26.9% in Q1 of 2023. For those who prefer to track results on a GAAP basis, Gross margin in the first quarter was 26.9%, compared with 22.6% in Q4 and 26.3% in Q1. 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, favorable product mix, and the benefits of our recycling programs, along with continued efficiency improvements throughout our business. Moving to operating expense, total non-GAAP operating expense in Q1 was 8.7 million, compared with $7.5 million in Q4 of 2023 and $8.7 million in Q1 of 2023. On a GAAP basis, total operating expense in Q1 was $9.4 million compared with $8.2 million in Q4 and down from $9.5 million in Q1 of 2023. As you've seen from our quarterly run rate in 2023, we had put in a number of constraints in place for OPEX to align with market conditions. As things are beginning to trend up, we're loosening up some of these constraints, which has brought OpEx up from the previous run rates. We do expect to hold it at approximately this level throughout the rest of this year. Our non-GAAP operating loss for the first quarter of 2024 was 2.5 million, compared with a non-GAAP operating loss in Q4 2023 of 2.7 million, and a non-GAAP operating loss of 3.5 million in Q1 of 2023. For reference, our GAAP operating line for the first quarter of 2024 was a loss of $3.3 million compared with an operating loss of $3.6 million in Q4 and an operating loss of $4.4 million in Q1. Non-operating other income and expense and other items below the operating line for the first quarter in 2024 was a net gain of $1.3 million. The details can be seen in the P&L included in our press release today. For Q1 2024, we had a non-GAAP net loss of $1.3 million, or $0.03 per share, compared with non-GAAP net loss of $2.8 million, or $0.07 per share in the fourth quarter, and non-GAAP net loss in Q1 of 2022 was $2.4 million, or $0.06 per share. On a GAAP basis, net loss in Q1 was $2.1 million, or $0.05 per share. By comparison, net loss was $3.6 million, or $0.09 per share in the fourth quarter. and gap net loss in Q1 of 2023 was 3.3 million or 8 cents per share. The weighted average basic shares outstanding in Q1 of 2024 was 43.0 million shares. Cash and cash equivalents and investments were 41.3 million as of March 31st. By comparison, at December 31, it was 52.3. Cash is down for two main reasons. First, our revenue billings tended to be back-end loaded in the first quarter, as most of China shuts down for Chinese New Year's. As a result, in Q1, accounts receivable increased by $6.1 million. This is simply a timing issue, as most of that cash can be collected in Q2. The second reason for the decline in cash in Q1 was CapEx spending of $5.7 million. This is not new commitments to facilities. This was work done in 2023 for which payment was due in Q1. As we look to the balance of the year, we expect CapEx to be in the $2 to $3 million range per quarter, most of which goes towards facilities work, which was done in 2023. One more note on cash. From time to time, we have had outside parties approach us with an interest to invest in our supply chain companies. Currently, interest in China is growing, perhaps related to the change in the economic circumstances in China. We believe that there is real value in these assets to be unlocked and may consider monetizing a portion of them this year. As a reminder, we now have over 10 companies in our supply chain where we have partial ownership shared with industry partners. Depreciation and amortization in the first quarter was $2.2 million. Total stock comp was $800K. Net inventory was down $600,000 in the first quarter. This includes inventory added through our recycling program. 33% of the inventory is raw materials and WIP was 63%. Finished goods makes up approximately 4%. The increase in WIP is primarily the result of increased crystal growth in anticipation of higher demand in Q2. With improving demand, we hope to bring our total inventory down by approximately $10 million over the year. Okay, this concludes our discussion of our quarterly financial results. Turning to our plan to list our subsidiary, Tongmei in China on the star market in Shanghai, we now believe that we have had some significant developments on the issue that the CSRC previously raised, and we believe the likely next step is that the CSRC can resume consideration of our application. As we've said, this is a lengthy process, but we continue to believe that Tong Mei is 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.