AXT, Inc. (NASDAQ:AXTI) Q1 2024 Earnings Call Transcript

AXT, Inc. (NASDAQ:AXTI) Q1 2024 Earnings Call Transcript May 4, 2024

AXT, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, everyone, and welcome to AXT’s First Quarter 2024 Earnings Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, 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. [Operator Instructions] I would now like to turn the call over to Leslie Green, Head of Investor Relations for AXT.

Leslie Green: 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 quarter — 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, and 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 Fischer for a review of our first quarter 2024 results. Gary?

Gary Fischer: 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 204 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 our side 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 5 customers generated approximately 33% of total revenue and 1 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. Nonoperating 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 GAAP net loss in Q1 of 2023 was $3.3 million or $0.08 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 31. By comparison at December 31, it was 52.3%. Cash is down for 2 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. As a result, Q1 and 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 and for which payment was due in Q1. As we look to the balance of the year, we expect CapEx to be in the $2 million to $3 million range quarter 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 $800,000. 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, Tong May 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 Tongmei 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.

Morris Young: Thank you, Gary. We believe our business is on a firm path to recovery, as evidenced by the continued growth in our business and solid execution, which allowed us to exceed our Q1 revenue and profitability pace. In the first quarter, we achieved 11% sequential growth in our revenues and 29% sequential improvement in our non-GAAP net income. While certain parts of the demand environment remains somewhat soft, all three of our substrate product line showed improvement, including a 48% growth in time phosphide revenue from Q4. Looking individually at these product lines. Indium phosphide once again became our biggest selling material in Q1. Sales was driven by continued recovery in the power market and a meaningful increase in demand related to AI.

We review AI as an exciting catalyst for Indium phosphide in the years to come. As AI requires high-speed lasers and detectors for rapid data transfer with increased bandwidth, low attenuation and low distortion. Today, AI applications are primarily oxide pixels, which require a relatively small amount of substrate material. But as the industry moves to 800 gig and then 1.6 terabyte speed, we expect that there will be a necessary transition to indium phosphide. We are already seeing development work happening today with next-generation silicon photonics devices and electro-absorption modulated laser or EML for high-speed data center transceivers. Revenue from these applications contributed to our strong indium phosphide growth in Q1 and will help drive our expected growth in 2024.

Our gallium phosphide revenue grew 24% sequentially in Q1, reflecting increased demand across a broad base of applications, including power amplifiers, HPT applications for wireless our switches, high-power lasers and LEDs. We believe much of the excess inventory in the supply chain has been decided, and we are benefiting from a desire among our customers to diversify their supply base as the market recovers. For example, today, our share of the HPT market is relatively small, but we believe we have a great opportunity to increase our market share over time and are pleased with early customer traction. In addition, our 8-inch gallium site development efforts have led to a groundbreaking advancements in both of our defect densities and yields.

We believe this innovation can be applied to our 6-inch gallium state products, allowing us to further enhance our competitiveness across all of our market research. In germanium substrate, demand for satellite solar cells were down substantially throughout 2023, is now beginning to recover. Sales increased 25% in Q1 over the prior quarter with renewed strength in Europe and Asia. And finally, coming off three quarters of strong sales in our raw material business as well as contribution from our recycling efforts sales from our raw material business declined as we expected in Q1. This decline was primarily the result of our consuming a greater portion of the output from our consolidated joint venture as our substrate business has strengthened.

In total, our portfolio joint venture companies continues to be a strategic value to our business, providing money of the critical material we use to make our products and allowing us to benefit from the cost and efficiency advantages. Now in closing, we are optimistic about the coming year and the growth and expansion of our business. We are seeing tangible signs of recovery across all of our product lines with new catalysts such as AI, providing strong incremental opportunity. We’ve worked hard over the last two years to pave the way for an exciting future by providing world-class products for a highly dynamic technology landscape, elevating our own business practices to meet the requirements of Tier 1 customers, delivering breakthrough innovations in the development of large diameter gallium arsenide and indium phosphide substrates and executing on a recycling program that both advances our ESG commitments and improves our cost structure.

We remain status focused on business efficiency and accelerating our return to profitability. With that, I will turn the call back to Gary for our second quarter guidance. Gary?

Gary Fischer: Thank you, Morris. In keeping with our comments today, we expect Q2 revenue to be between $25.5 million and $27.5 million. We expect our non-GAAP net loss will be in the range of $0.03 to $0.05, and GAAP net loss will be in the range of $0.05 to $0.07. Share count will be approximately 43.0 million shares. Okay. Well, this concludes our prepared comments. Morris and I will be glad to answer your questions now. John, can you take it back?

Operator: [Operator Instructions] The first question comes from the line of Charles Shi from Needham. Please go ahead.

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Q&A Session

Charles Shi: Hi, Morris. Gary, congrats on the good Q1 results and very happy about Q2 guidance. I want to start with the AI really related question. The indium phosphide, I think that last time when we speak — when we spoke about this, you were talking about semi-insulating indium phosphide wafers potentially being used for some of the high-speed detectors application. But in your prepared remarks, it sounds like you are getting a little bit more upbeat about the high-speed laser type of applications for 800 gig, 1.6 tera those kind of applications for the next-generation EML et cetera. So can you provide us a little bit of update your engagement on these AI applications so far? Do you — when do you see the laser application will start to contribute some meaningful revenues for the indium phosphide business?

Morris Young: Charles, first of all, the order we received one customer specifically told us is for us for AI, and that was from selling germanium phosphide. And the fact that we’re guessing if it was for detectors, it was a guess, okay? Because usually, indium phosphide good semi-insulating either for electronic applications or for high-speed detectors. However, recently in the industry, we also heard some of the EMLs require semi-insulating substrates. So this — whether it’s for lasers or for detectors, we all know from what we are making, the customer demand for our product is sort of a slight change from silicon do — I mean sulfate semiconducting substrates, usually good for lasers. And now it’s for semi-insulating in of the indium phosphide, but whether it’s detectors or lasers, it’s a an insulate estimate. We don’t really know. I’m sorry. But we do hear from our customer, it’s for a pretty large AI customer.

Charles Shi: Got it. Thanks. Well, Morris, thanks for the color you provide. I guess it’s something we will continue to chat. And obviously, we don’t want to dig more if there’s something about your customer you don’t want to share. So maybe a second question, maybe for Gary, I think in your prepared remarks, you talked a little bit more about the SAR listing. It sounds like you’re making some progress on that front. Can you kind of provide a little bit more color in terms of what kind of progress exactly? And give us a little bit better sense about why you think it’s moving forward a little bit more at this time.

Gary Fischer: So the process of communication with Shanghai Stock Exchange a CSRC is such that once we send in our applications, they will continue to ask questions. They want us to clarify a few things. And there are things which that they express, they have concerns with and we provide them with answers. And we think we made some good progress on the questions they have. And so now we think we are ready to go through the next step, which is go through their review process again, and they will then look at our whole application and either continue to ask questions or improve — approve…

Charles Shi: All right, thanks for the update. Okay, that’s all from me for now. Thanks so much and congrats again on the results and guide.

Operator: Yes. The next question comes from the line of Richard Shannon from Craig-Hallum. Please go ahead.

Richard Shannon: Well, hi, guys. Thanks for taking my question as well. And congratulations on a really nice guide here. Great to see you. To that point here on the guidance here, I wonder if you could elaborate on a couple of items here, first of all, just trying to understand the relative growth dynamics of each of your four revenue buckets here, I would assume you deposits probably your best growth driver, but wondering if you can kind of rank those and whether you expect them all to be growing sequentially. And then second of all, trying to get a sense of what’s implied here for gross margins, given that you said that OpEx could generally be the same in the second quarter as the first. I’m kind of getting a number that’s slightly higher than the first quarter, maybe as high as $30 or 30%, but just wondering if I’m doing the right math on that one.

Morris Young: Yes. So let me first try on the business conditions. Actually, the strongest growth we think next quarter is going to come from Gallium phosphide and also germanium. Germanium seems to be very strong and raw material is very strong as well. Indium phosphide actually at this point of the timing that we are projecting flat. And one other thing which is interesting about this business environment right now is that wherever the customer wants something, it’s the short — the lead time is extremely short. I mean, we usually ask the customer to give us at least four weeks lead time because we need to process the wafers and sometimes we even have to grow crystal. So the lead time issue is long. We don’t have a standard product for offering.

But nowadays, I mean, customers just want two weeks lead time, which is great. However, it’s all of prevented from having better visibility. But we can see that gallium phosphide is extremely busy. And indium phosphide right now, as we see now is a flat quarter, but things can change because we still got almost two months to go, given two weeks lead time. We have six weeks to take orders and deliver. And on the margin, Gary?

Gary Fischer: Maybe we can do this on a follow-up call, Richard, because it gets kind of complicated and I didn’t understand exactly what your model is telling you, but we can work on it with you, so.

Richard Shannon: Okay. Fair enough. Morris, I did want to follow-up on your comment regarding gallium phosphide being your highest growth driver here. To what degree is this maybe some inventory fill in some product areas that were driven down so hard in the last 1.5 years? And then I think you also mentioned some pickup in the wireless/HPT market. So I’m wondering to what degree that’s contributing in this quarter.

Morris Young: Well, first of all, I would say gallium phosphide was the first product coming down in terms of revenue, right? I mean, I remember it was the second quarter of 2022, gallium phosphide start to come down. So it takes usually six weeks before all the inventory got depleted. So now it’s coming back. So because indium phosphide takes, I think, three longer weeks before it start to come down. Three, yes, three quarters, too. So I expect indium phosphide perhaps not to recover as quickly as gallium phosphide. Although the pickup of indium phosphide last quarter, I attribute that to the new business on AI and because I see PAM business is doing okay but not really robust. The telecom business is not great. And data center, from what I see, they are still inventory out there. So I think the AI part of the data center, I think, is pulling the demand for us and increase our revenue by, what, 40-some-odd percent 48% from Q4 to Q1. So the — yes.

Richard Shannon: I didn’t mean to interrupt Morris, so please continue.

Morris Young: No, I actually have forgotten what my. So what was another part of your question? Yes.

Richard Shannon: Yes, I think so. But there is an interesting follow-up to those comments here, which is like how much of your Indium phosphide businesses is AI today? It seems like given these kind of growth rates, it’s got to be a pretty substantial part now. Can you quantify that in any way?

Morris Young: Well, I think last quarter was significant. I would say, could be as much as 20%, although it’s a little bit difficult for us to really nail it because some customers would tell us and some customers don’t, okay? But as I said, indium phosphide business is very interesting. I want to encourage analysts to help us to do that analysis. There are two parts of indium phosphide one is semi-insulating and the other semi-conducting. The semi-insulating is usually made for detectors and electronic applications. And the software do semiconducting are usually low EPD and good for lasers, and they are the dominant demand for indium phosphide for many, many years. It’s almost like eight-one in favor of semiconducting wafers, okay?

But the last two or three quarters, the trend is reversed. There’s so much more demand on semi-insulating iron doled wafers. So it’s as if the laser just didn’t grow or maybe they still got too much inventory. And this new demand of iron doled making either some kind of laser or more likely high-speed detector is growing very strong. So what I’m hoping for is that the sulfide material will recover as the inventory get consumed and will come back again. But this iron actually is a new application will continue its own trajectory of growth.

Richard Shannon: Okay. Very interesting dynamics there. I’m going to ponder that while I ask a couple of other questions here. I guess just a quick one here. You had a 10% customer in the quarter. Can you identify that or at least the sector and whether that they’ve been a 10% customer in the past.

Gary Fischer: It was an EPPE house, Richard. And…

Richard Shannon: So It’s actually related to the AI customer, right?

Gary Fischer: Yes.

Richard Shannon: Yes.

Gary Fischer: Okay. Yes. It’s a historically long-term customer for us that does EPPE. And we don’t know for sure where that was going. But actually, we do know, but we can’t say I’m not going to lie to you.

Richard Shannon: Okay. Fair enough, Gary. Maybe just a couple of last questions here, and I’ll ask both of you to put on your long-term lenses here, or I guess we’ll call it a medium-term lens here. But just kind of wanted to conjecture on the opportunity for getting back to breakeven level by the end of this year or early next year? And maybe just as a reminder what that model looks like in terms of revenues and gross margins.

Gary Fischer: Well, we certainly think that it’s a reasonable target and goal to do that maybe this year. So we’re not giving up on it.

Morris Young: I would say it’s this year. Yes. So…

Gary Fischer: Yes. It’s probably somewhere between $28 million and $30 million a quarter, and we would need to get the gross margins to go up maybe close to 28% and keep the OpEx somewhere around 9.3%, 9.4%. That’s GAAP and OpEx, by the way. So…

Morris Young: And I think we do need some help from indium phosphide. I mean right now indium phosphide is only 50% of what we used to do at a peak.

Gary Fischer: Yes. I mean that’s probably the wildcard. And it’s — I would say that the indium phosphide surge, especially since it’s centered in the artificial intelligence area, it’s happening sooner than we expected. We thought it would — we believe early on it was going to happen, but it’s happening sooner. So the question is what’s going to happen in the next two or three quarters. But it’s a tremendous opportunity, and there’s billions and billions of dollars that are being invested in the hardware side of AI and the software side. So — and of course, we play in the hardware side. So it’s pretty amazing what’s on the horizon. So…

Richard Shannon: Okay. One last question, I’ll jump on the line here, guys. The short report that came out on your stock early last month, I think, is — I think we’ve established pretty well, there’s a bunch of Malarky for the most part. But it does bring up an interesting topic that I think it would be very interesting for you to address. And I think it’s risk that a lot of investors bring up with me. And that is related to the STAR listing and the investment by private equity investors. And if there’s any rejection of the application for whatever reason here, what’s the risk? And how do you get around the risk of having to repay that money and then find other ways to finance the company.