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

Gary Fischer: Well, as long as we’re in the process they have no right for redemption. And equally important, they don’t want to be redeemed. I mean the last thing they want is their money back. And so they’re very willing to be patient and that work with us. And it’s everyone was disappointed that it’s taken longer than we all expected. But…

Morris Young: So let me try to help out a little bit here, Gary. Look, I think — I mean, hard assets and doing manufacturing semiconductor or materials job industry is hot in demand in China. And that is showing up in the fact that we have other investors interested in acquiring a minority share of our other joint ventures, okay. So although the IPO takes longer than we thought it is. But I think our assets in China are highly valuable. I think the psychology or the thinking from a Chinese investor point of view, the money no longer can go into real estate to invest and doing materials and doing manufacturing and the real fundamental business manufacturing is highly desirable. So if we don’t, for whatever reason, we don’t go IPO, I would say one possibility is inviting other customers — I mean, investors investing into our joint ventures.

And we have several of them, which are highly valuable. I mean, of course, the most valuable is Toma manufacturing substrates, and we have the world ranking leadership in those fields, although they are smaller, but nevertheless, it’s highly desirable. But because we’re going public in China, so we cannot separate them and then invite investor into the main body of the investment to me. But for our joint ventures, we can certainly get other investors investing in those joint ventures.

Gary Fischer: Yes, let me give you — we have talked about this internally. So, we’re not worried about it. But as I said, the PE companies want us to go public. They don’t want to pull out. So these equity — private equity investors are all large and premier institutions, each with an investment of just under $5 million, which represents a relatively small part of their respective portfolios. And so far, since they have to be patient no matter what, they’re being patient. So and another thing that’s probably interesting to note is that they don’t have any recourse or their investment is not collateralized. So that’s why they needed to succeed. So — and we made some significant progress and some developments that we really can’t give any details, but some very good steps were taken in the recent quarter, which continues to sustain our hope regarding the IPO.

Richard Shannon: Well, great I appreciate all that detail I think a lot of investors wanted to hear that, and I think that’s a great response. So appreciate the time, guys. That’s all for me.

Operator: The next question comes from the line of Tim Savageaux from Northland Securities. Please go ahead.

Tim Savageaux: Hi. Good afternoon, and congrats on both the results and the outlook and especially the growth in indium phosphide. And I think there was a mention of kind of peak levels that you had achieved in indium phosphide. I think that’s getting up towards $20 million a quarter, maybe $1 million — but at that point, you also had some additional consumer business. And I guess my question is as you look at it now, the market opportunity you’re seeing, do you think this AI kind of optical data center opportunity can move you back toward peak indium phosphide levels by itself? And I have a follow-up.

Morris Young: That’s a good question. I — the customer who use our product for consumer products at the time — I mean, they still have one product using it for consumer product, by the way. They didn’t go all completely, and we are believe a big dominant supplier for that product. And we are also in negotiation and in qualification for yet other product although I don’t know what’s the launch time and whatnot. And the other thing is that talking to their engineers, at one time, they told us they have 11 projects centered around using indium phosphide in their consumer product devices. So I don’t think I’m giving that up, but indium phosphide just has so many different characteristics such as fire infrared and using as a detector, et cetera, et cetera.

So it’s unique in its place to be used as a technology device. Whereas AI application, I think it’s an extension of what people use it for data center. If you want high bandwidth, high-speed data transfer, low attenuation, I mean that’s the perfect choice. And if you have AI, that means you’ve got to access data much in 100, 1,000 times, even 10,000 times, and you have so many more data center, you want to exchange information. What’s the best way to transfer that information, it’s no banner. It has to be some kind of an optical device to transfer that data. So I think it’s difficult for me to say when it’s going to be so strong and so how big but whether it’s going to rival to the consumer product. But I think both of them do need indium phosphide…

Gary Fischer: Yes, when Morris said optical, that means it’s got to have the indium phosphide because the wavelengths can be read by indium phosphide — so — but yes, we believe we will get back to those levels, Tim. As Morris says, we’re not sure on the timing. And it very well could get back to that level sooner than we thought because of AI. Six months ago, we didn’t have this kind of expectation. I don’t know for the people listening to it. I think last week, there was really an amazing article in the New York Times about the amount of money invested in AI in Q1 of this year, and it was, I think, $32 billion. And that’s not just software, that’s hardware, too. So it’s data center stuff. So I mean, we’ve all been around a long time and so we’ve seen stuff, but I was very amazed by that.

And I sent it to Morris and Leslie, I said it to our Board of Directors because that’s going to — we know we’re at the bottom of the food chain or the end of the train, but that’s going to benefit any phosphide substrates. And so the dream or the hope is that the consumer comes back and it competes against AI for who’s going to be the biggest contributor to indium phosphide revenue. And we don’t need a miracle for that to happen. I think it’s a very reasonable goal.

Tim Savageaux: Got it. And I want to ask a little bit more about the improvement or the pretty dramatic growth that you saw in Q1 in indium phosphide. And you’ve already talked about — you have a unique perspective kind of in the ecosystem. And maybe I’m going to ask you to guess a little bit more here. But I guess my question is around the breadth and how you could characterize that strength. Obviously, you can sell to a lot of different folks in this arena, whether it’s Epiwafer suppliers or vertically integrated laser manufacturers or module manufacturers. And I think you’ve done business with all of those types of guys. And so whether it’s looking at the type of customers or looking at wafer sizes, what does that tell you about the breadth of demand that you see as the — historically, you’ve had a couple of major customers on the data center side?

Or can you see to the extent new customers are showing up? Or are there a couple of customers really moving the needle for you when you see this extraordinary growth in Q1?

Morris Young: The Q1 customer actually is new. I mean they are a customer on other products. But for that application for AI was new. And they’re telling us their customer, but I can’t repeat it. It’s a big, big customer.

Gary Fischer: Well, there’s a — we know the players, right? There’s Meta, there’s Google, there’s Microsoft, all of those data centers are going to — where indium phosphide is going to have a play is rack to rack, rack to the aggregation point within the data center and then the aggregation point to a different data center. All of that needs high speed. If you think of the data that’s computed in AI then you’ve got to transfer it and move it around in order to get an end result. And so within the rack, we don’t think they’ll go to AI to indium phosphide. But rack to rack and beyond, that’s where indium-phosphide has a definite application. So…

Morris Young: Of course, Gary, you’re not saying anything different. Why is it AI, data set are already doing this. But it’s just that data center has to get so busy talking to each other and exchange information a thousand times or 10,000 times that requires higher speed highway. That is where the indium phosphate come in.

Gary Fischer: The other thing that one of our marketing guys taught me is that some of the large data centers are now having a shortage of power of electricity to run the thing. So they’re downsizing in the future architecture to smaller — more data centers that are smaller but are spread around, and that’s going to benefit us. So…

Tim Savageaux: Got it. Well, okay, it sounds like there was sort of a big customer helping to drive that growth in Q1. And sort of the rest of the color I was looking for. I know there’s only so much you can say. But clearly, you’re at the substrate level, you’ve got an Epiwafer supplier who maybe selling into a module manufacturer. I mean I imagine that you’re maybe not all the way up to the cloud provider level, but you have customer touch points all along that ecosystem. And I was just looking for as you see the pieces move around what you’re seeing in terms of opportunity at any of those levels, right, whether it’s going directly to a chip supplier, obviously, you used to do a lot of business with Intel and their module assets are over at Jabil now. Are you seeing sort of different customers kind of show up at different parts of the food chain, I guess, in driving this AI growth.

Morris Young: Not yet. In fact, I think if I mean we have some China customer, which is showing up — taking a lot of wafer as well, but they’re not telling us anything. I mean I think the customer base seems to be shifting somewhat before these things all happen to consumer product that sort of win way. And then there was a data center that you were talking about, which was taking a lot of wafer, they are not prime customers at the table right now. There is a new Chinese customer coming in, but we don’t know where that is coming from. And this new customer is taking this as leading in the phosphide and we know they’re telling us it’s going to AI. But I wish I can see that’s the second one, the third one coming in, that would be great.

Gary Fischer: We think we understand the architectural needs well enough that there’s little doubt in our mind, there’s no doubt, frankly, that we’re going to end up benefiting and getting into multiple data centers along the big names that I just ran off. So…

Tim Savageaux: Got it. Thanks very much.

Gary Fischer: Thanks, Tim. Next question?

Operator: The next question comes from the line of Danny Cheng from B. Riley Securities. Please go ahead.

Danny Cheng: Good afternoon. My first question is actually on gallium arsenide. So you’re expecting that to be the main driver from first quarter to second quarter. Just wondering if there any applications or customers kind of driving this strong growth?

Morris Young: LED is strong for automobile. Lasers is strong, but not as high as at the peak. I would say it’s about 50% of the peak level. Automobile is probably 70%, 80% of the peak and HPT is a new, I believe, opportunity for us, and we’re trying very hard to get ourselves back into it. And if we are successful, we can expect more revenue growth for HPT as well. And the China market seems to be fairly strong in gallium arsenide.