AXTI - Earnings call transcript Q2 2019

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Operator

Good afternoon, everyone and welcome to AXT’s Second Quarter 2019 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer and Gary Fischer, Chief Financial Officer. My name is Howard and I will be your coordinator today. At this time, all participants are in a listen-only mode. reminder, call a being As Instructions] this is conference recorded. [Operator the now AXT. to like would conference to for I Relations turn over Investor Leslie Green, go Please ahead.

Leslie Green

you, everyone. Thank good and Howard afternoon

utilize on I and manufacturing trends financial and call, including schedule regarding other statements product and made succeeding China fabricated that market expenses, begin, expected Before chemical capacity, will mix, remind questions to our regarding, orders control timeliness growing performance as environmental things, in comments conditions, regulations in the relocation, to and company, to like and make provide as to including costs conditions economic safety of and increase well conference course among projections yields in you or our we health of growth global restrictions. this the our during substrates, would trade we quarters using including political your the tariffs industry future manufacturing and we to emerging the serve, response our the chips to our improve forward-looking other the devices ability or markets applications, efficiency, and and

for you product, financial partially chain of in and conditions are our to the restrictions, financial and expectations company competes, caution delays uncertainties our limited risks increased statements of products. to markets global tariffs wish to company’s materially. owned cause on environmental results management’s differ company timing regulations not that the future demand market and and their and include conditions the China, and trade the of are overall events customers These supply impact actual and and such We could in with sales potential uncertainties, based by performance acceptance are the deal the uncertainties subject that but risks current on in to which events or

information to by from you discussed reports with in contain the axt.com Commission. actual will expectations. online that on the cause July filed refer could on website at This website this XX, Exchange to additional addition Securities materially call, that our and link we the XXXX. differ risk current conference maybe our our call factors available through and company’s be from factors to available In periodic are results These

Also before we we to today, that Investor release our close issued reporting is market the on note of begin, financial information a press I the for following shortly Relations want results quarter. portion at axt.com. of This available website second the

turn quarter Fischer to of over for our Gary review like call now the to would a second I results. Gary?

Gary Fischer

revenue. Leslie you, for to revenue first sales million quarter increased afternoon to quarter in quarter $XX.X in our was second second and comparison, XX% Of $XX.X the of $XX.X total million revenue, Thank good By by million $XX.X of revenue Total in million. revenue ‘XX the $XX.X XXXX of was increased America from with million. X was customers and the everyone. and XXXX material In the QX. quarter. substrate two of second joint second revenue quarter the was XX% North XX% revenue XX%. XXXX, In Europe reached total from million compared of the million X%, of XX% the raw our QX in in prior top Revenue generated $X.X from customers $X.X Asia-Pacific and approximately ventures quarter,

of previous million the $XXX,XXX. compared second quarter. quarter $X.X was XXXX. for in for for of were $X.X QX quarter quarter operating expenses $XXX,XXX product Gross This second XX.X% of Total result the was Total was up compensation compared second Operating with mix. XX.X%, stock prior the in quarter margin from QX primarily $X.X income with the million XXXX improvement in the was million expense the million in QX. $X.X in and

net a with of of XXXX. loss net quarter quarter income $XXX,XXX quarter compared a million second the of the and gain for AXT’s $X,XXX was XXXX Interest owned of in income income other expenses other the second and of chain a $X.X and method. quarter loss other the supply foreign for XXXX and partially for net of second for a $XX,XXX gain from totaled loss and the a included companies equity Interest of $XXX,XXX first under of interest $XX,XXX, the in accounted exchange

quarter in $XXX,XXX of second a charge QX. the $XXX,XXX for charge tax was of with the Income of compared XXXX

the importing XX. China. by of XX% QX rate United $XXX,XXX from wafers tariffs the Our to May a approximately results on That into as States XX% on included in the tariff from result charge increased way

or net a had of we comparison, By net loss million million a a $X.XX or had of XXXX, $X.XX income $X.X $X.X profit loss of QX a For we per share. of share QX was XX,XXX,XXX per shares. diluted XXXX $X.XX in of or of a $X.X of income quarter for The and net profit share XXXX. the in million first share QX per count

June X% approximately comparison and XX. XX of at to materials, Net XX% it million at goods. XX. consisted March inventory Accounts million the in in amortization of XX, June decreased compared and in $XX.X million were with finished $XX.X Ending working quarter with compared $XX.X By June million. cash XX% March and investments reserves Depreciation million. XX was CapEx to only Cash second inventory at was in as of progress $X.X inventory and net million at $XX.X equivalents at receivables $XX.X and XX. million in $X.X March $XX.X increased raw was million

in us the focus in previously, As XXXX. we is noted the for inventory reduction

will estimate. estimated want of million is Previously, XXXX. I on still our our that the facility the provide That numbers, with I we on use Before XXXX for relocation update in $XX cash in an about of relocation. cash conclude the use to we for

$X will million. and half XXXX, will spend think second million we $XX first of the now about For about half we the be

loan which the offset $XX $X Further, we half another We Bank, be approximately positive do helps cash. flow. of also second setting and outflow. the XXXX China utilized will think we in we Fargo bank not credit as are operating renminbi which flow of have up cash source of a with Wells first half in million operating We XXXX are have for of Chinese positive million, cash the for a line

to continuing are resources. confident and monitor we remain We sufficient that have cash

As a we Beijing future. facility remainder, monetize that to has considerable in value the be will in current the able

the it Young financial I wraps over review up turn This of Morris Okay. now a will for for Morris? Dr. review. the the call business. to

Morris Young

revenue Revenue high surpassed good conditions, gallium of just and Gary economic Amidst indium turbulent you, our in arsenide solid of all-time achieved ahead largest again expectations as quarter. this the came geopolitical phosphide global and Thank having afternoon posted a backdrop everybody. AXT quarter. an a our and contributor sales single

on cash and achieved improved we continued gross focus addition, efficiency, manufacturing our positive In flow. reduction inventory with cash management, and margins

believe are our time. relocation the that are We solid growth business continuing foundation our for facility likely we of the technology execute and laying a over drive trends in that significant to on to are

as begin, at to emerge a strategic continues early core technology phosphide their highly major development. the To of several indium still material in trends,

shipment For is is second the believe we infrastructure. to completed XG XG relating infrastructure order a cycle horizon. the example, the large for of during upgrade major on order evidence quarter, We that this

trade XX will XG by In services fact, to association, report worldwide subscribers. published XXXX available their countries made than operators the more a approximately suggest a they by communication have wireless CTIA, that XX recent in

offers where the predict, believe and critical architecture at not will higher play compelling of that While we positioned important value quality supply acceptable. chain applications. all the junctures that to And a indium well the role phosphide timing be believe frequencies difficult for materials would our is and the AXT are to into are market for latency XG the of major these customers. opportunity proposition our supply we required

with QX, first connections application our PON phosphide for the substrates XXXX to typical we and beyond. among the worldwide the for XG in quarter-over-quarter. to In it strengthen rollout the may significant. lumpy an in increase In demand We market drive saw demand it this also market. were the be and opportunity PONs Fiber believe is remains for near-term indium for further

So, growth not policy are from incremental in expecting QX. we

as see enter center in however We we the initial of QX. are pleased the data connectivity indication improvement market to

many phosphide has technology. high a role for scale also broader result experiencing photonics hyperscale in factor know, in quarters a technology in centers. efficiency, difficult data This photonics latency large coupled silicon particularly and Silicon all power which major significant demand in enterprise with emerging low this several and environment bandwidth, been improvement market long plays centers adoption, drive requirements. As reach of a large is critical with Indium data inventory. key you a of soft is as scale are excess

in interconnects greater entire to would centers data amount to performance through the the data able With growth from data expected move intensive be architecture. services, throughout large network resulting in new of requirements need

the about transition Ethernet As are XXXG our a XXX time optimism and technologies. gigabit customers expressing result, over to

QX to in example, April volume this its silicon reach production transceiver expects For on announced in year. XXXG of Intel it that photonics

As to the our indium benefits the data majority PON potential opportunity is and connectivity speed, is the phosphide increasingly be for architectural compiling moves industry application expanding. vast significant. and of silicon telecommunication to of short, photonics revenue likely their center the higher phosphide the In and contribute becomes for of indium

has ago, center our past grown adding to X Correspondingly, reported meaningful that years, the with from a $X phosphide. million contribute driver demand indium to year, for feature. or revenue. to beginning you material only our million. to X PON this telecom revenue than XX saw we for indium more data the years we this the years million begin $X an was ago, X will quarter the from phosphide Earlier exciting over

based development lidar monitoring, work wireless believe we devices applications right further, XG out the industry. automotive for phosphide include other look we These the could and being on advanced major fuel As done indium health now.

LED revenue setbacks the seen wireless quarters. for Now, applications both arsenide, turning gallium and to have in recent our

quarters widespread more persisting with until taking to wireless improvement beginning for improvement potential across we market demand. a we are previous QX. That weakness customers and optimistic seeing LED turn more see end in as our of into cautiously enter higher remain certain is in we see positive stronger we in the applications, now Discussions pleased customer incremental are the a we While applications said, are than base.

Overall, XXXX seen arsenide softer has a for market. gallium year

execute used sizable to-date relocation AXT We this opportunity team I a grateful proud I to our of to arsenide the entire am have undertaking. success manufacturing. and careful our the with of methodical am and gallium

our through a the focused year of from the the QX. the Those on efforts shipment now will process likely assisting balance increasingly new are qualification grant facility. customers and and into We shipment of through continue

the before to quarter. contribution back show to Finally, are made hand improvement our material raw with I want I cost we Gary this material able in for comes last time companies, and portfolio improving to the those note account gain environment a we This we results that overall of our the a equity particular, we for method In had portfolio pricing is changes the in quarter the structure. guidance, to raw in benefit to and our over the at call in substrate for better with job stabilizing QX our doing QX. a cumulative when leveraging are

are the progress quarter fronts. are difficult was our manufacturing expansion, for believe financial generation, our phosphide, business, improvement over achieved is to in our QX and the executing excellence a years. for demand market we closing, several of in Now, showing we invest areas In meantime, as laying of such cash We a foundation gain positive growth on strategic to our we and focusing including the profitability environment, indium major on move continued emerging the momentum solid continued technology. opportunity. in early of many the a results, In ready signs next trends technology

third will call our guidance. This turn I the concludes for now Gary? back quarter to my comments. prepared Gary

Gary Fischer

Morris. you, Thank

we a not indium discussed, order our QX. in we by a in QX part in and increase As repeat that had strong sizable revenue phosphide driven in for will

indications we demand see noted, an indium of data improving arsenide are as in LEDs. for the environment Morris phosphide However, for pleased in gallium center and to

$X.XX based such, expect share in million. will of to in As diluted range per $XX.X believe be see we We on $XX.X QX outstanding. $X.XX XX.XXX our between shares million earnings million the to revenue QX to in

and to This questions glad I be our Howard? Morris your will now. comments. prepared concludes answer

Operator

Instructions] comment or [Operator comes of Richard Our question the from line Shannon. first

Your line is open.

Richard Shannon

should the those right in Gary, go maybe guidance Gary, level similar to a that range we thank be have typically here to had think on of given to good want one, reading little second had question I the you quarter margins ask take we revenues absorb one, we here, seems tea third, guess similar on the the only the like a taking way margins, my quarter, here? are gross get questions. we ask few seconds you obviously bit a leaves but I the your here, will I the from should it number make about from how of for which in just with second sure to gross as

Gary Fischer

margin I is mix good of actually, for the in will not it’s as, and think QX Well, Richard, product indium phosphide. not gross as because primarily be quite

So, knock it in down I bit new probably a model.

Richard Shannon

Okay.

you here. a seems phosphide like suggesting be Let It about are fair Is revenue down me indium segment that assessment? ask will movements those sequentially. you

Gary Fischer

Yes.

Richard Shannon

Okay. reasonably Then gallium LED it to somewhat, have should is a like still we how sounds think up it sounds tepid, wireless but seems would like arsenide, little about comment, maybe from bit be your good. it

gallium would up So sequentially? arsenide then be

Morris Young

Yes.

half, better are signs the recovery. this time. first half is LED You one are is at than upcoming absolutely uniform not seeing of they are although And but definitely showing customer us telling second right.

we up better half. for will and half so LED be good than first So – second be have definitely QX definitely as from QX will revenue

Richard Shannon

And First you still expect would indium phosphide half okay. to be than third arsenide the then in quarter? gallium higher

Morris Young

let phosphide be might Hang a notes bit some just or a be me tie here, check indium might lower. on,

Richard Shannon

Maybe us new the or Okay. on a two perspective facility here. It good gives there. question

you Just of to I over the revenues facility the about largely your be the quarter the want Want perhaps much XX% anymore one. to an move XX% of from and transferred the by last get end state to as of to get this progress talked expect there thoughts on update new year? you the old as think to still whether here,

Morris Young

is a that Yes, question. good

ready. think is facility I the

done have far all turning so are the that of qualification them We work good all have It’s none result back. seen. we

can are the customers, offset is from our with them. of I we for demand customers that think I Beijing showing especially our soft, that transfer, once our support there ongoing still much facility a however being think not urgency

the working estimate as between So, of we facility locations, take customers from as new XX% into we them encourage that of but our teens upper are as coming new our to is year. more and to next from well progress more with half QX second the

Richard Shannon

related fair that’s more out of line enough. will and I to jump question sensing. one and Okay, XD ask

space. in pickup We have seeing Fuji seen the it in the last the a companies here XD days sensing, several couple like of and a comments are seems in we Android

quality is can I what of sensing which to ask a you opportunities kind you are Apple’s relative vendor maybe qualified of orders So and etcetera? to question, space terms want in you twofold any the food qualify B or into give to comments qualifications then XD chain Android seeing and

Morris Young

I think is production for the order second me half year, any the volume potential ask no. answer have whether if of we you for

news the very a good several do to are XD of for that industry. product sure We still That’s for forefront from take for is growth perspective with make they working the we and customers will – us. our note that sources our that money in still the sensing much

volume and of we within However, see – for complete to as don’t year it become will new half our and I perspective the better. this we factory think production, the the our moves second move better expected

Richard Shannon

the Okay, you. fair enough. That’s for questions guys. me all Thank

Morris Young

Thanks Richard.

Operator

you. Thank

or Our of from Quinn from Needham. comes next question line comment Bolton the

Your open. line is

Quinn Bolton

little Thanks. I bit Morris us you bit XG color on nice more a to if assume follow-up provide initial that application on and something wondering you hoping comments front-haul could backhaul, results. on specifically what second just a in but the the Gary, congratulations the that more little demand, could quarter on give Wanted your color opportunity? or optical is, on it’s

Morris Young

from don’t know Sure. customer applications substrate our the we what are. Usually us, when orders

that this demand and that is for application classify are size things the of specification pause know it’s some from center. certain way whether one each sort of of of we – would that data what the So is or

far As this particular infrastructure they manufacturer customer is are a telecom is infrastructure launching as XG XG a and build. concerned,

of order is how we first really to the opportunity tell, but and good see this big us rollout. So, we infrastructure us. XG they for they But a market big the sort especially think larger that how order very gave is for as is

out what higher Every you market. needed as of we need it manufacturer opportunity build bit also perspective the in will orders for as also make to give connection connection, market and need see opportunity time a to a us what will give to increase PONs infrastructure as was. the infrastructure an also So the a as how but other and XG XG those we an they backhaul well front-haul indication time opportunity for optical said us We indium that get and is business speed, phosphide, big that give that little only potential datacenter will not think PONs. you the for us

So, I be XG overall should news. think very good the

and said out. the infrastructure then PON the and So center second we build first as is data is layer layer finally XG

to I layer think to for material. opportunity it’s indium our all phosphide going the out

Quinn Bolton

was to Got data it of your that said by or center comments center you you module customers the get or kind to are? of beginning broad sense laser small of optical of are was it. trying companies to just see the driven handful starting beginning wondering of sort on based multiple uptick demand the a across just that data to improve, that demand a And then how just

Morris Young

they to are a but customer in they other diversifying don’t base, are are customer their customers. also their Well, listen are to, supplying very have saying what we but they a have particular call these they of large customers which diversified seem customers us do have to happy-goers they they indicate also we – and are, most customers to we they when obviously tell have but conference

Quinn Bolton

that year the smartphone have year have in by weak question yet seasonal into digestion still uptick side I picking seasonally the continue inventory with half? you smartphone go some the a gas then it’s the on would half think demand you that through to said be to obviously a the I in models typical new be going that Do in guess of business. you you And why still it. go may just the do where see or Got this you business, market into second sense we demand as second think the last just up

Morris Young

everybody was particularly Yes. I perspective mean quarter of would the a future. business characterize about the uncertain inventory very was everybody cut of and our the and I last business. trying the year to bad XXXX was

So down we saw our revenue dramatically. come very

quarter I a saw what but quarter the on is As would that’s things half half, ‘XX still half, in the not improved, reach are XXXX will quarter. it we XXXX first than second better level. the than the but particular up half definitely we but be of phosphide second it’s recovering half mode, to will far second And on as concerned, definitely ‘XX order better and wireless overall sizable is indium say second better level that to and be recovering first first or whether seeing seems quarter, for first as

Quinn Bolton

Got it.

thank very you Okay, much.

Morris Young

Quinn. Thanks,

Operator

you. Thank

or question from next comment from comes Our Gus Northland. the line of Richard

open. Your line is

Gus Richard

Thanks for taking the question.

quickly your prepared business in the line? didn’t comments Just product Any around that mention germanium you remarks.

Morris Young

uptick, are on – usual. reasonably mean we big Germanium strong zeroing is satellite demand. a they as I see don’t but the don’t

year. We of business the as second actually expect to the enter improve half the into we

Gus Richard

high-end are I LED it what is and think then and assuming any LED I blue you demand additional from was the am of LEDs, the improving? you not was you there just around market that’s low better parts And seeing are color Okay. said some end mentioned

Morris Young

Yes.

LEDs indicating signal we us saw so We particular business well alertness we infrared as fairly seeing not medium for large they the we customer their are automobile as why and same that are they are are hedging I size the high for the indicator sure? of website customer we customer for however are is bit beginning size are recovering of recovery. That’s in who end than showing we in their a LEDs I as diversified end of sizeable think high are giving a they LEDs the we recovering having one some think driver strong customer in are are also monitoring have their little am but smaller if or

Gus Richard

the primarily. around is market application the automotive so Okay

Gary Fischer

too Yes and signage end key driver. is but high Automotive a

Morris Young

the big actually And heads. application other is printer

Gus Richard

much. so you Thank Perfect. alright. Okay

Operator

from Thank next Instructions] Hamed BWS line you. [Operator comes from or comment Our question Financial. the of Khorsand

line is open. Your

Hamed Khorsand

the you next you of that seeing you going new So are the like feedback concerned customers about year? is on now you seems it’s are issue a far getting off talking are to ask what’s or as want this as first just from to difficulty it QX facility the move

Morris Young

here. let Yes take me this Morris

the good qualification you people be of [indiscernible] I have [indiscernible] maybe [indiscernible] good months is I last it have half once think finish just the told order difficult qualification not our [indiscernible] they of factory say does taking telecommunications they so was finish that XX if need they a delivering to with facility market and who [indiscernible] compared know is are and year they perhaps you the cycles most very the [indiscernible] the customers you process is and upon the are rigid second samples be so us into with customers a given some is and once water depends how to the deal performance normally that bit so I factory some seems customers the recover are people also those don’t factor showed so little they will first it think from that them qualification we high customer mean said are once factory you customers and when or hear own new to Morris I looking to more [indiscernible] their [indiscernible] can we will want hands mean improves fault start we see and will bit them we customer customers old from XX% opportunity that we [indiscernible] that need do doesn’t this our the customer want you XX we we it sometimes hold industry I will and [indiscernible] [indiscernible] as a our have their and business tell to our that little probably have so a this shifting old factor still sense their very buying a to to supply think evaluate that’s with qualification and that about start need XX% move encourage started emergency for that XX% [indiscernible] comfortable ready hindrance give them also okay better go. the our the [indiscernible] and me sometime can then we will are unfortunately and to they also robust like and and these

Gary Fischer

is this Gary. Yes

okay that don’t to on is so them just the bit is we working yes seen me longer to than wafers it sales happen so a summarize the one of Let our is on taking there add an they a the confident here always the that bit there thing on you customers tunnel what motivated has slow XX% to and between need had be is they sense little this that which but [indiscernible] have huge so a finding that’s keep between one the is that we there and with on the the and is is just with expected speak going terms tell because customer exactly gains shift will the [indiscernible] secondly problem really our internal may and that are we it motivation data to. is more that wafers there what where urgency little complaints about can’t want not also customer sides what we customer guys a no part the in not about first issue we through here is call any what it difference wanted have is of and

Hamed Khorsand

is revenue your new of coming from the much How facility?

Morris Young

It maybe. fluctuates. XXs the in low say I Probably would

Hamed Khorsand

in seems Okay. so And big It then this the about why can you cash even sheet? earlier balance you tone your focus much is balance like that’s of million had comments cash have priority there a this you $XX on just becoming though in talk the that quarter.

Gary Fischer

thing want one went sure so I for people cash make Well notice up to that.

Hamed Khorsand

noticed down comments are I also that, those Yes, making but you though.

Gary Fischer

quarter last We too. had comments

So comment people are asking on cash. please me

comment why am it So happy I to doing I that. am That’s on so.

Hamed Khorsand

Okay, you. great. Thank

Gary Fischer

You are welcome.

Operator

you. Thank

from or the Company. & Dougherty comment comes of next Our line question Hemze Mason from

now Your line is open.

Mason Hemze

Related and operating new curious orders out to facility, getting where are customers that you then to am capacity I transitioning there of your the what in new the facility? you are new

Morris Young

new will the be the over facility by able facility. completely take in to production all Tongmei our Well, definition

shipping XX%, So, utilization say XX%. it’s we about is if so only

Mason Hemze

Okay. And then as certified that of those where far deliver in as facility, out new at customers you to transition? are that getting

Morris Young

Well, are it news, not keep heard and mean, mean wafer delivery delivering sample on have you from samples. asking far I so take I we we upon as telling I bad we said, qualification ourselves but can more any cycle depends the what they qualify them, new facility.

interactive an that’s So process.

We are pushing it.

Mason Hemze

those increases favorable in end-market your expect viewpoint, forward looking of if it’s Okay. could applications any on And going forward? then arsenide, OpEx and I in terms gallium some what’s am of the we

Gary Fischer

we at we into. but view Expansion sell XD definitely gallium if arsenide Well, you that our And are and sensing so about is forward OpEx, expanding the driver, be market gallium that expect they application in lot to especially terms a look also a there that is should arsenide going revenue not a not cost one-to-one correlation. expanding are lasers us other of of industrial opportunity.

based direct our not they for model business some sales sales formula sales a professionals big mathematical compensate Our get order. primarily and we on relies if on

if selling go So the necessarily goes that doesn’t it costs revenue mean up. up,

Morris Young

Yes.

you is question see of are other we the building Beijing should new that we from upon, I comment maybe line I So, is think our facility. estimate factory based there around increase XX%

plenty is no so revenue and business expanding so year do or where per incurred will next expand to, two, cost, more you year gallium highest with size we that our price over take answer xXX% to the to ask capacity So should market got of arsenide to the erosion if you have

Mason Hemze

thank Okay, you.

Gary Fischer

welcome. are You

Operator

remarks. Thank the to you. any Dr. to back additional I for queue in conference closing showing over the like Young time. questions am Morris turn this no at I would

Morris Young

conference participating Thank you. our in for Thank call. you

Financial XXXX Hardware XXXX BWS XX Summit Investor as Growth During & X. many of Series Company Communication to in and Infrastructure QX, XX Chicago XXth as the Conference the well we August will Jefferies We and there. look be Values Dougherty York and Institutional participating New on forward on August Semiconductor you seeing Annual September on Investor Minneapolis Summer in in in

meet feel with if contact near free directly in to forward you to Gary to We you always, the Fischer As us. would future. Green speaking look me, Leslie and please like with

Operator

program. today’s gentlemen, in for and Ladies participating conference. concludes the This thank you

disconnect. now Everyone, wonderful may You have a day.

AXT (AXTI) 24 Jul 192019 Q2 Earnings call transcript