AXT, Inc. (NASDAQ:AXTI) Q4 2023 Earnings Call Transcript
AXT, Inc. (NASDAQ:AXTI) Q4 2023 Earnings Call Transcript February 22, 2024
AXT, Inc. beats earnings expectations. Reported EPS is $-0.09, expectations were $-0.13. 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 Fourth Quarter and Fiscal Year 2023 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My name is Eric, and I will be your coordinator today. [Operator Instructions]. I would now like to turn the call over to Leslie Green, Investor Relations for AXT.
Leslie Green: 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 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 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 and 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 22, 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 Fischer for a review of our fourth quarter 2023 results. Gary?
Gary Fischer : 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, indium 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 5 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 11.3% in Q3 of 2023 and 32.5% 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 10.7% in Q3 of 2023 and 32.1% 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 JinMei and BoYu. 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, more favorable product mix and the benefits of our recycling programs, along with continued efficiency improvements throughout our business.
Moving to operating expenses. The 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 $0.07 per share compared with a non-GAAP net loss of $4.9 million or $0.12 per share in the third quarter of 2023. Non-GAAP net income in Q4 2022 was $2.0 million or $0.05 per share. On a GAAP basis, net loss in Q4 was $3.6 million or $0.09 per share. By comparison, net loss was $5.8 million or $0.14 per share in the third quarter of 2023. GAAP net income in Q4 of 2022 was $1.3 million or $0.03 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 31, by comparison, at September 30, it was $43.6 million. Depreciation and amortization in the fourth quarter was $2.2 million and capital investments was about $4 million. Total stock comp was about $800,000. Net inventory was flat quarter-to-quarter. 38% of the inventory is raw materials and WIP is 58%. Finished 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, we need to resolve 1 open item, although it is moving slower than we expected, we are making progress and are confident that Tongmei remain 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?
Morris Young : Thank you, Gary, and 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 soft, somewhat soft, we are seeing increased orders for indium phosphide for both artificial intelligence and pound-related applications. Further, the gallium arsenide market, which was the first of our market to go into a recorrection appears to have largely worked through excessive inventory. Looking individually at these product lines, our gallium arsenide 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 attaining export permits for most of our customers.
We're seeing new demand for HBT 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 the new product could come to market as soon as next year. As many of you know, we have been investing in our 8-inch gallium arsenide technology in support of these applications. And we have recently made groundbreaking advancements in both our defect density and yields.
This innovation positions us strongly to gain a leading share in the market while efficiently supporting growing market demand. Now turning to indium phosphide. Sales grew 10% in the quarter with early signs of recovery in the power market and brand new demand related to artificial intelligence. We view AI as an emerging new application for indium phosphide that will develop in exciting ways over the coming years. Today, AI applications are primarily using gallium arsenide VCSELs, which requires a relatively small amount of substrate material. But as the industry moves to 800 gig and then 16 terabytes speeds, we expect that there will be a necessary transition to indium 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 indium phosphide as the best platform for rapid data transfer. We're already seeing development work happening today with next-generation silicon photonics devices and Electro-Absorption Modulated Laserq or EML for high-speed data center transceivers. Early revenue from these applications contributed to our indium phosphide growth in Q4 and will help drive our expected growth in Q1. This interest in indium phosphide for AI applications is intensifying the market demand for 6-inch indium phosphide. This fee signal clarity and long-distance capability of indium phosphide are optimal for AI applications. And as market grows, customer wants the scale and cost benefit of large diameter substrates.
We're excited by the progress we are making in our R&D efforts and expect to continue to lead our industry with the best-in-class material. While consumer and health care applications for indium phosphide today contribute only modestly to our revenue, we continue to see positive development activities and believe there is a great potential on the horizon. We are very early in 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 gross 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 AXT 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 customer, we delivered breakthrough innovation in the development of large diameter gallium arsenide and indium 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 the call back to Gary for our first quarter guidance. Gary?
Gary Fischer : Thank you, Morris. 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 $0.06 to $0.08, and GAAP net loss will be in the range of $0.08 to $0.10. Share count will be approximately 42.6 million shares. This concludes our prepared comments. Morris and I would be glad to answer your questions now. Eric?
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