Q4 2023 AXT Inc Earnings Call
Participants
Leslie Green; Investor Relations; AXT Inc
Gary Fischer; Chief Financial Officer, Vice President, Corporate Secretary; AXT Inc
Morris Young; Chief Executive Officer; AXT Inc
Richard Shannon; Analyst; Craig-Hallum Capital Group LLC
Charles Shi; Analyst; Needham & Company LLC
Presentation
Operator
Good afternoon, everyone, and welcome to AXT's fourth quarter 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'll be your coordinator today. (Operator Instructions) Thank you.
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 move manufacturing yields and efficiency, and 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 company and the impact of delays by our customers on the timing of sales and their product.
In addition to the 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 November 2, 2024.
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 third 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 third quarter results. Garry?
Gary Fischer
Thank you, Leslie, and good afternoon to everyone. Our 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 a continued improvement in artificial intelligence ponds and data center applications. Gallium arsenide also grew to $6.0 million, with it, 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 five customers generated approximately 28% of total revenue and no customer was over the 10% level.
Non-gaap gross margin in Q4 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 G&A and volume. 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 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 a 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 with a non-GAAP net loss of $2.8 million or $0.07 per share compared to the 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 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 31st. By comparison at September 30th, 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 800k. Net inventory was flat quarter to quarter, 38% of the inventory is raw materials and with 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 time of the IPO, we need to resolve one open item. Although it is moving slower than we expected, we are making progress and are confident that Tom May remains 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 revenue and a 43% sequential improvement in our non-GAAP net income. While the overall demand new markets remain soft somewhat soft, we are seeing increased orders for indium phosphide for both artificial intelligence and power related applications. Further, the gallium arsenide market, which was the first of our market to go into a correction, 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 follows depletion of excess inventory and our continued success in attaining export permits for most of our customers. We're seeing new demand for HBT key applications where we historically have had very little market share. We believe this is the result of both improving market conditions and a desire among customers to diversify their supply base.
We also see 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 one 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 seeing we have been investing in our eight inch gallium arsenide technology in support of these applications, and we have recently made groundbreaking advancements in both our defect density and yield. 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 were developed in exciting ways over the coming years. Today, applications are primarily using gallium arsenide Vixel's, which requires a relatively small amount of substrate material. But as the industry moves to 800 gig and then 1.6 terabyte speeds.
We expect that that 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 are already seeing development work happening today with next-generation silicon photonics devices and electro absorption modulated lasers, OEML. and DMLEML. 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 six-inch indium phosphide. This the signal clarity along business capability of indium phosphide 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. We expect to continue to lead our industry with the best in class materials while consumer and healthcare 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 our adoption of this material across a multiple away of emerging applications. And our success in supporting Tier one 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 a strong incremental opportunity.
In addition, I'm exceptionally proud of what a Aksys team accomplished in 2023, paving the way for exciting future, not only did we successfully navigate export license and 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 Moris. So 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 $0.06to $0.08, and GAAP net loss will be in the range of $0.08to $0.1 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?
Question and Answer Session
Operator
(Operator Instructions)
Richard Shannon with Craig-Hallum.
Richard Shannon
Great. Thanks, Morris and Gary for taking my questions and congratulations on a lot of good into the year. I'll just start with a question for Gary on your Q4 numbers here. Specifically on gross margins, while obviously volume helps here, the fall-through margin here was nothing short of excellent things, about 90%, which seems unusual, but maybe you can delineate more of the dynamics here. Obviously mix helps. But I'm wondering if there were some increase in utilization or unusual pricing and raw materials that help to do this and really want to get a sense of sustainability. I haven't had a chance to run your guidance for the first quarter to see what that implies for gross margin, but want to get a sense the fourth quarter as it leads into the first?
Gary Fischer
Okay. Well, it as usual, the biggest items that contribute to these kinds of improvements are going to be product mix or indium phosphide was up Q to Q on and volume in volume was up over $3 million there. There was a better improvement from the two raw material companies come and data also contributed. I think in terms of sustainability, in know, we should be in about the same range in Q1. It may be plus or minus a little bit, but we'll see. And And well, that's I think that's how I would respond almost.
Morris Young
Yes, I guess I'm not a finance guy, but I from what I know is that when we have a policy of writing all into which we did own SIP, we don't sell for 12 months period of time. And with the revenue come down and the write off for the excess inventory, it will start to impact us. But well, our would pick up the volume that not only the write off, it becomes less, but also we will have the opportunity to pick up those right of items to be on sale, thus improving our gross margin that could be a benefit.
Richard Shannon
Okay. That would certainly make sense. Thanks for that clarification. And maybe I'll follow-up here just on the guidance for the first quarter here. Obviously a little bit of growth at the midpoint here. How do we think about the major segments that you report on, whether they're meaningfully different than that may be on kind of average growth at the midpoint?
Morris Young
Yes, I think the significance is that the indium phosphide will continue to grow. Gallium us, I think, will grow substantially. Again, our Romanian is actually stable or in the beginning away to the overall revenue contribution. Actually raw material is going to decrease quite substantially quarter over quarter are not because the business is weak, but I think it's just that, you know, the raw material business had a great fourth quarter and the first quarter, it didn't pick up the large volume opportunity in Q1. So overall, although the revenue growth is modest, but actually comes mostly from the contribution of indium phosphide and gallium arsenide.
Richard Shannon
Okay, perfect. Thanks for that delineation. So let's jump into some of the product categories. Here in data center, meaning indium phosphide here. Sounds like it's I've got some opportunities here and clearly know this optical space where it seems like it's very nice here. Maybe you can talk about and I think you've you've been a little bit limited in kind of a narrow customer base in your past. I think you had one major customer there. Maybe you can talk about the efforts for diversification? And ultimately, how do we think about either data center growth this year versus last or maybe just the overall indium phosphide category?
Morris Young
I don't know, where did you get that idea from. We have a limited narrow customer base. I don't think we have a narrow customer base.
Richard Shannon
I think we have a don't you have to actually just have one larger, a big contributor to data center and many other smaller ones or some number of smaller ones?
Morris Young
Yes, data center, silicon photonics specifically was very sort of narrow and they did it grow it. They are poised to grow. They've been telling us it should grow substantially in Q2 in 2024, but we haven't seen that yet. I think they are incrementally better in Q1 than Q4, but they're telling us their visibility is still not good. But the overall they are telling us that Q2 2024 should be substantially better than 2023. So I think, you know, from what we see our indium phosphide telecom business is not Gray. The data center actually still got some inventory to digest panels market in China actually is picking up a bit.
Okay, but this still not robust compared to the peak time, but it's better than Q3 for sure and is continuing to be better in Q1 than Q4. And what I think is surprising to us, I think, is the AI application. Our you know, it first started something like six months ago and we thought A. was well first, the customer wouldn't tell us is AI. and then they come back again and they want more in Q4 and they now gave us yet another figure order in Q1. So to cumulative diluted delay days, it's in the millions of dollars range. So and this time, they also admit to us that it's a related. So we are cautiously optimistic, although they are not giving us no, but visibility how I've said will grow in Q2 and Q3. But the least I think it's so far, it's a very good sign. And I believe this, you know, indium phosphide solution for I will come is a matter of time, but I think I'm glad to see it's coming already soon.
Richard Shannon
Okay. So more some interesting detail there. It seems like you're splitting, I guess what I would call datacom, you're kind of splitting it between silicon photonics and AI and others here that perhaps a bit more detail that we can take offline there. But that sounds it sounds good to hear here. Let's see or maybe just touching on the side of indium phosphide here. It sounds like you're incrementally more positive on the consumer electronics and health care side here. Maybe just to get a sense of where that's coming from? And do you see any large customers kind of impacting your year this year?
Morris Young
Well, Richard, we are up we are cautiously optimistic. They are requesting a fairly sizable cold and waiting qualification process falls to launch later this year. But we don't have no signal it will become reality. I mean the volume is substantial. We know it's gone for consumers, but nothing is still into qualification process, whether what they were launched and will launch later on this year. We don't know, but we have at least and you see two customers requesting for the same volume for the same type of material debt they request. I mean, from the volume of it, we know it's a consumer product.
Richard Shannon
Okay. Fair enough. Well, that's good to hear. Last question, I will jump out of line here. Just touching on the micro-LED topic here. I guess I want to get a sense of your visibility and confidence in this market taking off. And I think you mentioned in your prepared remarks and sometime in calendar '25 here seems to be kind of a moving target in this space. And I think it's largely due to yields on the pick and place here outside of your direct and scope of your work here. But I just want to get a sense of your level of confidence that that can happen next year?
Morris Young
Well, there I think you probably know better than, hey, do I think from our and our development of the eight inch gathering asset progress supporting this, both in terms of CapEx capacity, our yield and our quality. Now we have we have made great advancements and in the last quarter, and we are now very confident and we have customer visit, I think, twice now. And the third attempt to visit us will happen next quarter, and we will soon see the qualification process.
So I think will what we can tell you is our customer telling us they are ready to launch sometime in 2025. And so that's why we get good. Weather is good. I mean, right now we're running hundreds of wafers per month. Okay? And so we continue to deliver. And now both are, I guess, the IGN payload loan production, our And so far, so good. However, performed very well, so I'm optimistic.
Richard Shannon
Okay. Fair enough. Thanks. That is all the questions from guys. I'll jump on.
Morris Young
Thanks, Richard.
Operator
Charles Shi, Needham & Company.
Charles Shi
Yes, thanks. Morris and Gary congrats on the fourth quarter results at one point ask you a little bit more details about the new opportunity you see in data center side, I believe you're referring to the datacom transceiver market, 800 gig plus. We are now based lasers, obviously coherent, I believe it's one of your end customers or we're very bullish about how much growth this part of the market is going to be. But for us, it's getting a little bit hard for us to think about how to translate their forecast of the 800 gig plus optical transceiver opportunity growth to your indium phosphide wafers So have you guys tried to quantify how much of that TAM and this part of the applications are going to kind of drive for you guys yet?
The other related question is based on your knowledge today. Are you single source, you know, for us, I think your phosphide wafer supplier or do you think the end customer may be sourcing from your competitors as well? Thanks.
Morris Young
Thanks, Charles. I'd hit that's a that's a little bit tough question, and it's a fairly long way. So so let me say this. I think right now, the data center I do want to clarify one thing, and this is a very hot item, this core optical cable project. And we're not really we're not related to that project. And that is mainly using Vixel using a plastic fiber. And I think there's a big company data center was to change out and coaxial cable was a big show with plastic fiber when adding that whether that optical cable will move from 400 G. 100 G to A. energy or not because they can use parallel pass. We're not seeing that at all. And what we're talking about the energy 1.6 gig or a terabyte, I think we're talking about potentially for a little bit longer distance, perhaps and more power data transfer.
So now whether that customer is single source or not. So So to answer your question are we can we quantify and so, you know, if a coherent is going to grow X percent are we going to grow with them? And so you have to take out I mean, I believe coherent is also doing Vixel. The Vixel, the problem with that market is it doesn't use a whole lot of gallium arsenide substrates. So the opportunity for us is much less than making the collect the plastic fiber for Vyxeos. So as far as single source or not is concerned, I believe we are still the largest and I believe also best-in-class indium phosphide supplier.
So we have multiple many, many customers and some of them use us a majority of their supply. And in fact, idling the artificial intelligence is customers that we recently engaged. I think we're single-source, but what are they going to develop into multiple source or that we don't know as. But we are also very cautiously looking for other people wanting to participate in that development as well. So on so we have a very good position in a fast-growing marketplace, but can know whether they are single source or mandates in physical retail.
Charles Shi
Got it. So maybe a follow-up question. It looks like that for roughly two quarters, say, a December last year, March, this new view, our core business level is now I mean return to that funding plus million per quarter level. Looking out a little bit beyond the March quarter, what's your best assessment right now? Are you going to be maintained at a similar level or are we going to revisit that high 10s of millions per quarter, that kind of level. I mean, generally, I wanted to get a sense how you feel about that run rate going through the rest of the year?
Morris Young
Sure. I think for next quarter. As I said, I think although we've only guided modestly higher overall revenue for next quarter, but raw material is decreasing. So there is a substantial increase in substrate revenue to compensate for that. So so I think for substrate, revenue is going to continue to grow both in terms of indium phosphide and gallium arsenide and for raw material, I don't think is going to drop off for the rest of the year. And we will have other joint venture journey to contribute as a revenue contribution as well later on of the year. So I think this year, it's going to be a continued growth year for Photonics before compared to 2023.
The question, I think it's how fast how strong it's going to be whether we're going to reach $90 million, but I think it's probably better than $85 million.
Charles Shi
Got it. Thanks. So that will be all for me for now.
Morris Young
Thanks, Charles.
Operator
I will now turn the call back over to Dr. Morris Young for closing remarks.
Morris Young
Thank you for your participation in our conference call. As always, please feel free to contact me, Gary Fischer or Leslie Green. If you would like to set up a call. We look forward to speaking with you in the near future.
Operator
Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect your lines.
