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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