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AXT, Inc. (AXTI) Q4 2022 Earnings Call Transcript

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AXT, Inc. (NASDAQ:AXTI) Q4 2022 Earnings Conference Call February 16, 2023 4:30 PM ET

Company Participants

Leslie Green - Investor Relations

Morris Young - Chief Executive Officer

Gary Fischer - Chief Financial Officer

Conference Call Participants

Charles Shi - Needham & Company

Matt Bryson - Wedbush

Richard Shannon - Craig-Hallum

Hamed Khorsand - BWS

Operator

Good afternoon, everyone, and invited to AXT's Fourth Quarter 2022 Financial Conference Call.

Leading nan telephone coming is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My sanction is Devin, and I will beryllium your coordinator today.

I would now for illustration to move nan telephone complete to Leslie Green of Investor Relations. Please proceed.

Leslie Green

Thank you, Devin, and bully afternoon, everyone.

Before we begin, I would for illustration to punctual you that during nan people of this convention call, including comments made successful consequence to your questions, we will supply projections aliases make different forward-looking statements regarding, among different things, nan early financial capacity of nan company, marketplace conditions and trends, including expected maturation successful nan markets we serve, emerging applications utilizing chips aliases devices fabricated connected our substrates, our merchandise mix, our expertise to summation orders successful succeeding quarters, to power costs and expenses, to amended manufacturing yields and efficiencies, to utilize our manufacturing capacity, nan increasing environmental, wellness and information and chemic manufacture regulations successful China, arsenic good arsenic world economical and governmental conditions, including waste and acquisition tariffs and restrictions.

We wish to be aware you that specified statements woody pinch early events, are based connected management's existent expectations and are taxable to risks and uncertainties that could origin existent results aliases events to disagree materially. These uncertainties and risks include, but are not constricted to, wide conditions successful nan markets successful which nan institution competes, world financial conditions and uncertainties, COVID-19 and different outbreaks of contagious disease, imaginable tariffs and waste and acquisition restrictions, accrued biology regulations successful China, nan financial capacity of our partially-owned proviso concatenation companies and nan effect of delays by our customers connected nan timing of income of their products.

In summation to nan factors that may beryllium discussed successful this call, we mention you to nan company's periodic reports revenge pinch nan Securities and Exchange Commission. These are disposable online via nexus from our website and incorporate further accusation connected nan consequence factors that could origin existent results to disagree materially from our existent expectations.

This convention telephone will beryllium disposable connected our website astatine axt.com done February 16, 2024.

Also, earlier we begin, I want to statement that soon pursuing nan adjacent of marketplace today, we issued a property merchandise reporting financial results for nan 4th fourth of 2022. This accusation is disposable connected nan Investor Relations information of our website astatine axt.com.

I would now for illustration to move nan telephone complete to Gary Fischer for a reappraisal of our 4th fourth 2022 results. Gary?

Gary Fischer

Thank you, Leslie. Good day to everyone.

Revenue for nan 4th fourth of 2022 was $26.8 million, that's down from $35.2 cardinal successful nan 3rd 4th of 2022 and down from $37.7 cardinal successful nan 4th fourth of 2021.

To break down our Q4 '22 gross for you by merchandise category. Indium phosphide came successful astatine $14.0 million, reflecting a marketplace softening, peculiarly successful nan information halfway and telecommunications infrastructure. Gallium arsenide was $5.5 million, reflecting nan wide slowdown crossed a number of applications, peculiarly successful China. Germanium substrates were $1.3 million. Our germanium substrate gross was up somewhat from Q3 arsenic we person resolved nan costs rumor that we described successful nan past quarters. Finally, gross from our 2 consolidated earthy worldly associated task companies successful Q4 was $6.0 million.

In nan 4th fourth of 2022, gross from Asia Pacific was 70% of sales, Europe was 15% and North America was 15%. The apical 5 customers generated astir 41% of full gross and 1 customer was complete nan 10% level.

Non-GAAP gross separator successful nan 4th fourth was 32.5% compared pinch 42.2% successful Q3 of 2022 and 32.4% successful Q4 of 2021. This was beneath our expectations and it is simply a consequence of importantly little measurement pinch gross coming successful astatine nan lowest extremity of our guidance, much of an unfavorable displacement successful merchandise operation than we had anticipated, and a important driblet successful nan value of earthy gallium successful Q4, which resulted successful debased separator publication from our consolidated associated venture. For those who for illustration to way results connected a GAAP basis, gross separator successful nan 4th fourth was 32.1% compared pinch 42.0% successful Q3 of 2022 and 32.2% successful Q4 of 2021.

Total non-GAAP operating disbursal successful Q4 was $9.0 million. This compares pinch $9.2 cardinal successful Q3 of 2022 and pinch $8.1 cardinal successful Q4 of 2021. On a GAAP basis, full operating disbursal successful Q4 of 2022 was $9.6 million, down from $10.2 cardinal successful Q3. For comparison, full GAAP operating disbursal was $9.1 cardinal successful Q4 of 2021.

Our non-GAAP operating statement for nan 4th fourth of 2022 was a nonaccomplishment of $252,000 compared pinch a non-GAAP operating profit successful Q3 of 2022 of $5.6 cardinal and $4.1 cardinal successful Q4 of 2021. For reference, our GAAP operating statement for nan 4th fourth of 2022 was a nonaccomplishment of $1.0 cardinal compared pinch an operating profit of $4.6 cardinal successful Q3 and an operating profit of $3.0 cardinal successful Q4 of 2021.

Non-operating different income and disbursal and different items beneath nan operating statement for nan 4th fourth of '22 was a nett summation of $2.2 million. The afloat breakdown is successful our property release. This included a authorities assistance of $1.2 million, and is simply a bully illustration of nan spot of our favorable estimation and [positive regard] (ph) for our beingness successful China.

For Q4 of 2022, we had a non-GAAP nett income of $2.0 cardinal aliases $0.05 per share, compared pinch $6.8 cardinal aliases $0.16 per stock successful nan 3rd 4th of 2022. Non-GAAP nett income successful Q4 of 2021 was $4.1 cardinal aliases $0.09 per share. On a GAAP basis, nett income successful Q4 was $1.2 cardinal aliases $0.03 per share. By comparison, nett income was $5.8 cardinal aliases $0.13 per stock successful nan 3rd 4th of 2022 and $3.0 cardinal aliases $0.07 per stock successful Q4 of 2021. The weighted mean diluted outstanding shares successful Q4 was 42.7 million.

Cash, rate equivalents and investments were $52.8 cardinal arsenic of December 31 [Technical Difficulty] trim it by astir $10 cardinal to $15 cardinal this year.

This concludes nan chat of our quarterly financial results. Turning to our scheme to database our subsidiary Tongmei successful China connected nan STAR Market successful Shanghai, fto maine springiness you a little update. Since nan Chinese New Year, we person had progressive speech again pinch nan China Securities Regulatory Commission, besides called nan CSRC. Their process is elaborate and thorough, and they person asked america to respond to a mates of further items. We are successful nan process of doing truthful now and stay optimistic that we will get CSRC support successful nan coming months. We person posted a little summary of nan scheme and nan process connected our website.

With that, I'll now move nan telephone complete to Dr. Morris Young for a reappraisal of our business and market. Morris?

Morris Young

Thank you, Gary.

During Q4, nan softening of nan macro situation continued arsenic expected. We saw a measurement backmost successful gross crossed our portfolio arsenic customers proceed to digest inventory successful nan transmission and measure their needs for nan coming quarters. Overall, we judge they are approaching nan 2023 request situation pinch conservatism and will further trim their estimated request successful Q1.

With that said, we're continuing to spot progressive improvement for caller applications and exertion investments utilizing [indiscernible] material. What this tells america is that while nan near-term situation is moving done a important inventory correction, nan mid-term and longer-term imaginable for our markets are vibrant. In summation to nan halfway applications that are driving our gross today, caller uses successful automotive sensing user product, wellness sensing show and much are taking style successful a very existent way.

For nan past 2 years, we are focused connected raising our readiness and business ratio and person created a world-class operation, tin of supporting nan existent and early request of Tier 1 customers. To that end, I'm very proud of nan activity that we person done of nan accomplishment of nan full AXT team. We person successfully completed nan relocation of our gallium arsenide and germanium substrate manufacturing, continued to build retired our capacity to support a melodramatic summation successful request for our indium phosphide wafers, made bully advancement connected 2 awesome R&D projects to nutrient larger diameter wafers, and implemented a recycling programme that use our costs building and thrust affirmative results successful our ESG efforts.

Collectively, our activity coming has positioned america much favorably than ever before, some pinch customers arsenic good arsenic competitory landscape. This includes gains successful our marketplace share, peculiarly indium phosphide, arsenic good arsenic enhancement of our estimation for value and innovation, and our expertise to standard and our expertise to present nan specification that alteration exertion progress. For these reasons, we are optimistic astir our return to maturation erstwhile nan marketplace recovers.

As we caput into Q1, we're seeing a business slowdown proceed arsenic customers crossed our portfolio are evaluating and reducing inventory. We judge that nan effect successful Q1 is exacerbated by nan emblematic business interruption of Chinese New Year arsenic good arsenic nan lingering effect of COVID shutdown successful China. As such, we are readying for a awesome reset successful Q1, but we do not -- but we do expect that we could spot betterment opening successful Q2 arsenic China reopens much fully.

Indium phosphide was down successful Q4, chiefly arsenic a consequence of continued cooling successful nan information halfway marketplace arsenic good arsenic ongoing softness successful 5G telecom infrastructure, peculiarly successful China. The [pounds] (ph) marketplace was coming down disconnected its peak, but was -- has been reasonably resilient. In addition, we proceed to execute good successful our user applications, but because of inventory digestions, we expect it to return a meaningful region successful nan first half of 2023. We person 2 programs that are presently shipping and we are excited for nan expertise to build semipermanent narration successful this important improvement market.

Our gallium arsenide gross is down importantly disconnected its mid-'22 highs, pinch customers successful China having slowed significantly. We're seeing a beardown effect connected applications utilizing wireless devices for IoT and headset markets, arsenic good arsenic business lasers, LED lighting and display. After specified a beardown decline, nan gallium arsenide marketplace appears to beryllium stabilizing and we could spot incremental betterment opening successful Q2.

We are making bully advancement successful our 8-inch gallium arsenide wafer development. This merchandise will beryllium a cornerstone for microLED take successful a assortment of user devices. While a meaningful gross ramp isn't expected to statesman until sometime adjacent year, merchandise qualification astatine nan substrate level are scheduled to statesman this year. AXT is good positioned to beryllium a premier subordinate successful this market.

We position microLED arsenic a breakthrough show exertion for consumers arsenic it is expected to present important betterment successful powerfulness ratio arsenic good arsenic greater brightness and much superb colors. Tier 1 companies are advancing its improvement and we judge it has nan imaginable to reshape nan gallium arsenide substrate industry.

We're pleased to study that we person resolved nan costs rumor pinch our germanium customers and we saw a mini betterment successful gross successful Q4. While nan germanium substrate marketplace has besides been affected by nan macro softness, we will beryllium moving towards sequential maturation successful nan coming quarters.

And finally, turning to our earthy worldly proviso concatenation companies. Consolidated gross was down owed to pricing unit successful Q4 and softer request environment. We do proceed to spot a bully publication from our proviso concatenation companies [contributing our] (ph) equity accounting beneath nan operating line. While our expanding value of definite earthy worldly tin beryllium antagonistic for a institution for illustration Tongmei, which is offset by improved publication beneath nan line. Our proviso concatenation strategy is unsocial arsenic compared to our competitors and is charismatic to our customers. This is simply a beardown attraction for america successful 2023.

In closing, though a softening of macro situation has reset our maturation trajectory, a inclination that has been driven our revenue, customer and exertion description s stay very overmuch intact. Today, we are nan world leader successful indium phosphide and we are nan institution that Tier 1 customers travel to erstwhile they are opening their caller invention to market. We proceed to raise nan barroom of method capability, creating clear differentiation pinch our competitors. Further, we person worked difficult to amended our ratio and we'll proceed to attraction connected delivering profitability. As such, nan fundamentals successful our business are coagulated and we're looking up to our early pinch optimism.

I will now move nan telephone backmost to Gary for our first 4th guidance. Gary?

Gary Fischer

Thank you, Morris.

Given nan continuing inventory correction arsenic good arsenic nan effect successful Q1 from Chinese New Year and COVID shutdowns successful China, we expect Q1 gross to beryllium betwixt $19 cardinal and $21 million. This little gross is expected to person a important effect connected our manufacturing overhead being dispersed complete less units, which will person a antagonistic effect connected gross margin. Product operation is besides little favorable and arsenic a consequence of little expected gross for indium phosphide. As such, we expect our non-GAAP nett nonaccomplishment will beryllium successful nan scope of $0.10 to $0.12, and GAAP nett nonaccomplishment will beryllium successful nan scope of $0.12 to $0.14. The stock count will beryllium astir 42.7 million.

Okay, this concludes our prepared comments. Morris and I will beryllium gladsome to reply your questions now. Devin?

Question-and-Answer Session

Operator

[Operator Instructions] Our first mobility comes from Charles Shi pinch Needham & Company.

Charles Shi

Hi. Good afternoon, Gary and Morris. Thank you for taking my question. Maybe first, I want to start, obviously, Q1 is simply a reset. But I did perceive you had immoderate comparatively much affirmative commentary. For example, gallium arsenide, you're seeing perchance immoderate denotation of betterment opening successful Q2. But what astir nan indium phosphide side? I did perceive you, yes, that successful Q1, location whitethorn beryllium immoderate slowdown related -- arsenic customer region a small spot successful nan first half '23. But if I necktie each your comments together, difficult for maine to not to think, possibly Q1 aliases even, if I want to beryllium much cautious, possibly Q2 seems to beryllium nan bottommost of this down rhythm for you. Can you stock pinch america immoderate color? What were your thoughts astatine this point? Yes, convey you.

Morris Young

Sure, Charles. I deliberation -- fto maine put this way. I think, though AXT is simply a mini company, but our business covers a full scope of different products. As you know, germanium is successful nan star cell, and gallium arsenide, not only covers nan handsets, nan wireless infrastructure, arsenic good arsenic high-brightness LEDs, and high-power lasers. And I judge each conception of nan business goes into nan premier request successful different stages. For instance, wireless handsets took a hit, I deliberation inventory correction early successful Q3. Infrastructure came a small spot later, and we perceive that nan HPT marketplace instrumentality inventory is still rather beardown there. But connected nan different hand, you tin opportunity that China is reopening up, pinch COVID problem retired of nan way, erstwhile will nan user request travel backmost up, and that was nan awesome driver for gallium arsenide HPTs.

As acold arsenic indium phosphide is concerned, we didn't spot nan softness successful indium phosphide for user merchandise until precocious successful Q -- let's say, mid Q1. So, [Technical Difficulty] important downshift successful indium phosphide request successful Q1, but will it retrieve and really much, and past it does depends upon nan equilibrium of different marketplace segments, specified arsenic consumer, erstwhile will they commencement to benignant retired inventory they have, and nan information center, will it retrieve soon capable to springiness america immoderate important business contribution.

So, it is -- correct now, it's difficult to say. I utilized to opportunity past year, passim nan past I deliberation five, six quarters, we've been saying that AXT is having improved clarity of what is coming successful nan business pipeline. But because of nan business interruptions aliases inventory corrections, I deliberation we'll suffer that visibility. We conscionable don't person a full batch of visibility of seeing what we tin recover. I deliberation it's astir apt going to beryllium level successful Q2, but decidedly we hope, pinch user coming backmost successful China, I deliberation nan marketplace will commencement to bounce backmost successful Q3 and Q4 of this year.

Gary...

Charles Shi

Thank you.

Gary Fischer

I think, it's a bully response. The short summary is, yes, we deliberation Q1 is going to beryllium nan bottom, and we'll each find retired successful different period aliases two. So, yes.

Charles Shi

Yes, thanks. So, possibly a small spot longer-term. You said that indium phosphide, 2 programs shipping, I mean, accumulation products to your extremity customers. Do you person overmuch visibility if location possibly a 3rd programme wherever you tin get to nan shape that you tin vessel accumulation wafers to your customers this year? Or possibly this twelvemonth is much astir a continuation of nan existing 2 programs, possibly grow nan measurement a spot erstwhile we get -- really get to nan 2nd half of nan twelvemonth erstwhile those extremity products commencement to ramp again? That's my 2nd question.

Morris Young

Yes. I would say, we don't spot immoderate caller user merchandise applications for indium phosphide this year. If there's immoderate expanding request aft they count each their inventories and if they digest their inventory is astir apt if nan request goes from nan apical statement telephone sets to nan little sets and past that whitethorn thrust immoderate expanding demand. I cannot tell, because nan customers aren't giving america visibilities.

As acold arsenic early improvement is concerned, Charles, you had maine correct present successful a very benignant of among nan inventory corrections. So, things are reasonably pessimistic. But if you were to inquire maine what indium phosphide are utilized for, what's our marketing, our gathering information, what's nan possibility, I decidedly deliberation location is simply a batch of maturation potentials, particularly successful sensors, successful lasers wherever you request precocious information arsenic good arsenic autonomous vehicle. I mean, we had customer liking successful america delivering sizable merchandise to that market. But that enquiry was precocious sometime past year, but it ne'er materialized. When will it travel back? I don't know.

I deliberation different imaginable merchandise is healthcare product. Again, nan customer was picking our merchandise for a beta tract aviator production. I deliberation unluckily that is not materializing and becoming a awesome accumulation merchandise request now. When will it travel back? I deliberation nan liking is there, but we conscionable don't person visibility, it will travel to go a awesome accumulation request yet.

Charles Shi

Yes. Thank you, Morris. Definitely understand that this is simply a proviso concatenation that, well, nan customer to -- I mean, your extremity customer astir apt only going to show you almost nan past infinitesimal whether it's go, nary go, wholly understand.

So, I deliberation my past mobility really astir nan larger diameter gallium arsenide for microLED application. I deliberation that 1 of your apical customer precocious said it's that -- they're going to spot meaningful gross successful 2025, which benignant of implies that, that's nan clip they commencement to vessel successful volume, right? But I don't cognize really overmuch of your gross will lead to their gross successful position of generating meaningful gross from this microLED application. Can you benignant of springiness america immoderate thought really nan ramp of gross could look like? I deliberation you said that you're going to commencement shipping immoderate measurement this year, but -- this year, adjacent twelvemonth and nan 2025. How does nan gross ramp look like? Thank you.

Morris Young

Sure. We are shipping hundreds of wafer to customers. I deliberation they are doing their aviator runs arsenic good arsenic looking astatine wafer successful each different ways, including going epi and seeing really level they request nan wafer to be, and moving done their aviator accumulation lines. And I deliberation we work together pinch you. I deliberation though nan earlier projection was that it's going to commencement to person a accumulation ramp up successful 2024, but I deliberation it's -- we deliberation it's going to beryllium precocious 2024 alternatively than early 2024. So that matches pinch your 2025 large accumulation ramp.

But I deliberation I'm very gladsome to spot that this task is really taking style and looks for illustration it's going to beryllium a awesome project. But I deliberation nan bigger known is really successful this task will beryllium and will it dispersed to different applications. Because our customer has told america that this is conscionable nan commencement of nan program, and eventually, this could lead to thing for illustration 5 to 10 times nan measurement arsenic nan first request is. And it does dangle upon really good they tin tally this task and really good they tin trim nan cost, and really wide microLED performed. But I think, arsenic you know, location are many, galore different competing technologies eyeing for this microLED applications, specified arsenic wearables, specified arsenic goggles.

So, I deliberation this is simply a large triumph for gallium arsenide. And I deliberation we are very good positioned because we not only are successful substrate making, but we are besides successful supplying immoderate different earthy materials, which will use us, because this -- nan request for gallium arsenide is going to summation significantly. I deliberation that's nan measurement I position it, what nan microLED is going to be. But arsenic I said, I deliberation nan timeframe of erstwhile will they beryllium commercially ramping up successful measurement production, I deliberation it's astir apt precocious 2024 to 2025.

Charles Shi

Got it. It sounds for illustration you whitethorn lead your customers' gross ramp up by a small bit, aliases that benignant of makes sense, right, because wafer -- first, you vessel nan wafer, you admit revenue, they process nan wafer, they admit their revenue. But convey you very much, Morris and Gary. I dream to drawback up much pinch you soon. Thank you.

Gary Fischer

Thanks, Charles.

Operator

Our adjacent mobility comes from Matt Bryson pinch Wedbush.

Matt Bryson

Hey, acknowledgment for taking my questions. First 1 is, erstwhile you look astatine nan 3 factors you mentioned that's impacting gross margins, Gary, tin you supply immoderate weight arsenic to -- aliases immoderate thought of nan weight of each of those factors connected nan quarter?

Gary Fischer

Well, I would say, nan little gross is nan cardinal portion of nan communicative and nan merchandise operation wasn't arsenic bully arsenic we expected. So, those are astir apt nan 2 main things. A small spot of beneath anticipation from nan earthy worldly companies, but it's really much astir nan substrate business.

Morris Young

But connected nan different hand, nan guidance for Q1 past nan awesome effect of nan gross separator coming down, I will astir apt deliberation is shifting much towards nan merchandise mix, because we expect indium phosphide to return a awesome deed connected nan inventory correction. So, that will driblet significantly. That will effect our gross separator overall.

Gary Fischer

That's correct.

Matt Bryson

Understood. But past -- truthful erstwhile we're reasoning astir normal gross margins, if you're capable to return revenues to nan level that they had been up, past you're still looking astatine nan gross margins you were enjoying a 4th aliases 2 ago. Is that fair?

Morris Young

Oh, absolutely. I deliberation we -- though location are value unit from customers erstwhile business is not looking good, but there's not a important -- I mean, it's not a driblet of wide margin. Our business is reasonably unchangeable and we besides expanding our efficiency. We person caller associated ventures taking attraction of nan earthy worldly supply. So, we're confident. And arsenic business return, I deliberation we should beryllium looking guardant to mid-30%s and moreover -- yes, precocious 30%s.

Matt Bryson

No. Understood. I conscionable wanted to make judge it wasn't much of a -- nan pricing wasn't much of a factor, right, because that'd be...

Gary Fischer

No, pricing is not really a -- nan cardinal factor. Yes, there's value unit from clip to time, but really nan large logic is what I conscionable said. So -- and we're assured that erstwhile things rebound, each nan worldly that we've done for nan past 2 years to amended gross margin, it's going to blossom again. It's conscionable taking a region because of nan disruption successful nan marketplace correct now.

Matt Bryson

Understood. And then, I guess, my 1 different mobility is, you talked there's immoderate programs being perchance put connected clasp astatine your customers fixed nan much difficult environment, which makes sense. But connected nan silicon photonics front, are you still seeing advancement there? Or thing you tin talk astir arsenic to really you spot that marketplace processing for AXT?

Morris Young

Yes. Silicon photonics, I think, is doing fine, though nan information halfway marketplace from what we publication successful nan marketplace is that it's not doing well. I mean, they opportunity region arsenic you cognize -- I mean moreover I publication Microsoft, their information halfway business is not doing well. So, they are taking a correction, and truthful is Amazon. So, each these large information center, if they're not buying, past our silicon photonics aren't doing well.

But connected nan different hand, I would still say, arsenic acold arsenic Internet and unreality computing is concerned, location is going to beryllium much and much information transferring backmost and distant and you request much data, much -- bigger information halfway and you request fibre optics to lick nan bandwidth and nan velocity problem. So, I deliberation that's each going bully for indium phosphide material.

So, I deliberation longer trend, there's nary mobility astir it. I deliberation it's -- we're going to spot growth. But short term, we're going to person inventory correction. I'm moreover Microsoft, their business is benignant of being soft correct now. Everybody is looking astatine imaginable slowdown successful nan wide economy.

Gary Fischer

Yes, I would adhd that 1 of nan strengths of our business exemplary is that nan lifecycle for immoderate of these cardinal applications is really rather different than nan wide semiconductor industry. As we each know, each 18 months aliases 24 months, you've sewage to travel retired pinch a caller chip. But nan information halfway is simply a bully example. That's going to beryllium present for -- and beryllium a driver for silicon photonics and truthful for indium phosphide for astir apt 5 to 15 years. I mean, there's really -- it's difficult to judge it would ever slow down. So -- and if you look astatine our history successful gallium arsenide, nan life rhythm for immoderate of those products was 15 years -- aliases 12 to 15 years. So, it's rather different, and it's -- but it's a affirmative difference. So...

Matt Bryson

Got it. Thanks truthful overmuch for nan color.

Gary Fischer

Thanks, Matt.

Operator

[Operator Instructions] Our adjacent mobility comes from Richard Shannon pinch Craig-Hallum.

Richard Shannon

Well, thanks, guys, for taking my questions. I'm going to deed connected nan gross separator taxable present and inquire a very nonstop question, Gary, arsenic I usually do here. Trying to fresh nan guidance to get to nan bottom-line and guessing connected OpEx present and I was coming up pinch gross margins that are astir a small spot beneath 20%. As I look backmost successful history to nan past 4th astir $20 cardinal per quarter, I saw a number of astir 26%, 27%. Clearly, you've sewage a antagonistic operation present pinch indium phosphide, but that quality seems reasonably dramatic. So, I wonderment if you could show america really adjacent we are successful doing our mathematics here.

Gary Fischer

So, Richard, are you describing nan Q4 results aliases the...

Morris Young

No, Q1.

Gary Fischer

Q1.

Richard Shannon

First quarter.

Morris Young

I deliberation Richard wants to cognize really do we comparison pinch nan past cycle? I mean, erstwhile we had $20 cardinal quarter, Richard is saying our gross separator was amended than what you telecasted aliases forecasted.

Richard Shannon

Yes. Is 18% astir right, because it's a batch different than past clip you're astatine this income level? So, I conscionable want to get a small spot much clarity there.

Gary Fischer

I'd opportunity it's excessively low. I don't cognize for judge what it's going to beryllium yet. Obviously, fixed nan operation successful the...

Morris Young

I think, what our exemplary says is much than 20%, I think. Yes, 21%. But that's our model.

Richard Shannon

Okay. Well, you intelligibly sewage immoderate different parts to model, truthful we'll follow-up offline there, but conscionable want to get that 1 retired of nan measurement here. That is helpful. And conscionable wanted to make judge I caught this correctly. On nan first quarter, do you expect indium phosphide to beryllium down much than 50% sequentially? And this was wholly owed to user and information center? Were location different elements of it? Just want to make judge I caught each of them.

Morris Young

Yes. I deliberation information halfway is not helping, but astir importantly is nan consumer. And nan consumer...

Richard Shannon

Okay. All right, great.

Morris Young

...part didn't return a large inventory correction until recently, and...

Richard Shannon

Yes. We understand their cycle, truthful that surely doesn't needfully surprising, truthful that's adjacent capable then.

Gary, I conjecture benignant of a multipart mobility here, benignant of taking -- nan taxable of inventory, nan taxable of CapEx and reasoning astir rate flows this year, you made a prepared remark astir trying to pain $10 cardinal to $15 cardinal of inventory this year, which is bully to spot present fixed nan [churns] (ph) present recently. Wonder if you remark besides connected what your CapEx expectations are for nan twelvemonth particularly comparative to past year. And since a batch of nan build present successful CapEx has been indium phosphide, and you've sewage a reasonably important spread here, nevertheless impermanent it whitethorn beryllium here, it seems for illustration you don't person arsenic overmuch urgency to build astatine slightest correct away. So, I want to get your consciousness of -- to what grade your CapEx needs to beryllium arsenic precocious arsenic past year? Let's conscionable benignant of trim it disconnected there.

Gary Fischer

Okay. Well, nan short reply is it won't beryllium arsenic precocious arsenic past year. In summation to clamping down connected inventory, we're going to put nan brakes connected CapEx arsenic well. So, I would say, $3 cardinal to $5 million. And we tin modify that if things bounce back. We person investments we'd for illustration to make. But Morris has already sewage his shotgun retired and if anyone talks astir a batch of CapEx, they're going to beryllium successful trouble. So...

Morris Young

Well, moreover if business were to prime up, I mean, nan walk that we did for past twelvemonth was because nan customer request is measurement outstripping our expertise to deliver. That's why we were building very aggressively and moreover towards 2nd half of nan year. So, immoderate of those builds are still hanging retired there. So, moreover if nan business were to recover, I deliberation -- we do expect it to retrieve and it will proceed to grow, we tin grip it. No problem astatine all.

Gary Fischer

Yes.

Morris Young

And it's only wherever -- if we are seeing different aliases 2 which I dream different user merchandise will travel successful to usage indium phosphide, past we're going to commencement building again. So, I deliberation nan -- I dream you understand that it's a lag, right? I mean, we're forecasting it's going to grow. So, we're going to build nan capacity because we don't want to [shortchange] (ph) aliases not beryllium capable to present to our customers. But then, erstwhile it's a trim off, past evidently we put a break on, but there's immoderate remnant worth hanging retired there. But I don't deliberation it's astatine risk. Because I deliberation indium phosphide for nan adjacent early astir apt will sorb each those other capacity we scheme to build. Yes.

Richard Shannon

Fair enough. And that's a...

Morris Young

Yes.

Richard Shannon

Sorry, Morris, didn't mean to trim you disconnected there. Please, finish.

Morris Young

Oh, no. I finished. I said, it's not we planned, but we built past year.

Richard Shannon

Okay, adjacent enough. Last mobility for me, benignant of dovetailing disconnected of 1 of those remarks successful there, Morris, regarding conscionable wide sensing applications. I deliberation successful an earlier mobility asked astir your ample customer and I deliberation if I sewage you correctly, said you don't expect immoderate caller programs successful this existent almanac year. How astir benignant of much broadly reasoning different customers and applications regarding sensing, and to what grade are they successful early-stage versus late-stage improvement specified arsenic they could effect this year, aliases possibly successful pursuing years? Maybe conscionable benignant of springiness america nan large image semipermanent there.

Morris Young

Yes. But Richard, I deliberation -- I had my caput hanging down now. But if you look astatine indium phosphide, I deliberation -- arsenic I said, I deliberation healthcare is simply a large application, though I deliberation nan improvement is taking a pause. I mean automotive, we person a customer asking for 3,000 4-inch indium phosphide per month, and they were giving a general quote, and we were calculating really overmuch will it costs america and we were almost build -- fresh to build other capacity for them, but they didn't travel through, okay? But I don't deliberation they're playing games pinch us, okay?

So, I deliberation location are galore different progress, specified arsenic if you're going to person nan Meta goggle, I was told that you request a eye-tracking indium phosphide sensor. And if that marketplace were to return disconnected and -- but past of course, there's a batch of improvement programme taking a region correct now. But I deliberation those are many, galore of these users, which will usage indium phosphide. And 1 customer told america location are 12 projects being developed utilizing indium phosphide to amended consumers' acquisition to amended their handheld devices. So -- but if you asked maine past year, I think, well, possibly there's a fewer which could travel to fruition successful 2024, but I deliberation I'm taking much blimpish [Technical Difficulty]

Richard Shannon

Okay.

Gary Fischer

Let maine adhd thing to that, too. It's benignant of a large image comment. But indium phosphide is taking connected a life of its own, and it's robust. It's awesome to watch. It's breathtaking for america to beryllium a leader successful this benignant of material. And there's going to beryllium worldly that's going into gaming, automotive sensors, wellness and well-being. So, it's decidedly taken connected nan life of itself.

Morris Young

Yes. And I deliberation if you're looking for short term, I would opportunity China is looking to pump up nan economy. I deliberation nan authorities whitethorn want to do immoderate infrastructure build. As acold as, I think, United States, I think, U.S. is reasoning astir nan large infrastructure build, wants to make Internet relationship disposable passim [Technical Difficulty] materials utilized for basal -- thing which person thing to do pinch fibre optic communication, truthful I deliberation they whitethorn help. But I deliberation astatine this point, 5G guidelines position is not built, which is connected a debased point, and telecommunication is connected a debased point. But immoderate of this – government-pumped infrastructure build is going to thief connected nan request of indium phosphide.

Richard Shannon

Okay. Perfect. That's each from maine guys. Thank you.

Gary Fischer

Thanks, Richard.

Operator

Our last mobility comes from Hamed Khorsand pinch BWS.

Hamed Khorsand

Hi. Just wanted to really understand if you're talking astir a reset successful nan business successful Q1, why you're not considering resetting your business building arsenic it is? What's giving you nan assurance that you will bottommost retired successful Q1?

Morris Young

I deliberation we're taking a reset, Hamed. I think...

Gary Fischer

I agree.

Morris Young

We're not buying material. We're shutting down astir of our construction...

Gary Fischer

Lower CapEx.

Morris Young

Lower CapEx. We're looking astatine each imaginable ways to tighten nan -- our budget.

Gary Fischer

Lower inventory.

Morris Young

Lower inventory. But erstwhile -- are we looking astatine cutting backmost connected [R&D] (ph), that astir apt is area we're not cutting backmost yet. But we're going to return a cautious look because that's nan early of nan company, specified arsenic 8-inch gallium arsenide, we want to support connected processing it, truthful that we tin person a robust [indiscernible] output arsenic good arsenic nan capable capacity to present to our customers. That gross is going to travel if we tin return attraction of that business. I mean, truthful is indium phosphide. Hamed, although, arsenic we said, we're not building much capacity anymore. I mean, if you were to inquire america past year, we were saying we're going to summation our capacity by 50%, didn't we? So, this is simply a reset. We're not building that capacity nary more. That's a reset.

Hamed Khorsand

Okay. And then, arsenic acold arsenic nan inventory is concerned, immoderate consequence that it becomes obsolete by nan clip nan business turns around?

Morris Young

No. 50% of our inventory is earthy material, and earthy worldly will ne'er spell bad. I mean, we tin moreover waste nan earthy material, can't we? And nan different 40% is work-in-process, which without cutting aliases polishing to immoderate merchandise specification. And gallium arsenide, indium phosphide has been present -- gallium arsenide has been present for 25, 30 years, truthful it will ne'er spell away, okay? I mean, truthful thing which is already trim to customer specification, which is only 4% aliases 5%, and moreover then, I don't deliberation we person mislaid customer. The astir terrible reward is that nan customer return our merchandise and don't salary and they spell bankrupt, that's nan only clip wherever we lost. So, I don't deliberation there's a full batch of consequence for inventory.

Gary Fischer

Yes, successful this business exemplary -- and again it's different from nan semiconductor, because I travel retired of that background. But nan truth that we are a worldly subject institution and we commencement pinch earthy materials, there's not a batch of guidance request to beryllium micro managing and watching retired for obsolescence and things for illustration that. So...

Hamed Khorsand

Okay. Thank you.

Gary Fischer

Thanks, Hamed.

Operator

There are nary further questions astatine this time. I now move nan telephone backmost complete to Dr. Morris Young for closing remarks.

Morris Young

Thank you for participating successful our convention call. As always, please consciousness free to interaction me, Gary Fischer aliases Leslie Green directly, if you would for illustration to group up a call. We look guardant to speaking pinch you successful nan adjacent future.

Operator

Thank you for attending today's presentation. You whitethorn now disconnect.

Editor: Naga



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