Good afternoon everyone and welcome to AXT's First Quarter 2016 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My name is Jessica and I will be your coordinator today. Today’s call is being recorded. I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Jessica, 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 and our ability to control costs and improve efficiency, increase orders in succeeding quarters, improve our competitive position as the market improves, as well as other market conditions and trends. 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 market in which the Company competes, global financial conditions and uncertainties, market acceptance and demand for the Company's products, and the impact of delays by our customers on the timing of sales and 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 and available online by link from our website for additional information on risk factors that could cause actual events or results to differ materially from our expectations. This conference call will be available on our website at axt.com through May 02, 2017. 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 2016. 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 the first quarter results. Gary?

Thank you, Leslie. Good afternoon. Revenue for the first quarter of 2016 was $18.7 million, compared with $18.1 million in the fourth quarter of 2015. This is slightly above our expectations of $17.5 million to $18.5 million. In the first quarter of 2016, revenue for North America was 13%, Asia Pacific was 64% and Europe was 23% of total revenue. In the first quarter, we had one customer that generated more than 10% of revenue and the top five customers generated approximately 41% of total revenue, reflecting again our diversification in both products and customers. Gross margin in the first quarter was 28.1%. This strong improvement from the prior quarter is a result of the continuing shift in product mix favoring indium phosphide and also good progress in manufacturing yield improvements. In addition, in the prior quarter, we took a lower cost of market inventory write-down charge from one of our gallium raw material subsidiaries and that reduced our consolidated gross margins last quarter by approximately 3 percentage points. If you look at our gross margin over the four quarters before Q4 2015, gallium write-down has been averaging close to 24% and then in Q4 it dropped. Q1 is a good rebound driven by more indium phosphide sales and more efficient manufacturing. Total operating expenses in the first quarter were $4.8 million, almost as exactly the same mount as the $4.8 million in Q4 2015. Total stock compensation was $253,000 for the first quarter of 2016, of which $5,000 was included in cost of revenues, $200,000 in SG&A, and $48,000 in R&D. Operating profit for the first quarter of 2016 was a positive $498,000 compared with an operating loss of $1.7 million in the previous quarter. Other income for the first quarter was a hit of a 168k. This number…

Thank you, Gary, and good afternoon everybody. Q1 was a strong quarter for AXT in which we exceeded our revenue and profitability guidance and posted a strong increase in both our gross margin and operating margins from the prior quarter. In addition, our indium phosphide revenue is the highest it has been in recent years, continuing the strong growth trend we have been seen. On Q1, our indium phosphide was north of 30% of our total revenue for the quarter and again with the single largest contributing product being higher than semi-insulating gallium arsenide, semiconducting gallium arsenide and germanium products. In addition, it was a significant contributor to our gross margin. While indium phosphide is still an emerging material, the drivers for its demand are significant and are becoming clearer as activity steadily increases. For example, our indium phosphide sales continued to be driven by lasers and detectors for fiber optic communications and passive optical network applications such as EPONs and GPONs. These shortfall networks are used for internet access, Voice-over-Internet Protocol, digital TV delivery in metropolitan areas, and backhaul connections for 4G cellular base station. In addition, silicon photonics continue to grow rapidly as a driver for indium phosphide. Silicon photonics is an evolving technology in which data is being transferred by optical rays that can carry far more data in less time than electrical connectors – conductors. A number of leading companies including Cisco, HP, IBM and Intel are developing their technology for next generation datacenters to improve connectivity both within and between that. Here again, indium phosphide is a material of choice for the transmitter and receiver at each end of the data stream. And finally, we are seeing increasing evidence that high performance substrates will be a key element for 5G wireless technology. In order to…

Thanks, Morris. As we look ahead to Q2, we expect to see continued growth in our business in keeping with the near-term result trends that Morris just discussed. As such, we believe that revenues will be in the range of $19.5 million to $20.5 million. We’re expecting the bottom line to be in the range of breakeven to a profit of $0.02 per share based on $32 million diluted common shares outstanding. I’d also like to mention that AXT will be presenting at the B.Riley conference in Los Angeles on Wednesday, May 25. This concludes our prepared comments. Morris and I will be glad to answer your questions now. Operator?

Thank you. [Operator Instructions] We’ll go now to Richard Shannon with Craig-Hallum.

Hi, Morris and Gary, congratulations, very nice quarter, and thanks for taking my questions.

Thank you, Richard.

You bet. I guess my first question is I couldn’t run math fast enough, but just want to ask Gary, what’s the implied gross margins for your second quarter guidance, is that flat to up, can you help me out there and help us understand the kind of puts and takes for the guidance there?

You mean for Q2 coming up?

For second quarter, yes.

I have an echo there. Isn’t there? Operator, is there an echo on the line?

There was a bit of one, yes.

Now, it’s okay.

Can you hear me okay, Richard.

I don’t hear it anymore.

I can hear you guys perfectly. Apparently, you can hear me well.

We’re okay now. There was something. Well. As I said, except for Q4 2015, we’ve been running in the low to mid 20s and now of course we shot across the line and are 28. We’d like to observe another quarter or two before we would use 28 in our model, but something a bit north of 25% is reasonable until we learn more.

Okay…

I think if I may chime in here, I think it does depend upon the product mix. We’d love to see indium phosphide coming strong again. Raw material is either variable, I mean it doesn’t – we’re now – we’re seeing it stabilizing now, although is a very low level. So we’re assuming nothing changes over there.

Okay, fair enough. If I could backtrack very quickly to the first quarter results, you mentioned indium phosphide somewhere over 30%. I think the previous quarter you said that was close to 30%. Can you give us a sense of the growth rate there either on a sequential or year-on-year basis in the first quarter?

Well, we haven’t calculated, but it’s a strong quarter. I mean its all time high again in recent years, that’s all I can say. Indium phosphide because it’s an emerging material, so sometimes the increases can be up to 20%, but then in the next quarter we can backtrack a little bit. So if you want to say, it can be a little bit lumpy, but year-over-year in the last two years, it was over a 50% as we say. This coming year, we’re shooting for good growth again.

Okay. You kind of preempted my following questions there Morris, but what is implied within your second quarter guidance for indium phosphide revenues, is that for growth at least as much as the overall corporate growth or?

Up, yes, it will be up, should be another…

Should be up…

No, another strong quarter.

Okay. Okay, well, congratulations on that. Morris, maybe if you could talk a little bit about your efforts to gain more customers for indium phosphide, I think you mentioned or you think you’re either number one or number two in sales there. And then you also mentioned supporting both lasers and photo detectors within the optical communication space. Are you use differently for either of those main products and also do you have a sense of whether your application is driving your more kind of the long haul versus more of the Access or PON networks as you referenced?

Well, your first part of question is, are we using different material? No, it’s the same. But mostly, I think sometimes we see some customer has a very, very tight specification for – we’re guessing they are probably using higher power laser. So they will require a much lower EPD and some of them have optical arrays or detectors where they need a very uniformly low EPD materials. Again, that’s a special niche market for us. So we can satisfy those specifications. I think it’s a challenging spec, but it’s a very good spec for all our products. And what’s your second part of the question?

Whether you're exposed more to the long haul part of the market or more access where we’re – or as you referenced the PON market?

That is hard for me to answer because we’re selling to two layers of customers. Let’s say, mostly our important customers are the epi growers. And the epi growers, they probably – they tell us that is for lasers or detectors or for to the machine arrays, but they didn't tell us it is for long haul or short metropolitan areas.

Okay, I kind of delve to that, but just want to get a sense of that. Morris, I guess my last question I'll jump out of line here. You talked about some customers interested in sampling 6-inch indium phosphide wafers. Do you have any sort of anywhere near volume capability on that? Or when do you think you’d plan to have something up and running at the 6-inch in volume perspective?

Well, honestly, we don't have the product yet. We're developing it. We know the interest is coming up very strongly. We noticed it. We actually have multiple customers requesting sample quantities. So, we're developing it. Our goal is to have product ready by the third quarter of this year. And then we shall see from that point on how fast the demand comes up and how fast we can ramp up our production. AXT has always been very good at executing production increase such as we demonstrated in gallium arsenide. Hopefully with that again did it for indium phosphide as well. We can handle over 50% growth year-over-year and that’s an excellent performance in executing production increases.

Okay, interesting. That's great detail, Morris. I think that’s all the questions for me. I'll jump in the line, but again congratulations on a great quarter.

Thank you, Richard.

[Operator Instructions] And we'll go next to Edwin Mok with Needham and Company.

Hey, guys, congrats for the great quarter. Thanks for taking my question. So, first one, just go back to the gross margin, Gary. Is it fair to say that the mix of indium phosphide was the biggest contributor for the strong gross margin? And is it fair to say that indium phosphide gross margin is greater than the corporate average?

Yes. Both of those comments are true. And also keep in mind that last quarter for – in the December quarter, we had an inventory write-down for lower cost of market on gallium raw material, so that's why last quarter spikes down to the low point that it did.

So if I just kind of look at that and you guys expecting indium phosphide to grow, an opportunity that would actually grow your company overall. When that benefits your gross margin, but your guide margins to be down sequentially, I’m trying to reconcile those, is it just conservatism before actually ramped [indiscernible]?

We’re being a little conservative arguably. We’re both – Morris and I are both probably conservative in terms of just our personalities and in Q1 everything lined up really nicely. And we’re encouraged by that, but we'd like to see one or two more quarters like that. So, I think it’s – my view is better to be a little bit more conservative is 28%. So…

I’d like to chime in on that as well.

Sure.

Indium phosphide used to be only 10% of our revenue, so although margin is better, but the contribution is actually very small. And that becomes more and more of our product mix, I think they should contribute more, but still it's a gradual event, okay. So, you're right. If indium phosphide continue to grow, after a year, four quarters, I think their contribution margin from indium phosphide overall gross margin for the company should be significant. It should have an ever increasing upward lift for some quarters, so that I’ll just say. Yes, we're being a little bit conservative when we say something north of 25% instead of using 28%.

Okay, actually that’s extremely helpful.

Yes.

And next I am going on to kind of comment on the indium phosphide for 5G wireless application you mentioned. Is that kind of something that frontend handset chip supplier are looking at? Or are we talking about more for base station how base station application for 5G. I’m just trying to understand that. And what do you think the timing of those 5G, since you have supply materials possible that you actually [indiscernible] actual mass adoption. So can you help us out with that?

Sure, I believe indium phosphide will be used as HPT devices for the cell phone power amplifier. I think that’s a must area other than that maybe on the Wi-Fi end, where it requires very high frequency, but of course initially I believe indium phosphide probably will be more expensive than gallium arsenide. So if gallium arsenide can answer the requirements for the 5G devices, gallium arsenide will have a significant play in that. But I think as performance increases and some high-end probably will migrate into indium phosphide, base station I definitely think could be indium phosphide business or some people are saying it could be a silicon carbide or gallium nitride type of business where you have both high frequency as well as high power. So – but I think definitely wireless cellphone where its operating voltage is much smaller definitely require indium phosphide material, except the fiber product. I believe people are saying it could be 2020, but although I think the recent news says that Verizon is having a demo vision of the 5G networks early next year.

Okay, that’s helpful. Morris, you didn't talk too much about germanium on the call. But, if I do my math correctly, I think germanium actually grew a little bit this quarter. Did I just grow my math and…

Yes.

Any kind of color what drove the sequential growth for germanium, was it just can’t stabilize…

Yes, I think germanium did grow, right, Gary?

Yes.

But germanium we didn’t talk much about it because I think it's a – how should I say, I mean it’s a business for serving the satellite business and the satellite is – it’s a one quarter up and other quarter down. And the margin on that business is not really that great. And the other thing is the other market for germanium is CPV, their market practically is dead, okay. But there’s a one – what you call this the Google proposed, OneWeb using 100 some odd satellite systems.

Yes, yes.

If that were to come to the market, people are saying proposing by 2017 or 2018 there could be a big, big business for germanium substrate again. But you know…

In the meantime, it’s not…

Yes, in the meantime…

We like the product, but it doesn't have the same thrill as indium phosphide.

Yes, indium phosphide is probably more predictable.

Yes.

And it grows quarter-over-quarter. We're more excited about it.

I see, okay, that’s very, very, helpful. Lastly – and I’ll let the other guys ask. Gary, you mentioned on the last part of your commentary that your site in Beijing is – Beijing could push up by government and therefore you guys maybe go for next site, right. Do you expect that cause any kind of disruption on your production as we go to the early part of the year overall in 2017. I am just trying to gauge that and do you have other facility that you [indiscernible] capacity there to kind of provide a more solution. I am just trying to understand what…

Yes, well – I could take first crack on it. We don't expect disruption in production then some of our customers would be upset if there is disruption. So, you have to do a faith and orderly relocation. You don’t do it overnight in one step. It will be a normal kind of plan that that companies have to have when they move like this. So we would move part of our equipment and get it set up and running and leave the rest back in Beijing. And so we are operate – produce from two sites until we know that the new site is stable. And in some cases, the more mature customers will want to compare the old wafers to the new wafers, but it’s going to be using the same equipment, the same raw materials and the same processes. So, we wouldn’t expect there to be any new differences. So, no, no, there shouldn’t be a disruption. There is some risk of that of course, but I think we feel positive about it. We’ve got a lot of good options. We’re looking at stuff. We’ve done this kind of thing before in our career. So it’s a headache, but we’ve always try to corporate with the officials of China and that’s why we have their respect and their appreciation.

So, just two quick one on that. One is should we expect some kind of incremental CapEx that will come late on the year, potentially get some color of what should we expect CapEx could become as you go for that part of transition. Second thing is it true that when you move from one site to the next some of your customers might have to re-qualify those substrates, I’m just trying to understand how sensitive customer are in terms of location production?

Yes, I think to answer your second part of the question, it definitely needs requalification. Customers are mission sensitive. So we do need to – but then we do requalification with our customers all the time such as we have a new source of gallion, new source of arsenic. So we are very familiar with requalification process while we do it to requalify ourselves looking at its critical parameters first and then we send samples quantity to our customers, once they qualify them we can start to run from the new facility. And as far as CapEx is concerned, Gary, do you want to answer that part of the question?

Sure, we don’t have any hard numbers yet whatever CapEx we do invest would be it’s going to be depreciated over approximately 27.5 years. So it’s not likely the move the needle from what we have today. We don’t have any concern about financing. We have existing cash. We also have our facility that we’re currently in which, as I said, if we totally vacated, we can sell that eventually and it’s worth millions and millions of dollars. So there will be some CapEx, but it shouldn’t move the needle from what you see today.

Okay, that’s all I have. Thank you. Great…

I think, let me coming from known financial point of view, I think the location that we are in prime area or will be the prime area for the Beijing metropolitan area, so the city government is going to move to nearby all our address. So, I think that real estate [ph] should be appreciate quite a bit. So although we may have to spend money to buy other piece of land and to construct a new facility, but it should be more than compensated by vacating and selling the present location.

Great, that’s all I have. Thank you.

And we’ll go next to Tom Sepenzis with Northland Bank.

Yes, hi, thanks for taking my question and congratulations on the quarter and the guide. I’m just curious, I don’t think I understood why – what is happening, why are you closing the indium facility?

We’re closing – well, we’re not closing the facility that the present location of the manufacturing location that we have in Beijing, the city government is moving the city government to a location closed by us. Such that they don’t like to see semiconductor industry nearby. So they are pressuring us to move along to a different location. But – so that’s why we have to move. And it’s not just AXT anyone that’s in the world called the hard manufacturing business is being edged out and they’re going to convert this region of the city into boutique offices and restaurants, they’re putting in an amusement park. So it’s the whole nine yards and we’re not being isolated or singled out. We’re one of about 3,000 companies in that area that are being respectfully asked to volunteer to relocate.

Okay. And then what kind of confidence do you have here for – what kind of visibility do you have going into Q2 because quarters tend to be lumpy and I’m just curious as to what gives you confidence as you’re going to rise your range here to 19.5% to 20.5% in June on the revenue side?

Well, Tom, AXT has sort of a set of procedures to reach our next quarter guidance. I think that comes from both sales as well as our financial model and sometimes we missed a little bit just like last quarter. We will guided a little bit lower range and we achieved a little bit higher, but it’s within I would say good confidence level is plus minus 10%. So if we are over 10%, we’ll probably preannounced, if we’re down 10% we’ll probably preannounced as well. And that’s a general rule. So, we do take put a lot of efforts into coming to those projected projections that will come to the guidance.

Great, thank you. That’s very helpful. I appreciate it.

We’ll now take your question from Orin Hirschman with AIGH Investment Partners.

Hi. How are you? Congratulations on the results.

Thank you.

I have just one question. Thank you. In terms of next quarter if the growth coming completely from $200 million sometimes completely from the indium phosphide business or is it some that’s coming over from the base gallium arsenide business?

I think germanium – indium phosphide, we did make sure that will show growth in our projection, gallium arsenide by the way should have an increased quarter as well.

In raw materials we’ll have an increase.

Yes, raw material actually will increase as well.

So its not one product, its several, like indium phosphide definitely going to grow, but we’ll get a little help on gallium and also raw materials.

Gallium arsenide…

Yes, gallium arsenide, yes, yes.

Can you just go back did you actually mentioned what percentage was on the indium phosphide business this quarter…

We’re having difficulty in hearing you. Can you get closer to the phone?

Yes, did you actually indicate what percent of revenue the indium phosphide business was this quarter?

I think we said its north of 30%...

Okay.

But we didn’t break it out.

Okay.

We say it’s more than 30% in the last quarter.

Okay, okay. Thanks so much.

You’re welcome.

We’ll now take your question from Jorge Rivas with Craig-Hallum.

Hello, guys, just a few follow-ups from us. So, first of all, what’s the timeframe for the relocation of the facilities from the Beijing? When should you expect to have that all finished up?

Yes, the first phase is end of 2017.

Okay.

We should stop gallium arsenide substrate manufacturing. We think that would probably vacate from the facility for indium phosphide and germanium probably by the end of 2018.

Okay, okay that’s good to know. Also I wanted to get more granularity on the gross margins and ask what was the impact or the benefit from the write-down that happened in the past quarter. We’re seeing an increase of about 11% quarter-over-quarter. So if you could break that down between the benefit or mix versus the impact on the write-down that took effect this quarter?

Well, the write-down would have a zero impact. If we wrote it down to the market price, which is what we did for lower profit market then we neutralize its negative impact. So, the improvement that we saw did have a swing from being very negative on raw materials in Q4 to being somewhat better in Q1. And that’s probably maybe three percentage points.

Okay.

Through the gross margin.

Okay.

We also just had – we’ve been working on manufacturing the concept of continuous improvement in yield and we got some help there, that I think it’s probably worth another may be 2% to 3%. And then we even had improvements in the indium phosphide yields.

All right.

So between increased revenue of indium phosphide plus improved yields in indium phosphide, then you get several percentage points on that. So as we break it down it may trend.

Yes. Okay, great. And then just couple more on indium phosphide. So we’re hearing from multiple sources that there are constrains in the optical supply chain that are probably going to last for a couple of quarters. So first all, I’m wondering if you guys are – you need to increase capacity. And that’s the first part of the question. And the second part of the question is that the optical industry tends to go through price or negotiations and price pressure tends to be very idiosyncratic of the industry. I’m wondering if you guys are exposed to that kind of price pressure in your indium phosphide business?

Sure. I think that’s a very good question. I think to answer the question about how much we’re preparing to grow. So let me demonstrate, we have been growing over 50% year-over-year we’ve been saying for the last two years. So we have demonstrated that we can grow over 50% year-over-year. So how much are we preparing to grow? Yes, I think we are increasing our capacity as we speak, okay. And we are also developing the six-inch capability. So we can – if anything that we can very, very efficiently do is increasing our capacity. As far as pricing pressure is concerned, we are having annual negotiation with our customers on pricing. However, usually comes up with higher volume. And so far we haven’t seen a whole lot of pressure on our material. As we also said, at this point, performance is probably important than price, and guaranteed volume also is very, very important. But that’s not to say that if you come up with a $2 million order and you say, well, Morris, can you drop the price a bit? Yes, we can definitely ask Gary to calculate it. We can benefit from the higher volume then we definitely can give discounts. But we’re definitely are not seeing the high pressure as we see in some of the mature products, I would characterize it say, let’s say, the latter part of the gallium arsenide volume increase, where you see a very matured product then the price just drops every year. So for indium phosphide we don’t see that.

Okay. That’s all from me guys. Thanks a lot.

You’re welcome.

We’ll now take a question from Sheldon Grodsky with Grodsky Associates.

Gentlemen, do you think you can maintain the 50% growth in the indium phosphide for another year or two?

Well, as the numbers get bigger, as the denominator grows, it’s probably harder to keep this above 50% going. It’s just a natural phenomenon of numbers as they get bigger. So, mathematically correct answer is no, we don’t. We think that it won’t be 50% again. But I think in our business model for 2016, we’re in the 40% growth range, or north of 40%. Can it reach 50%? May be can, but right now to be conservative, we’d say it’s not going to be over 50%.

Thank you.

Excuse me, I think that’s a CFO answer. You want to get the CEO answer? I will say this, okay, I mean I think we can handle the high usual growth, but we are just not modeling our business that way. Are we preparing for that? You bet. We are increasing our capacity. And because we know the technology well, we don’t have to invoke a very high CapEx to do that. And we are keeping check with our customers and some of these 5G if you were to increase very rapidly, who knows. As well silicon photonics, we are just seeing the start at the tip of the iceberg. So, I really wish you, I think if you model the business 50% or 45%, it’s a very good business model growth.

Let me ask one more question. Do you think that relocating your facilities is going to be very disruptive or do you think it will be a – you’ll be able to do that fairly smoothly?

Well, it’s a headache, I mean, I don’t like to move, but I think we have to. But I think given the time that we are aware of this move coming up to us, I think we should be able to execute a smooth relocation.

How far do you think you may have to move?

Well, we like to keep to nearby places, because it’s more convenient, and catching our employees, that’s easier too. But we like to keep it as close as possible. But some of the constrain also comes in from the fact that we are manufacturing gallium arsenide material, and arsenic is increasingly becoming a sort of a highly dangerous material even for China. So that will give us some limit as to the choice of places we can move to.

Thank you.

I think the distance is less of an issue than just being really organized, having the right people in charge of the program and taking advantage of the long timer origin that we have to plan for and get ready and execute it.

Thank you.

And it appears that there are no further questions at this time. I’d like to turn the conference back to the speakers for any additional or closing remarks.

Thank you for participating in our conference call. As always, please feel free to contact me, Gary Fischer or Leslie Green directly, if you’d like to meet with us. We look forward to speaking with you in the near future.

This concludes today’s call. Thank you for your participation. You may now disconnect.