Good afternoon, everyone and welcome to AXT’s Second Quarter 2020 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My name is Liz and I’ll be your coordinator today. [Operator Instructions] I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Liz, 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 and succeeding quarters to control costs and expenses, to improve manufacturing yields and efficiencies, to utilize our manufacturing capacity, the schedule and timeliness regarding our relocation, 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 and 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 or other outbreaks of a contagious disease; potential tariffs and trade restrictions; increased environmental regulations in China; market acceptance and demand for the company’s products; the financial performance of our partially owned supply chain companies and the impact of delays by our customers on the timing of sales of their products. In addition to the factors that may be discussed in this call, we refer you to the company’s periodic reports filed with the Securities and Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at axt.com through July 22, 2021. 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 second quarter of 2020. 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 second quarter results. Gary?

Thank you, Leslie and good afternoon to everybody. Total revenue for the second quarter of 2020 was $22.1 million by comparison revenue in the first quarter was $20.7 million and revenue in the second quarter of 2019 was $24.8 million. Of our total revenue substrate sales were $16.9 million in Q2 compared with $16.9 million in the first quarter and $20.6 million in Q2, 2019. Revenue from our raw materials joint ventures was $5.3 million in Q2 up from $3.8 million in Q1 and $4.2 million in Q2, 2019. In the second quarter of 2020 revenue from all of Asia Pacific was 70%. Europe was 19% and North America was 11%. In the second quarter one customer reached 10% of revenue and the top five customers generated approximately 30% of revenue. Gross margin in the second quarter was 30.6% up from 26.6% in the prior quarter. The improvement in gross margin was due to a combination of higher revenue some improvements in manufacturing as well as strong performance from one of the two consolidated raw material companies. By comparison gross margin was 34% in Q2 of 2019. Total operating expenses in Q2 were $6.3 million up slightly from $6.2 million in prior quarter. Total stock compensation expense for the second quarter of 2020 was $640,000. Operating profit for the second quarter of 2020 was $478,000 compared with an operating loss of $634,000 in the previous quarter that is a swing of $1.1 million which is a good shift. Operating profit in Q2 of 2019 was $2.3 million. Other income net for the second quarter of 2020 is a gain of $1.4 million. This includes a net loss of $168,000 from the partially owned companies in AXT supply chain accounted for under the equity method. A foreign exchange gain of $52,000…

Thank you, Gary and good afternoon, everybody. Amidst the backdrop of unprecedented global change AXT substrate material continues to have increasing relevance in the technologies and applications that are likely to define the next decade. We are encouraged to see growth in strategic applications like 5G which not only drives our growth but also functions as the catalysts for number of related technologies. We saw this most clearly in our indium phosphide sales in Q2. We had expected to take a step back following strong quarter in Q1 instead demand for indium phosphide was against drop [ph] in Q2 allowing us to deliver high end of our revenue range and outperform earnings. We believe that indium phosphide is being used in 10G and emerging 25G laser interconnects or 5G base stations. Growth in the 5G network construction present a net new opportunity for AXT. We don’t yet know how big it will be. But we know that it is beginning to drive both front haul and back haul applications and it is also likely to continue to fuel a healthy prong [ph] market as the two technologies are very closely linked. Further, AXT is well positioned to supply into all of the major supply chain for 5G and its related applications. We believe that our growth to-date demonstrates the compounding value proposition that our deep indium phosphide expertise represent for our customers. Growth in 5G is also driving greater bandwidth requirement in the data center. In Q2, we also saw healthy demand for indium phosphide for data center applications. Silicon photonics technology provides a number of advantages such as lower power consumption and increasing bandwidth and data transfer capabilities. This coupled with surge in consumer demand for high speed broadband services, a driving hyperscale cloud and large enterprise data centers…

Thank you, Morris. As Morris discussed the demand environment for our products seems to be improving with a number of growth drivers intact. As such we expect to see revenue in Q3 of between $23.5 million to $24.5 million. We believe that our net profit will be about breakeven. We won’t have the help in Q3 of a grant in China. But that is offset by increased revenue. Growth is good, so we can deal with that. Share count will be approximately 40.750 million shares. Okay, this concludes our prepared comments. Morris and I will be glad to take your questions now. Operator, Liz?

[Operator Instructions] our first question comes from the line of Richard Shannon with Craig-Hallum. Your line is now open.

Morris and Gary, thank you for taking my questions and congrats on the nice quarter and guide here. I guess my first question from a financial point of view, Gary you had an awfully good gross margin from well what I had modeled here. You’re talking about some mixed shift and I think some manufacturing efficiencies. How should we think about the third quarter number here and what’s implied here in terms of any mixed shifts and continued manufacturing improvements?

Okay, in the third quarter we’re pretty confident that it’s going to continue to increase go upward into the right. It’s not going to be like a super high jump but it’s going to continue to trend upwards. We’re still seeing that mid-term we hope we can get back into the mid-30s. We think that’s reasonable and expect that we can do that just not quite sure how long it will take. As Morris did mention about some and significant opportunities for indium phosphide that’s beneficial for us in terms of mix and that will be part of what drives the number in the right direction. So it will be up a little bit again next quarter. Part of the reason that probably we were ahead, what your model said Richard because you know the revenue was little bit stronger than we thought in the beginning of Q2 and so, you know more revenue is a big help in gross margin because there’s a fair amount of fixed cost in our cost structure. Okay, go ahead Richard, any more questions?

Yes, few more. Thanks for that. So I think if I heard your language correctly both of you talked about data center, picking up more in the fourth quarter. It seems like you’re suggesting it was helpful in the second and maybe in the third. Did you specifically call out growth in the fourth and if that’s the case, is this from your consistent longtime large customer? Do you have new customers in here or if you can help us understand the dynamic here by calling out the fourth quarter?

I think indium phosphide will continue to grow in third quarter but fourth quarter will definitely be other up quarter for this data center connectivity business. So let me answer this way, this is a customer that we have known but we have not sold directly to them previously. We are in the path of qualifying with them and of course you know we cannot specifically comment who they are because we’re under NDA. But I can let you know that our view is that, there’s a huge impact because of the Coronavirus on cloud computation. So this is a clearly a strong and ongoing growth for now and growth is going to accelerate and this is dramatic culture event. I think is going to continue for the foreseeable future. So that means, it’s good - if it’s going to grow - good growth for our customer and the result is that, silicon photonics becoming increasingly strategically important in data center connectivity and this is a multiple year opportunity and we will continue to grow with it. And the qualification position us to increase our market share in the marketplace, which is we’re already growing nicely and all of this cloud players are going to put their foot on the gas pedal, we believe and we’re agnostic as you know that we should be able to sell to everybody. But specifically, we do are going to make [ph] qualifications with specific customers. So we’re hopeful that we can increase the market share with this particular customer. But also, we can sell more into many installations and we believe this rigorous clarification and mentioned previously, will get us to other Tier 1 players. We expect the similar level certification and maturity to fund their supply alliance. So this is not only good for us, but also with this trending into serving the first tier customers will get us to be able to play into other emerging applications such as the healthcare and other applications which all have Tier 1 customer demand that will increase the volume of indium phosphide application to a very much unprecedented volume applications for indium phosphide.

Great, very interesting comments Morris. I may jump out of line for my last question and come back to follow-up on that one, very interesting topic here. But I did want to ask a question regarding your commentary about making your manufacturing processes more rigorous. Can you help us understand what this means in terms of cost and OpEx, over what time period you expect this to have an effect and is this, can you help us understand what’s driving this? Because obviously quality is important in general always has been here. What is the impetus and where do you need to go with this more rigorous manufacturing process?

Sure. As you know, when you move up the food chain to Tier 1 customers. They obviously - number one requirement is very highest quality standard and fortunately, we have very good quality in our indium phosphide inlet [ph] properties such as dislocations and you know the surface polys, we have a very good high-quality standard. But what we perhaps need to improve is seeing our manufacturing line we need to implement a lot of for instance SPC control. We need to follow certain protocols to serve the customer to give them heads up. If we have any improvement in our quality, we need to communicate ahead of time and we need to also improve our ability to monitor our quality on line basis. So you can perhaps imagine this is an increased cost because we probably need to buy some sophisticated testing equipment. But on the other hand the Tier 1 customers. They also more consistent and in our experience it’s also as they don’t make mistake. So we can expect, if we do adhere to the good quality standard, we will have more return the material because there’s miscommunication between customer and supplier and as you know, when we you get problems with customers it’s always, the supplier for the bill [ph]. So we do believe that we’ll get ourselves more engineers and trainers and managers to monitor the progress and actually more communication with - and customers we have to go through really rigorous training as well as fitting to their computer ordering systems. So that, there will be less mistake and they are very predictable. But once we get regarding, we got locked onto the more automated ordering system and quality monitoring system. We have many portables that we need to connect to. So it’s more sophisticated. But I’m glad we are almost through all this requirements. I do believe once we get in, that will elevate AXT to a higher level which we believe that most of the Tier 1 customer required this kind of service anyway. So it’s going to be a good thing for us.

Okay, let me under run a couple things that - more test on. I would say that from a big picture standpoint. These particular customers we’re thinking of -- they want more transparency, they want more data. So we have to figure out how to do that properly. The good example though is a change in the manufacturing process which could be a very small change in which case we wouldn’t in the past necessarily have notified some of the customers. But now if we make even small changes we have to step up and be transparent about that and let the [indiscernible] workers and things like that. And we Statistical Process Control, SPC, we’ve been using it for years. But now this particular customer specifically couple of customers have said, but we also want you to do this with your SPC and that with you SPC and so they brought you the scope and the depth. So we’re very excited about it and we think it’s going to make us an even better company and it’s a fun process and it’s a lot of enthusiasm within the ranks of the company.

Excellent. I appreciate all the detail. I will jump on the line.

Our next question comes from Gus Richard with Northland. Your line is now open.

In terms of some of the new applications you highlight might drive LED and health monitors etc. which ones do you expect to start to see revenue from, the first?

We’re running parallelized on that in all of them. But we think the first to come online for revenue regular volume production is probably from data center business.

Okay and then just touching on the germanium business. How is that trending? It seems to be just any color there.

What business you’re talking about?

Germanium?

Germanium. Germanium is kind of flat and it’s slightly down this quarter. We see it’s probably going to be sort of meandering around this line and not dropping significantly either but it all depends upon whether there are satellite launches. And you know satellites launches are fairly consistent. But sometimes the customer have one larger [indiscernible] and they will buy more [indiscernible] out of question whereas they don’t and it is not a, let me say a focused business for AXT as of now, right now anyway. But if what’s that, the constellations satellite covering the whole web [ph] infrastructure if that went to build then obviously there’s going to be a lot more opportunity for germanium. But as of now it’s going to be a $2 million to $3 million per quarter business.

Okay. And you’re referring to like SKYNET and SpaceX is doing.

Yes.

Okay and then on probably on the raw materials business. Do you expect that the hold in flat moving forward that business seems to be pretty strong and is that still being driven by OLED?

I think we’re going to see from our joint venture, they can see through Q3. They think Q3 it would be a pretty good strong quarter but they don’t have visibility for Q4.

Okay, got it. All right. Thanks so much. I’ll jump out of line.

Our next question comes from Quinn Bolton with Needham. Your line is now open.

I wanted to follow-up on Richard’s question about the datacenter application. First, is this the beginning of what you think is a sustained ramp with this customer or do you see it as kind of a shorter term one or two quarter project that would then tail off after some period of time.

Well in Q2, we have not started. We will start to see some revenue come in Q3 and our customer telling us. It’s going to be a ramp for Q4 because they got to doing some inventory. So it’s going to be a consistent performer for the rest of 2021 and it’s obviously if 400G becomes adopted more rapidly as we expect it and data center grows will definitely pickup their business demand. So to answer the question, I mean it’s definitely going to be an uptick in quarter in Q3. But a big quarter in Q4 because of inventory build and in over 2021 but we believe this is going to be a more consistent revenue driver for us.

I think you’ve given us a couple of hints. But just wondering it sounds like this is a silicon photonics based 400 Gig optical module product that you’ll be shipping lasers into or the indium phosphide substrates for the lasers.

Yes, but 100G we’ll also use - we’ll deliver this mainly for 100G and 400G.

Oh, so it’s both 100, 400 Gig.

Yes.

Got it. And then as I talked about the mini LED opportunity on the call, just wondering what do you think the timing of that going to higher volume is.

Well we think the opportunity probably is going to be more towards 2022 and I think later we got some samples in the qualification line. But I think our customer probably still got a few things that need to be ironed out such as sorting and the replacing of this very time related [indiscernible] and obviously we think this is a great, great opportunity but we still sort of early. I mean as you know we believe, we have very strategic advantage in tackling this business because we are more of the free western high-quality substrate manufacturing in the world. We are the major LED six-inch supplier to one of the German LED makers and these micro LED customer is proposing to use, they need not only high quality, but also, they have very high volume and they also need very competitive price. I think if you want to combine the three on top of it, the customer probably is also thinking about how you’re going to manage the upstream supply chain such as (pBN) crucibles and gallium agnostic [ph] and if you combine all these things we are ahead of the competition. But obviously this is still early. I will not declare victory and we’re working very hard trying to be a supplier in that business.

Got it and then just for Gary. Gary you mentioned that Beijing JV we’re more profitable and with this higher taxes. Do you expect the profitability of the JV to kind of step back down to more normal levels in Q3 and beyond or any further comments you can make by the JV profitability?

We think those two companies are going to continue to be profitable. We see jumping around a bit from time-to-time and they’re not that great at forecasting. It’s not their strength and so we don’t press them for too far out. But so yes, they’ll continue to be profitable. I’m not sure where the tax thing is going to settle out. But I think 550 to 650 is probably close. We did have an extra charge in Q2 because retroactively we had to pay a tax on a rebate that we got like a year and half, two years ago. So sometimes that happens in China. They even forgot we want you to pay taxes on this, so.

Got it. Okay. Thank you.

Yes, they’re looking good. They’re going to be profitable.

Great.

Next question.

Our next question comes from Hamed Khorsand with BWS Financial. Your line is now open.

So first off, could you just quantify the current environment that you’re seeing for indium phosphide with the data center and 5G compared to the last cycle you saw. You think, as far as the demand you’re seeing, you think that this is towards the end of the cycle or you think you’d view it’s really at starting point?

I definitely think this is the beginning. I think we’re starting to see the 5G applications just starting. As you know, I saw some report that say the base station in China is 600,000 for this year and next year. It’s going to drop up to 1.6 million base stations per year in 2022 and 2023. And so I believe this is only the beginning. But this is only China, what about Europe and what about United States. As you know that we are, we’re the substrates supplier. So no matter where you’re going to be built a base station, you need indium phosphide substrates and also you need five optic connectivity. As far as data center is concerned, I think we’re getting into a new trend of growing. I believe data center will definitely keep on growing. However to improve - you can increase switching speed so perhaps you need less devices. But I think fiber optic part of the silicon photonics it’s going to enjoy extra growth opportunity that is, when you’re down to 40G or below, you can still deal with that kind of photonics connection with actual [ph] cable and maybe gallium arsenide [indiscernible] with plastic fiber. But as you go upping speed, you need to consume, less power, -- data transmission reliability and transmission distance you need. So indium phosphide single mold fiber is absolutely needed and then we also know that silicon photonics where you get to higher speed because of [indiscernible] vendor kind of switching mechanism and we’re able to compete very well at higher, higher frequency rate. So although you know so there are two level of growth opportunity, we believe that we can enjoy one is that with Coronavirus everybody is complaining about bandwidth is not big enough and then everybody wants instant connectivity and you now have a layer on top of it 5G which will increase the data traffic again and then again you add onto it, the work from home and then the speed is going to be higher and the data center is going to get bigger. So I believe there are many multi layers of benefit which will benefit silicon photonics as well as indium phosphide.

So why, if you have so many different endpoints that are doing so well. Why is revenue not anywhere close to what you were doing in the last cycle where you didn’t have these many endpoints available to you?

I’m not so sure Hamed you’re right. I mean, I don’t recall the revenue level. But I can tell you over the last 10 years, we grew our indium phosphide revenue by effect of 20. All right. So but that’s a real growth. But quarter-to-quarter you may up and down, for instance last year sometime we had big Huawei order, we didn’t get it for many quarters. So quarter-to-quarter it’s difficult to say this particular quarter got to be higher than the last quarter. But overall the other thing I can tell you is that, again this quarter indium phosphide is equal to both gallium arsenide, semis with semiconducting combined and we again believe next quarter and the quarter after indium phosphide is going to continue to grow, that we have the visibility of and gallium arsenide, we think it’s going to be okay, but we don’t see the growth. So if I were to predict that indium phosphide will definitely surpass gallium arsenide as the revenue contributor for our business in Q4 and beyond. But of course you know next year who knows maybe micro LED will stop coming, [indiscernible] will stop coming and gallium arsenide has not [indiscernible]. So don’t kick it, right. But it’s good. You have one product line growing and the other one growing with it. So let them compete us, number one.

One thing I would say to add is, the opportunity that we are into now. It really wasn’t in full production in Q2. So as we start to ramp in real production in Q3 and then even more in Q4. I think the dots will get connected. So it stands to staging.

Got it. Okay. I appreciate it. Thank you.

Our next question comes from Dave Kang with B. Riley. Your line is now open.

Speaking of Huawei, so whatever happened to their follow-on?

We haven’t seemed to yet. So we’re waiting patiently. No, we don’t have any order from Huawei in this month.

What’s been the message from them? I mean, is it coming or is it pretty much dead or what’s the status?

Our salesforce has been in contact with them. I think the feedback is still they like our product. They like our quality. They like our service. But one thing their management message to us, is they don’t like the fact that we’re US Company.

Afraid, could be a part of decoupling process?

I’m - hope not. And France [ph] under the current law, we can supply them. We would definitely treat them like a customer. We serve them. If we don’t violate the laws and we don’t, we not. But the other thing I think I would like to remind you is that, indium phosphide substrate supplier there’s not a whole tons of it. And you cannot go to the street corner and order indium phosphide from the other supplier. There’s only three. It’s us, Sumitomo and JX. And the third supplier are not even using the good quality VGF technology. So I don’t know, I think and definitely it’s a challenge and hope we can work it out and as I said again, that’s not whole lot of supply line and capacity. It is also a consideration and we’re definitely eager and ready to serve whoever wants to use good quality indium phosphide substrates.

Got it. And then regarding fourth quarter. I know you’re not giving official outlook. But since you talked about this new data center customer be qualified and expected to ramp in fourth quarter. Could there be enough to off seasonality and maybe even fourth quarter be up sequentially or still going to be down?

Dave, that’s our plan. We think potentially fourth quarter. I mean it’s still early. But we think we - trend of course [indiscernible] in fourth quarter.

So Dave, [indiscernible] listening. Traditionally we do tend to go down in Q4. So you guys all expect that and there’s no sense trying to speed between the lines and just flat out. We think we’re going to grow at three quarters and there’s going to be a change for at least this calendar year or so.

Can you remind us why fourth quarter is seasonally soft, is it mainly because of PONs or is there something else?

Dave, let me give you the analysis. First of all, the fourth quarter have the Chinese national holiday October 1, right? Second of all, we lost half of month in December nobody works beyond December 15 and so the first quarter is traditionally slow for us and then on top of it. A lot of this product line happens in the fall. So we’re in beginning of food chain, so when Q2 or Q3 is supposed to be everybody ordering stuff and then make it build in Q4 and then sell into the market and then Q4 everybody take a breather. So but we do have some visibility from our customers they’re expected to run. They’re talking to us about the possible capacity. So we’re preparing ahead of time, so hopefully that we can meet the demand. But I think hopefully according to our calculation and we should be able to grow even Q4 of this year.

Got it and Gary just on numbers, just wanted to clarify. If I heard them correctly. I heard deprecation is 976, but the I didn’t hear CapEx, what was the CapEx?

I think $4.3 million.

4.3. Okay, you think it’s going to remain kind of elevated because of you’re in expansion mode or how should we think about CapEx going forward?

I think it can be in that range for another couple quarters. The difference is, it’s a little bit less than - it’s not so much facility stuff as some equipment stuff. We’re ordering more furnaces. We ordered testers that Morris had alluded to test indium phosphide stuff. So but you know it’s - all in all the numbers look very, very similar in terms of cash to 2019 and in 2019 the total net burn was $3.2 million. So we feel comfortable with cash, so yes.

All right, great. Thank you.

Our next question comes from Richard Shannon with Craig-Hallum. Your line is now open.

All my questions have been asked. You can take me out of the queue. Thank you.

I’m showing no further questions in queue at this time. I would like to turn the call back to Dr. Young for closing remarks.

Thank you, everybody in participating in our conference call and we’re participating in several conferences many of you are aware number of conferences that we’re participating. So but if you need time to connect to the management please contact Gary Fischer or Leslie Green for - here we go. We’re going to participate in the Annual BWX Growth and Value Summer Series virtual event, August 12th. The Needham Virtual SemiCap and EDA Conference at August 13. And Jefferies Virtual Semiconductor IT Hardware and Communication Infrastructure Summit on September 1st and September 2nd. As always please feel free to contact me, Gary or Leslie. If you need to speak to us. Thank you very much. Bye now.

Ladies and gentlemen. This concludes today’s conference call. Thank you for participating. You may now disconnect.