Good afternoon, everyone and welcome to AXT's First Quarter 2023 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My name is Abby, and I will be your coordinator today. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Abby, and good afternoon, everyone. Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements regarding, among other things, the future financial performance of the company; market conditions and trends, including expected growth in the markets we serve; emerging applications using chips or devices fabricated on our substrates; our product mix; our ability to increase orders in succeeding quarters to control costs and expenses, to improve manufacturing yields and efficiencies, to utilize our manufacturing capacity, the growing environmental, health and safety and chemical industry regulations in China as well as global economic and political conditions, including trade tariffs and restrictions. We wish to caution you that such statements deal with future events are based on management's current expectations and are subject to risks and uncertainties that could cause actual events or results to differ materially. These uncertainties and risks include, but are not limited to, overall conditions in the markets in which the company competes, global financial conditions and uncertainties, COVID-19 and other outbreaks of contagious disease, potential tariffs and trade restrictions, increased environmental regulations in China, the financial performance of our partially owned supply chain 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 expectations. This conference call will be available on our website at axt.com through April 27, 2024. Also, before we begin, I want to note that shortly following the close of market today, we issued a press release reporting financial results for the first quarter of 2023. This information is available on the Investor Relations portion of our website at axt.com. I would now like to turn the call over to Gary Fischer for a review of our first quarter 2023 results. Gary?

Thank you, Leslie, and good afternoon to everyone. Revenue for the first quarter of 2023 was $19.4 million down from $26.8 million in the fourth quarter of 2022 and down from $39.7 million in the first quarter of 2022. To break down our Q1 revenue for you by product category, Indium phosphide came in at $7.1 million, reflecting market softening, particularly in data center, consumer and telecommunications infrastructure. Gallium arsenide was $5.0 million, reflecting the overall slowdown across a number of applications, particularly in China, germanium substrates were 1.4 million. Our germanium subject revenue was up slightly from Q4, and we have resolved the payment issue we described in the past quarters. Finally, revenue from our two consolidated raw material joint venture companies in Q1 was $5.9 million. In the first quarter of 2023, revenue from Asia Pacific was 68%; Europe was 18%, North America was 14%. The top 5 customers generated approximately 28% of total revenue and no customer was over 10% -- non-GAAP gross margin in the first quarter was 26.9% compared with 32.5% in Q4 and 33.8% in Q1 of 2022. For those who prefer to track results on a GAAP basis, gross margin in the first quarter was 26.3% compared with 32.1% in Q4 and 33.6% in Q1 of 2022. Total non-GAAP operating expense in Q1 was $8.7 million. This compares with $9.0 million in Q4 and with $8.6 million in Q1 of 2022. On a GAAP basis, total operating expense in Q1 was $9.5 million, down slightly from $9.6 million in Q4 of 2022. For comparison, total GAAP operating expense was $9.6 million in Q1 of 2022. The -- our non-GAAP operating line for the first quarter of 2023 was a loss of $3.5 million compared to the non-GAAP operating loss in Q4 of $256,000…

Thank you, Gary, and good afternoon, everybody Well, good morning here in China. As expected, revenue took a step back in Q1 as the inventory correction that we began to see in gallium as at late last summer, accelerated in phosphide applications. Despite lower revenue, we feel confident in our market position and strong customer relationships. We have continued to focus on manufacturing efficiencies, having increasing success in our recycling efforts, which benefit our gross margin performance in Q1. As we look forward, while the current demand environment remains dynamic, we are seeing positive signs that our revenue is stabilizing and that certain applications within gallium aside such as power amplifiers are beginning to show some improvements. This makes sense as these were among the first applications to experience weakness beginning in September of last year. Now, turning to our individual markets. Indium phosphide held fairly firm through January and then experienced a meaningful decline in February and March, most notably in the data center and consumer applications. We're not expecting an improvement in these applications in Q2, though they appear to be stabilizing. Hong applications, particularly in China showed some improvement in Q1. And if China moves forward with the national stimulus for an as has been discussed, it would likely provide a catalyst or upgrade cycle in China telecommunication infrastructure. As I mentioned, gallium arsenate demand appeared to be improving modestly; power amplifier and power lasers showed some signs of recovery in Q1. We also continue to be increased by the industry progress in microLED, as well as our own progress in preparing our business for this opportunity. We're already delivering 8-inch gallium as wafers to customers and generating modest revenue, while formal qualification for the flagship program with our large customer won't occur until sometime in the…

Thank you, Morris. Given the continuing inventory correction, we expect Q2 revenue to be between $19 million and $21 million. Product mix is likely to include growth in gallium arsenide substrates and continued weakness in indium phosphide. We expect our non-GAAP net loss will be in the range of $0.10 to $0.12, and our GAAP net loss will be in the range of $0.12 to $0.14. Share count will be approximately 42.7 million shares. This concludes our prepared comments. Morris and I will be glad to answer your questions now. Aby [ph]?

[Operator Instructions] Your first question comes from the line of Charles from Needham.

Just want to understand how you think about the revenue progression through Tononi3. It's a downturn year, but I try to see if we can find any historical precedent to try to get a sense of how this year is going to shape out. It looks like you're kind of guiding flattish revenue into second quarter of the year. Does it kind of make sense to you? Maybe the second half of the year, maybe you'll continue to bump along the bottom. That's my first part of this question. But the second half of this question is, I think historically, in a normal environment, Q3 tends to be slightly higher better than Q1. Q3 tends to be the peak quarter of the year. Would that be the case this year? Or you think that maybe it's going to be a little bit different given the severity of the downturn...

Go ahead, Morris. Let me take that.

Okay. I think certainly, I agree with you, Charles. I think that's the normal pattern. But I think we certainly see that for consumer product and the data center for indium phosphide because it's just got into the inventory correction 2 months ago or 3 months ago. So we expect it to continue. But we do see some activity, especially on HPT and power laser in China, especially. And so they saw stabilized last quarter, and we are seeing revenue modestly going up a bit. And that perhaps is an encouraging sign. But how strong they're going to continue for the next quarter? And how long this inventory digestion for indium phosphide consumer and data center will be it is hard to say because I think although everybody is expecting the inventory to be consumed, but I worry, I guess, about although how -- although the inventory may be down a bit, but how strong the recovery of the economy will be. In other words, will there be another leg to go if U.S. economy were to slip into a recession, and that could prolong the inventory on the demand recovery.

Yes. And Charles, I would say that we don't see revenue declining in Q3. And in fact, internally, I think it might start to tick up in Q3. And because the circumstances in the economy are so unusual right now, I would agree with Morris. It doesn't necessarily mean that Q4 will be below Q3. We don't know. So...

Got it. The other question I want to ask is on the cost side. Can you remind us again what was your CapEx for Q1? And can you also remind us what's the full year CapEx target for you in concise?

CapEx in Q1 was $2.7 million. And I think for the whole year, it will be below $5 million. So we'd really sort of put a lid on things. There was some stuff already in the works that crossed over into Q1. But in general, Morris and Gary have become Dr. no and Dr. no, we're not going to do that for.

Got it. It sounds like you're going to further put a break on capital spending for the next 3 quarters of the year, given that in Q1, you already spent almost more than half of the budget you have for the year.

Yes, that's the goal.

Got it.

There are some things that we have to do to stay in compliance with the building codes and regulations. But in general, we're re-existing.

Yes, got it. Maybe a last question. I want to ask you about the consumer. Definitely, we recently did hear some rumors about maybe the premium electronics company, they may be having second part whether to continue with under the display proximity sensor for the handsets. It feels like -- it sounds like they may be thinking about reverting back to guarding arsenide-based solutions, have you seen any of the signs that's really happening? And how should we think about that? I believe what I was talking about was the second consumer program, but any new data points for the third potential consumer program as of today?

Yes. On specific customers, you're talking about the proximity sensor. We hear the same thing. The immediate is probably going to be switched back to gallium VCSEL but it's still up in the air whether the detector will use an indium phosphide detector or a gallium asset detector. As we understand it, indium phosphide detector is much more sensitive, so you can use a smaller area, thus maintaining the smaller large or pie-shaped window on the phone. But at this point, we really have no visibility at all. So I think we should -- we are nervously waiting kind of the decision on what they will decide for the -- in the next few months. We do have one other customer in Taiwan, although they are fairly secretive and they are looking for something to run using in phosphide semi-insulating wafers. We believe is a detector for collision avoidance or not -- I mean, autonomous driving. But again, we're guessing what it is. But the -- looking at the pilot quality production they have purchased wafer so far and also the quotation we provided them for that application. I mean, it's still early. So those are probably the 2 consumer product that we're looking for. And obviously, I think Micro it's taking one step further into reality. I think although it will be launching late, we believe, but nevertheless, it becomes -- we believe it is -- it will come. And as I said in the script that we are making very good progress in terms of preparing for it, although we're not going to spend a whole lot of money, but we already built the line for them. And so, we're ready to ramp up production for them sometime in 24, late '20s. So for other samplings are already delivered to our major customers. And by the way, this major customer was giving us a facility tour in the last week or so, and they are very pleased we had a very, very good meeting.

Got it. Thank you, Morris. Thank you, Gary.

You're welcome, Charles.

Your next question comes from the line of Matt Bryson from Wedbush Securities.

First one is you're guiding for flat to higher revenues. But obviously, you're looking for that -- for the loss to increase a bit, is that mix? Or what else is -- or where else is expense going up?

It's mix primarily. We hope to keep expenses flat. And -- there may be a little bit less contributed below the line. So not sure yet. So...

And then I guess from a customer inventory perspective, everyone in the supply chain is struggling not just because the end demand is softer, but also because inventory is getting worked out of the system. Do you have any idea where your customers are in terms of that process? And how much do you think inventory rationalization versus lighter end demand is weighing on revenues right now.

Well, I think although gallium as we speak, is giving us more order. Like in Galil's say, HPT on lasers, when we visit our customers in Q1 or early Q1, it was -- or even Q4 of last year, there was just no order. And for HPT, we are starting to take thousands of wafers -- but compared to tens of thousand wafer is still only 20% of the peak, but at least it's a consistent order pattern. So we feel reasonably comfortable it's coming. And if you read into the conference script, they're talking about second half of the year will be better than first half, although they are still running 30%, 40% of their peak level. As far as power lasers concerned, it's just starting. We got -- we used to deliver thousands of wafer per month. It's now in the hundreds. It's 110. But we've got to wait the other months or so to see how sustainable it is. So, I think -- but it's difficult for us to tell is that everybody controls inventory because in this environment, probably everybody wants to squeeze the inventory and see if they can drive more cash out. And there's no fear because every supplier is more eager trying to get orders. So along with it, there are price pressure with that as well. So -- but I think the long term -- I mean, I'm looking at maybe 2 or 3 quarter horizon, MicroLED should be a driver. And I don't believe there's any reason why power laser for [indiscernible] because it's for industrial manufacturing. I think industrial manufacturing, the consumer market in China is coming back, I believe, because I see the streets are more traffic and more people. But I think when will it translate into industrial…

Just to summarize, more, I guess, what you're seeing is you're starting to see signs that [indiscernible] at least in the markets, you start -- there's demand and inventory has been worked down within non-phosphide is still going to take a couple of quarters before you figure out exactly where demand is just because you've got so much -- or there is so much inventory in the system. Is that fair?

Yes. In a way, that's what I'm saying but as I said again, as far as indium phosphide is concerned, because there are 2 ways we can look at the opportunity for us. I mean one is the existing market when they recover, that should be a big drive for demand. I think there's another one that is the new applications. As I said, we have a Taiwanese customer. They are making inquiries and making piloting runs on [indiscernible] but we don't know exactly what the application is. But from the looks of it, it's quite substantial in terms of volume -- so we're guessing it is for autonomous vehicle, but we just have to wait and see where we are getting that monthly order. So -- but the usual old customers, such as consumer products and data center, the traditional data center, yes, they are balked down in inventory. We're not seeing the orders yet.

Your next question comes from the line of Richard Shannon from Craig-Hallum.

And good morning to Morris in China. Let me ask a couple of quick tactical questions here, probably for Gary; both for the first quarter results and your outlook on the second quarter here. Can you describe what your -- or quantify what your China revenues did not just Asia Pacific but China only?

I'm happy to share it, but I don't have it in front of me. So maybe I can look it up and tell you I don't really.

If you want to look it up as more of a question here. Morris, going to the topic of data center. You talked about one of your previous answers here about a fair amount of inventory your customers admitted to here, it sounds like in the last quarter. Are you getting a sense of continued movements in that business and forward road map planning and stuff like that? Because I've heard of some potential reorganizations or something going on internally there. So I just want to make sure that you expect that to be a continuing business after what looks like an inventory burn.

Richard, well, I think they are very enthusiastic about the future product. We are -- we're engaging with them almost weekly on trying to solve their next-generation futuristic requirement material requirement as well as working with them. They are a very methodical and very good customer to work with. And so we don't see any reduced activity with them at all. I don't think they're going to be dissolving anytime soon. Actually, we do see new product development. I think it's for higher power and higher speed. But from the materials level, it's very difficult to tell, but that they're saying is for new products.

Thought process; that's good to hear. Morris, maybe if you can touch and add a little bit more detail of what you're seeing going on within micro LED. And I guess, when do you expect more larger orders coming here? And kind of what are the stages of progress to getting to what I think you referred to as potential high-volume production late in '24?

Yes, I think we are skewed to get qualifications done in the next I would say 3 to 4 months. In other words, we're ironing out all the specifications the customer are needed, how many ingots and how many wafers they need for qualification and they just did a site visit for us. So I think both parties are fairly happy. I mean, especially the customers are very impressed with our facility. I mean, I think, I mean, one of the comments was interesting, although -- they're saying, "Wow, you guys are doing so much 6S practice in manufacturing and all the SBC and order controls. And this looks like the European semiconductor manufacturing plant, but you are in China. So I took it as a compliment. So I think we are all happy. But as far as the volume ramp is concerned, yes, we always -- we were told it's going to ramp sometime late in 2024.

Okay. And in the context of the forecast you're getting from this large customer or maybe large customers for 8-inch gallium arsenide for micro LED, you said you've got a pilot line set up already. If the forecast hold true to what you're hearing you're seeing from them currently, when would you have to greenlight a second tranche of equipment to support higher volumes?

Well, I think it's -- you can maybe call it fortunately or unfortunately. I mean we -- I think we spent most of the money already. I think we're ready -- because I think our original planning was probably 2x the volume before. So -- and also, infrastructure build, you cannot do sort of smaller incremental build. So we spent more money on building. That's already done. But as far as the equipment is concerned, we feel fairly comfortable to fulfill their first tranche production in late '20 for starting without purchasing any further new equipment.

Okay, fair enough. I'll ask a couple of questions and Gary and jump out of line here. First of all, Gary, did you are able to find those numbers in China.

Yes. China was $8.1 million in Q3, Q1.

Okay. And then is this expected to be no worse than flat in the second quarter?

I think it will be up a little bit in the second quarter.

Okay, good to hear. Last question for you, Gary, is just thinking about your balance sheet here. And I think one of the messages you portrayed last quarter and kind of repeated here is about trying to squeeze some cash out of working capital. Obviously, inventory went up a little bit. You explained that about the recycling dynamic here. As you look throughout the year with the CapEx plan and other things here, how do we think about where cash goes directionally? Is this a year where that goes up directionally down, and this is obviously independent of whatever debt level you have as well. How do you see that working cap this year?

I think for the next couple of quarters, I would expect it to be relatively flat. It could move up or down a little bit. But typically, with our business model, when we when we're in a down cycle, we can rely on inventory, we tighten things up. And so the cash burn is not that high. When we grow a lot, when we grow quickly, that's when cash can be cash flow negative because we're investing so much in the growth process. So -- so yes, that would be my comment on that.

Okay, that's fair enough. That's all I need to hear. That's all the questions from you guys.

All right. Thanks, Richard.

There are no further questions at this time. Dr. Morris Young, Chief Executive Officer, I turn the call back over to you.

Thank you for participating in our conference call. This quarter, we will be presenting at the 20th Annual crack Halle Institutional Investors Conference in Minneapolis. As always, please feel free to contact me, Gary titer or less Green directly if you would like to set up the call with us, we look forward to speaking with you in the near future. Bye.

This concludes today's conference call. You may now disconnect.