Good afternoon, everyone, and welcome to AXT's Third 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 Christina, and I will be your coordinator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Christina, 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 move manufacturing yields and efficiency, and 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 and their products. In addition to the factors that may be discussed on this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at axt.com through November 2nd, 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 third 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 third quarter results. Gary?

Thank you, Leslie. Good afternoon to everyone. Revenue for the third quarter of 2023 was $17.4 million, down from $18.6 million in the second quarter of 2023, and down from $35.2 million in the third quarter of 2022. To break down our Q3 2023 revenue for you by product line, Indium phosphide came in at $4.9 million, reflecting a stabilizing market with modest improvement in data center applications, gallium arsenide was $4.2 million. We're pleased to obtain our first permits to ship gallium arsenide substrates during the quarter and continue to work through that process on behalf of a growing number of our gallium arsenide customers. Germanium substrates were $1.2 million, up from the prior quarter, also reflecting our progress in obtaining permits on behalf of our customers. Finally, revenue from our two consolidated raw material joint venture companies in Q3 was $7.0 million. In the third quarter of 2023, revenue from Asia Pacific was 82%, Europe was 14%, and North America was 4%. The top five customers generated approximately 31% of total revenue and no customers over the 10% level. Non-GAAP gross margin in the third quarter was 11.3%, compared with 9.8% in Q2, and 42.2% in Q3 of 2022. For those who prefer to track results on a GAAP basis, gross margin in the third quarter was 10.7%, compared with 9.2% in Q2, and 42.0% in Q3 of 2022. The primary drivers affecting our corporate gross margin in Q3 were volume, product mix and an improvement in our raw material business gross margin. Beyond the near term, we remain confident that we can get back to the mid-30% range as the environment strengthens through higher overall volume, more favorable product mix, and the benefits of our recycling programs, along with continued efficiency improvements throughout our business. Moving to…

Thank you, Gary, and good morning, everybody. Well, this is China, we are evolving. The demand environment in Q3 remains stable, and we were pleased to see some encouraging early signs of improvement in the data center market, resulting in modest higher indium phosphide revenues. We still believe that inventory digestion across our markets will continue through the end of the year, and in some cases may persist into 2024, but we believe the worst of the declines are behind us, and we're looking forward to the new year with optimism. We have worked diligently throughout 2023 to advance our innovation in large diameter substrates and to support and nurture emerging opportunities across our portfolio. In indium phosphide, as the data center market prepares to move to 800 gig data rates, we are seeing increased development around next generation silicon photonics devices, an Electro-Absorption Modulated Lasers, or EML, for higher speed data center transceivers. The growing adoption of AI technology is providing a strong catalyst for the industry transition to higher speed, and we are excited to be engaging with customers for new opportunities as the market expands. Our proven performance in optical devices for the data center coupled with our success in developing 6-inch indium phosphide substrates is putting us in a solid position for both current and future generation of data center optical devices. We're also seeing positive development activities in both consumer and healthcare applications for indium phosphide. This further reinforces our conviction that we are in a very early stage in the adoption of this material across a multiple – multitude of emerging applications. Our early success not only validates indium phosphide as a material of strategic importance, it validates AXT as a world-class supplier to Tier 1 companies. We believe that the next two years…

Thank you, Morris. In keeping with our comments today, we expect Q4 revenue to be between $16 million and $19 million, we expect our non-GAAP net loss will be in the range of $0.13 to $0.15 and GAAP net loss will be in the range of $0.15 to $0.17. Share count will be approximately 42.6 million shares. Okay, this concludes our prepared comments. Morris and I would be glad to answer your questions now. Christina, operator?

Yes. [Operator Instructions] Okay. And your first question comes from the line of Richard Shannon from Craig-Hallum. Your line is open.

Well, hi, Morris and Gary, thanks for taking my questions and Morris, thanks for getting up so early in China this morning. Let's say let's ask a question on the guidance here for the quarter, just to kind of get the assumptions built in here. Obviously, the midpoint here is roughly flat with the third quarter, which makes sense given your comments about stabilization. Are there any unusual trends within the substrate buckets as well as raw materials to get to that point? Are they all roughly similar to flat sequentially?

I don't think there's much ripples or nuances. It's kind of business as usual, frankly. So yes, I don't have a lot of other color to add. So…

Yes, I think the only thing we – yes, the only thing I may add is, gallium arsenide is still – we're still working through how many permits can we get. So, I mean, the more the permits we can get and perhaps we can increase that slightly, but it's not a very significant increase.

Okay. And then, I guess, specifically, I want to ask on indium phosphide, given the importance of that revenue stream here. You're talking about the strength in data center, but hadn't mentioned anything about consumer telecom or some of the other markets there. So maybe going to kind of delineate by the submarkets that are driving that into the fourth quarter. You are still expecting data center to grow, and I guess, specifically, I want to touch on the fact that, I think, your large customer in that area has transferred that transceiver business to another buyer. And so I want to get a sense of the degree to which that business will sustain.

Gary, you want to take that or so maybe let me do it.

I can start, and you can join if you want. So data center is a strong sector for indium phosphide. Our Business Development guy, Tim Bettles, is kind of upbeat about it, frankly, so that's positive. The Jabil transaction, we talked about this with Tim today, and he actually feels it's a good decision. So basically, it will allow Intel, in his view, okay, to focus on their core strengths, and it shouldn't detract at all from our revenue stream to Intel, and if they grow and improve, it will increase. So Jabil becomes basically a systems integrator, that's what they do, is assemble stuff, and Tim thinks it's a good shift in the business model, but of course, it's our opinion from AXT, and clearly, it's Intel's decision. But we don't see it as a negative at all. We see it as a positive.

Okay, fair enough. Maybe just the last topic on indium phosphide here, just want to get a sense of continued traction with consumer electronics applications, whether it's your big historical customer or anyone's coming in here, just some thoughts on how you expect that to go over the next few quarters.

Yes, we’ll continue to work with our customers, although it is still early, but we have sent a sample to at least two customers who potentially is going to decide how much to ramp and what's the timing for ramping, but we are in the early stage of qualification. But that application, I understand, is for consumer applications and is scheduled to launch, if it is successful, in Q3 of 2024. So I think that activity, is still – I believe, given the market is so dire, I think it's active, and people are planning for next generation application for indium phosphide.

Okay, fair enough. Two more questions for me. I'll jump out of line. First one, just following up on the comments on micro-LED, I may have missed something in there with the spotty line here, but I guess my general question here is, how is the environment here and the importance of this to your certain customers out there relative to last quarter is? Are things holding in there in terms of timeframe and size, or is there more uncertainty here as the macros certainly seem to get worse over the last 90 days?

Well, I think the intention for customers to proceed is firming up. I do believe they're coming. I think the only question I have is what the volume is going to be and how fast it's going to ramp up to the next phase, et cetera. I mean, we're given the initial ramp-up volume production, I think, it's somewhere around mid-2025, and of course, it's going to ramp gradually from next year onwards into the first stage of production is 2025, I think. And I think that timing, although it slipped from early predictions, but nevertheless, I think, the customer is committed to go ahead with it.

Okay. And the last question for Gary is on cash flow. I think last quarter you were talking about trying to generate some positive working capital here, and I see inventories are down slightly, but perhaps you're expecting or hoping for a little bit more. What's your general thought here as we look on operating cash flow and working capital benefits this quarter and into the near future?

Well, first of all, in terms of inventory, I have gone back with my coworker and sort of looked at some historic inventory levels when maybe we were doing $25 million a quarter, $30 million a quarter. So it illustrates to me that we should be able to take inventory down. So I am still targeting to do that. I think at a minimum, we should shrink it by at least $10 million. Reciprocally, it's easy to do that if our run rates are high, and it's harder to do that when our run rates are so frankly modest right now. So, I feel confident that we can do it and that we will do it. And if you look at our overall, like I was looking at the cash generated from operating activities in our internal cash flow thing, it's negative $280,000 for the first nine months of this year. Because you are adding back depreciation, you are adding back stock comp, and there are some low-hanging fruit items on the balance sheet. Inventory is one, accounts receivable is one. Especially in China we have three long day sales outstanding. So I'd like to bring that in. So yes, I think it's okay. And I will, of course, be delighted to bank the IPO money. But in the meantime, I think, we're safe.

Okay. Fair enough. That is all for me, guys. I will jump out of line.

Thanks, Richard. Christina, any more questions?

Yes. So there are no further questions at this time. So I will turn the floor back over to Dr. Morris Young.

Thank you for participating in our conference call. We will be presenting at the Needham Growth Conference in January, and looking forward to seeing many of you there. As always, feel free to contact me, Gary Fischer or Leslie Green, directly, if you would like to set up a call with us. We look forward to speaking with you in the near future.

Thanks, Morris.

Thank you all.

Thank you. And this does conclude today's conference call. You may now disconnect.