Good afternoon, everyone, and welcome to AXT's Fourth Quarter and Fiscal Year 2023 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. My name is Eric, and I will be your coordinator today. [Operator Instructions]. I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Eric, 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 and 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 February 22, 2025. 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 fourth 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 fourth quarter 2023 results. Gary?

Thank you, Leslie, and good afternoon to everyone. Revenue for the fourth quarter of 2023 was $20.4 million, up from $17.4 million in the third quarter of 2023 and down from $26.8 million in the fourth quarter of 2022. To break down our Q4 '23 revenue for you by product category, indium phosphide increased sequentially to $5.4 million reflecting a stabilizing market with continued improvement in artificial intelligence, ponds and data center applications. Gallium arsenide also grew to $6.0 million with excess inventory largely worked down and certain applications showing improvement. Germanium substrates were $1.1 million, down slightly from the prior quarter. Finally, revenue from our consolidated raw material joint venture companies in Q4 was $7.9 million. In the fourth quarter of 2023, revenue from Asia Pacific was 77%. Europe was 16%, and North America was 7%. The top 5 customers generated approximately 28% of total revenue and no customer was over the 10% level. Non-GAAP gross margin in the fourth quarter was 23.2% compared with 11.3% in Q3 of 2023 and 32.5% in Q4 of 2022. For those who prefer to track results on a GAAP basis, gross margin in the fourth quarter was 22.6% compared with 10.7% in Q3 of 2023 and 32.1% in Q4 of 2022. The primary drivers of the sequential improvement in our corporate gross margin in Q4 were higher additional volume, product mix and improved gross margins at both JinMei and BoYu. 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 operating expenses. The reduction in overall revenue, we have maintained spending discipline in our operating expenses to…

Thank you, Gary, and good afternoon, everybody. We believe that we are now beginning to see a recovery in our market. In Q4, we achieved 18% sequential growth in our revenue and a 43% sequential improvement in our non-GAAP net income. While the overall demand environment remains soft, somewhat soft, we are seeing increased orders for indium phosphide for both artificial intelligence and pound-related applications. Further, the gallium arsenide market, which was the first of our market to go into a recorrection appears to have largely worked through excessive inventory. Looking individually at these product lines, our gallium arsenide revenue grew 42% sequentially in Q4, reflecting increasing strength in both wireless and LED applications as well as depletion of excess inventory and our continued success in attaining export permits for most of our customers. We're seeing new demand for HBT applications, where we historically have had very little market share. We believe this is the result of both improving market conditions and the desire among customers to diversify their supply base. We're also seeing improving demand geographically in China across a variety of applications, including LEDs, wireless switches and high-power lasers. As we look forward, the micro-LED market continues to solidify. Several Tier 1 companies are driving this adoption and the new product could come to market as soon as next year. As many of you know, we have been investing in our 8-inch gallium arsenide technology in support of these applications. And we have recently made groundbreaking advancements in both our defect density and yields. This innovation positions us strongly to gain a leading share in the market while efficiently supporting growing market demand. Now turning to indium phosphide. Sales grew 10% in the quarter with early signs of recovery in the power market and brand new demand related…

Thank you, Morris. In keeping with our comments today, we expect Q1 revenue to be between $20 million and $22 million. We expect our non-GAAP net loss will be in the range of $0.06 to $0.08, and GAAP net loss will be in the range of $0.08 to $0.10. Share count will be approximately 42.6 million shares. This concludes our prepared comments. Morris and I would be glad to answer your questions now. Eric?

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

Great. Congratulations on a good end to the year. I'm going to start with a question for Gary on your fourth quarter numbers here, specifically on gross margins. Well, obviously, volume helps here. The fall-through margin here was nothing short of excellent. I think it's about 90%, which seems unusual. Maybe you can delineate more of the dynamics here? Obviously, mix helps, but I wonder if there was some increase in utilization or unusual pricing and raw materials that helped you do this and really want to get a sense of sustainability. I haven't had a chance to run your guidance for the first quarter through and see what that implies for gross margin, but I want to get a sense for the fourth quarter as it leads into the first.

Okay. Well, as usual, the biggest items that contribute to these kinds of improvements are going to be product mix, indium phosphide was up Q-to-Q and volume, and volume was up over $3 million. There was a better improvement from the 2 raw material companies. And that also contributed. I think in terms of sustainability, we should be in about the same range in Q1. Maybe plus or minus a little bit, but we'll see. And -- well, I think that's how I should respond. Go ahead, Morris.

Yes. I'm not a finance guy, but from what I know is that when we have a policy of writing off material, which we don't sell for 12 months period of time. And when the revenue comes down, then the write-off for excess inventory will start to impact us. But when we pick up the volume, not only the write-offs becomes less, but also we will have the opportunity to pick up those write-off items to be on sale, thus improving our gross margin. That could be an impact.

Okay. That would certainly make sense. And maybe I'll follow up here just on the guidance for the first quarter here. Obviously, a little bit of growth at the midpoint here. How would we think about the major segments that you report on whether they're meaningfully different than that kind of average growth at the midpoint?

Yes. I think the significance is that indium phosphide will continue to grow. Gallium arsenide, I think will grow substantially again. Germanium is actually stable or insignificant in a way to the overall revenue contribution. Actually, raw material is going to decrease quite substantially quarter-over-quarter not because their business is weak, but I think it's just that the raw material business has a great first quarter and the first quarter, it didn't pick up the large volume opportunity in Q1. So overall, although the revenue growth is modest, but actually comes mostly from the contribution of indium phosphide and gallium arsenide.

Okay. Perfect. So let's jump into some of the product categories here in data center, meaning indium phosphide here sounds like it's got some opportunities here. I clearly know this optical space where it seems like it's very nice here. Maybe you can talk about -- I think you've been a little bit limited in the kind of a narrow customer base in your past. I think you have 1 major customer there. Maybe you can talk about the efforts for diversification. And ultimately, how do we think about either data center growth this year versus last or maybe just the overall indium phosphide category?

I don't know where did you get that here from we have a limited, narrow customer base. I don't think we have a narrow customer base. I think...

Don't you just have 1 larger big contributor to data center and many other smaller ones or some number of smaller ones in?

Yes, data center, silicon photonics specifically, it was sort of narrow. They didn't grow. They are poised to grow. They've been telling us it should grow substantially in 2024, but we haven't seen that yet. I think they are incrementally better in Q1 than Q4, but they're telling us their visibility is still not good, but they -- overall, they are telling us that 2024 should be substantively better than 2023. So I think from what we see on indium phosphide, the telecom business is not great. The data center actually still got some inventory to digest. Tong's market in China actually is picking up a bit, okay? But it's still not robust compared to the peak time, but it's better than Q3 for sure, and it's continued to be better in Q1 than Q4. And what I think is surprising to us, I think, is the AI application. It first started something like 6 months ago, and we thought it was -- well, first, the customer wouldn't tell us it's AI. And then they come back again and they want more in Q4, and they now give us yet another bigger order in Q1. So cumulatively [indiscernible], it's in the millions of dollars of range. So -- and this time, they also admit to us that it's AI-related. So we are cautiously optimistic, although they are not giving us good visibility how I think will grow in Q2 and Q3. But at least, I think it's -- so far, it's a very good sign. And I believe this indium phosphide solution for AI will come, it's a matter of time, but I think I'm glad to see it's coming already through.

Okay. Morris, some interesting detail there. It seems like you're splitting up, I guess, what I would call datacom that you're kind of splitting up between silicon photonics and AI and others here that perhaps there's more detail that we can take offline there, but that sounds good to hear here. Let's see here. Maybe just touching on other side of indium phosphide here. It sounds like you're going to really more positive on the consumer electronics and health care side here. maybe just get a sense of where that's coming from? And do you see any large customers kind of impacting your year this year?

Richard. We are -- we are cautiously optimistic they are requesting a fairly sizable quote and we're in qualification process for -- to launch later this year. But we don't have no signal, it will become reality. I mean the volume is substantial. We know it's for consumers. But it's still into qualification process, whether -- what it will launch and will be launched later on this year, we don't know. But we have at least see to customers requesting for the same volume for the same type of material that they request. I mean from the volume of it, we know it's a consumer product.

Okay. Fair enough. Well, that's good to hear. Last question. I will jump out of line here. Just touching on the micro-LED topic here. I guess I want to get a sense of your visibility and confidence in this market taking off. I think you mentioned in your prepared remarks and sometime in calendar '25 here, seems to be kind of a moving target in the space. I think it's largely due to yields on the pick and place here outside of your direct scope of your work here. But I guess I just want to get a sense of your level of confidence is that it can happen next year?

Well, there, I think you probably know better than I do. I think from our end, our development of the 8-inch gallium arsenide program supporting this, both in terms of capacity, our yield and our quality. Now we have -- we have made great advancements in the last quarter, and we are now very confident. And we have customer visit, I think, twice now. And the third attempt to visit us will happen next quarter, and we will soon see the qualification process. So I think what we can tell you is our customers are telling us they are ready to launch sometime in 2025. And so that's what we get done. Whether it's good -- I mean, right now, we're running hundreds of wafers per month, okay? And so we continue to deliver now. But -- so I guess they are in Tyler Land production. And so far so good, our wafer performs very well. So I'm optimistic.

Your next question comes from the line of Charles Shi with Needham & Company.

Maurice and Gary, congrats on the fourth quarter results. I want to ask you a little bit more details about the new opportunity you see in data center side, I believe you're referring to the datacom transceiver market 800 gig plus ML-based lasers. Obviously, coherent, I believe it's one of your end customers who are very bullish about how much growth this part of the market is going to be. But for us, it's getting a little bit tough for us to think about how to translate their forecast of the 800 gig plus optical transceiver opportunity growth to your indium phosphide wafers. So have you guys try to quantify how much of the PM this part of the applications are going to drive for you guys? And the other related question is, based on your knowledge today, are you single sourced as an indium phosphide wafer supplier? Or do you think the end customer may be sourcing from your competitors as well?

Charles, that's a little bit tough question, and it's a fairly long one. So let me say this. I think right now, the data center, I do want to clarify 1 thing. There is -- it's very hot item is called optical cable project and we're not related to that project. And that is mainly using VCSEL using a plastic fiber. And I think there's a big company, data center wants to change out coaxial cable with VCSEL with plastic fiber. We're not doing that. Whether that optical cable will move from 400G, 100G to 800G or not because they can use parallel pass, we're not in that at all. And when we're talking about the 800G 1.6 gigahertz -- terabytes, I think we're talking about potentially for a little bit longer distance, perhaps and more power data transfer. So whether the customer is single source or not. So to answer your question, can we quantify and so if coherent is going to grow x percent, we're going to grow with them. And so you have to take out -- I mean, I believe coherent is also doing VCSEL. The VCSEL, the problem with that market is it doesn't use a whole lot of gallium arsenide substrates. So the opportunity for us is much less than making the plastic fiber for VCSELs. So as far as single source or not is concerned, I believe we are still the largest -- I believe, also best-in-class in indium phosphide supplier. So we have multiple many, many customers and some of them use us in majority of their supply. And in fact, I think the artificial intelligence customer that we recently engaged, I think we are a single source, but whether they're going to develop into multiple source or not? We don't know. And but we are also very cautiously looking for other people wanting to do participate in that development as well. So we have a very good position in indium phosphide marketplace. But whether they are single source or not, it's difficult to tell.

Got it. So maybe a follow-up question. It looks like -- for roughly 2 quarters, right, December last year in March. This year, you are business levels now, I mean, return to that 20-plus million per quarter level. Looking out a little bit beyond the March quarter, what’s your best assessment right now? Are you going to be maintained at the similar level? Are we going to revisit that high-teens millions per quarter, that kind of level? I mean, generally, I want to get a sense how you feel about the run rate going through the rest of the year.

Sure. I think for the next quarter, as I said, I think, although we only guided modestly higher overall revenue for next quarter, but raw material is decreasing. So there is a substantial increase in substrate revenue to compensate for that. So I think for substrate revenue is going to continue to grow, both in terms of indium phosphide and gallium arsenide. And for raw material, I don’t think it’s going to drop off for the rest of the year. And we will have other joint venture tuning in to contribute a revenue contribution as well later on of the year. So I think this year, it’s going to be a continued growth year for 2024 compared to 2023. The question I think is how fast, how strong it’s going to be. Whether we’re going to reach $90 million, but I think it’s probably better than $85 million.

I will now turn the call back over to Dr. Morris Young for closing remarks.

Thank you for your participation in our conference call. As always, please free to contact me, Gary Fischer or Leslie Green if you would like to set up a call. We look forward to speaking with you in the near future.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect your lines.