Good afternoon, everyone. And welcome to AXT's Third Quarter 2024 Financial Conference Call. Leading the call today from China is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. In addition, Tim Bettles, AXT’s Vice President of Business Development will be participating in the Q&A portion of the call.

My name is Christina, and I will be your conference coordinator today. [Operator Instructions] And now, 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, emerging applications using chips or devices fabricated on our substrates, our product mix, global economic and political conditions including trade tariffs and import and export restriction, our ability to increase orders in succeeding quarters to control costs and expenses, to move manufacturing yields and efficiency or utilize our manufacturing capacity.

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.

In addition to the matters just listed, these uncertainties and risks include, but are not limited to, the financial performance of our partially owned supply chain companies, increased environmental regulations in China and COVID or other outbreaks of contagious disease.

In addition to the factors just mentioned or 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 October 31, 2025.

I also want to note that shortly following the close of market today, we issued a press release reporting financial results for the third quarter of 2024. 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 2024 results.

Gary?.

Thanks, Leslie, and good afternoon to everyone. Revenue for the third quarter of 2024 was $23.6 million, compared with $27.9 million in the second quarter of 2024, and $17.4 million in the third quarter of 2023.

To break down our Q3 ‘24 revenue for you by product category, indium phosphide was $6.8 million, reflecting continued demand in data center applications, including AI, as well as passive optical networks. Gallium arsenide was $6.6 million in line with the pullback we expected after the strong growth in Q2.

Germanium substrates were $1.6 million, down from the prior quarter, based on our decision to walk away from certain low margin business opportunities. Finally, revenue from our consolidated raw material joint venture companies in Q3 was $8.6 million, based on continued healthy demand.

In the third quarter of 2024, revenue from Asia Pacific was 77%, Europe 12%, and North America 11%. The top five customers generated approximately 29.4% of total revenue, and no customer was over the 10% level. Non-GAAP gross margin in the third quarter was 24.3%, compared with 27.6% in Q2 ‘24, and 11.3% in Q3 of 2023.

For those who prefer to track results on a GAAP basis, gross margin in the third quarter was 24.0%, compared with 27.4% in Q2 2024, and 10.7% in Q3 of 2023. On to operating expenses. Total non-GAAP operating expense in Q3 was $9.0 million, compared with $8.9 million in Q2 of 2024, and $7.8 million in Q3 of 2023.

On a GAAP basis, total operating expense in Q3 of 2024 was $9.1 million, compared with $9.5 million in Q2, and $8.6 million in Q3 of last year. We expect OpEx to be holding up at approximately this level throughout the balance of 2024.

Our non-GAAP operating loss for the third quarter of 2024 was $2.6 million, compared with a non -GAAP operating loss in Q2 of $1.2 million and a non -GAAP operating loss of $5.8 million in Q3 of 2023.

For reference, our GAAP operating line for the third quarter of 2024 was a loss of $3.4 million compared with an operating loss of $1.9 million in Q2 of 2024 and an operating loss of $6.7 million in Q3 of 2023. Non-operating other income and expense and other items below the operating line for the third quarter of 2024 was a net gain of $469,000.

The details can be seen in the P&L included in our press release today. For Q3 2024, we had a non-GAAP net loss of $2.1 million or $0.05 per share compared with a non-GAAP net loss of $800,000 or $0.02 per share in the second quarter of 2024. The non-GAAP net loss of Q3 2023 was $4.9 million or $0.12 per share.

On a GAAP basis, net loss in Q3 was $2.9 million or $0.7 per share. In comparison, net loss was $1.5 million or $0.4 per share in the second quarter of 2024. GAAP net loss in Q3 of 2023 was $5.8 million or $0.14 per share. The weighted average basic shares outstanding in Q3 of 2024 was 43.2 million.

Cash, cash equivalents and investments decreased by $4.5 million to $38.8 million as of September 30th. By comparison, at June 30th, it was $43.3 million. Depreciation and amortization in the second quarter was $2.3 million. Total stock comp was $0.8 million. Net inventory was up slightly in the second quarter to $86.1 million.

This includes inventory added through our recycling program. 36% of the inventory is raw materials and WIP is 61%. Finished goods makes up approximately 3%. Okay, this concludes the discussion of our quarterly financial results.

Turning to our plan to list our subsidiary, Tongmei in China, on the STAR Market in Shanghai, let me give you a brief update on the IPO status. We have continued to keep our application current.

Last year and part of this year, the total value of the Shanghai Stock Exchange struggled as the China economy slowed and the real estate sector moved down significantly. This trend resulted in much fewer IPOs. It also led to weaker IPO applicants being removed from the in-process category. We are encouraged that Tongmei was not one of those companies.

We are still part of the in-process group and it is a much more selective and smaller group than a few years ago. More recently, the substantive stimulus package in China has helped the economy and boosted the total value of the Shanghai Stock Exchange and we believe these movements may be generating positive momentum for IPOs and for Tongmei.

We have continued to lead the team with a diligent energy as we think that Tongmei is a good IPO candidate. We'll keep you informed and hope to have good news to deliver to you. With that, I'll turn it over to Dr. Morris Young for a review of our business and markets.

Morris?.

Thank you, Gary. Q3 came in largely in line with our expectations. Coming off of a stronger than expected Q2, the primary difference from our guidance with our lower germanium substrate, which reflected our choice not to participate in certain low-margin opportunities.

Outside of this, data center-related demand remains solid for our indium phosphide substrates, and we are beginning to show to grow our market share in HPT devices for wireless headset. Looking individually at our product line, In indium phosphide, data center high speed optical connectivity and AI continues to be our strongest drivers.

In particular, growth in demand for high speed pixels of 100 gig or faster per line is opening a green field market opportunity for indium phosphide-based photo detectors in 400 and 800 gig multimode optical interconnects for short distances.

We saw indium phosphide orders related to 800 gig applications in Q1 and Q2 and have received a follow-up order in Q4, which puts us on track for healthy growth in 2035.

In addition to photo detector applications, we know that indium phosphide will be a necessary material for high-speed lasers as the industry moves to 800 gig and 1.60 pluggable transceivers for median to longer distance transmission beginning in 2035.

We're working with a number of customers and are already seeing exciting opportunities with next-generation silicon photonics devices and electro-absorption modulated lasers, or EMLs. For example, we're seeing growth in demand with increased orders in Q3 and Q4 from one of our larger silicon photonics customers for optical transceivers.

In addition, we have developed a new indium phosphide product, targeting silicon photonics and EMLs. We have our first design win with our leading customer and multiple ongoing qualifications with additional customers. Our gallium arsenide revenue pulls back in Q3 as expected after growing more than 20% in Q2.

Overall, the market recovery is somewhat lumpy, particularly given the weak economic conditions in China. But new fiscal stimulus in China announced in September could provide a catalyst for a truly market environment.

This will benefit demand across a broad based of applications, including power amplifiers, HPT applications for wireless switches, high-speed power industrial labels, and LEDs.

We continue to be encouraged by our relatively new traction in HPT applications by bringing the learning from our product that's advancing in our 8-inch gallium arsenide development to our 6-inch gallium arsenide wafer production.

We believe we can improve our cost structure and provide a highly competitive solution to a market where our penetration historically is low. Initial shipment into our leading customers gives a confidence that we can be successful in gaining additional share. We expect our revenue from these applications to grow in 2035 as we continue to rise.

In addition, our gallium arsenide recycling efforts continue to be successful. We're now fully licensed and processing material that we have collected over time but did not have the capability to recycle. This is visible to the investment community in both our revenue and gross margin as we make one of our raw material joint venture companies.

These efforts also advance our ESG commitment and drive meaningful efficiency in our manufacturing. Turning to germanium substrate, with the rapid rise in germanium raw material pricing which negatively affect our gross margins. We are being highly selective in the opportunity we choose to participate in.

This impacted our revenue in Q3 and will bring our germanium revenue down meaningfully again in Q4. We expect that they will bottom in Q4 with limited overall contribution so that there will no longer be a headwind to our growth as we're expanding other areas of our business.

We do believe that the market for low orbit satellite is promised in the coming quarters and we will participate in those opportunities where we can derive corporate level business values. And finally, our raw material business grew again in Q3 on increasing demand, stable gallium prices, and the success of our recycling efforts.

Our portfolio of joint ventures of raw material companies continued to be a strategy value to our business and continue to contribute positively to our results. In closing, we are optimistic about the growth and expansion of our business over the coming quarters. Data centers represent a great opportunity for us in our indium phosphide business.

And we see further tailwinds in 2035 with recovery of telecom and CapEx spending for power and backhaul applications. Our gallium arsenide business is poised to benefit from those in HPT applications.

I would believe a strengthening of the economy in China in 2035 is likely to be a positive catalyst for improvement in wide variety of applications, including industrial lasers and LEDs. We remain highly focused on accelerating our return to profitability and look forward to reporting to you on our progress.

With that, I turn the call back to Gary for our first quarter guidance.

Gary?.

Thanks Morris. And keeping with our comments today, we expect Q4 revenue to be slightly improved, coming in between $23.0 million and $25.0 million.

This takes into consideration growth in our indium phosphide substrates, driven by data center applications, as well as approximately consistent contribution from our gallium arsenide substrates and stronger raw material revenues.

Growth in these areas is expected to be partially offset by a decrease in germanium revenues, which are likely to bottom out in Q4. We are pleased by the growth in the most strategic parts of our business, and we believe we are positioning ourselves strongly for 2025.

In terms of the rest of our guidance, with the expectation of changing healthy gross margin performance, we expect our non-GAAP net loss will be in the range of $0.03 to $0.05, and GAAP net loss will be in the range of $0.05 to $0.07. Share count will be approximately 43.1 million shares. Okay, this concludes our prepared comments.

So we'd be glad to answer your questions.

Christina, operator?.

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

Hi, Morris and Gary. Thanks for taking my questions here. I guess there's a number of them that seem important to ask here. Let me just look back into the third quarter here real briefly and understand the dynamics relative to the germanium business here.

How big of a surprise was this to the, I would assume, as a difficult pricing environment? Is this a business you expect to hope to continue and compete in and generate revenues like you have in the past or is this a serially lower level of revenue expecting this business over time?.

Yes, I think the germanium raw material price more than doubled during the quarter.

And as you know, it's difficult to increase price to our customers because most of our customers are satellite porter builders and so they have their own budget, so we opted not to quote those moderate and attractive margin, but we're going to decline some more business in Q4, so that will reduce our expectation of germanium, however, the germanium substrate business, I believe still, I’d say we have a solid footage in that business other than the fact that it's very much dependent on the cost of raw material.

But what I see is that our competitors will have the same problem as we are, so we think it's the market settles down and everybody start to calm, we believe we're highly competitive, so as the market settles down, we will come back to the market.

As you know, that low orbit satellite business is booming and is scheduled to have, I think even much, is to have 40,000 low satellite, low altitude satellite and China is going to launch a number of satellite up there as well, so I think that market eventually will come back, but we will see how the pricing structure evolves..

Okay, that's helpful and good to know. Thanks for that, Morris. Let's touch a question or two on Indian fast ride, probably a most strategic business here. I guess want to get the sense of the drivers here you're talking about for growth here, I mentioned data centers.

That's mean photo detectors or Sili photonics or maybe just be clear on, on what the growth drivers are..

Yes, I can take that..

Yes, go ahead, Tim..

Thanks for your question. And this is Tim, yes, we believe that AI and data center revenues will be strong growth for us and we think we're seeing the beginnings of that right now, we've seen some good increases in demand in Q3 and Q4.

So what we're really looking at here is we're looking at Indian phosphate based, high speed photo detectors that go into a VIXL photo detector pair for a multi-mode transceiver. So we all know that the short-distance multi-mode transceiver market is growing quickly at the moment.

And as the speeds of the VIXLs go to 100 gig per line and higher, there's a need to move to an in GaAs photo detector. So we're seeing quite a lot of increase in that, and we're participating well in that. So we believe that's a greenfield opportunity for us that is only set to grow through the rest of this year and then into next.

We're also participating strongly, we've chosen to focus on the silicon photonics and the EML applications, where our substrate benefits really count to these devices. So we've penetrated some key silicon photonics customers and also some EML customers, and we're seeing growth in there as well..

Okay, and Tim, just to follow up on this, just to be clear on this last topic here, silicon photonics, these are specifically for lasers and not photoinjectors, is that correct?.

Yes, that's correct. It's predominantly CWDFP lasers or other lasers that go into that silicon photonics business, correct..

Okay, fair enough.

And how would you characterize the breadth of engagements and visibility into that growth? Do we have wins in place? We have forecasts in place? How do we think about the kind of general trajectory here, and what could this mean for AXT over the next, say, one to two years?.

Right, so yes, we're definitely participating heavily in that. I think we're in a number of the key customers in this space.

And what we're seeing so far is we're seeing growth in our silicon photonic sector over the next one to three years as being one of the largest sectors of the data center business, and specifically at this time for the transceiver product. We are, as they say, participating heavily with a number of customers in that market already for their lasers.

We've still got some more work to do. We've still got some other customers that we need to get qualified with. But as Morris said in the discussion, we have a design win with a new product that we've launched specifically for silicon photonics and EML. And we're qualifying a number of other customers.

So we see the opportunities there of being really big..

Okay, wonderful. Thanks for that detail, Tim. Maybe one last question, I'll jump out of line. Morris, you'd mentioned your prepared remarks about some opportunities here with HPT's. Noting as I think most of us know that it's been a market you've been under-penetrated for quite some time. Maybe talk to where and how you're getting design wins.

What kind of, again, what kind of visibility you're seeing here. What kind of share is possible in this market? Again, it's one where you haven't been. And I would imagine the incumbents here might resist losing share here. So I just want to get a sense of how big we could see this market getting our time..

Yes, this market size is about $80 million to $100 million. And it's a sort of a steady business depending on how much more 5G phone are built because they require more HPT's per phone.

And I think the interest in our participation in the HPT market really comes from a number of China customers who worried about, because of the gathering restrictions from exporting out of China. So they want a diversified supplier. So we got sort of that door opening for us.

And we believe, we spent a lot of development effort into the edge development. We think that was very successful. We have been able to improve our yield as well as our characteristic of the edge. But unfortunately that edge program has slowed.

But we find that what we learned on edge, we can just easily apply it into the 6-inch program so that we should be able to reduce our costs, improving our yield, and with the newer demand for the HPT for 6-inch, I think we're highly competitive, because I think right now, we have approximately 10% of the market share, and as you know, there are only three players in this competitive landscape, but we believe that we have plenty of opportunity to increase our share..

We do have another question from Richard Shannon from Craig-Hallum. . Your line is open..

Well, great. I'm not sure if I got out of line, but thanks for another opportunity here. Maybe just one or two quick ones, guys. Morris, you talked about the stimulus opportunity in China. Can you talk to which product or product line or lines you expect to see impact how fast that might happen.

And then if we're trying to judge you on your China-based revenues over, say, the next couple of quarters, how should we think about where that can go?.

Yes. I think our Indian [fast ride] opportunity, mainly our direct customers, we believe are mainly Western customers, although we sell into active customers. But where do they go? They probably go through one or two layers of device makers, but they could then go into the hyper sensors of the United States.

And although China data center, I believe the speed is slower, but definitely they will also enjoy that market when they expand. I mean, China market really, I think probably we know the laser market, high power laser market is really very sensitive to the economic activities. As you know, that lasers are mainly used for high power cutting tools.

And so both in battery manufacturing, as well as the automobile manufacturing, when the economy slows a bit, their demand drives up. And LED is another example. And if you make a whole lot more cars, I think the LED demand is going to go up. So is cell phone.

As you know, that cell phones were sort of having a recovery sometime early this year, coming from a really low selling volume during COVID. But I think the economy in China right now especially second half of the year is not really strong.

So we believe that anything related to the consumer, industrial activities and cell phone in particular I think if they go up, they should help us. So I think the stimulus package will not only help us in terms of our product offering activities but also, I believe will positively impact us to help us to go IPO.

Because the Shanghai Stock Echange, the index has moved from the bottom. Last I saw was almost like 30% up. So I think that if the momentum builds, I think that should clear the way for us to go public in China..

Okay. That is helpful. Thanks for that, Morris. I'm going to touch on my last question related to that in a second here, but I just want to touch on, again, the new fast ride side. I think you made a brief comment relative to the telecom market, which we haven't heard about in a little while here.

Sounds like you're seeing some signs of visibility in that market. I assume, again, that's to be clear, is excluding the pawn market. If you can, if that's the case, please be clear on that one.

But are you getting any sense of visibility in terms of orders or other things that indicate telecoms can be an improvement next year?.

Richard, I think right now, I think it's steady. But it's not going down. I mean, it's not like last year. Last year, it was almost all dried up. Everybody said they got too much inventory. But right now, we gauge that by looking at our pawns market activity. They are, if I will say the boom time is 100, the low was maybe 20, we are around 30..

Okay. All right, that's fair. One last question here, just kind of hitting on the topic. The topic of China as it relates to the potential STAR listing. You mentioned the market regulator, whatever, winnowing out some of the weaker opportunities there. And AXT it's been left in here, I guess.

Maybe if there's any positive signs or interactions, you can suggest that we're seeing some progress moving forward. Obviously, you've been talking about this for more than a couple of years and want to get a sense of, if there's any positive signals here rather than just the lack of negatives..

Yes, Richard, that's a good question, but it's a hard question. I think one of the difficulty, I mean, I think when we first applied, we were fairly optimistic because at that time, China's Stock Exchange was approving something like three to four company going public per week, okay.

But ever since early 2020, but we've got some questions with the China Stock Exchange.

They go through each of the companies all the way from exactly their personal finances, they look very thoroughly on your comparable, comp receivable as well as your inventory and who you sell to and they do, I would say 100% more due diligence on everything what you do.

But ever since COVID happened and the market collapsed, especially in real estate, and that drives up all the Shanghai Stock Exchange public market activities.

So they start to blame and say, hey, don't bring any more company public unless they are stellar in performance as well as they are needed to drive the economic advancement, especially in high technology. I think we sit on the latter field, but however, we see the revenue rundown for us for the last two years definitely didn't help.

But I think our revenue is coming back and the Shanghai Stock Exchange, because of the stimulus package is coming back a bit, as well as we have resolved, yes, it was saying a major issue with one of their concerns in the last quarter. So hopefully that we're seeing the light at the end of the tunnel here..

Okay, fair enough. I appreciate it..

I think, sort of dancing a little bit, because I, although I think I'm fairly optimistic, but it's really very much up to them. They have to check all the boxes; they have to approve everything before they let us go..

Thank you. And with no further questions, I'll turn the floor back over to Dr. Morris Young..

Thank you for your participation in our conference call. Before we report earnings to you again, we will be participating in the Needham Growth Conference. We hope to see you, many of you, there. As always, please feel free to contact me, Gary Fisher, or Leslie Green.

If you would like to set up a call with us, we look forward to speaking with you in the near future..

Thank you. This does conclude today's conference call. You may now disconnect. Have a great day..