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. 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 that 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 a 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.

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 at $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. 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 and a non-GAAP operating profit of $4.8 million in Q1 of 2022. For reference, our GAAP operating line for the first quarter of 2023 was a loss of $4.4 million compared with an operating loss of $1.0 million in Q4 2022 and an operating profit of $3.7 million in Q1 of 2022. Non-operating other income and expense and other items below the operating line for the first quarter were a net gain of $1.1 million. The details can be seen in the P&L included in our press release today. For Q1 of 2023, we had a non-GAAP net loss of $2.4 million or $0.06 per share compared with the non-GAAP net income of $2.1 million or $0.05 per share in the fourth quarter of 2022. Non-GAAP net income in Q1 of 2022 was $4.3 million or $0.10 per share. On a GAAP basis, net loss in Q1 was $3.3 million or $0.08 per share. By comparison, net income was $1.3 million or $0.03 per share in the fourth quarter of 2022 and $3.2 million or $0.07 per share of profit in Q1 of 2022. The weighted average basic shares outstanding in Q1 was $42.5 million. Cash, cash equivalents, and investments were $53.6 million as of March 31. By comparison, at December 31, it was $52.8 million. Depreciation and amortization in the first quarter was $2.1 million and CapEx was $2.7 million. Most of this is facilities and indium phosphide equipment-related. Total stock compensation was $0.9 million for the quarter. Net inventory at March 31 was $91.7 million, with 45% of the inventory being raw materials and work in progress, while finished goods made up approximately 3% of inventory. We had a very successful quarter in our recycling efforts, which benefited our margins in our ESG efforts. But when we grow new ingots with recycled indium phosphide, it adds to the inventory. Almost half of the increase in inventory is still recycling. Inventory reduction remains a key focus for us this year, and we expect to bring it down as the demand environment improves. 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. Since the Chinese New Year, we have had active dialogue again with the China Securities Regulatory Commission or the CSRC. Their process is detailed and thorough, and they have asked us to respond to a couple of additional items. We are in the process of doing so now and remain optimistic that we will get CSRC approval in the coming months. We have posted a brief summary of the plan and the process on our website. With that, I'll now turn the call over to Dr. Morris Young for a review of our business and markets.

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 arsenide late last summer accelerated in indium 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 arsenide, 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. Telecom applications, particularly in China, showed some improvement in Q1. And if China moves forward with the national stimulus as has been discussed, it would likely provide a catalyst or upgrade cycle in the Chinese telecommunications infrastructure. As I mentioned, gallium arsenide demand appeared to be improving modestly, with power amplifiers and power lasers showing some signs of recovery in Q1. We also continue to be encouraged 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 arsenide 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 second half of 2023, we have visibility into the likely technical specifications that will be required. We feel good about our ability to meet them. In addition, our 8-inch line for gallium arsenide crystal growth is up and running at our Cadu facility, and we are very excited by our progress in driving improved efficiency there. Turning to germanium substrates, following the resolution of the payment issue with one of our customers, we saw incremental growth in revenue. While the germanium substrate market has also been affected by macro softness, we will be working towards sequential growth in the coming quarters. Finally, to our raw material joint ventures. Our revenue in Q1 was flat with the fourth quarter and represents another area where we are seeing stable vision. Gallium raw material prices remain approximately flat this quarter and are up from the low levels we saw in the fourth quarter of 2022. In closing, though the softening of the macro environment will continue to impact growth near term, the trend that we have driven our revenue and customer expansion remains very much intact. We continue to excel in our testing capabilities, and we are ready for our business to support new applications that are likely to drive future growth. Further, we continue to work hard on improving our efficiency, and we are focusing on accelerating our return to profitability. I will now turn the call back to Gary for our second quarter guidance.

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 to 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.

Your first question comes from the line of Charles from Needham.

I just want to understand how you think about the revenue progression through 2023. 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 the second quarter of the year. Does that kind of make sense to you? Maybe in the second half of the year, 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 and better than Q1. Q3 tends to be the peak quarter of the year. Would that be the case this year? Or do 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 products and the data center for indium phosphide because it's just entered the inventory correction 2 months ago or 3 months ago. So we expect it to continue. But we do see some activity, especially on high-power transmitters and power lasers in China. Especially, they saw stabilization 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 take is hard to say because I think although everybody is expecting the inventory to be consumed, I worry about how strong the recovery of the economy will be. In other words, will there be another leg to go if the U.S. economy were to slip into a recession? And that could prolong the inventory and the demand recovery.

Yes. And Charles, I would say that we don't see revenue declining in Q3. 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.

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

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 were some things already in the works that crossed over into Q1. But in general, Morris and I have become rather conservative and are not going to spend much more.

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. Maybe a last question. I want to ask you about the consumer. We recently heard some rumors about some premium electronics companies that may be having second thoughts about continuing with indium phosphide versus gallium arsenide-based solutions for display proximity sensors for handsets. Have you seen any signs of this 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. There is a chance they might switch back to gallium based VCSEL, but it's still up in the air whether the detector will use an indium phosphide detector or a gallium arsenide detector. As we understand it, the 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 be nervously waiting for a decision on this 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 indium phosphide semi-insulating wafers. We believe it's a detector for collision avoidance for autonomous driving. But again, we're guessing what it is. But looking at the pilot quality production, they have purchased wafers so far and also the quotation we provided them for that application, it's still early. So those are probably the two consumer products that we are looking for. And obviously, I think microLED is taking one step further into reality. I believe it will be launching late, but it is something we believe will come. And as I mentioned in the script, 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 have already built the line for them. We are ready to ramp up production for them sometime in late 2024.

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 the loss to increase a bit. Is that mix? Or what else is causing the expenses to go up?

It's primarily mix. We hope to keep expenses flat. There may be a little bit less contributed below the line, but we're not sure yet.

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?

I believe that while we are receiving more orders for gallium arsenide in areas like high-power transmitters and lasers, our visits to customers in the first quarter and late last year revealed very limited orders. For high-power transistors, we are beginning to process thousands of wafers, but that is still only 20% of what we reached at peak levels. The order pattern is becoming more consistent, which gives us some confidence in future demand. According to the conference discussions, they expect the second half of the year to outperform the first, despite still operating at 30% to 40% of peak capacity. Regarding power lasers, we’re just at the start; we previously supplied thousands of wafers monthly, but now it's down to around 110. We need a few months to determine if this level is sustainable. However, assessing inventory control across the industry is challenging, as many are likely trying to reduce inventory to free up cash. There is no hesitation in the market since suppliers are eager for orders, which is leading to price pressures. Looking ahead two to three quarters, I believe microLED could be a significant driver. I see no reason for power lasers to stay at low levels since they are vital for industrial manufacturing. I also sense a rebound in the consumer market in China, indicated by increased pedestrian traffic, but the timeline for this to impact industrial production remains uncertain. In data centers, there is an inventory surplus as our customers acknowledge they over-purchased last year and need time to reduce their stock. However, growth is expected due to AI applications that will necessitate more computing power, creating an increased demand for data centers and opportunities for silicon photonics and indium phosphide substrates. While this suggests long-term growth, it may not provide immediate benefits in the next quarter or two.

To summarize, you're seeing signs that at least in the markets, you're starting to see demand and inventory is being worked down, but within non-phosphide it's still going to take a couple of quarters before we can assess the complete demand levels due to the existing inventory levels in the system.

Yes, that is what I'm saying, but as I mentioned, we can look at the opportunity for indium phosphide in two ways. One is the existing market recovery, which should drive demand, and the other is the new applications. We have a Taiwanese customer making inquiries and piloting runs with indium phosphide, which we believe are for an autonomous driving application. Yet, it's still early to gauge volume. For traditional customers like consumer products and data centers, they remain tied up in inventory without sending new orders.

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

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. Can you describe 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 for you.

If you want to look it up, that's fine, but going back to the topic of data centers, you mentioned a fair amount of inventory your customers have admitted to. Are you getting a sense of continued movements in that business and forward road map planning? I've heard of some potential reorganizations going on internally. Do you expect that to be a continuing business after this inventory burn?

Richard, I think they are very enthusiastic about future products. We are engaging with them almost weekly, trying to solve their next-generation futuristic material requirements. They are a very methodical and reliable customer to work with. We don’t see any reduced activity with them at all. I don't think they're going to dissolve anytime soon. In fact, we see new product development for higher power and higher speed applications.

That's good to hear. Can you touch more on what you're seeing with microLED? When do you expect to see larger orders coming in, and what stages are in progress to get to high-volume production late in 2024?

Yes, I think we are set to get qualifications done in the next 3 to 4 months. In other words, we are ironing out specifications with the customer regarding the quantity of ingots and wafers needed for qualification. They even visited our facility and seemed impressed. Both parties appear satisfied. As for volume ramping, we were told that it would likely start in late 2024.

In relation to the forecast from this large customer for 8-inch gallium arsenide for microLED, when would you need to greenlight a second tranche of equipment to support higher volumes, given you have already set up a pilot line?

I think we already spent most of the necessary budget for our infrastructure build since it requires a significant capital investment upfront rather than small incremental spending. We are ready to fulfill their production requirements without new equipment purchases.

Okay, fair enough. I'll ask a couple of questions and then hand it back to you. Gary, did you find the China revenue numbers?

Yes. China was $8.1 million in Q1.

Okay. And 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.

Good to hear. Just thinking about your balance sheet here, one of the messages portrayed last quarter and repeated here is the focus on extracting cash from working capital. Inventory increased slightly, which you attributed to the recycling dynamic. As you look throughout the year with CapEx plans, how do we think about cash directionally? Does this year see an increase or is it independent of your debt levels?

I think for the next couple of quarters, I expect it to be relatively flat. It could move up or down a little bit. But typically, with our business model when we're in a down cycle, we can rely on inventory. We tighten things up, so the cash burn is not that high. Rapid growth is when cash can be cash flow negative due to investments.

That's fair enough. That's all I need to hear.

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, 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. Bye.

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