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. 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 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 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.

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 five 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 align with the current environment. Total non-GAAP operating expense in Q4 was $7.5 million, down from $7.8 million in Q3 of 2023 and down from $8.9 million in Q4 of 2022. On a GAAP basis, total operating expense in Q4 of 2023 was $8.2 million, down from $8.6 million in Q3 and down from $9.6 million in Q4 of 2022. Our non-GAAP operating income for the fourth quarter of 2023 was a loss of $2.7 million compared with a non-GAAP operating loss in Q3 of 2023 of $5.8 million and a non-GAAP operating loss of $256,000 in Q4 of 2022. For reference, our GAAP operating line for the fourth quarter of 2023 was a loss of $3.6 million compared with an operating loss of $6.7 million in Q3 of 2023 and an operating loss of $1.0 million in Q4 of 2022. Non-operating other income and expense and other items below the operating line for the fourth quarter of 2023 was a net loss of $62,000. The details can be seen in the P&L included in our press release today. For Q4 of 2023, we had a non-GAAP net loss of $2.8 million or $0.07 per share compared with a non-GAAP net loss of $4.9 million or $0.12 per share in the third quarter of 2023. Non-GAAP net income in Q4 2022 was $2.0 million or $0.05 per share. On a GAAP basis, net loss in Q4 was $3.6 million or $0.09 per share. By comparison, net loss was $5.8 million or $0.14 per share in the third quarter of 2023. GAAP net income in Q4 of 2022 was $1.3 million or $0.03 per share. The weighted average basic shares outstanding in Q4 of 2023 was $42.9 million. Cash, cash equivalents and investments were $52.3 million as of December 31, by comparison, at September 30, it was $43.6 million. Depreciation and amortization in the fourth quarter was $2.2 million and capital investments were about $4 million. Total stock compensation was about $800,000. Net inventory was flat quarter-to-quarter. 38% of the inventory is raw materials and work-in-progress is 58%. Finished goods make up approximately 4%. 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. With regards to Tongmei, we need to resolve one open item, although it is moving slower than we expected, we are making progress and are confident that Tongmei remains an excellent candidate for listing. 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. 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 somewhat soft, we are seeing increased orders for indium phosphide for both artificial intelligence and related applications. Further, the gallium arsenide market, which was the first of our markets to go into a correction, 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 to artificial intelligence. We view AI as an emerging application for indium phosphide that will develop in exciting ways over the coming years. Today, AI applications are primarily using gallium arsenide VCSELs, which requires a relatively small amount of substrate material. But as the industry moves to 800 gig and then 16 terabits speeds, we expect that there will be a necessary transition to indium phosphide. AI will drive up the need for massive data transfer requirements with increased bandwidth, low attenuation, and low distortion. We believe this will result in increased demand for indium phosphide as the best platform for rapid data transfer. We're already seeing development work happening today with next-generation silicon photonics devices and Electro-Absorption Modulated Lasers for high-speed data center transceivers. Early revenue from these applications contributed to our indium phosphide growth in Q4 and will help drive our expected growth in Q1. This interest in indium phosphide for AI applications is intensifying the market demand for 6-inch indium phosphide. This capability and long-distance capability of indium phosphide are optimal for AI applications. And as the market grows, customer wants the scale and cost benefit of large diameter substrates. We're excited by the progress we are making in our R&D efforts and expect to continue to lead our industry with the best-in-class material. While consumer and healthcare applications for indium phosphide today contribute only modestly to our revenue, we continue to see positive development activities and believe there is great potential on the horizon. We are very early in the adoption of this material across multiple emerging applications, and our success in supporting Tier 1 customers proves our capability for large volume, high precision devices. Finally, sales from our raw material business grew 13%, with continued gross margin improvement. Overall, the pricing environment remains relatively stable, and we don't expect any major changes in Q1. In closing, we are looking forward to the coming year with optimism. We believe that the trends that we have driven our revenue and customer expansion remain very much intact with new catalysts such as AI providing strong incremental opportunity. In addition, I am exceptionally proud of what the AXT team accomplished in 2023, paving the way for an exciting future. Not only did we successfully navigate the export control license process on behalf of our customer, we delivered breakthrough innovation in the development of large diameter gallium arsenide and indium phosphide substrates, and we set a new bar of excellence for our industry. In addition, we implemented a recycling program that both advances our ESG commitment and improves our efficiency. Finally, while the progress on our IPO may be less visible externally, I'm very grateful for the diligence of our team and confident that we can successfully bring it to fruition. In the meantime, we will continue to prioritize cost savings and efficiency, and we are focused on accelerating our return to profitability. And thank you to our customers and our shareholders for their continued support. I will turn the call back to Gary for our first quarter guidance.

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.

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 in 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 two 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 that we don't sell for a 12-month 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 do the write-offs become less, but we also 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 in the first quarter, it didn’t pick up the large volume opportunity in Q1. So overall, although the revenue growth is modest, it actually comes mostly from the contribution of indium phosphide and gallium arsenide.

Okay. Let's dive into some of the product categories in the data center, focusing on indium phosphide, which appears to have some opportunities. I understand the optical space looks promising. Could you discuss the limited customer base in the past, particularly with your major customer, and share your efforts for diversification? Additionally, how do we view data center growth this year compared to last year, or more generally, the indium phosphide category?

I don’t agree with the notion that we have a limited customer base. While the data center silicon photonics area was somewhat narrow and hasn’t seen growth yet, it is expected to grow substantially in 2024, although we haven't observed that growth yet. It seems to be improving incrementally from Q1 compared to Q4, but visibility remains unclear. However, they expect 2024 to be significantly better than 2023. Regarding indium phosphide, the telecom sector isn’t performing well, and the data center still has some inventory to manage. Tong’s market in China is showing some improvement; it's not robust compared to past peaks, but it's definitely better than Q3 and continues to improve in Q1 compared to Q4. One surprising development is the AI application, which started about six months ago. Initially, customers were reluctant to mention it as AI, but now they've returned for larger orders in Q4 and Q1, cumulatively amounting to millions of dollars. This time, they acknowledged that it’s AI-related. While we still lack good visibility, I’m cautiously optimistic that growth will occur in Q2 and Q3. Overall, the signs are positive, and I believe our indium phosphide solution for AI is on the way; it's just a matter of time, and I’m pleased to see progress already.

Okay. Morris, some interesting detail there. It seems like you're splitting up, I guess, what I would call data communication, that you're kind of separating 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 the other side of indium phosphide here. It sounds like you're becoming more positive on the consumer electronics and healthcare 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 cautiously optimistic. They are requesting a fairly sizable quote and we're in the qualification process to launch later this year. But we have no signal it will become reality. I mean the volume is substantial. We know it's for consumers. But it’s still in the qualification process; whether it will launch later this year, we don't know. However, we have at least seen two customers requesting the same volume for the same type of material.

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 a kind of 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 work here. But I guess I just want to get a sense of your level of confidence that it can happen next year?

I think you might have more insight than I do. From our perspective, we've made significant progress in developing our 8-inch gallium arsenide program, including improvements in capacity, yield, and quality over the last quarter. We're feeling very confident about it. We've had customer visits recently, and another is planned for next quarter as we move towards the qualification process. Our customers indicate they are prepared to launch sometime in 2025. Currently, we're processing hundreds of wafers each month, so we are in production. Everything is going well so far, and our wafers are performing exceptionally. I'm optimistic about the future.

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

Morris 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, is 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 tried 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?

That's a challenging question, and it's quite detailed. Right now, regarding the data center, I want to clarify that we are not involved in the well-known optical cable project, which primarily utilizes VCSEL with plastic fiber. A major company is aiming to replace coaxial cables with this technology, and that’s not something we’re participating in. The potential shift of optical cables from 400G and 100G to 800G is not something we are involved with either. When we discuss 800G and 1.6 terabits, we're considering longer distances and higher power data transfer capabilities. As for whether our customers are single-sourced, I can't provide specific growth percentages, but we generally expect to grow alongside the coherent market. However, coherent solutions also include VCSEL technology, which offers limited opportunities for gallium arsenide substrates since it leans more towards plastic fiber. In the realm of single-source suppliers, we remain a leading and high-quality indium phosphide supplier, with a wide customer base, some of whom rely heavily on us. For instance, we have recently engaged an artificial intelligence customer where we are their sole supplier, but it's uncertain if they will seek multiple sources in the future. We are actively exploring partnerships with others interested in this development as well. Overall, we hold a strong position in the indium phosphide market, but it’s hard to determine the sourcing dynamics definitively.

Got it. So maybe a follow-up question. It looks like for roughly two quarters, right, December last year and 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 of 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, raw material is decreasing. So there is a substantial increase in substrate revenue to compensate for that. I think for substrate revenue is going to continue to grow, both in terms of indium phosphide and gallium arsenide. For raw material, I don’t think it’s going to drop off for the rest of the year. We will have other joint ventures tuning in to contribute a revenue contribution as well later on this 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 and 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 feel 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.