Good afternoon everyone and welcome to AXT's second quarter 2018 financial conference call. Leading the call today is Dr. Morris Young, Chief Executive Officer and Gary Fischer, Chief Financial Officer. My name is Ashley and I will be your coordinator today. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call is being recorded. I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Ashley 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 guidance or make other forward-looking statements regarding, among other things, the future financial performance of the company and our ability to control costs, improve efficiency, increase orders in succeeding quarters, increase our competitive position in the market, our schedule and timeliness regarding the relocation plan, our thoughts on air pollution in Beijing, our ability to meet demands for our products, as well as other market conditions and trends including those expected growth in the markets that we serve. We wish to caution you that such statements deal with future events and 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 market in which the company competes, global financial conditions and uncertainties, potential tariffs and trade restriction, increased environmental regulations in China, market acceptance and demand for the company's products and the impact of delays by our customers on the timing of sales of 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 and available online via link from our website for 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 July 25, 2019. 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 second quarter. 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 second quarter results. Gary?

Thank you, Leslie and good afternoon everyone. Total revenue for the second quarter of 2018 was $27.1 million this compares with $24.4 million in the first quarter of 2018 and $23.6 million for the second quarter of 2017. This represents year-on-year growth of 15%. Our total revenue substrate sales were $21.6 million compared with $19.4 million in the prior quarter. Revenues from our raw material joint ventures was $5.5 million Q2 compared with $5.1 million in Q1. In the second quarter of 2018 revenue from North America was 8%, Asia Pacific was 67%, and Europe was 25%. Also in the second quarter, no customer reached 10% of revenue and the top five customers generated approximately 33% of total revenue. We think this is noteworthy as it shows growth that is diversified in both products and customers. Gross margin in the second quarter was 40.6% compared with 39.2% in the prior quarter. We are of course pleased with the gross margin and let me give some explanation and color on this. First, we had favorable product mix. Second, we benefitted from an increase in the price of raw materials which positively impacted margins at the free consolidated raw material joint venture companies. A third and smaller factor in Q2 is that we have previously written down gallium and one of the three consolidated companies and so when they sell the material their gross profit dollars are better about 1% of our gross margin can be attributed to this in Q2. Total operating expenses in Q2 were $6.5 million compared with $5.6 million in Q1. Three items stand out that pushed up OpEx. A one-time bonus payout and one of the subsidiaries of about $0.35 million. Site consulting fees regarding the relocation of $0.12 million and filing fees for business licenses and…

Thank you, Gary and good afternoon everybody. Q2 was a solid quarter for AXT. We achieved revenue above our expectation as a result of a healthy demand for our products in every major category. In addition, with the positive revenue mix and strong manufacturing execution we posted one of the highest gross margins in our company's recent history. For investors who have been tracking the performance of our raw material business, you will be pleased to see that in Q2 we posted a net gain from the seven partially owned companies in AXT supply chain. In total, these factors contributed to a strong profitability in Q2 which more than doubled from the same quarter in the prior year. We're keeping these results with the continued growth and the emergence of a broad base of applications that require our products. And there are others such as 3-D fencing they are still to come. Presenting a path of opportunity over the next 18 months. As such we are actively preparing our substrate business will grow in a number of ways. Including the ongoing relocation of all gallium arsenide and germanium manufacturing which is progressing according to plan. Now for a review of our markets. Let's begin with indium phosphide. We achieved a record quarter for indium phosphide revenue in Q2. Demand was solid from all the primary application is for the substrates. The power market was the largest contributor to our increasing sales this quarter. Demand was particularly strong in China driven by increasing number of broadband subscribers. We believe that the ongoing need for faster networks and increasing fiber to the home requirements will continue to fuel these applications. Though it may be somewhat lumpy in the second half. Meanwhile, we're beginning to see an improvement in demand for indium phosphide…

Thank you, Morris. As we discussed, we are encouraged to see upside potential across the portfolio and believe we are well positioned in many applications that will drive our business growth in 2018 and beyond as such we expect to see revenue in Q3 between $27.5 million to $28.5 million. We believe our profit per share in Q3 will be in the range of $0.08 to $0.10 based on 40.316 million diluted common shares outstanding. This concludes our prepared comments. Morris now would be glad to answer your questions now. Operator?

Thank you. [Operator Instructions] And our first question comes from the line of Edwin Mok with Needham. Your line is now open. Mr. Mok, your line is now open.

Congrats for great quarter. Great quarter and great guidance. My first question is on indium phosphide. Morris, you mentioned on the prepared remarks that you see some volatility around the PON market in the second half of this year but you expect certain photonics to come back stronger. Are those offsetting you'd expect to see more growth in the coming quarters just directionally is there a way to think about that?

We do expect indium phosphide to continue to grow, but off course the growth driver for the first half was mostly car, but we think the silicon photonics probably will start to shoulder more growth in second half.

I see. So, you expect overall to grow but the driver will be different in the second half versus first half that's the way we should think about it. Is that correct?

Yes.

Yes, okay. And then on raw material at least that the price has gone up quite a bit but we haven't seen the raw material revenue grow much is it because you're using more of that for your substrate and therefore even though your subsidiary are enjoying this higher price you're not, you're selling actually lower into the market is that how we should think about that?

Gary any comments on that?

Well it was up 10% Q-on-Q. No, I don't think there is anything any real color or something to read between the lines. It's up. It's known in the public that the raw materials prices generally are up and it's too big to determine what happens quarter-to-quarter.

So, let me a little color about our joint ventures. We have three consolidated company. I mean one is dealing with raw gallium and the other it's refined gallium and third one is pBN we call it. But I think through the last three four years, the main contributor to our joint venture revenue has shifted more towards the pBN layer as well as refined gallium. The raw gallium used to be the predominant revenue driver for our joint venture business now become a distant story.

And pBN by the way is for high temperature crucibles. So, we use those in our own ingot growth process and the company that makes them also sells in the open market.

And the other things I made comment is that although the raw material price has recovered and so we turned from negative into positive. But nonetheless it has not reached the old-time history. The gallium prices are still selling for somewhere around let's say $200 a kilogram as compared to last year was only $110-$120 a kilogram which is all time low. But remember, back in 2011 gallium was selling for $800 to $900 a kilogram. So it hasn't reached that level yet, if it did then our joint venture revenue would have been $10 million I'm sure.

Great. That's very wonderful color. And I just want a guidance, you guys are guiding for higher revenues but then this point of EPS it's lower is it just because you are mauling less profit contrary from the joint venture, I think that was a driver for the EPS for this quarter, is that correct?

I think Edwin we're saying, we're guiding the revenue to be higher but then the profitability the EPS was not higher. So, this maybe a deal. Gary?

Well, I think probably the gross margin. I don't know but it helped from this lower cost of market write down that we've mentioned and that's probably not going to be repeated in the next quarter. So, I think it's, there might be some upside there but I think it's probably in the range of $0.08 - $0.10.

I would also ask to say, you got to compare guidance to guidance not performance versus guidance. Because this quarter after all it beat by $0.02.

Right. I see that you did realign this quarter. So, I guess we should just stick with the mid-thirties gross margin target. That's how you are targeting the model and that's how you are modelling the business it is quite like that?

I think I'm okay with somewhere in the 37.5 you know. I mean I was trying to keep the community at about 35% until we had a few more quarters go by to make sure that this was real, but so I'd say mid-thirties or maybe north of that towards 37 yes.

Great. That's actually very helpful color. That's all I have. Thank you.

Thanks Edwin.

Thank you. And our next question comes from the line of Gus Richard with Northland Capital. Your line is now open.

Yes. Thanks for taking my questions. Morris can you talk a little bit about the in case you're in process. Maybe how many customers you have qualified and are they LED customers are they what sort of customers have quarter at this point?

Gus, that's a difficult question. I mean I was looking at excel files table of number of customer qualifications sample we send and the number of customers that we send to. It's all cost aboard all the way from LED to RF to [indiscernible] and we are sending to qualification to lot of people.

Can you give us a sense? How many?

It's all major customers. I would say 100's of customers. I mean whoever wants to qualify. Some of them doesn't really require qualification.

Yes, universities and smaller consistent players that order small quantities. They'll do at best a paper quote. They'll just look at our internal characterization data and compare. But the revenue generating customer virtually is been given wafers and some are finished and some are still in the process. The most important thing to know is its pretty comprehensive. Secondly our internal call data is pretty much virtually identical I mean that was the goal that you could look at it away from sight from the old site and compare to the new site and not be able to tell the difference and that's happening. But we don't, to be honest more so than I have counted the excel sheet we've looked at it. But one of our senior level technical people running the spreadsheet for us. I don't have an exact number. But it's easy to say that all the customers that are large that had already given way for some.

I guess Gus this question perhaps may be more pertaining to how many are we starting to shift from the new side. I think the essence to that is our new site although was sending a lot of qualification sample too but new side has not turned out to be a production facility yet as of now. And we probably expect that to happen in the next month or so. And beginning perhaps the first one to run real production is probably germanium wafers.

Got it. And then just on the gross margin the upside from the previously written off material how much did that add to gross margin in the quarter.

I think it added about one percent.

One percent. Got it. Okay. I think that's it for me. Thanks so much.

Thanks Gus. Have a good afternoon.

Thank you. And our next question comes from the line of Richard Shannon with Craig-Hallum. Your line is now open.

Morrison and Gary thanks for taking my questions as well. I'd like to ask a question on the guidance for the third quarter on the revenues. Can you just give us brief high-level thoughts on direction of growth of your major categories within substrate as well as raw materials just to get a sense relatively speaking that would be great please.

Yes, I think indium phosphide will continue to grow. Germanium has got a growth driver. Raw material we are figuring it's probably going to stay flat and gallium arsenide I don't think there is anything which is major. I think wireless is probably a little bit weak. But we have many other opportunities. One was we're going to have some growth for the clone based gallium [indiscernible]. But you take gallium arsenide overall, I think it's weaker growth than most germanium and other.

It'll grow modestly in aggregate but it's the probably stronger growth than the other two products.

Okay. Perfect. Maybe to dig in one of those indium phosphide, it wasn't real clear to me the extend of contribution sequentially in the third quarter you are expecting from PON versus silicon atomics and other applications if you can make sure we really understand the direction that would be great too.

Well, I think PON's market was really strong in first quarter and second quarter but towards the end of the second quarter the PON's market start to turn south. There was a rumor and seeing customers have built some inventory and they but what they did say he will come back but to what degree we don't know but we do expect that silicon photonics to come back but again it's probably more back end loaded towards second half of third quarter. So, I think it's like indium phosphide, I think PON's market is little bit worse than the last quarter, but silicon photonics start to come back up. But silicon photonics we're not seeing as did it come back up. I expected revenue to be much more powerful then. And more stable.

And more stable.

Okay. Into that topic on silicon photonics you get a sense of there is inventory being burned through here any other sense of what's going on with that. I believe that's more of a singular customer but any color you can add there would be great.

Yes. That's why here. I think they have improved the yield and some of the previously out of the spec for the matter of the thickness spec I mean they would, it turns out that they can use it too. So they have the capability to expand their usage of our old inventory material but which will burn through quickly I believe and then once they burn through the inventory they will start to reorder.

Okay. Fair enough. Maybe one of two more quick questions from me. Wanted to touch on raw materials based on a previous question that I may not have caught all the details here [indiscernible] are you talking about some improvements in raw materials prices and I think you were saying that the raw gallium JV is actually distant in terms of contribution there. I've been tracking the gallium pricing for some time, it actually appears to be kind of flattening out or maybe even rolling over here. But I think it is raw gallium pricing number that I am tracking here. So, is there a divergence in pricing between the raw and refined gallium and are the trends in the other items I think the pBN crucibles I think is what you referred to is that continuing to grow or if you can give us any sense of trends there both revenue and profit wise?

Okay. That's a mouth full of questions. So, let me take that. The pBN, yes, I think it now turns out to be a very big contributor to our revenue for our JV's and our pBN crucible companies called ball you they used to be doing pBN for crucibles now they've found a new business line which is doing OLED. In OLED there's a lot of manufacturing components which requires pBN's high temperature stability properties so they are growing that business very nicely. As far as they are growing both revenue as well as better profitability. They are expanding the capacity in a big way, so we do expect them to do even better in the future quarters and the other thing that happened to these people in crucible company is that they had a German competitor who liked their products so much became buying a10% shareholder in the last quarter spending about $2 million to buy into our JV third partner. So, as a result you can see that joint venture is now valued at $20 million in equity value. So now getting into raw gallium. The raw gallium, the all-time low price was 700RMB per kilogram. I have been tracking on with Renminbi, I'm sorry I didn't exactly change it to US dollars. But you can certainly divide it by 6.5 and get the US dollars. That has increased to about 1500RMB per kilogram by some time in Q2. But as you said it's not rolling over back to around 1250RMB per kilogram. So, although it's not as great as the recent peak, but certainly is much better than what used to be the bottom of the market which is about 700RMB to 800RMB per kilogram. So, did I answer most of your questions?

Yes. You got them all. So Morris, thank you for that. And I'll just throw a last one in for Gary. On the non-consolidated joint-ventures you noted a positive contribution first time in 10 quarters. Do you expect that trend to continue i.e. to continue remain profitable for the foreseeable future or is there a different trend we should think about?

Well, you know me I like to see it happen few quarters in a row before I stick my neck out. I think it's, I'm not sure it's going to hit any home runs but I think there's a high likelihood it'll be at least break even or a little bit north of that. So we'll have to see you know if it really takes gets on a run or not so.

I think the market situation to me I think is a little bit complicated because first of all they say grade issue and the world economy is that. Nobody knows quicker which direction will go but normally when you see a raw material he usually had a very long cycle when it goes down goes out 5, 6, 7 years and when it goes up, it goes up at least 3, 4 years. So, now we are in the first beginning of the cycle I think. So how long it will go and you know this increase in demand for gallium is coming from both gallium arsenide and I saw an article in semiconductor today which is predicting gallium arsenide to grow tremendously fueled by this LED demand, the pixel demand that all is going to put pressure on the capacity of the gallium production. So, I don't think I mean sure it's going to go up and down a little bit about street direction but I do think that the man it will stop increase and that. The price of all this raw material.

Okay, perfect. Thanks for letting me ask all those questions guys. Thank you. That's all from me.

Thanks Richard.

Thank you. And our next question comes from the line of Hamed Khorsand with BWS Financial. Your line is now open.

Hi. So, first question I had was are you generating any revenue from the wafers that you are selling for the qualification process at the new facility?

Yes, usually. I don't think it's free samples. I think it's, we do deliver qualification wafers with - we have to get paid.

It's not a meaningful number Hamed. It's not going to be moving the needle in any big way.

Understood. And then are you managing the start-up process of the new facility given that you're seeing maybe like sluggish growth is probably the best way to say as far as what's going on right now. As far as managing capacity so there's no oversupply?

I don't think we said sluggish growth in any long-term way. Well, you know for us the PON market was slowing down.

But that's to me by the market and not how much we can produce. So, I think we have plenty of capacity.

No, he is asking that we're building too much.

Are we building too much? I don't think so. I mean we don't build, I mean we do have some redundant inventory as we stated in our prepared comments but it's all because they are customer demand, we don't build for nothing.

The footprint of the building will have some extra space that's deliberate that's not very expensive to include when you are building and then as I've said before the long pole on the tent for adding capacity is the facility. Once the facility is facilitated and then placed then we can get equipment moved in much more quickly. So facility might take a year, but equipment maybe from decision point to getting in the line and tuning it up could be 90 days. So, the strategy has been to make sure we have the facilitation and the footprint available and then we can add furnaces pretty fast.

And just given that you're still in this transition of moving to a new facility. How sustainable are gross margins at these levels that's been quite a bit out performance to what I was expecting?

Well, as I said I think the gross margin a reasonable place to be thinking is approximately 37.5. And I don't think it's so much necessary because where the facilities are happening but you know as the overall price of raw materials goes up we benefit even the operating line on the seven companies because they make more money but in general we will pay more for raw materials especially raw materials that are not bought from the three consolidated joint ventures because the characters are different. So that's going to be as a bit of a drag. No one should be forecasting north of 40% and you know we expect it's going to drift down a little bit but not because of any single thing about the facility, it's more about the influence of raw materials.

Yes, but there's also this redundant fixed cost though and so far, you've put up two quarters in a row above 37.5 I'm just adding Q4 was there at 37.2. So, is it more about leverage in the operating business or is it all just the product mix?

No. There is the overall increased volume then it absorbs more deeply if you will so we sometimes can be under absorbed if the volumes let's say south of 25 million and when we're in these ranges then the absorption from the fixed costs is better.

I think, Hamed may have a point is that sometime in the future let's say mid 2019 or early 2020 when our new facility start to come online. Now you're going to start to put that through your fixed overhead you could have dual location or three locations that give you that burden to absorb, but then we have always been saying we then will evaluate our Beijing for some of the we would start to decommission it.

Yes. So, Morris is correct there will be some overlap and if there is overlap and at the same time there is a revenue decrease and we start dipping south of $25 million it's going to be noticed, but if the revenue continues to tick up a bit from quarter to quarter it probably won't be noticed, it will just be absorbed in an increased volume.

You know there is other way you calculate it with that. The kind of facility we build our are depreciable in 25 years.

27.5 years.

27.5 years. So per quarter you think we have doubled counting on those facility using a vision helping a $0.5 million a quarter or something like that. You know you can't sort of quantify that. I mean I don't think it's going to be meaningful. I think yes you are right if you can start to get I'm excited about the data center business in 2019 as well as - and LEDs then if revenue start to go north and all those our…

Then we'll be glad we have all that equipment in facility. So, we will eventually, there will be some extra depreciation expense and the short answer is that we hope it will be absorbed by increase in revenue growth and volume growth. And then a side note is more saluted to is that at some point we will decommission some utilizations in Tong Mei Beijing and so then those are not in service and use then the GAAP accounting rules would say that it would have to stop depreciating them and then they are subject to the impairment valuation tests which would be is the site, is the book value of the site or the piece of the element of the site that you are examining let's say its part of the buildings I think is the book value of that item above the market value or below the market value. And so we will have to perform those tests. However, because the whole thing in the Beijing district that we're in is about the redevelopment of that of that section called [indiscernible] the real estate prices have moved up pretty dramatically in the last two or three years. And they will probably continue to increase. So, I can't say for sure but I think it's very very unlikely that there would be a facility impairment valuation.

Okay. Thank you.

Thanks Hamed.

Thank you. And our next question comes from the line of Jade Burke [ph] with Game Plan Financial Advisors. Your line is now open.

Good afternoon. Thanks for taking my question. I just wanted to follow-up kind of the long term demand for gallium arsenide substrates and specially there was a comment - at the Analyst Meeting with regards to thinking that gallium substrate would win back share in 5G cell phones. That was lost I believe back in the 2011-12 timeframe. So are you guys seeing any customer activity along those lines. Do you believe that to be the case and could you quantify, I mean I know it was a big deal in AXT history when that business went away in 2011 and it was big deal in gallium prices shortly thereafter when that volume was lost. Can you guys comment on any of that?

Sure. So, this is a very interesting question, yes you correctly remind me how painful that was when gallium arsenide lost of SOI for the pNB business for the switching business for the cell phones. But I think looking ahead for the 5G, I think most of the markets think that 5G will use higher frequencies. The first step is going to 6gigahertz and the next step is going to 28gigahertz. Now for 6gigahertz, I believe that gallium arsenide probably can see that market very well. But the number of chips will be used I don't believe it's going to dramatically increase the usage of gallium arsenide. But I will say the opportunity of AXT looking at 5G it's rather something forward. One is when you go to 28gigahertz and then the speed of those hand-held devices probably will start to require something more sophisticated and much more mature property wise probably would start to require [indiscernible] that would be a very good benefit to our indium phosphate substrate business. But not a whole lot of big opportunity for gallium arsenide although, gallium arsenide if you tune the device probably right, it probably can reach 28gigahertz too. But I think indium phosphate because of the natural property it's going to perform much better at much higher frequency. And the next frequency for 5G is actually 77gigahertz. As you see those higher and much higher frequency that requires a different material and indium phosphate by nature can handle higher frequency at a much easily. So there are other opportunity for 5G that is when you use 5G network, you will need a lot of cell phone towers. Right now 4G you have a cellphone repeater every square mile. So you see those cellphone towers along the highway, but when you deal…

No, that's very helpful. I would ask for clarification though you did say in your prepared remarks that the gallium -- some of the gallium strength, a driver to that was power amplifiers and I hadn't heard power amplifiers being a driver in your gallium business for quite sometime, so that lead to the question. So I was just seeking clarification but thank you for your feedback.

Okay. Anything else?

And I'm not showing any further questions at this time. I would now like to turn the call back over to Dr. Morris Young for any further remarks.

Thank you for participating in our conference call. We will be participating in the Jefferies 2018 Semiconductor Hardware & Communications Infrastructure Summit on Tuesday, August 28 in Chicago; and the Dougherty & Company 2018 Institutional Investor Conference on Thursday, September 6 in Minneapolis. We look forward to seeing many of you there. As always, please feel free to contact me, Gary Fischer or Leslie Green directly if you would like to meet with us. We look forward to speaking with you in the near future.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a wonderful day.