Good afternoon, everyone and welcome to AXT’s Fourth Quarter and Fiscal Year 2021 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer and Gary Fischer, Chief Financial Officer. My name is Justin and I will be your coordinator for today. [Operator Instructions] Please be advised that this call is being recorded. [Operator instructions] I would now like to turn the call over to Leslie Green, Investor Relations for AXT.

Thank you, Justin and good afternoon everyone. Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements regarding, among other things, the future financial performance of the company, market conditions and trends, including expected growth in the markets we serve, emerging applications using chips or devices fabricated on our substrates, our product mix, our ability to increase orders in succeeding quarters, to control costs and expenses, to improve manufacturing yields and efficiencies, to utilize our manufacturing capacity, the growing environmental, health and safety and chemical industry regulations in China as well as global economic and political conditions, including trade tariffs and restrictions. We wish to caution you that such statements deal with future events, are based on management’s current expectations and are subject to risks and uncertainties that could cause actual events or results to differ materially. These uncertainties and risks include, but are not limited to, overall conditions in the markets in which the company competes, global financial conditions and uncertainties, COVID-19 and other outbreaks of contagious disease, potential tariffs and trade restrictions, increased environmental regulations in China, market acceptance and the demand for the company’s products, 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 maybe 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 2023. Also, before we begin, I want to note that shortly following the close of the market today, we issued a press release reporting financial results for the fourth quarter and fiscal year of 2021. 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 and fiscal 2021 results. Gary?

Thank you, Leslie and good afternoon, everyone. As a reminder, in response to investor request and to align with our peers, as well as to provide better clarity on our operational financial results, we will be providing both GAAP and non-GAAP financial results. Non-GAAP results, exclude stock based compensation. Investors can find a GAAP to non-GAAP reconciliation tables in our earnings announcement. Today, we are pleased to report that total revenue for the full quarter of 2021 was $37.7 million up 9% from $34.6 million in the third quarter of 2021 and up 40% from $27.0 million in the fourth quarter of 2020. Q4 marks are eight consecutive quarter of growth and highlights the market expansion and increasing demand for our indium phosphide and gallium arsenide substrates. To break down our Q4 '21 revenue for you by product category, indium phosphide was $13.1 million, gallium arsenide was $11.3 million, germanium was $4.2 million and revenue from our two consolidated raw material joint venture companies was $9.1 million. In the fourth quarter, revenue from Asia Pacific was 74.9%, Europe was 16.7% and North America was 8.4%. Again in Q4, no customers reached 10% of revenue and the top five customers generated approximately 29% of total revenue. Our continued revenue diversity demonstrates that our growth is not overly dependent on one large customer or application. This was another factor contributing to our confidence that our growth has reached a point of sustainability and will continue throughout 2022. Non-GAAP gross margin in the fourth quarter was 32.4% compared with 33.8% in Q3 of 2021 and 34.0% in Q4 of 2020. For those who prefer to track results on a GAAP basis, gross margin in the fourth quarter was 32.2% compared to 33.3% in Q3 of '21 and 33.9% in Q4 of 2020. Our…

Thank you, Gary and good afternoon, everybody. 2021 marked a significant turning point in our business. As Gary mentioned, we grew 44% in a single year and more than 65% over our 2019 revenue results. We believe that we are hitting a inflection point in which applications that were once considered bleeding edge are now coming to market for more mainstream adoptions. Across our portfolio, we're working with customers for new innovations, helping to rethink what is possible and advancing specialty material into areas the market might not have conceived of just a few years ago. To prepare for this growth in opportunity, we have modernized and exceed into a supplier capable of meeting the requirement of tier one customers. Over the last four years, we successfully relocated and expanded our facilities with three world class locations. We upgraded our business and manufacturing systems and processes. We grew our supply chain for critical materials, and we invested in both our technology roadmap and our customer's success. The growth you are seeing in our business is a result, not just one or two quarter of success, but eight consecutive quarters of increasing revenue with historically low customer attrition. In 2021, our indium phosphide business grew by 41% and is now our single largest revenue contributor. Gallium arsenide substrates grew by 38% driven by wide variety of applications and germanium substrate grew by 18%. As Gary said, our increase in revenue is organic. It comes from expansion of our markets from our own market share gains and strategic customer wins all of which has a long term growth opportunity still to come. In 2022, we expect continued momentum in the indium phosphide based optical applications for telecom and data center and modernization. 5G is a big driver alongside a more general global…

Thank you, Morris. As Morris discussed, the demand environment remains strong in Q1 coming off a very strong Q4. In fiscal year '21, we're expecting revenue to be between $38 million and $40 million in Q1 of this year. In accordance with our commentary on gross margin, we believe that our non-GAAP net profit will be in the range of $0.07 to $0.09 and GAAP net profit will be in the range of $0.05 to $0.07. Share count will be approximately 42.8 million shares. Okay. This concludes our prepared comments. Morris and I and Leslie will be glad to answer your just now. Operator?

[Operator instructions] And our first question comes from Richard Shannon from Craig-Hallum. You line is now open

Well. Hi Morris, Gary and Leslie. Thanks for taking my questions. A couple quick ones on the on the guidance here. Obviously a very, very nice numbers on the top line, but let me focus on gross margins here. First, given the bottom line profit numbers here in EPS, it would suggest that gross margins aren't going to be improving much sequentially if at all. How would you characterize that and all the dynamics that hurt the gross margins in the second half of last year? Are they improving to a degree and then any effects of mix in there as well, please?

Well, I'll go first and Morris can follow. Actually we think gross margin will improve quarterly to quarter this year. We think this coming Q1 is probably the bottom and we'll see things improve. So I would say that the cost of running the business all the way from raw materials to manufacturing, consumables, like polishing pads, labor, they have gone up a surprising amount. So I think we're playing catch as to how to handle that. Now that we see the light, we don't think it's going to get it magically turn back and get better. So we have to take other steps to handle that. But I think yield efficiencies can be improved. We're certain that product mix will continue to link towards indium phosphide. We're certain about revenue growth, very confident there. So all of those combined to help the gross margin percent and as we move through the year, we'll take a look perhaps if, whether we should try and raise some ASPs.

Yeah. Richard, let me tell you from my perspective. Indeed, raw material plus electricity, you name it, everything has gone up, and this is one, this one has not happened in the last what, 15 years or so. So it's very strong and internally we are already talking among ourselves. We think it's time for us to ask our customers to work with us and see, we can do some adjustment to be part of the cost. So, that's question number one. I think we'll be successful in certain areas. We definitely are starting to do that already. And the second is that as Gary said there are some efficiency improvement that we need to do to ourselves to lower our costs. And thirdly, I think, last year we started to get into some of the lower margin business just to get ourselves our foot into the door, because we know that there's a shortage of the HBT market and this is quite substantial among of shortage. So we took a lower margin business to get in there, but we think as we get qualified, we should be able to get not only the volume increase, but also improve our margin as we go into a more formal delivery to that market.

Okay. Some good stuff to think about there. While I pondered that, let me get to another question here Morris on your growth, the outlook for this year reiterated your belief of 15% to 20%, and you gave us a number for indium phosphide of 35% to 40%. I guess the first part of the question I'd like to ask is with the health sensing applications, how much of that application is contributing to that growth? Is it a small amount, medium amount and is this one customer or more than one customer contributing to that this year?

The design win we talked about in our script was one customer and they start to ramp in the fourth quarter. The revenue is meaningful. But I think it's more meaning it's even more exciting is I think there are two more products to be introduced sometime this year and we believe one is coming perhaps as early as Q3.

Okay. So just to make sure you see this as a meaningful contributor to the growth profile of indium this year or a meaningful amount, excuse me.

Yes.

Okay. Excellent. That's helpful. Maybe following back up on the growth margin topic here again, Gary, in your prepared remarks you talked about hoping to reach 35%. Do you require pricing increases to make that a reality or is that something you can do just with yields and maybe volumes and other things on the cost side?

I think we probably need some help on the pricing too.

Okay. Let's see here. Gary, I think you also mentioned a strategic customer that was, I think you're giving some good pricing that her gross margins a little bit. Is that specifically referring to the health sensing application or is this something else?

No, it was a HBT market.

HBT market. Okay. That's helpful. I guess last one question for me. I will jump out the line here. CapEx, I think you spent $10.5 million last quarter. What's the outlook for this year? When do we get to more of a normal run rate here? We still have heavy amounts of capacity and other investments to make here this year.

Yeah, that's a good question. We're trying to soft land some of the CapEx stuff and wind it down, but we really view this as an investment time or the market is red hot and so we need to stay up with it. So normally we would do $4 million to $6 million in equipment. I think this year it could be between $7 million and $9 million. So that's the normal stuff. We'll probably have to do some facility work for indium phosphide, which will be several millions of dollars maybe as much as $5 million. But again, we view that as an investment. The horizon looks very bright and we certainly have got the attention of the customer base because we're the ones that can move the fastest and grow capacity. So micro LED is being studied carefully. We don't know for sure where that's going yet. So if it heats up, then we may do some CapEx in that category as well, but that's to be determined. So, we'll keep you posted. So that's kind of our sense of that for that time. Yeah.

Okay. Perfect. I think that's all for me. I will jump on a line. Thanks guys.

[Operator instructions] And our next question comes from Hamed Khorsand from BWS Financial. Your line is not open.

Hi. So first off, I just wanted to see you, you've usually in the historically not had so much clarity as far as growth is considered for throughout the year. What's giving you that clarity this year?

Yeah, that's a very good question. I'm glad you noticed that. We usually don't have visibility even to the next quarter, but we have because of the increasing demand and from what we know quite a few of this product, for instance, let me give you example for indium phosphide. We are certainly sold out. We have extended our lead time. We normally call four to six weeks now it's up to eight to 10 weeks. Okay. And, also from our marketing check, our competitors lead time is even longer okay. And for the HBT for gallium arsenide, the lead time is extremely long and that was the reason why we have exited that market for many years and now the customers are coming back to us and asking us if we can build some capacity for them. We are in close, discussion with them and see if we want to get into that market. So we do have good visibility. We also have good visibility in terms of micro LED however, because it's a new market. So we are not counting it in until we see it clearly that it's going to come to fruition. But as you can see that we already started to generate revenue from installing arsenate, so even that is giving us better, better visibility of how things will shape up. So yes, you're right. The visibility is better. And in fact, we never thought we, in the past years, we can never say, well, this year our indium phosphide will grow 35% to 40%. We think we have high confidence, it will grow that fast.

Okay. And then what actions or process are you taking to prevent double ordering as far as your customers are concerned?

That's a good question. I think maybe the confidence level from us is this way. You see some of these let's say the design win we had last fourth quarter of last year, we worked with this customer almost for 2.5 years. We finally got it and double ordering or whether they building inventory that could also happen, but we are not seeing it. We don't, we don't see a big jump up on demand. In fact, our indium phosphide capacity as of now is all sold out. And that's why our lead time is getting up to 10 weeks. And from what we know our competitors even longer and I think our competitors are more reluctant, I believe to build capacity. To build capacity these days is not a easy thing to do especially in indium phosphide. It's a very difficult process to establish and we believe that we have advantage of building the capacity quickly for them.

Okay. My last question was Gary, what's the adequate level that you think you could preserve cash? You've continuously burned cash throughout this growth process. When could we see a reversal of that?

Well, I think it's directly linked to a CapEx. And I don't have a CapEx plan for 2023, but I'm hoping that we'll see a slope down. So, but I would say that I'm comfortable with our cash position. inventory took a big jump up during last year. So, I don't see that, having to go up a lot more. And we're still looking again until the IPO happens. We're looking at some bank borrowing in China. It's an interesting note once our IPO application was accepted, which was on January 10, there's surprisingly a lot more interest from the banks for Tongmei to secure debt. So it's having maybe even Morris can comment also, but there's kind of a ripple effect of different organizations and China base institutions that are excited about Tongmei are excited about the IPO. So but yeah, I don't think cash. I'm not losing sleep over cash, but we do watch it carefully and, I know it went down in the Q2, but I think we're okay. So…

Well, I would, I would add on to this, look, 44% growth takes a lot of more equipment facilities and inventory account receivable. I'm not a financial expert, but I know all that requires cash. And, but I think we are generating good cash flow, Gary. we did a cash flow analysis. We think we can handle it, but I think, going forward, if you think some investor probably wants to see the cash flow slow down. I think otherwise I think when we have cash flow over strongly, that means our business is growing. We need a cash to grow our business. Since when we, we can get very close to $40 million a quarter. And my goal is sometime this year, we're going to break 50 million a quarter that's unthinkable just a year or two ago. And that all means, better organization, better foundation, which we're building. That all means cash.

Great. Thank you.

Thanks, Hamed .

And thank you. And I am showing no further questions I would now like to turn the call back over to Dr. Morris young for closing remarks.

Thank you for participating in our conference call. As always feel free to contact me Gary Fisher or Leslie Green directly. If you would like to set up a call, I would like to forward -- I will looking forward to speak with you in the near future.

Thanks everybody.

This concludes today's conference call. Thank you for participating. You may now disconnect.