AXT Management Discusses Q2 2012 Results - Earnings Call Transcript

AXT (AXTI)

Q2 2012 Earnings Call

August 01, 2012 4:30 pm ET

Executives

Leslie Green

Raymond A. Low - Chief Financial Officer, Principal Accounting Officer, Vice President and Corporate Secretary

Morris S. Young - Co-Founder, Chief Executive Officer and Director

Analysts

Avinash Kant - D.A. Davidson & Co., Research Division

Edwin Mok - Needham & Company, LLC, Research Division

Richard C. Shannon - Craig-Hallum Capital Group LLC, Research Division

Dave Kang - B. Riley & Co., LLC, Research Division

Rob Ammann

Presentation

Operator

Good afternoon, everyone, and welcome to the AXT's Second Quarter 2012 Financial Conference Call. As a reminder, today's conference is being recorded. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Raymond Low, Chief Financial Officer. My name is Lisa, and I will be your coordinator for today. As a reminder, we will be conducting a question-and-answer session at the end of today's conference. Instructions will be given at that time. I would now like to turn the conference over to Leslie Green, Investor Relations for AXT.

Leslie Green

Thank you, Lisa, 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 and our ability to control costs and improve efficiency, increase orders in succeeding quarters, improve our competitive position as the market improves, as well as other market conditions and trends. 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 market in which the company competes, global financial conditions and uncertainty, 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 SEC and available online by 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 August 1, 2013. 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 second quarter of 2012. This press release could be accessed form the Investor Relations section of AXT's website at axt.com.

I would now like to turn the call over to Raymond Low for a review of the second quarter 2012 results. Ray?

Raymond A. Low

Thank you, Leslie. Revenue for the second quarter of 2012 was $25.2 million compared with $23.5 million in the first quarter of 2012. Total gallium arsenide substrate revenue was $14.9 million in the second quarter of 2012 compared with $12.2 million in the first quarter of 2012. Indium phosphide substrate revenue was $1.3 million for the second quarter of 2012 compared with $1.5 million in the first quarter of 2012. Germanium substrate revenue was $2.5 million (sic) [$2.4 million] for the second quarter of 2012 compared with $2.6 million in the first quarter of 2012. Raw material sales were $6.5 million for the second quarter of 2012 compared with $7.2 million in the first quarter of 2012.

In the second quarter of 2012, revenue from North America was 17%, Asia Pacific was 64% and Europe was 19% of total revenue. One customer generated more than 10% of our revenue during the second quarter, while the top 5 customers generated 39.3% of our second quarter revenue.

Gross margin in the second quarter was 29.8% compared with 34.9% of revenue for the first quarter of 2012. The drop in gross margin was largely the result of the new People's Republic of China value-added tax, or VAT, levied on foreign enterprises that import materials, which do not form part of the final product. AXT recently received notice of the retroactive VAT, which applies to the period of July 1, 2011, to June 30, 2012, and amounted to $1.27 million expense in the quarter ended June 30, 2012, which resulted in a 505 basis points impact to gross margins. Excluding the effect of this VAT tax, gross margins in the second quarter would have been 34.9%. Going forward, we expect that this new VAT will negatively impact gross margins by approximately 150 basis points per quarter.

Selling, general and administrative expenses were $4 million for the second quarter of 2012 compared with $3.9 million in the first quarter of 2012. Research and development cost was $914,000 for the second quarter of 2012 compared with $835,000 for the first quarter of 2012. Total stock-compensation expense was $292,000 for the second quarter of 2012, of which $18,000 was included in cost of revenues, $239,000 in SG&A and $35,000 in R&D.

Income from operations for the second quarter of 2012 was $2.6 million compared with income from operations of $3.6 million in the first quarter of 2012. Net interest and other income for the second quarter of 2012 was $219,000. Net income in the second quarter of 2012 was $1.3 million or $0.04 per diluted share. Without the effect of the retroactive VAT, net income in the second quarter would have been $2.6 million or $0.08 per diluted share. This compares with net income of $1.6 million or $0.05 per diluted share in the first quarter of 2012.

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