AXTI

AXT Inc (AXTI)

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AXT Inc. (AXTI)

Q4 2007 Earnings Call

February 26, 2008 4:30 pm ET

Executives

Philip Yin - Chairman and CEO

Wilson Cheung - CFO

Analysts

Pierre Maccagno - Needham

Avinash Kant - Broadpoint Capital

Richard Shannon - Northland Securities

Dave Kang - Roth Capital

Jiwon Lee - Sidoti & Company

Peter Castellanos - Glacier Partners

Rusty Cannon - RKC Capital

Presentation

Operator

Good afternoon ladies and gentlemen, and welcome to the AXT, Inc. fourth quarter and fiscal 2007 Earnings Call. I would now like to turn the meeting over to Phil Yin, Chairman and CEO. Please go ahead, Mr. Yin.

Phil Yin

Good afternoon, everyone and welcome to AXTs fourth quarter and fiscal year 2007 conference call.

I am Phil Yin, Chairman and Chief Executive Officer and I would like to thank you for taking the time to be with us. With me today is Wilson Cheung, our Chief Financial Officer. Wilson will take you through a detailed financial overview of our fourth quarter and our fiscal year results and then I will give you my perspective of our markets and future opportunities. Following the conclusion of my comments Wilson will provide forward-looking guidance and then we will open up the call to your questions. Wilson?

Wilson Cheung

Thank you Phil. 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 maintain profitability, control costs and improve efficiency, the impact of customer qualification of our products, growth in our customer base and expansion of our addressable market, increasing market share, industry trends that are driving increasing demand for our products, the growth in the handset market, increasing prevalence of LEDs in a wide variety of lighting applications, the worldwide adoption of solar energy, our expansion into complementary technologies which allows us to increase our product portfolio, as well as market conditions and trends.

We wish to caution you that such statements deal with future events, are based upon management's current expectations and are subject to risks and uncertainties that could cause actual events or results to differ materially. 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 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 February 26, 2009.

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 and fiscal year 2007. This press release can be accessed from the Investor Relations section of AXT's website at AXT.com.

Now, turning to our financial results, revenue for the fourth quarter of 2007 was $17.6 million, a 21% increase from $14.5 million in the third quarter of 2007. Gallium arsenide substrate revenue was $12.3 million for the first quarter of 2007, compared with $9.9 million in the third quarter of 2007, specifically, six-inch diameter wafer sales worth $4.3 million for the fourth quarter, compared with $2.2 million in the third quarter of 2007.

Indium phosphide substrate revenue was $330,000 for the fourth quarter of 2007, compared with $408,000 in the fourth quarter. Germanium substrate revenue was $747,000 compared with $536,000 in the fourth quarter. Finally, sales of raw materials, primarily 99.99% pure gallium, were $4.3 million in the fourth quarter of 2007, compared with $3.6 million in the third quarter, as a result of additional sales to Asian customers. However, we are seeing raw material prices stabilizing in 2008 and expect sales to return the $3.5 to $4 million range in the first quarter of 2008.

In the fourth quarter of 2007, revenue from North America was 17%, Asia-Pacific was 67% and Europe was 16% of total revenue. No customer generated more than 10% of our revenue during the fourth quarter, while the top five customers generated 39% of our fourth quarter revenue. Gross margin was 30.1% of revenue for the fourth quarter of 2007. This included a benefit from a sale of approximately 466,000 in full reserved wafer, which positively affected the quarterly gross margin by 2.7 percentage points. By comparison, gross margin in the third quarter of 2007 was 31.3%. This included a benefit from the sales of approximately 556,000 in fully reserved wafers, which positively affected fourth quarter gross margin by 3.8 percentage points.

With regards to gross margins, it is important to note that since the beginning of 2007, we have made a conscious effort to capture additional market share. Our business has generated gross margin since that time in the low-to-mid 30% range including some special items, such as sales of fully reserved wafers, which caused our margins to come in higher. We outlined those items so that investors can understand the composition of our margin performance.

We believe that this strategy to gain market share has resulted in considerable additional revenues and allowed us to record high gross profits and accordingly better operating margins and EPS. This fourth quarter for example our operating margin improved from Q3 7.4% to 8.9%.

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