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2008 Interview with: AXT, Inc. (AXTI-NASDAQ), CFO, Wilson W. Cheung - featuring: their high-performance compound and single element semiconductor substrates comprising gallium arsenide (GaAs), indium phosphide (InP) and germanium (Ge). |
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| AXT, Inc. (AXTI-NASDAQ) | |
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AXT’s New Management Team Has
Successfully Turned The Company Around And Returned To Profitability With
Approximately A 20% Market Share Today
AXT designs, develops, manufactures and
distributes high-performance compound and single element semiconductor
substrates comprising gallium arsenide (GaAs), indium phosphide (InP) and
germanium (Ge) through its manufacturing facilities in Beijing, China. In
addition, AXT maintains its sales, administration and customer service
functions at its headquarters in Fremont, California. The company’s
substrate products are used primarily in lighting display applications,
wireless communications, and fiber optic communications. Its vertical
gradient freeze (VGF) technique for manufacturing semiconductor substrates
provides significant benefits over other methods and enabled AXT to become a
leading manufacturer of such substrates, particularly in optoelectronics
applications. AXT has manufacturing facilities in China and invests in five
joint ventures producing raw materials. Mr. Cheung: “AXT back in 2004 had some very unique challenges in that it had recently completed the move of its manufacturing facility to China and had encountered some issues as a result. I believed my background and experience in dealing with China operations and turn around situations would fit well into this role. Also, AXT is in the compound semiconductor business, which is a very special industry with excellent growth potential. Today, we are a company that is growing very rapidly with primarily three industry applications. Our core business is gallium arsenide (GaAs) substrates, which relates to both wireless handsets and LED’s, and is growing at a healthy compounded annual growth rate. The second business that attracted me is the germanium (Ge) substrate business for solar applications, which has tremendous potential. Finally, we have the indium phosphide (InP) substrate business, which is quite specialized. We also have a very unique business model because the company wisely invested years ago into five raw material joint ventures that supply all of our critical raw materials and give us supply and price guarantees. So AXT had great potential.”
CEOCFO: What have you done to turn things around? Mr. Cheung: “Back in 2002/2003 when we began to move our manufacturing facility to China we encountered some quality issues that were difficult to detect prior to shipping materials to our customers. Accordingly, we experienced a significant number of customer disqualifications, our sales had declined sharply and the company’s market share plummeted into the single digits. So in the middle of 2005, the company recruited a new management team with Dr. Phil Yin, our new chairman and CEO, leading the new organization. Dr. Yin revamped the entire operations and sales organizations and recruited many senior management staff, including our chief operating officer, VP of sales and VP of business development, all of whom have worked with or for Dr. Yin for many years. Our chief operating officer, in particular, is based in China and he and his new team were able to resolve the majority of the haze issue within several months. Since 2005, we have continued to improve our product quality and have now regained our credibility and reputation. We also turned profitable by Q3 of 2006, and now have approximately 20% market share. Accordingly, we are targeting about 30% market share by the end of 2008, which will put us in the No. 1 market share position according to Strategy Analytics.”
CEOCFO: Would you explain what is it you make and who is using it? Mr. Cheung: “We are a substrate supplier for the compound semiconductor industry; we would liken ourselves to the foundation of a house. Certain types of electronic devices are built upon our substrates, such as power amplifiers and switches for cellular handsets and optoelectronic devices such as LED’s. We manufacture the bare wafers and we sell to two types of customers: we sell to the foundries who grow an epi layer on top of our substrates, and we also sell to device makers who grow their own epi but also outsource to the foundries when they run out of capacity. The epi ready wafers will be further made into devices I mentioned previously.”
CEOCFO: What sets you apart? Mr. Cheung: “We have several competitive advantages. First of all, our manufacturing facility is in China where our labor cost component is low, relatively speaking, to our competition. Secondly, as I mentioned, we have five joint ventures in China and they supply raw materials to us. Raw materials include but are not limited to gallium (Ga), arsenic (As), and germanium (Ge), which guarantees us supply and protects us from any abrupt price fluctuations. We are in a very good position because our joint ventures have a road map to continue to meet our demand as our needs and products continue to grow.”
CEOCFO: Please tell us about your bread and butter business and the new areas you are going into. Mr. Cheung: “Our bread and butter business continues to be the gallium arsenide (GaAs) business, which right now makes up about 70% of our overall business. We continue to expand our gallium arsenide business due to the continued growth and demand of the wireless handset and LED markets and our success in regaining market share from our competitors. Both of these markets are expected to grow nicely in the next four to five years, so we are very optimistic about our future. In addition to the gallium arsenide business, we are also growing our germanium (Ge) substrate business at a very substantial rate due to the demand for solar energy, especially in the terrestrial applications for concentrated photovoltaic (or CPV) solar cells. In fact, we doubled our germanium substrate revenues in Q1 of 2008 from Q4 of 2007 alone. Granted, we are working from a smaller base of revenue at this time but the potential is very exciting. We expect to increase the germanium substrate revenue sequentially at a very robust rate as we get more customer qualifications. We believe that the energy crunch and further development in CPV’s will drive our growth in the germanium substrate business. I always tell investors that this is the ‘Blue Bird’ business for AXT.”
CEOCFO: What is the competitive landscape and why are your customers choosing to go with your products? Mr. Cheung: “We have two primary competitors in our core business who are located in Japan and Germany. So one of our strong differentiators is that it is more cost effective for us to scale our operations and meet customer demands. As our industry has grown, we help our customers keep up with demand, particularly in the larger diameter substrates. Also, we are the only supplier with joint ventures in raw materials. That helps us guarantee our customers that we can supply them and it also helps us be very competitive from a cost standpoint. Gallium and arsenic are strategic materials and they will only get more scarce. Our competition, because they do not have fully integrated joint ventures like we do, have to go out and buy raw materials on the open market at higher market prices. In fact, our competition is buying raw materials from our joint ventures. This has been the key competitive advantage for us.”
CEOCFO: What is the financial picture of the company today? Mr. Cheung: “AXT financially is quite solid these days. If you look at our balance sheet, there are a couple of things noteworthy. Regarding our cash, we have about $40 million as of March 2008; we are planning to use the cash primarily for working capital purposes. We have very little debt right now and are planning to pay down $6.5 million of debt on July 1st. At that time, we will become a debt-free company. From the income statement perspective, we have been profitable since Q3 of 2006, and we believe as we move into 2009, our growing business will continually contribute more to the bottom line.”
CEOCFO: What are the challenges and advantages about working in China? Mr. Cheung: “You have to deal with different cultures, languages and time zones on a daily basis, which is just part of being a global company. However, one of the things that is very beneficial for us is the cost. Before 2004, when the majority of our manufacturing operations were still in the US, labor cost was about 30% of our total cost of revenues. Right now, our labor costs are about 10%. We also have very good relationships with the local government because one of our founders, who is the president of our joint venture operations, is a local long-time Beijing resident. We are proud of our facility and doing business over there.”
CEOCFO: What is the general philosophy of the company because that really makes a difference in success?
Mr. Cheung:
“Our Chairman and CEO, Dr. Yin, has recruited a management team, all of whom
have a customer-centric attitude. Because of this, we were able to resolve
the majority of our quality issues back in 2005 and put the company back on
the right track. We put together a very good get-well plan and we shared
that with our customers and investors. We also established very realistic
milestones which I think are all key contributors to success in turning this
company back to profitability.” CEOCFO: What do you expect to see in the next few years and why should potential investors be interested? Mr. Cheung: “There are a couple of things. If you look at the revenue streams, they are in three very robust industries; the wireless handset market, the LED market, and the germanium market for solar. Secondly, if you look at the company’s operating structure, we have always been cost-conscious and we have right-sized the company since 2005 to an infrastructure where we can support over $20 million in quarterly revenues. This is also very evident when you look at our operating margins, which have improved sequentially from about 8% three quarters ago to the current 10%. We continue to strive for improvement so more dollars can go to the bottom line. In addition to financial leverages, look at our competitive advantages over our competition. We are in China and strategically integrated with our joint ventures, so we have a steady stream of support on raw materials. Last but not least, you need to look at the management team. We have a very solid management team and we have executed many important milestones allowing us to recapture market share. But don’t get me wrong, investors have not missed the boat because we are only half way to where we want to be.”
CEOCFO: Is the investment community in general starting to pay attention? Mr. Cheung: “Yes, particularly in the last twelve months. It is also coupled with the fact that we are now active in marketing the company and we are working with several sell-side firms who provide us research coverage. We are doing road shows, and are trying to visit as many funds and institutions in the country as possible, immediately after the quarterly earnings releases. We would love to reach out to new investors and expand our shareholder base every quarter through participation in financial conferences and other investor interactions.”
CEOCFO: What should people remember most when reading the AXT story?
Mr.
Cheung: “People
need to remember that we are a growing company in a great market. But we are
still underfollowed and we believe that our stock has a lot of room for
growth.” |
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“In the middle of 2005, the company recruited a new management team with Dr. Phil Yin, our new chairman and CEO, leading the new organization. Dr. Yin revamped the entire operations and sales organizations and recruited many senior management staff, including our chief operating officer, VP of sales and VP of business development, all of whom have worked with or for Dr. Yin for many years. Our chief operating officer, in particular, is based in China and he and his new team were able to resolve the majority of the haze issue within several months. Since 2005, we have continued to improve our product quality and have now regained our credibility and reputation. We also turned profitable by Q3 of 2006, and now have approximately 20% market share. Accordingly, we are targeting about 30% market share by the end of 2008, which will put us in the No. 1 market share position according to Strategy Analytics.” - Wilson W. Cheung |
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