Fourth Quarter 2008 Results:
Revenue for the fourth quarter of 2008 was $15.6 million, compared with $17.9 million in the third quarter of 2008, and $17.6 million in the fourth quarter of 2007. Total gallium arsenide (GaAs) substrate revenue was $9.1 million for the fourth quarter of 2008, compared with $13.6 million in the third quarter of 2008, and $12.2 million in the fourth quarter of 2007. The decline in revenue in the fourth quarter of 2008 was primarily due to an overall market slowdown with lower than anticipated demand from customers and some push-out of scheduled shipments to the first and second quarters of 2009, which also resulted in lower production levels.
Indium phosphide (InP) substrate revenue was $473,000 for the fourth quarter of 2008, compared with $484,000 in the third quarter of 2008, and $330,000 in the fourth quarter of 2007. Germanium (Ge) substrate revenue was $684,000 compared with $795,000 in the third quarter of 2008 and $746,000 in the fourth quarter of 2007. Raw materials sales were $5.3 million for the fourth quarter of 2008, compared with $3.0 million in the third quarter of 2008 and $4.3 million in the fourth quarter of 2007.
Gross margin was 4.8% of revenue for the fourth quarter of 2008. This included a benefit from the sale of about $703,000 in fully reserved wafers, which positively affected the quarterly gross margin by 4.5 percentage points. By comparison, gross margin in the third quarter of 2008 was 25.4%. This included a benefit from the sales of about $769,000 in fully reserved wafers, which positively affected third quarter gross margin by 4.3 percentage points. Gross margin in the fourth quarter of 2007 was 30.1%, including a benefit from the sale of about $466,000 in fully reserved wafers, which positively affected the quarterly gross margins by 2.7 % percentage points.
The deterioration in gross margin in the fourth quarter of 2008 from the previous quarter was primarily due to the following:
Our gallium joint venture in China is housed in and receives services from an affiliated aluminum plant. Our joint venture ceased production for five weeks during the fourth quarter as a result of a supply shortage of raw materials from the aluminum plant, which had reduced production and halted operations due to falling aluminum prices in the second half of 2008. Accordingly, in order to meet customer supply obligations, our joint venture had to source finished products from another independent third party supplier, resulting in low gross margin for the quarter. Our joint venture has also sourced finished products from this independent third party supplier when demand has exceeded the joint venture’s capacity, and will continue to source finished products from this independent third party supplier, despite lower gross margins, if it again experiences power and supply shortages or if customer demand again exceeds its capacity; and
Gross margin was negatively impacted as a result of lower production volume (less overhead recoveries), higher warranty expense as a result of warranty reserves from certain customers resulting from our failure to meet specification requirements, and higher unfavorable variances due to lower yields from our GaAs production line.
Operating expenses were $4.1 million in the fourth quarter of 2008, compared with $5.5 million in the third quarter of 2008, and $3.7 million in the fourth quarter of 2007.
Loss from operations for the fourth quarter of 2008 was $3.4 million compared with loss from operations of $926,000 in the third quarter of 2008, and income from operations of $1.6 million in the fourth quarter of 2007.
Net interest and other income for the fourth quarter of 2008 was $656,000, compared with net interest and other income of $89,000 in the third quarter of 2008, and net interest and other income of $608,000 in the fourth quarter of 2007.
Net loss in the fourth quarter of 2008 was $2.4 million or $0.08 per diluted share, compared with net loss of $1 million or $0.03 per diluted share in the third quarter of 2008, and net income of $1.9 million, or $0.06 per diluted share in the fourth quarter of 2007.
Year 2008 Results:
Gross margin for year 2008 was 24.6% of revenue compared with 34.8% of revenue for year 2007.
Management Qualitative Comments:
2008 was a challenging but productive year for AXT, stated Phil Yin, chairman and chief executive officer. We recorded more than a 25% increase in revenue from 2007, successfully negotiated a new 2009 contract worth nearly $15 million with one of our largest customers, concluded a major qualification with a leading germanium substrate customer, expanded our customer base to include several top tier companies and laid important groundwork for growth when the macro environment strengthens. Still, the economic downturn in 2008, coupled with the inventory overhang in our industry and customer-specific issues that we continue to work through, put pressure on our financial performance and will have a significant impact on our first quarter 2009 results. As we look beyond the first quarter, we believe that the business will begin to improve as a result of pockets of strength in our gallium arsenide business, new qualifications of customers in the LED and photovoltaics market and our improved cost structure as a result of efforts to streamline our business in relation to the current demand environment. We remain encouraged by the overall trends in our industry and believe that we will successfully leverage our competitive advantages for growth and market share gains as the economy improves.
Outlook for First Quarter, Ending March 31, 2009:
The company anticipates revenue for the first quarter will decrease to between $7 million and $8 million. The company anticipates that net loss per diluted share will be between $0.05 and $0.08, which takes into account our weighted average share count of about 30.5 million shares.
