Q4 2020 AXT Inc Earnings Call
Good afternoon, everyone and welcome to E X piece fourth quarter and fiscal 'twenty 'twenty Financial conference call, leading the call today is Dr. Morris Young Chief Executive Officer, and Gary Fischer, Chief Financial Officer. My name is waning and I will be a coordinator today at this time.
All participants lines are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone.
Please be advised that today's conference is the EBIT luggage. If you require any further assistance. Please press star zero.
I would now like to turn the call over to Leslie Green Investor Relations for <unk>.
Please go ahead ma'am.
Thank you, Brian 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 Sydney market conditions and trends, including expected growth in the markets we serve.
Emerging applications using chips or devices fabricated on our substrate, 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 schedule and timeliness regarding our relocation the.
Rowing, 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 best are based on management's current expectations and are subject to risks and uncertainties that could cause a.
[noise] 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 of COVID-19, and other out and the other outbreaks of contagious disease potential tariffs and trade restrictions increased environmental.
<unk> in China market acceptance and 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 may be discussed in this call. We refer you to the company's periodic reports filed with the securities.
Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results for materially from our current expectations. Just conference call will be available on our website at <unk> Dot com through February 18th 2022.
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 'twenty fiscal year 2020. This information is available on the Investor Relations portion of our website at AXT Dot Com I would now like to turn the call over to Gary Fischer with a review of our fourth quarter.
And fiscal year results Gary.
Thank you Leslie and good afternoon, everyone total.
Revenue for the fourth quarter of 2020 was 27.0 million up 6% from $25 5 million in the third quarter of 2020.
And up more than 46% from $18 4 million in the fourth quarter of 2019.
Of our total revenue growth.
Sales were $21 5 million in Q4, compared with $20 3 million in third quarter and.
And for $14 five in the two for 2019 revenue from our raw material joint ventures was $5 5 million in Q4 up from $5 2 million in Q3 and up from three 9 million from Q4.
In the fourth quarter of 2020 revenue from Asia Pacific was 71 per cent Europe for 16 in Taiwan was 13% in North America was searching bradesco.
Thanks for Taiwan.
Right so.
In the fourth quarter, two customers reached 10% of revenue and the top five customers generated approximately 37 per cent of total revenue.
Gross margin in the fourth quarter was 33, 9% down slightly from 34 six per cent and the prior quarter.
Given that in Q4 of 2019, the gross margin was 21 per cent year on year comparisons very encourage.
This spread is a quick illustration of the leverage we get from higher revenue and I think it is noteworthy in terms of evaluating our business model.
Both Q3 of 2020 and the recent Q4 are much stronger.
I think we can still achieve higher than the recent two quarters in terms of gross margin and Morris and I will be watching for some specific items. One of course is product mix and other was overall revenue volume a third is that we think there are still some gains to be made in yields and manufacturing efficiencies and manufacturing teams settled into the new locations.
Total operating expenses in Q4 were $7 2 million up from $6 6 million in the prior quarter and $6 7 million in Q4 for 2019.
R&D is up 125, K over Q3, as we're making good progress on some R&D programs.
SG&A as a 460 K and that increase was driven by several factors.
The largest contributors as year end bonuses totaling about 350 K.
About half of this was in the two consolidated raw material companies.
We had a good year with a strong finish in Q4, it was nice to be able to reward our team.
Second we had a charge for bad debts, 50, K something that does not happen too often in our business model.
We also had charges related to the private equity round and preparing for the IPO in China.
And travel was up as a number of us, including Morris and they went to China.
Total stock compensation expense for the fourth quarter was $692000.
Operating profit for the fourth quarter was $1 9 million compared with an operating profit of $2 2 million in the previous quarter and an operating loss of $2 8 million for Q4 of 2019.
Other income net for the fourth quarter was 22.
2020 was a gain of almost 600 okay.
This includes grants of almost 540 K.
Especially noteworthy is the net profit of 350 for key from the partially owned companies in the chassis supply chain accounted for under the equity method. So that's good news for them.
Nice to see that group be positive against the market for raw materials has tightened up and this is a good sign we think this will hold in 2021.
These gains were offset by a foreign exchange loss of 300, K and a net charge of 40 came from interest income and expense.
Income tax for the fourth quarter of 2020 was a charge of 100 and 8-K compared with the charges 673 Kt in Q3.
Our Q4 results included approximately 400 K in tariffs as a result of the 25 per cent tariffs charged on importing wafers into the United States from China.
For Q4, 2020, we have a net profit of $2 1 million or profit of five cents per diluted share.
By comparison with a net profit of 1.0 million or profit of <unk>.
For diluted share in the third quarter of 2020.
The net loss of 2.0 million for a loss of five cents per share in Q4 of 2019.
The share count for Q4 was 42.0 for 2 million shares.
Cash cash equivalents and investments were $78 6 million as of December 31 by.
By comparison at September 30th it was $29 8 million.
This increase.
As a result of the $48 8 million.
Uh huh.
Pardon me this increase.
$48 48 million is directly related to the IPO for sets of partnering with private equity firms in China.
Without that cash would have been flat.
I will give a brief update on the star market IPO project project in a moment.
Appreciation and amortization in the fourth quarter was $1 $3 7 million and investments for $5 3 million.
Net inventory at December 31 increased by $3 2 million in the quarter and ended at $51 5 million ending.
Ending inventory consisted of approximately 48% in raw materials 47 per cent for work in progress and only 5% in the finished goods.
The largest increase was in raw materials and this was deliberate on our part.
Okay. This concludes the discussion of our quarterly financials, let me just briefly highlight the fiscal year for.
For the fiscal year 2020 revenue was $95 4 million up almost 15% from $83 3 million in fiscal year 2019.
This represented growth in every revenue category across our portfolio.
And underscores the momentum we are seeing as a major technology trends that drive demand for our compound semiconductor substrates.
Gross margin for fiscal 2020 was 31, 7% of revenue up from 29, 8% of revenue for fiscal year 2019.
Net income for the fiscal year 2020 was $3 2 million for <unk> per diluted share.
Paired with a net loss of $2 6 million for <unk> per share for fiscal year 2019.
I'd now like to give you a brief update and comments about our plans to lift our company in China on the star market in Shanghai and this these comments also includes some forward looking statements.
Okay.
On November 16th we announced the strategic plan to access Chinese capital markets and progress to an initial public offering.
Sure.
And by our company and the formal name of staging Toggling Crystal Technology company.
Wait for manufacturing company going to China, Although the shorting is telling me so.
The first major step in this process is engaging reputable private equity firms in China to invest funds are telling me.
This went smoothly she was met with enthusiasm and close faster than we expected in.
In January the final installment of $1 5 million in private equity fund that came in in total with bench, approximately 49 million and an aggregate sold approximately 7% to 8% of telling me.
Simultaneously, we've been working on some reorganization plans, which will make tongue may have broader product lines more consolidated revenue more customers and in general strength in this company and support the high valuation awarded by that investment for community. One example is that we are moving to crown jewel raw material companies for you and me.
Into the total family.
We did receive some very positive feedback from a number of shareholders when we announced this.
Several of you described this is unlocking a hidden assets and that resonates with Morris Leslie to me.
Morris founded totaling 19 nine years and the management team is nurtured and steered that company now for over 22 years Morris and I. Both spent over two months there in the fall of 2020, including the mandatory for two weeks accordingly.
Especially with the relocation hasn't gone so well we agree that we are now unlocking the hidden assets in China.
One of you also responded with an email that just said wow and that resonates for sure.
We hope to file the application with the China Securities Regulatory Commission by the end of June.
A lot to accomplish to achieve that goal and it will be different for months for us.
Okay. This concludes the financial review.
I will now turn the call over to Dr. Morris Young for you bought this Morris.
Thank you Gary and good afternoon everybody.
2020 was a year of solid achievement for <unk>.
Capped off by the growth in Q4.
Which is typically a seasonally down quarter.
We completed the relocation of our gallium arsenide manufacturing.
Elevated our business and manufacturing processes processes to meet tier one standard.
And expanded capacity in response to increasing demand.
Now with the gathering momentum of <unk>.
<unk> and its related technologies, new applications emerging in health care and consumer devices and the technology progression in data center connectivity, we believe.
<unk> is a strong competitive position to lead our industry and enable money of the defining trends of the coming decades.
And we are ready.
In fact, we don't want to make physical you projections.
But I will give you a few today.
First in 2021, we expect to bring eight inch gallium arsenide and fixing genia phosphide to market.
We expect to hit or exceed that elusive 30 moving.
Revenue quarter per quarter Mark.
We expect to ramp up production with multiple tier one companies.
And finally, we are excited to successfully moving <unk> towards a 'twenty 'twenty two listing on the stock market in China.
We believe this year will be a transformative for.
<unk>.
And in turn for our employees, our customers and our shareholders.
Well, we said it before.
I am truly excited.
We reported to you all power Wes.
So, let's get started with indium phosphide.
For 2020 with a strong second strongest revenue quarter.
Quarter for indium phosphide portfolio in the history of <unk>.
Our results were exceeded only by Q2 2019, when we received a very large order from a single customer, whom we believe with moving our inventory for expected future demand.
In Q4, 2020, however, our revenue achievement was spread across many customers and money obligations.
We believe the total revenue diversity demonstrates the broad and sustainable nature of our growth opportunities in indium phosphide.
It was in April of 2019 that we first mentioned five day revenue or earnings reported loss.
A year later price.
G and is closely related power applications.
Driving significant growth in our indium phosphide revenue.
Demand has been particularly strong in China and Taiwan.
And we don't see any slowing in 2021.
<unk> continues to rollout worldwide.
We believe capacity our industry remains fairly tight.
We have and.
And we'll continue to ramp capacity at all for Beijing facility to keep pace with customer demand.
Scaling quickly and cost effectively is something that <unk> is uniquely able to do.
And we expect to gain market share because we have the shortest lead time among our primary competitors.
In data center connectivity.
The ever expanding number of users devices.
Applications are driving the transition to technology that transport faster more scalable infrastructure.
Hi, Kevin I would say the connectivity will continue to be essential.
In fact, many believe that the evolution from 100 to 400 G will happen faster than the move to 100 gig.
We're seeing this growth in silicon photonics, reflecting our steady strong demand in data center related revenue.
Moreover, we are pleased with the highly productive customer relationships. We are developing in this area of our business.
And we are applying the tier one processes, we have developed deep benefit customer experiences across our portfolio.
In 'twenty and 'twenty, one we expect to see the meaningful emerges.
As you know new obligations for indium phosphide in such areas as health care monitoring and consumer devices.
When they are being innovative fully driven by tier one player and showcase the unique properties of indium phosphide.
These applications have too.
Potential to represent a entirely new growth area for which we are well position and engaged.
Now turning to gallium arsenide.
The OLED revenue continued to rebound.
Driven by high end applications, including automotive.
Wireless gallium arsenide revenue was down seasonally in Q4, but Iot applications seem to be providing a lift in the ongoing demand for semi insulating gallium arsenide substrate.
New obligations, most emerging today and on the horizon, including world facing cameras.
Although minded and virtual reality automotive sensors, and biosciences and more.
As we talk about previously.
My clearly day may follow.
The next major volume driver of gallium arsenide chips.
Micro Leds are expected to consume less power provides sharper contrast, and produce really in lighting and colors.
Their applications are set to scale from wearable devices and handheld devices to very large screen like high debt high end TV all for future.
While current market expectations vary greatly and they are subject to change over time.
We're seeing reports that the micro OLED market for smaller consumer devices like Wearables and force may eventually reach and new demand of 2 million six inch gallium arsenide substrate for the Red day OLED portion alone.
If that comes to pass.
It would be larger than the entire.
Market for semi conducting gallium arsenide substrate.
Regardless of the specific numbers. This is an exciting space that could add significant new values to the OLED market in 2024 and beyond.
Tier one players are already driving the development and we believe that all wafers are being used for early stage activities.
In recent quarters with so much happening at all.
There are parts of our product portfolio, we haven't focused much of our business commentary on germanium substrate.
But for the contest.
Three of our business grew more than 20 per cent in 2020 I'm.
After a significant slowdown in 2019.
The primary driver is the satellite solar cell market, which appear to have entered a period of recovery.
We expect to see further improvement in 2021.
Now turning to raw materials.
This is an interesting and exciting time for our raw material business.
In 2020 those.
Good for you and Jim May relocate it.
The refractory to all campus in casual.
This has enabled those joint ventures to expand capacity in response to strong market demand.
For you, which manufactures high temperature P. B M crucibles.
M P B M based tools for OLED.
Continue to see healthy growth.
Jing Mei.
The joint venture for <unk> is a diversified industry industrial high purity materials supplier.
Which is also posting solid results as gallium price has continued to increase.
In addition to high purity galleon Jingwei also supplies indium phosphide poly and other materials.
Relocation and expansion has allowed those joint ventures to participate in new business opportunities, which is fueling our continued growth.
They are close proximity to our own manufacturing lines, allowing <unk> to expand recycling efforts in order to produce bringing their products.
Our improving manufacturing economics.
In addition to volume and Jumeii, we're pleased that the joint ventures for which we account for using the equity method also in aggregate contributed positively.
Two our profitability in Q4.
When they are benefiting from the increase in commodity pricing.
Driven by a healthy demand environment.
In conclusion.
We're heading into a new chapter of our growth and development.
The major technology trends that we have discussed over the past quarters and now gathering momentum.
With new ones visible on the horizon.
Our totally facility in Beijing.
<unk>, Inc.
<unk>.
Ready to meet this moment and enables the innovations.
Some of the most discerning customers in the world.
Tornado anyone is shaping up to be a transformative year for our industry and for <unk> specifically.
And part of our journey will include preparation for our stock market listing.
Which we believe will further strengthen our financial position.
Locke additional value for our key stakeholders.
We are very pleased to have you with us on this journey and we appreciate your ongoing enthusiasm and support.
This concludes my prepared comments I will now turn the call back from Gary for our first quarter guidance Gary.
Hey, Morris.
As Morris discussed the demand environment remains healthy with a number of growth drivers moving away.
We expect to see revenue in Q1 of between $28 5 million to $29 5 million.
We believe that our net profit will be in the range of five to seven.
With a share count of approximately $42 1 million shares.
This concludes our prepared comments Morris and I will be glad to answer your questions now boy net.
Yes, Sir as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Standby, while we compile the Q&A roster.
Once again to ask a question. Please press star one on your telephone.
Yeah.
The first question is from Richard Shannon of Craig Hallum. Your line is now open.
Well, Thanks, Morris and Gary for taking my questions and congratulations on some really nice numbers here.
For a number of questions here, let me start just very quickly with the guidance here, Gary Morris a $29 million at the midpoint here versus a 27 number typically your seasonally down a little bit in the first quarter can you kind of help us describe the kind of the individual segments here and then kind of describe qualitatively, what's what's driving all of this what's.
It's helping you too much better than seasonal first quarter of the year.
Our GAAP.
Do you want to take the first crack.
First of all.
Without pulling out a bunch of numbers there.
Actually it is out of cycle right now because we normally have a down quarter in Q4.
But this recent Q4 was up and that's the first time in a number of years and then typically I wouldn't say Q1 is down from Q4.
It may be.
Flat or a tiny bit.
So, but having said that yeah, we are projecting growth.
We see lots of momentum.
The raw material companies are doing well and Morris can comment on that but we're seeing raw material prices increase and that's going to ripple through the numbers.
Both on the equity companies down below that we will use the equity method for as well as Ah Boy you and join me and then we're continuing to see strong.
Market demand, maybe not so strong for the gallium arsenide wireless, but every other substrate category.
Is looking good Morris you want if you want to add to that sure sure.
Yeah. So let me let me.
Dive a little bit deeper I mean, indium phosphide is absolutely strong.
In fact.
Our lead time has increased.
Then before but compared to our competitors.
We're told we're still having the shortest lead time, we are increasing our capacity.
And the demand seems to be just very robust.
I think for.
Dominion.
The business is good as Gary said, you know, perhaps the wireless is the weakest link, but its going to still hold flat.
Also let me remind you too.
Q1, not only has one.
One of the month, which is only 28 days for February but also the factory because of Chinese new year has to shut down for about a week or so.
The number of working days for us.
To a shorter and for us to be able to ramp.
The revenue up so you can see that.
The demand is.
A very very strong.
Okay. That's all for those comments I'm going to follow up on kind of gross margins you always like to try to figure out what you're thinking here youre talking about indium phosphide being strong and and also raw materials. I think is helpful. But directionally Gary you can help us think about relative for the fourth quarter, where you're looking for gross margins.
Yeah.
Well you know.
The.
We know the things that drive it and we try and mention them frequently true to your community as well, but our mix is one thing.
And you know that.
Continuing to be favorable.
Total revenue was helpful. As it grows because it absorbs more of the fixed cost over more units. So.
In <unk>.
We see the volume generally going up.
As a side note it is possible and some of these larger accounts kick in.
The the.
The volume could go up but it could hold the gross margin EBIT, because you might lose the benefit of some of the pricing with high volume with tier one customers, but but gross profit can go up.
Gross profit dollars can go up no matter what.
We hope gross margin will.
Initially.
To just give it back to 35 per cent.
We're confident that that's going to happen.
We can't say when for sure, but you know hopefully soon but that's that's not where we'll settle for a goal we'd like to go higher than that and I think that there's a there's more runway for us to do that so.
We're feeling uneasy about it I guess is what I would say.
Morris you want to add anything.
Yeah.
I think you know what I will comment you know usually gross margin is good.
CFO territory, but I would say it is I mean, we just finished the move.
For our gallium arsenide factory, which is not a small matter.
We have done excellent job not losing any customer and we are ramping up fairly nicely and then we said once they settle in the factory, we still got more.
Efficiency gain.
<unk> proven to do.
As I said, our indium phosphide business is very strong and depends about how much more we can do all you need fast why I think that should help us on the gross margin.
I think you know.
The other thing is obviously that the.
Overall, our revenue we said before that we are looking for that elusive $30 million, Mark and we believe that.
The overall cost of running the factory and everything else is it's going to be a lot more efficient as we pick up our revenue.
Okay I do want to follow up quickly on the gross margin topic as you look farther out here Gary in your prepared remarks, you talked about.
And Morris I think you just mentioned again about the potential for yield improvements as you've gone through the smoothed, which most people.
People would think is a significant move.
How much more do you have left to go here and I am asking a question partly quantitatively.
But I'm also asking it kind of in a in a in a simplistic manner with same mix and you know obviously growing volume of what Youre thinking about but can you get to 40% gross margins as you get back to yields back up to where they were before he did the move.
Well without getting into the details I definitely think so.
I think sales but of course, we also need some.
You know the product mix some of the high end accounts.
Gallium arsenide business.
You need phosphide definitely for sure and if we load up the factory definitely we can.
The game market.
Gross margin of course, I think we have to debate healthy debate I would say with scary because after all Gary has to calculate those gross margins and I can't promise.
Promised that gross margin, but I definitely see that we can do it.
Okay fair enough.
Boris as my boss, so I'm not going to I'm not going to disagree with them.
I think that's a good policy Gary.
Alright last question I will jump out of line indium phosphide, you're talking about some really strong growth here.
Wanted to kind of get a.
Multi part question here I guess for you Morris.
I think you've mentioned in your prepared remarks about strength in five G and corn I know, it's a little bit hard to tell there what we've seen from the industry is maybe a little bit of a pause driven by the trade tensions with Huawei, who is I think the biggest driver there I wonder what to what degree is that coming back here versus other dynamics like datacom or even some of these.
New applications, you're referring to.
Well, so far I mean, I read the news about the trade tension and cetera, but I think our five G application does not limit itself to Huawei or any particular region.
You know indium phosphide is used for the front haul link on the base stations and you know China installed base building 601000 last year and they're going to just increase.
Rather than decrease.
Like it or not they need to meet qualified to do that linkage and and you know with.
With the pandemic worldwide and maybe the <unk> build out for the slow down in 2020, and I think as the economy recovers definitely somebody is going to catch up and you try and I'll try to catch up and that.
Definitely what you see indium phosphide Pas and I I think it's just a measure of how much more is going to increase rather than it's going to have a slowdown and that's that's from IBD and as far as the other applications I was talking about yes, we're working with our customers.
Yes, they are.
We are gaining a lot of trust and we're seeing the ramp up.
But where are they going to launch the product.
We don't know.
Honestly I think.
We hope sooner than later.
Okay Fair.
Fair enough I will jump out of line. Thanks, guys.
Thanks Richard.
Next question please.
Your next question is from high net of course sign of Dws financial Your line is now open.
Hi, So first off I just wanted to see it.
What's driving your.
Clarity Morris as to your comments about 30 million per quarter.
This year I mean is it your customers committing to more orders or what are you seeing beyond this core qualitatively from your customers, that's giving you that confidence.
Yeah.
So let me answer this way I think you know.
Really we don't have.
The growth visibility normally we only got you know a customer can turn off the order anytime as we always say.
Looking at our indium phosphide order book.
So far it's very strong and I don't see any slowing down and also if you look at the supporting application of indium phosphide, what used to be you know the law.
Last time, it was very strong with back in 2015.
The Big application, Dan was Palm and then Paul So the flow down and then.
Silicon Photonics start to pick up now if you look at the indium phosphide applications, where not only have the <unk> and I believe is only the beginning the first evening.
They still got more to go or if anything theyre going to grow faster.
And then you know silicon photonic as it starts slowing down at all and we just engage with a first for your customer they they buy instead of through a that'd be supplied either day down by directly and we just see more opportunity to increase our order with them and then we also see the consumer product.
Application that we mentioned they all our call, which I think is.
It hasn't started yet so you know given that I think indium phosphide is good and the fall from from Eh.
Semi conducting gallium arsenide, we see.
You know the automobile industry is definitely strong will help our customers guided the revenue is going to increase our revenue increase for.
For the 6% up to 8% to 12%. So that's good news because they are a very large customer of ours and we also see.
No other.
Automotive OLED customer, giving us the same signal and then we also see we haven't started the VIX, though.
High power laser market, which I think is also strong and wireless is probably the only one of which is sort of.
Well I think 2020 in 'twenty.
We're still a growth year, but we just don't have a good finger point at what specifically, they're going to growth, but the demand is again it.
I think it's it's it's good.
And finally Dominion.
We grew 20% price had lost last year, and we believe the order pattern seems to be strong and not counting.
So called one web and conducting all five D.
Communications.
And so I think you know what dominion is going to have a good year as well. So if you look at it all for categories are doing great and finally raw material for.
Our two joint ventures, not only they move to that new factory, they've got all of that.
The capacity expansion you can ask for and the market is.
Again strong.
I can't just say.
Raw material prices, he is increasing and demand is strong.
For all our raw materials.
Okay and then my other question was.
Are you, adding customers or is the revenue lift coming from existing customers.
I think both.
I mean, some of the customers I speak I think go through my mind of course I cannot tell you the names.
But some of them are new customers day coming in with large orders hopefully that theyre going to ramp.
And some of the other customer day, they used to buy small amount from us at least.
This new qualification going through are they going to become a major customer of ours.
So I think you know it's both and.
Lastly, I would say we have been saying about this we are.
No.
Getting our factory to serve the tier one customer which includes.
SPC control.
You have more metrology, so you'll have you adhere to more.
A rigorous control in terms of.
That will increase our costs in terms of engineering in terms of serving the customer the right way, but.
Eventually it is going to pay off because people then would trust our quality better and they will.
B Boy these do get more small businesses.
Yeah, I'd just add.
And just to say that you know.
We do have good communication.
Between the agency and our customers and that's one of our strengths and we promote that and.
Our sales and marketing group is very devoted to listen to the customer.
And sometimes what we hear we don't like.
And we've been through those cycles before and you've been with us when we've gone through some of them.
But right now it's like turning up the volume on your stereo system that there's just a lot of positive feedback about their expectation. So communications is up and what its good.
Second thing is that with Morris touched on is the relocation is over so there are customers who are holding back I'm just.
Just as some investors held back frankly, because they were they were concerned about the relocation risk now.
Now that's been converted into an opportunity and we're going to we're going to grow the company and take market share.
So I think that's for some customers back.
And then Oh.
To increase our volume.
And then then there are new customers that are you know we've been shipping.
Shall we say pilot production levels to and that's going to eventually turn on so.
So it's it's basically customer feedback I mean, that's.
That's what's happening.
Okay and then my last question was going to be.
As far as the tight capacity is concerned.
Yeah.
Do you know how much capacity.
You're sure as far as the market is concerned.
What what's the driver.
Competition doesn't buildup in capacity and just there's ample supply out there.
I think in hindsight I think that the passive product.
I mean, obviously, we always have.
Utmost respect for our competition.
I think ill, but indium phosphide is it.
Material I'd be always saying, it's very difficult.
And also because of the specific applications of indium phosphide, yeah, mostly for high end telecommunications lasers and income.
Assume a product.
They have a very stringent requirement.
So not only we have the capacity, but we I believe that we have a very high quality standard. So I think we are we are ahead of our competition.
I see.
And but as far as.
Capacity, we are trying to build that capacity in our customer definitely are telling us.
You know I would need this and they give us protection that but of course, we have to take it with a grain of salt because sometimes.
They don't double or triple order, but but then we cannot afford to take them lightly either because we don't want to disappoint them.
So you know we are.
For the cooking to our customer's guidance.
And hopefully we won't disappointment and I I I also believe that indium phosphide is not a material that you can go to your corner store and order it doesn't take home okay.
The qualification time, the strength specification Ah the whole nine yards I mean, they have to come over to our factory and turning things around take a look at it in a day.
Times, even specifically ask for what kind of metrology tool.
We expect you'll wait wait for it before you ship to them. So it's a very elaborate process that we are working with our customers that we are.
This particular application, we worked with them almost for two.
Two years.
And so we have constant feedback and so you know.
But of course, we don't take the business for granted I mean, they can always say, okay, well, we're going to keep pushing on the business to your to your competitor.
We cannot stop them, but then they do give us guidance on how much gigawatt.
Yes, let me add a little bit Morris at that.
If you look at the characteristics of.
Our.
<unk> T.
Even though you know actually you've been around a long time, there's still a quite an entrepreneur entrepreneurial spirit in the company management.
<unk>, which which both Morris and I try and project.
As well as our other key key you know vice presidents.
Well, if you compare that to one of our other competitors. They are much more conservative there they're more consensus based on their decision making.
They they they don't move as fast so I'm, not saying that no customer can add capacity and growth.
The likelihood is is much lower than it is with a S. T. In the case for another customer a competitor they're privately financed.
They don't have access to capital markets like we do and they're not part of a big company.
So I think we have some some reasons to believe that there is barriers to entry in terms of rapidly adding capacity. The only company who can prove that they can do it well is they ask Pete because we just did it.
Thank you.
Youre welcome.
Next question please.
If there's no questions at this time and I would like to turn it back to Dr. Morris Young CEO of <unk> for any further comments.
Okay. Thank you. Thank you for participating in our conference call as always please feel free to contact me, Gary Fischer or Leslie Green directly if you would like to set up a call with US we do look forward to speaking with you in the near future.
Yeah.
Uh huh.
Ladies and gentlemen, this concludes today's conference call and thank you for participating.
May now disconnect.
Okay.
Yes.
Okay.
Okay.
Yeah.
Right.
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