Q2 2022 AXT Inc Earnings Call
Okay.
Okay.
Good afternoon, everyone.
The second quarter 2022 financial conference call, leading the call today is Dr. Morris Young chief.
And Gary Fischer, Chief Financial Officer, My name is Catherine and I'll be your operator today at this time all participants are in a listen only after the speaker's presentation there'll be a question and answer session to ask a question during the session need to press star one on your telephone.
I'd like to turn the call over to Leslie Green Investor Relations for spark.
You may begin.
Thank you Kevin 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 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 growing.
Mental health and safety and chemical industry regulations in China, as well as global economic and political conditions, including trade tariffs and restrictions.
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.
The uncertainties and risks include but are not limited to overall conditions in the markets in which the company competes global financial conditions and uncertainties.
COVID-19, or other outbreaks of contagious disease potential tariffs and trade restrictions increased environmental regulations in China market acceptance and demand for the Companys products. The final financial performance of our partially owned supply chain companies and the impact of delays by our customers on the timing of sales and their products.
In addition to these factors that may be discussed on this call. We refer you to the company's periodic reports filed with the Securities and Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our expectations. This conference call will be available.
On our website at <unk> Dot Com through July 2023 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 second quarter of 2022. This information is available on the Investor Relations portion of our website at <unk> Dot com.
I would now like to turn the call over to Gary Fischer for a review of our second quarter results Gary.
Thank you Leslie and good afternoon to everyone.
We're very pleased and excited with the financial results in Q2, let's walk through them and get Morris on stage by weight Morris just returned from four months in Beijing. So it's nice to have you back so.
Revenue for the second quarter of 2022 was $39 5 million approximately comparable to $39 7 million in the first quarter of 2022 and up 17% from $33 7 million in the second quarter of 2021.
For the first half of 2022 revenue was up 22% over the first half of last year.
To break down our Q2 'twenty two 2022 revenue for you by product category Indium phosphide came in at $15 7 million slightly over Q1 and.
And again, a new record Galli.
Gallium arsenide was $12 2 million and this is another positive number in the quarter $12 $2 million is the highest quarterly revenue for gallium arsenide since the third quarter of 2012.
Uranium substrates were $3 9 million in revenue from our two consolidated raw material joint venture companies was $7 8 million.
In the second quarter of 2022 revenue from Asia Pacific was 74% Europe was 13% North America was 13%.
Top five customers generated approximately 35% of total revenue and.
And one customer was was over the 10% level.
We continue to believe the revenue diversity demonstrates our growth is not overly dependent on any particular customer or application.
This is another factor contributing to our confidence that we've reached a point of sustainability. He can outpace market growth in 2022.
non-GAAP gross margin in the second quarter.
Was 39, 4% compared with 33, 8% in Q1 of 2022 and.
36, 4% in Q2 of 2021.
For those who would have preferred to track results on a GAAP basis gross margin in the second quarter was 39, 1%.
Compared with 33, 6% in Q1, and 36, 3% Q2 of last year.
As you can see we made huge progress on gross margin in Q2.
While there were many factors that contributed improved yields, particularly in crystal growth was one of the most significant ones.
Morris conducted regular meetings on yields during his four months in Beijing.
And part of our margin improvement has come as a result of this focus.
Another contributing factor is that both boy you and Jim May our two consolidated raw material companies improve their gross margins.
Third factor is that we developed a process technology that enables us to recycle remnants of indium phosphide processing material.
In addition to the gross margin benefit. This program is another step forward for us in our ESG commitment.
The fourth factor is product mix by comparison to the first quarter the mix looks pretty similar however, within each substrate product the diameter mix can impact gross margin so product mix was more favorable in Q2.
Moving on total non-GAAP operating expense in Q2 was $9 1 million. This compares with $8 six in Q1 and was seven four in Q2 of last year.
On a GAAP basis total operating expense in Q2 was $10 1 million.
Paired with $9 6 million in Q1.
For comparison total GAAP operating expense was $8 3 million in Q2 of 2021.
The totals for the current Q2 include a charge for bad debt of about 200, K. We don't experience. This very often but we did this quarter.
non-GAAP operating profit for the second quarter of 2022 was $6 4 million.
Compared with non-GAAP in Q1 of $4 8 million.
$4 9 million in Q2 of last year.
For reference GAAP operating profit for the second quarter was $5 3 million.
From an operating profit of $3 7 million in Q1, and an operating profit of $3 9 million in Q2 of last year.
Non operating other income and expense for the second quarter was a net gain of $2 3 million.
This includes a gain of $2 2 million from the end consolidated raw material companies.
The full breakdown is in our press release the contribution from the equity method raw material companies is higher than usual and reflects higher asp's for the raw materials and more units sold.
For Q2, we had a non-GAAP net income of $6 7 million or <unk> 16 per share.
Compared with.
$4 3 million or <unk> 10 per share in the first quarter of 2022.
non-GAAP net income in Q2 of 2021 was $5 4 million or <unk> 12 per share.
On a GAAP basis net income in Q2 was $5 5 million or <unk> 13 per share by.
By comparison net income was $3 2 million or <unk> <unk> per share in Q1, and $4 4 million or <unk> 10 per share in Q2 of last year.
The weighted average diluted shares outstanding in Q2 of 2022 was $42 5 million shares.
Cash cash equivalents and investments were $57 2 million as of June 30th VY.
By comparison at March 31, it was $44 $3 million.
This is an increase of $12 $9 million, we did get a bank loan in China for approximately $13 8 million.
During the quarter.
If you eliminate that loan the cash is basically unchanged for the quarter.
Depreciation and amortization in the second quarter was two.
$2 million.
And capital investments were $16 8 million of which about $14 8 million was construction.
Most of this is facilities related and indium phosphide equipment related.
Total stock comp was $1 1 million.
Net inventory at June 30 was $77 $3 million in light of the current supply constraint.
<unk>.
And so the locked and loaded with demand accelerates and we did buy ahead in Q2.
But 50% of the inventory is raw materials and with this 46%.
Finished goods actually declined in the quarter and makes up only 4% of inventory.
This concludes the discussion of the quarterly financial results turning to our plan to list our subsidiary tongue may in China on the star market in Shanghai, We did have a very big development recently, which is at the Shanghai stock exchange approved <unk> application for.
The initial public offering.
The application was approved on July 12, and will now be submitted to the China Securities Regulatory Commission for the next step in the review process.
We consider this to be a major major milestone in our effort to complete the star market IPO.
As we are told that the Shanghai stock Exchange review is the most detailed thorough and lengthy from the reviews. We still have more work to do and we do not want to be overconfident, but the achievement of this milestone will hopefully mean that Tom make a complete the listing in this calendar year most likely in Q4.
We're very proud of the team for our progress and believe that our success further underscores our achievements in demonstrating <unk> world class capabilities.
Overall, the IPO is getting a lot of very positive visibility in China and as a 40 ton may a new level of respect and prestige.
Before I turn the call over to Morris I want to take a moment to address the COVID-19 restrictions in China too.
To date, we have not had any shutdowns of our operations in Beijing, Tianjin <unk> as.
As we noted last quarter, we have experienced some supply chain disruption as a result of shipment delays and supplier shutdowns relating to products that we use in our manufacturing process.
However, so far we've been able to mitigate the impact with inventory on hand, we've also seen some pockets of softness where customers are on lockdown, but the demand for our products coupled with the diversity of customers and applications that need them have allowed us to shift our allocations to other customers or applications that remain in high demand.
Like most companies we are monitoring the situation closely and are managing through these issues with high level of attention.
We remain in close contact with our customers to understand any changes in their demand expectations should those changes occur.
Okay, well with that I'll turn I'll now turn the call over to Dr. Morris Young for a review of our business and markets Morris.
Thank you Gary.
This is a very exciting time in our business.
Our strong execution on a number of fronts.
<unk> has set the stage for great opportunities in the coming quarters.
Continue to achieve strong growth in a highly strategic applications and are currently ramping several tier one customers.
Further.
Our product quality and technical capability have created expanded activities that.
And that is increasingly difficult for our competitors to match.
As is evidenced by our market share gains and indium phosphide.
And despite supply constraints in our industry.
Working hard to meet customer requirements.
A growing number of applications.
We're also achieving notable success in the development of large diameter substrate that will enable the next generation of technology innovation across a number of end markets.
These strong execution.
Has driven.
First half revenue growth of 22% of the previous year.
<unk> continues to enable us to outperform our market.
With emerging opportunities that will layer on.
Over the coming quarters.
As Gary mentioned, we set a new record for indium phosphide revenue in Q2.
Demand for our products for <unk> telecommunications datacenter and Lidar applications continue to grow.
Overcoming a downtick in the pons market in Q2.
We also saw healthy growth in our new customer applications.
With its continued.
Continue ramp in Q2.
In addition, we're pleased to report that we're now qualify into a second consumer applications for which will deliver pre production quantities of indium phosphide wafers in May and June .
I cannot stress enough the cigna.
Because of this achievement.
S T answered the call on a very tough product specification, surpassing the best efforts of our.
Our competition and has proven.
Well.
Up to the challenge of meeting the stringent requirement of a world class organization.
As such we are now.
Now in a position to build meaningful revenue.
Brand new markets, where XD.
And we are also engaging with other tier one customers for opportunities that were previously not available to us.
We now.
<unk> the company to be.
Indium phosphide wafers.
This year.
With double our capacity he talks about it.
Demonstrating our unique ability to scale quickly and cost effectively to meet customer demand.
Even with the additional capacity, we expect that there will be continued to be supply constrained into next year.
We continue to work closely with our customers to meet their requirements.
I mean.
On the innovation front.
We have achieved the important milestone in the development of 16 Julian Botswana.
We are now producing and being beginning to sell Brian device quality wafers of six inch indium phosphide.
This is the culmination of major R&D initiatives for AFC.
The material quality of our large diameter substrate demonstrate our commitment to excellence.
And the differentiation of our VEGF crystal growth process.
We're pleased to be able to offer our customers meaningful advantages in scalability low stress and low default rates.
New high volume application comes to market.
Turning now to gallium arsenide.
Total revenue was up in Q2.
Our traditional high end LCD market demand remained strong in applications, such as automotive display and high end signage and lighting.
We also continue to see strength in high power industrial laser applications.
We have gained significant market share.
These lasers are commonly used in Walgreens.
Just the equipment.
As for cutting metals.
Not a robot applications and others.
Wildfire applications for Iot also helped to drive a modest increase in revenue over the prior quarter.
In RF devices demand is expected to come down a bit in Q3.
But we'll continue to focus on strengthening our position for future opportunities.
We made good use of the tighter environment to renew our relationship with key customers and believe we have laid important groundwork for future market growth market share growth.
That sounds great vacation and capability capacity of our new manufacturing facility, coupled with our achievement of several tier one customers.
Demonstrating our ability to support customers in this space with high volume high quality substrates.
Before I leave the topic of the gallium arsenide substrate I wanted to give you update.
Our eight inch gallium arsenide development program.
I am pleased to report that.
We now have two major customers for these products.
And we are working with them on design specification.
The level of engagement from our customers is exciting.
And give us increasing confidence that there is a real market developing for large diameter gallium arsenide.
We believe that a inch substrate will be an important enabler for new high volume obligations over the next several years.
Now I will turn to germanium substrates.
Coming off of two of our highest revenue quarters in Q4 and Q1.
Those were down so in Q2.
The satellite solar cell market.
Which is the primary driver for convenience tends to be lumpy.
No industry forecast for new satellite launches show continued strength.
I do want to note.
We do expect Jeanine is revenue to be down meaningfully in Q3.
As a result of a customer specific payment issue that we expect to resolve before the end of the year.
Revenue for our two consolidated joint venture was about flat in Q2 and looks to remain solid in Q3.
In particular <unk>.
You may has been contributing well.
We continue to diversify its product offering beyond high purity gallium.
St is relocating to our casual location GMA has more capacity and state of the art abilities.
Today.
Also offered purified Indian.
Indium phosphide poly for sale.
In addition, <unk> successfully developed the gallium recycling program.
We're just helping us drive efficiency in our cost structure.
Both <unk> and <unk>.
We have strong R&D culture that is contributing to innovation.
Two new offerings that enhance their value.
In conclusion, our strong execution has paved the way for a remarkable transformation of our business.
They were more diversified than ever before.
With success.
Cross a wide variety of customers applications with.
We have proven that we can raise the bar on our business processes in order to meet the very high standards of some of the most sophisticated customer in the world.
And in return.
We can't earn their business.
I respect.
Which is opening doors to growth opportunities across our portfolio.
As we look ahead to.
So the next Gen technology that was reshape everything from connectivity.
<unk> device to Lidar.
Healthcare monitoring and more.
<unk> is bringing to market innovations in large diameter substrate that would help make them possible.
And all of this is being validated by our continued progress in a very diligent IPO process Porto amazed stock market listing in China.
I couldnt be prouder of our team.
While more excited.
About our future ahead.
I will now call turn the call back to Gary for our third quarter guidance Gary.
Gary.
Okay.
I had myself on mute so.
Can you hear me now.
Yes.
Okay. Thanks.
Demand across our portfolio continues to be strong and we are working hard to keep up with customer orders in particular, we're expecting indium phosphide to have healthy growth in Q3 with multiple tier one customers and the breadth of applications driving this including datacenter telecom consumer driverless cars and others.
Hey, Morris night for lasers in Leds is also growing well.
On the top line growth in these areas will likely be somewhat obscured by a decline in germanium substrates caused by the customer specific issue that Morris mentioned.
Once it is resolved draining substrate revenues are expected to rebound.
Important read through for our business is that we are growing and seeing strong demand across our business with new growth drivers that are just gaining momentum.
We expect to ramp these opportunities through the end of this year and well into next year.
That said Q3 revenue will be between $39 million and $41 million.
We also expect gross margin to continue to be strong.
As such we expect our non-GAAP net profit will be in the range of 15 to 17.
And.
Okay.
And GAAP net profit will be in the range of 12 to 14.
The share count will be approximately 40 to 66 1 million shares.
Okay, well. This concludes our prepared comments Morris and I will be glad to answer. Your question is Kevin Morris operator, ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your Touchtone telephone, we'll pause for a moment wall compile the Q&A roster.
Okay.
Our first question comes from Charles <unk> with Needham Your line is open.
Hi, Morris and Gary Good afternoon, Congrats on the very nice results, and especially improvement and profitability level I wanted to start with the new opportunity of indium phosphide.
Again, congrats on winning this new application I believe this was backend.
I think.
Either yesterday or the day before number one customer did announce that they are winning some indium phosphide applications in smartphones and the following the first.
Whang in depth Gws gearbox.
Well I don't know if you want to comment on this but that you're talking about the same application on <unk> or maybe give us a little bit quantitative insights here.
You do have a little bit of an incremental revenue of course offset by some weakness in germanium, but in the third quarter, but should we expect this new opportunity to bring you more incremental revenue that first application that you work earlier this year or end of last year. Thank you.
Sure.
I'll take that first Gary.
So the second opportunity yes.
Charles I think we believe it's bigger than the first one.
We are ramping with them.
<unk>.
The pilot production now and we believe probably towards Q3 Q4 is should be twice the number of wafers.
Going into this application.
As to what application it is.
I would tell you.
Really puzzles us.
As you know often we only provide substrate and we provided two epic growers and.
So and even if I know.
I am not allowed to talk about it anyway. So.
But we think.
Somewhat related to a <unk>.
Indium phosphide laser and coupled with a detector applications and we think its consumer product related and we believe that.
In the beginning they offer a surgeon.
<unk> seen the beginning and.
If it becomes.
Popular then.
The volume could grow as these spreads to other models.
Got it got it sounds like this is Mike.
We'll be implemented a subset of this particular consumer product demand that could be proliferated.
Thank you.
You expect a sort of runway ahead, even for the same applications that right.
Yes.
Got it got it.
Maybe the next question I really can't.
Can you give us some update on the micro OLED opportunity I know understandably you are working on larger gallium arsenide wafer size.
On the micro OLED, if that really becomes a reality it sounds like it's going to consume a lot of gallium arsenide wafers I'm not sure if you have enough capacity.
Hospital today, but.
Can you give us some update.
Where where you are in terms of.
Micro OLED.
Modification and you said, the one year way to year way through years away. Thank you.
Sure Charles.
I believe the best estimate I mean.
We now have two customers, we are working with them in designing the product specification right now withstanding sample quantities hundreds of wafers to them.
One of them for several months now and the other one just the beginning.
And we believe they are going to start to go through their production line and there we're starting to see.
Where it needs to be to have an improvement.
Where they think.
It's good.
They have given us.
Preliminary volume.
But we're not holding them to it because I think we obviously need to work with them because if we were to take there.
Commitment then we have to sign up for the commitment to deliver so at this point is still a little bit too early but I will.
I would say.
It probably will start to ramp up in production mode in 2024.
And the volume.
Could be.
In.
I would say that total addressable market in the first year at least in my estimation it could be somewhere around $30 million.
Got it thanks.
A question for.
Gary.
The gross margin strength you have in this quarter I think you did mentioned several factors but.
It sounds like to improve the yields up crystal growth.
Yes.
The primary one and I would assume this is something that will provide you a sustainable margin benefits and.
Yes.
What's your thought about gross margin going forward are you sort of expecting maybe the highest burdens.
Going to be the baseline now or U.
You are still.
Want to hold on to your original guidance, maybe it's like a low to mid thirties.
No I'm willing to surrender.
Yes.
A conservative position.
I think.
Higher <unk> as a.
Good general range for.
The rest of this year so.
I do want to stress that Morris and I really take seriously that.
We want to not just talk the talk we want to walk the walk so the most important thing for US is to is to run the business well.
We've certainly made tremendous progress in Q2.
We know we've been working on all along but it wasn't quite as getting to the surface to be seen so.
So yeah, I'm OK I think.
It.
It's not going to be realistic for me too.
It has.
People that run model state right at 35%, so, but I wanted to add something else does that.
It is correct.
The yield improvement is very very helpful is significant.
<unk>.
There are other things going on with that debt.
Are important.
<unk>.
Another big contributor was the.
The utilization of the new process technology that we've developed where we can recycle the remnants of indium phosphide.
So that that made a big contribution.
It contributed a little bit in Q1, and even a smaller amount in Q4 of last year.
But they really made great progress in Q2 and.
It's it's really a big step so and then.
Always always always we look to product mix.
And that's why we're so excited about indium phosphide.
This phenomenon going.
Where that helps drive the gross margin so.
Okay next question.
One moment.
Our next question comes from Matt <unk> with Wedbush. Your line is open.
Thank you congrats great quarter, congrats, particularly on that gross margin line.
Just on the germanium side of things can you quantify at all what.
Youre thinking about in terms of.
Headwinds in calendar Q3.
Okay.
Yeah go ahead Morris.
Go ahead, you are in the numbers.
Yeah.
Well, we came in at Q2 about three.
$3 nine right in.
I think it will be.
Around maybe $2 million or $1 9 million in Q3.
The thing I want you all to understand is that.
Yeah.
We're going to try and get this thing.
Resolved now we're not going to wait till December 31.
And.
The demand is still there.
It's been improving in the last couple of quarters.
I'll try to satellites and we all know satellites are.
Going.
To go up so.
So.
But in case, we don't get it resolved.
Fast enough then.
We've taken our forecast down and we're giving you the conservative forecast.
But we're working this problem and it's not it's not land and on the back burner.
That makes that makes sense.
Shifting over to.
Kind of capacity.
Inventory, Gary can you just remind us what a more typical inventory mix might look like or more typically what you'd be carrying in terms of finished goods.
Okay.
Well.
It's pretty small.
Over.
Over time it could be.
<unk>.
Five or 6%, it's in my memory, and maybe more sequel correctly.
Remember being like 10%.
So.
We tend to get that stuff shipped out I'm just looking at my notes here, but.
So.
<unk>.
It usually stays flat this quarter it went down.
Got it.
To me it from a business standpoint.
If we're going to have.
Inventory increase I want it to be in raw materials and with.
And not just be building FG or finished goods.
Got it.
I guess my my last question.
<unk> is simple.
So it sounds like if you had more material and particularly more indium phosphide you could ship more material I guess, when we're thinking and clearly youre spending money.
On Capex.
Can you talk a bit about how that spend.
Equates to increase capacity.
Both heading out of this year and then into next.
Sure Mark do you want to take that Azure.
Sure.
Sure.
It's a continuous process that actually.
I I.
Yes, I wanted to expand on this question a little bit first of all that.
In our script, we are doubling our capacity this year, but as we see.
On the second consumer product ramping up we think potentially as you still won't be supply a little bit tight now and we do have two other product.
Well.
And their qualification.
Other consumable consumer wearable product, which is in qualification.
No not in qualification, but will be in qualification in second half of the year and we believe that.
It could.
To wrap up in the second quarter of next year.
And yet we'd have other.
Other customer.
Yeah.
The inquiry about.
<unk>.
Product push.
Okay.
Travelers car market.
Laser lidar kind of specification for indium phosphide.
So that's.
A lot of moving parts, if we put it all together.
<unk>.
This doubling of this year, probably is not going to be good enough and we're going to continue.
To grow but of course, we also.
Recognizing the fact that economy may be sort of a downturn, but on the other hand these are new product development.
Are they going to be a factor greatly by the recession coming recession or not I think that's the question.
For Us I think.
<unk>.
It's a little bit easier because you see in our production the thing which.
Have the most cost build.
Adding to our production capacity expansion is facilities in other words to build our clean rooms.
Bill DIR waters.
Etc, and for us to judge.
To add processing equipment crystal growth equipment, which we may design and make most of our cells.
The move is relatively easy.
So.
And recently that we are expanding our indium phosphide production.
<unk> facility.
In a very solid way in Beijing, which is a very good thing because as you recall, our Beijing facility used to be able to do it.
Indium phosphide, gallium arsenide, and germanium wafer processing altogether and three years ago, we decided to move out our gallium arsenide wafer processing, so that left out a big hole in the Beijing facility.
And this.
Big demand for indium phosphide, just fits right into that whole all we need to do is a little bit modification, because clean was clean room and Dr. Waters. The atwater. So so we can save ourselves quite a bit of money as well as <unk>.
The pain to build a new clean room and spend the money so.
So I think we're very fortunate and but I don't know if I answer all the question for you. So although as I said I think we're doubling our indium phosphide capacity this year.
But we think we still need to.
Do some planning for more expansion next year swaps.
Excellent.
That's my question Philip Morris again, congrats great quarter.
Thanks, Matt Good morning, remember for our next question.
Our next question comes from Sam Peter from Craig Hallum. Your line is open.
Hi, guys I'm on.
For Richard here, Thanks for taking my questions.
First one it looks like you're you're top customers grew.
In dollar terms a good quarter.
Quarter over quarter.
I'm curious are those topline customers, let's say in cloud customers do you have in the first quarter or are they different.
Gary do you know.
No I don't know.
You can find out.
Yes.
I didn't study I didn't do it quarter to quarter comparison.
The usual suspects.
Yes, maybe I will just say a whole lot.
Yes.
There is one thats been inching up that Hasnt made the top five.
The last time I looked.
But generally it's pretty constant.
The ones that we name is 10% from time to time, we didn't have any 10% customers in all of last year, but prior to last year frequently ask Ram and landmark.
The different quarters would be 10%.
And they're always in the top.
Chelan, but with this phenomenon that Morris described and I call. It phenomenon because there really is something going on up there for indium phosphide.
We're just at the right place at the right time.
<unk>.
Of the three substrates that we produce.
The best in producing indium phosphide wafers so.
It's very difficult process technology, because it's grown under pressure, so we're better than our competitors for sure.
But so so there really is a phenomenon.
I wanted to underline that word because there's something going on for indium phosphide.
And we're right in the right spot.
So whats the reason I say that is some of the things that Morris described are going to generate business with new customers, who are not in the top five and a year from now that some of them will be.
Okay, Yes, that's great Jerry.
That's my question, while I understand that dynamic with possibly and that's kind of what I was asking after with any of those new customers that kind of made it yet so that's helpful.
Hmm.
Second with indium phosphide and that topic I'm just run out the numbers here.
And I think last quarter already.
Over the past few quarters, you talked about indium phosphide growing 30% year on year.
For fiscal 'twenty, two as a whole and just looking at where the numbers shake out it seems like that number might end up being closer to 40%.
On your growth in 2022 is that how you guys are thinking about it or is that a little too aggressive.
Well next quarter is definitely a strong quarter, what we're counting on.
But I don't know what the fourth quarter is going to be like I think it's going to be a strong growth. This year and last year I think our indium phosphide grew something like 44% right Gary.
I'm looking at here.
41%.
41%, sorry, I just tried to achieve 3%.
[laughter].
Yeah forgive us.
Okay.
Okay.
Hang on a second.
I was just going to quickly add something up.
Okay.
Yes.
Yes.
Youre correct.
30% likely to be too conservative.
They are just doing a quick handheld calculator thing here so.
So.
Is definitely be more than 35% and I think so and it could begin with four against so.
Okay.
I don't have I don't have the Q4 number unlike worksheet right now so.
But I've got to actuals plus.
We think it's going to happen for Q3.
Q3, any hospital is going to grow double digit over Q2.
Okay.
That's great perspective, thanks, Gary.
And I think my last question just on the large diameter substrates that you seem like you had some success both with six inch indium phosphide in eight inch gallium arsenide.
I'm curious if you could describe it.
Good morning.
So let me understand you want me to compare ourselves with our competitors on these two products.
Yes, I'm just curious it sounded like you had some advances.
Youre, a large diameter substrates in the quarter.
Just curious to hear how you think that kind of change here.
Relative to your competitors are or where you think you said.
With those.
Those products right now.
Well. These two products is in the development stage, so they're not selling a light generating a lot of revenue yet okay.
So.
So far as we know in the world.
There is one.
Well actually two competitor now has it make AE inch gallium arsenide substrates.
We don't know each other's capability and ability.
Our quality our bare wafers.
And for that matter cost.
As far as indium phosphide is concerned.
No one another.
Competitors knows how to do indium phosphide.
Six inch wafer.
The reason.
Proud to announce it and.
Mark is that we have done a lot of work.
Just achieving it but.
But I think.
If I were to compare product in the marketplace. This is now the time to compare because there's very few demand.
We are only making the first product offering and it will take quite some time to make this product more mature.
And fix the specification et cetera, so I'll be very happy to talk about let's say three inch and four inch coaches.
Q1, 10000 wafers, we can talk about what specification you want and how do we differentiate our product specification capability compared to my competitors I think that's the way I would describe it so are these newly developed product.
<unk>.
It's difficult to to say.
How do we compare to our competitors mainly because.
It's.
It's difficult to know what they are and we.
We know where we are.
Yes.
I agree with you Morris I wanted to add one thing though.
That.
Where we do stand out in terms of differentiation.
Is that where the only competitor.
Who has new facilities.
New equipment upgraded facilities upgraded equipment add capacity quickly.
So when we get into a competitive.
Bake off.
We think we'll do well on specs and technology, but I think we have an edge over our competitors because.
Some of these applications are very high volume.
And the the customer that is buying for this stuff.
Is nervous about capability, and that's where I think we shine.
Yes.
Got it I appreciate the perspective, that's it for me.
One moment for our next question.
Yeah.
Our next question comes from Ethan Road that would B Riley Your line is open.
Yes.
Hi, there thanks for taking my question.
Could you provide some additional color on your backlog and how you see that playing out directionally over the next few quarters, especially with respect capacity buildup.
Go ahead Morris.
Well, we don't ever.
And the backlog by the way.
No because I don't know how to build that backlog number.
I mean, maybe I can answer it this way I think.
In the past few years, we always say is difficult for us to come up with.
Solid forecast because our customers can always cancel their orders and they don't give us a long term forecast of how much they want.
But in the last five six quarters.
We have been able to tell our investors our visibility is a much better.
We are forecasting lets say.
Some product is lot more clear for instance, indium phosphide.
We've got customer lineup and telling us how much they want and in some cases.
They don't have enough to fulfill their current.
Short term need and so we have to push out the lead time to six to eight weeks.
And.
But as we.
Increase our capacity, we should be able to shorten lead times.
Yes.
But.
For instance, germanium.
And I know the need is there.
But obviously, we're not going to forecast that they are going to be my next month's forecast because we haven't resolved.
The price and.
Payment issue I mean.
Dominion.
We are seeing to talk about but germanium.
Harry's had very large portion of germanium raw material cost of goods sold and germanium raw material price has increased quite substantially almost doubled in the last year or so so as you can see.
<unk> constitute 50% of about my cost of goods sold and not cause doubled that squeezes my margin tremendously.
So obviously, we want to talk to our customers that see big help.
If they can then you know we need to to find out.
Yeah.
Other way to make ourselves.
Knowledge terrible organization.
So I don't know if I have answered that question, but we've never done the bill.
Book to Bill ratio.
Yes.
Ethan let me.
Yes.
Let me, let me give it a little more color, but the nature of our business model is that.
We go purchase order to purchase order.
The key is that.
Sure.
We work off a forecast and we built a forecast.
And the reason we can do that instead of build to orders is that the orders are cyclical once you're in it's very difficult for a customer to qualify.
A wafer substrate supplier.
Once they qualify.
They want to they don't want to go.
Get somebody else or get a third source. So so we don't we don't Morris correct, we don't really monitor.
Backlog in that way, but we don't have to forecast. So we have a forecast all the way through Q4 already.
And they're usually pretty reliable so because because of the nature of the business model, where they need us and we need them and it's hard to switch.
Okay go ahead.
Yes, certainly thank you that's very helpful.
So do you think that you see like double ordering that's an issue.
And that is always always next year, yes, absolutely.
But we try to talk to each other we're trying to talk to them and say Hey, you know.
Are you aware.
Your customers ordering the same thing.
Our double ordering.
We do make sure we don't want to stuff the channel for sure.
But so far we don't see it.
Yes, we're not seeing that now and we're pretty close to the to the big customers. So.
Yes again.
They have a vested interest to not.
Abuse the relationship because they need the product so.
Especially right now it's tight out there right now.
From the supply side.
Our competitors and for US we know that.
It's running tight.
So theres not a lot of gamesmanship in terms of.
<unk>.
Yes.
Does that mean.
Our wafers are actually perishable.
They have a guarantee shelf life.
And they sit on the shelf.
Then Dave can I use it they have to return all the way through for us to re Polish.
Sometimes we do it for free, but sometimes we have to charge for restocking fee.
I don't think you can make any sense for somebody to overbuy it in a socket.
Thanks, that's really helpful. Congrats.
Congrats again on the quarter.
Thanks Nathan.
One moment for our next question.
Our next question comes from Herman <unk> with Gws financial your line is open.
Hi.
Just a follow up on that question.
How much of a clarity variability is there and the orders that you received from customers.
How would you describe the clarity you have within the current quarter and beyond the current quarter.
You mean.
The current quarter this current quarter.
Clearer and better than the.
All of that.
We receive forecast for next quarter.
I do understand I mean.
As order.
Well I'm just trying to understand.
The last question.
<unk> guide.
What was it 38 to 41 closer to the lower end. So I'm just trying to understand what the variability is in the ordering trends in your guidance.
You provide.
You ended up at 39 instead of 41.
And how it spills over into this quarter.
Okay. So.
And Thats a very good question actually.
Covid did play a role in the last week or two in the <unk>.
Last quarter Q2.
By the end of Q2 as you know.
<unk> start to ramp up a little bit.
Net.
The wood.
So we are missing one or two of these orders that we cannot deliver to our customers. So originally we thought we're going to be.
Almost.
The other million half more than what we delivered.
But it is what it is that as you said it could be pushed to next quarter right.
Yes.
Yeah, but if you want to look at it that way I don't remember we have pushed over the last quarter or they were pulling any order last quarter on that.
You know we thought towards the end of Q2, it was a very strong quarter.
Okay.
Just to point out.
<unk> 95 at the low end of the range as it is.
Exactly at the midpoint of the range so.
No understood.
Gary.
The.
About the bad debt charge.
Your receivables how are you managing that and are you, making adjustments and who youre, giving credit terms too.
No we haven't changed our policy.
We're pretty tight.
For existing customers there is no issue.
But every once in a while.
And existing customers gets in trouble.
Im not saying every year, but.
I don't think we've had a big write up like this.
Okay.
Maybe in a couple of years.
So if it's a new customer than we do the credit checks they have to fill out a credit application.
We use <unk> or.
Or similar services like that internationally. So I think we're pretty pretty good at that.
For the small accounts like universities and stuff.
Not much credit risk there so.
But yes, we haven't we have pretty.
A pretty diligent process.
We haven't needed to change it so it's working.
Okay and my last question was that the.
These two.
The tier one customers that youre ramping.
Extra several sorry the quarter several.
Any of them under the 10% line.
They are the 5% line that could actually become a big deal for you.
As you start ramping up what's the timeline to seeing optimal revenue from these tier one ramps.
Okay.
Hum.
I haven't done that calculation, but.
It really depends about when do they start to ramp and some of these customers have date, yes.
Cros.
Lying in fact, one customer takes the waiver R&D they build appian.
The other one.
So I'm not so sure I can't predict who is going to be the number three and it's going to ramp up to number two.
<unk>.
But so far I don't see any very dramatic change.
All I know is indium phosphide and will grow very nicely next quarter, yes.
Okay.
Okay. Thank you.
Can you comment and I'll.
I'm not showing any further questions I'd like to turn the call back over to Dr. Morris Young for any closing remarks.
Okay.
Hey, Thank you participating in our conference call. This quarter, we will be presenting at the virtue of Dws Financial Conference August 23rd.
And the third annual Needham virtual semi cap customers on August Tony.
And the Jefferies 2022 semiconductor comprehensive Chicago August 30th we'll look forward to seeing many of you there 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 look forward to speaking with you in the near future.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].