Q3 2022 AXT Inc Earnings Call
Okay.
Good afternoon, everyone and welcome to Axt's third quarter 2022 financial conference call, leading the call today is Dr. Morris Young Chief Executive Officer, and Gary Fischer Chief Financial Officer. My name is Andrea and I will be your coordinator today at this time all participants are in a listen only mode. After the speaker's presentation, there will be a Q.
A question answer session.
To ask a question during the session unions Press Star one on your telephone you will then hear an automated message advising your hands raised please be advised that today's conference is being recorded I would now like to hear the conference over to Leslie Green Investor Relations for <unk>. Please.
Thank you Andrea 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 admire.
Mental 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 based on management's current expectations and are subject to risks and uncertainties that could cause actual.
Vince or results to differ materially these uncertainties and risks include but are not limited to overall conditions in the market in which the company competes global financial conditions and uncertainties. COVID-19 are outbreaks of other contagious disease potential tariffs and trade restrictions increased environmental regulations 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 and 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 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 current expectations. This conference call will be available on our website at <unk> Dot Com through October 27, 2023 also before we begin I want to.
Note that Charlotte shortly following the close of market today, we issued a press release reporting financial results for the third 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 third quarter results Gary.
Thank you Leslie and good afternoon to everyone.
Revenue for the third quarter of 2022 was $35 2 million.
That's down from $39 5 million in the second quarter of 2022.
Up from $34 6 million in the third quarter of 2021 for last year.
To break down our Q3 dollars 22 revenue for you by product category Indium phosphide came in at $17 7 million.
Gallium arsenide was $8 1 million down from Q2 by about $4 million and reflects the overall slowdown in the marketplace Germania.
The remainder of substrates for $1 1 million or.
Our germanium substrate revenue was down by about $2 7 million from Q2 part of this is the general slowdown we observed in part is due to the payment issue. We described last quarter.
We expect to resolve that situation in the near future.
As of today, we are not shipping to the customers in question.
Finally revenue from the two consolidated raw material joint venture companies in Q3 was $8 3 million.
In the third quarter of 2022 revenues from Asia Pacific was 67% Europe , 14% North America, 19%.
Top five customers generated approximately 41% of total revenue and one customer was over the 10% level.
non-GAAP gross margin in the third quarter was 42, 2% compared with 39, 4% in Q2 of 2022.
And 33, 8% in Q3 of 2021 for.
For those who prefer to track results on a GAAP basis gross margin in the third quarter was 42.0% compared with 39, 1% in Q2 and 33, 3% in Q3 of last year.
As you can see we can.
Continue to execute well on gross margin despite lower volumes in Q3, our favorable product mix improved yields and new indium phosphide recycling program all contributed to strong results.
Total non-GAAP operating expense in Q3 was $9 2 million. This compares with $9 1 million in Q2 and was seven 7%.
In Q3 of 2021.
On a GAAP basis total operating expense in Q3 of 2022 was $10 2 million compared with $10 1 million last quarter for comparison total GAAP operating expense was $9 1 million in Q3 of 2021.
non-GAAP operating profit for the third quarter of 2022 was $5 6 million compared with non-GAAP operating profit in Q2 of 2022 of $6 4 million and $4 in Q3 of 2021.
For reference GAAP operating profit for the third quarter of 2022 was $4 6 million compared with an operating profit of $5 $3 million in Q2 of 2022, and an operating profit of $2 4 million in Q3 of 2021.
Non operating other income and expense for the third quarter of 2022 was a net gain of $2 7 million.
This includes a gain of 2.0 million from the unconsolidated raw material companies.
The full breakdown.
This release for.
For Q3 of 2022, we had a non-GAAP net income of $6 8 million or <unk> 16 per share compared with $6 7 million or <unk> <unk> per share in the second quarter of 2022.
non-GAAP net income in Q3 of 2021 was $5 4 million or <unk> 13 per share.
On a GAAP basis net income in Q3 was $5 8 million or <unk> 13 per share by comparison net income was $5 5 million or 13 cents per share in the second quarter of 2022, and $3 8 million or <unk> <unk> per share in Q3 of 2021.
Weighted average diluted shares outstanding in Q3 was 43.0 million.
Cash cash equivalents and investments were $48 2 million as of September 30th by comparison at June 30, It was $57 2 million.
Depreciation and amortization in the third quarter was $2 1 million and capital investments were $4 7 million. Most of this is facilities related.
Stock comp was 1.0 mean.
Net inventory at September 30 was $88 5 million 50.
50% of the inventory is raw materials, 46% as width and finished goods makes up 4%.
This concludes the discussion of our quarterly financial results turning to our plan to list our subsidiary Tom May in China on the Star market in Shanghai, Let me just give you a brief update as previously reported our IPO application was approved by the Shanghai Stock Exchange in July and was then submitted to the China Securities Regulatory Commission, often we referred to that as the CSR.
In August for the next step in the review process, we have had feedback from the <unk> in the form of questions and our advisers believe the questions were normal and customary we hope to get <unk> approval soon and telling them. They still have to accomplish the offering as early as Q4 2022.
This has been a long process, but we remain very enthusiastic and optimistic we have posted a brief summary of the plan and the process on our website.
Before I turn the call over to Morris I wanted to take a moment to address the topic of export control restrictions with China since <unk>.
Some of you have asked we have extensively studied the new restrictions and guidance, including consultation with our legal experts as such we and our attorneys have concluded that the new restrictions are not applicable to our products equipment or manufacturing process. We do we do not expect to experience disruption as a result.
Okay, well with that let me turn call over to Dr. Morris Young for a review of our business.
Markets Morris has been in China and is there right now so he got up.
Early in the morning, and it still is early in the morning, There Morris go ahead.
Thank you Gary.
Sure.
Well good afternoon everybody.
Yeah.
No.
The softening of the macro environment reset our growth trajectory.
Trends that have driven our revenue customer application expansion remains very much intact. Despite.
Despite the fact that our Q3 results demonstrate several key themes.
First indium phosphide is expanding and becoming increasingly strategic material across the landscape of technology.
Second.
<unk> continue to make meaningful.
Meaningful sustainable progress in driving our gross margin performance.
And third we are successfully supported the business.
And quality requirements of some of the most the Sony tier one companies in the world.
These three factors and the scores.
I'm confident that our business is.
Each to a turning point.
The type of innovation that is driving the expansion of applications, where all materials. We created is lifting our baseline opportunity.
Even in the softer demand environment.
More importantly.
<unk> is solidly positioned as a leader.
Our product quality and technical capability is creating the standard of excellence that is increasingly difficult for our competitors to match.
As is evidenced by our market share gain indium phosphide.
Our Q3 indium phosphide revenue grew 12% over Q1 Q2 to set a new high for quarterly revenue.
This is also a 48% increase over Q3 of 2021.
Driving our growth.
The ramp of <unk> consumer applications that contributing meaningfully to our results.
And in line with our expectation coming into the quarter.
As we mentioned previously.
First is the proximity sensor will audio devices and the second is the endo glass sensor for high end handset.
We're shipping into both application in production quantity.
Strong performance in consumer was offset by weakness in PON and telecommunications.
Applications, particularly in China.
The data center market was also modestly moderately weaker than we expected.
For the quarter.
The majority of the revenue shortfall in Q3 came from gallium arsenide.
Industrial lasers Leds for automotive and wireless headsets applications were all done in a meaningful way.
Much of this related.
As to China.
Where customer conservatism towards future demand coupled with COVID-19.
And weather related shut down within the supply chain resolving the steep drop in orders.
We're confident this is not a loss in market share.
We are not seeing customers canceling orders.
More commonly.
They are delaying placing orders.
In other cases.
Hey.
This is to get a better picture into future demand.
In the other cases it may be the result of shortage within the supply chain.
We see this issue persisting through Q4, but because of the rapid decline in the second half of 2022 improvement in the demand environment or the supply environment could result in a relatively quick recovery in <unk>.
23.
This is also important to know that.
We continue to see a meaningful amount of development work happening for new obligations in both indium phosphide and gallium arsenide.
Customers are highly focused on new innovation.
We believe that this will contribute to some exciting new.
Use case for our substrate in the coming fiscal year.
Including consumer and healthcare monitoring.
A bit further out micro OLED applications are growing increasingly more promising.
We would not be surprised to see noticeable revenue in FY 'twenty four.
In terms of our own innovation I'm pleased with the progress we are making in Boes 80 inch gallium arsenide, a six inch indium phosphide material.
Our R&D investment, allowing us to ensure that we are ready to meet the market when application for these larger diameter move closer to production.
Finally.
Revenue from our two consolidated joint ventures.
Sure.
About $8 3 million in Q3.
We expect the softer demand environment to bring sales down.
In Q4, mostly from <unk> made.
That is as the result of raw material prices coming down.
Ongoing customer conservatism.
For you, who makes <unk> crucibles is likely remains steady.
In closing.
Despite the setback of a weaker environment, we haven't made any more progress in our business and we are well positioned to weather the near term softness.
Today.
We are the world leader Indium phosphide, and we are the company that tier one customer come to when they are bringing new innovation to market.
We continue to raise the bar on our technical capability and our quality, creating clear differentiation with our competitors.
Further we have worked hard to improve our efficiency.
And as a result, we are delivering solid profitability.
Over the coming quarters.
And the environment.
We'll do what he will.
And though we will diligently manage our business through it.
Our eyes on the horizon.
Because the massive trend.
We will continue to transform the landscape of technology are not going away.
<unk> will be the leading supplier of many of these materials.
I will.
I'll now turn the call back to Gary for our fourth quarter guidance Gary.
Thank you Morris.
That said, we expect Q4 revenue to be between $26 million and $29 million, which reflects our view that the inventory corrections will continue during the quarter.
As such we expect our non-GAAP net profit will be in the range of three to five.
And GAAP net profit will be in the range of $1 <unk>.
Share count will be approximately $43 zero million shares.
Okay. This concludes our prepared comments Morris and I will be glad to answer your questions now Andrea please.
Go to Q&A.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Okay.
Our first question comes from Charles <unk> with Needham <unk> Company. Please go ahead.
Hi.
Good morning, Morris Good afternoon, Gary.
Mike.
Maybe a first question wanted to ask you.
How to reconcile what we heard from your number one customer, but the Appia housing Taiwan.
That particular company recently said that they are quite bullish about <unk>.
Our fiber rollout in China next year and that they think will be a growth year.
What is your thought.
Your business going into 2000 and so.
Fourth quarter 22 seems like that the correction will continue but <unk> to 'twenty. Three are you seeing a similar trend as our number one customer and especially on the telecom.
On the Datacom side. Thank you.
Okay.
Let me take this first Gary.
Yes Charles.
Indeed, we think indium phosphide will continue to grow although I think Q4 is.
<unk>.
Taking a slight dip I think but I think the trend of indium phosphide growth is going to continue and I think not only telecom datacom is going to be growing in 2023, but also the consumer product.
Zinc is going to.
Not only are.
Continuing to grow hopefully, we're going to pick up one or two more new consumer product applications, which as you know could be.
No.
Accelerating growth because it's a new product.
Okay.
Yes.
That particular company is a long term customer of ours and.
<unk>.
We feel.
Very strong with them.
And we expect to continue to serve their needs.
Yes.
Got it.
So maybe the second question.
The consumer.
Business.
How what's the total revenue opportunity you are seeing for the current the one you already have the second consumer application.
The end customer.
What's the total size of the revenue opportunity.
Through this this smartphone cycle and.
Do you see any changes to the forecast that they provided to you.
Over the recent weeks or months, but because.
I hear you say you said that the.
Trend up indium phosphide growth will continue but that kind of makes me Wonder you did guide down.
Q4.
But.
Quite a lot and I wonder whether that second consumer application has a little bit of change in terms of how fast the ramp can be into Q4.
Yes, I don't think there is a slowdown in the.
Demand for these second a consumer product in Q4.
I believe the slide.
Downtick on indium phosphide demand.
<unk> from our other China customers.
Which.
Unfortunately, we don't know exactly where theyre doing it could be data count it could be.
<unk> market et cetera.
But.
But definitely this particular customer is not slowing down.
In fact, if I may add I think they are only using on the high end of.
Home market in their first launch this year and hopefully.
Later on they are going to use it in the whole spectrum of product offering so we do expect.
Perhaps.
The demand for this product on the second product is going to go up next year.
Yes, so let.
Just to clarify this is going to be my last question to clarify.
You are optimistic.
Two more consumer applications dust proliferation.
Indium phosphide based sensor into the.
Oh, well, that's their low end product.
Market Thats, probably consider mid to high end.
Is that accounted as a third application or youre talking something completely different and when you talked about the two more consumer application there.
No that's not.
That's now consider a new wing, we think thats, probably going to increase the demand, but but we haven't talked to the customer yet in terms of how much.
They wanted us to prepare because.
This is too early for next year demand.
I'm talking about possibly we can pick up one or two more new consumer product applications. As you know that we have.
At least two product is solar in the queue.
But we are not sure, especially with the economy shaping up like this where are they going to introduce this new product.
Thank you very much.
Thanks, Charles Thanks Charles.
Next question. Thank you our next question.
I'm, Richard Shannon with Craig Hallum Capital Group. Please go ahead.
Well, Thanks, Morris and Gary for taking my questions. Let me ask just very specifically on the fourth quarter guidance here, you, obviously talked about indium phosphide down a bit.
The overall number here at the midpoint is down a little bit more than 20% can you delineate.
The other categories, how they're doing relative to relative to kind of that mid point I'm, assuming gallium arsenide and maybe raw materials are down more than average, but maybe Gary if you could delineate that will more closely there would be great. Please.
Yes.
Well.
We're trying to be conservative first of all.
Secondly.
We are uncertain about.
When the when the market is going to bounce back.
But I.
I don't think anyone.
On this call or in the tech business thinks it's going to bounce back in Q4 so.
<unk>.
So.
Therefore, we forecasted all of the products to be down.
A big.
And a big drop in raw materials.
Robert had been running at about $8 million.
That alone will be down at least 25%.
And it's.
I think it's just reflective of the overall slowdown.
In the markets so.
Sure.
So.
As I said to our team it's a good thing we're grown ups because.
It is what it is we can't change the whole marketplace.
And if it shifted on us.
I wouldn't say overnight, but it was a very dramatic and rapid shift.
During the summer.
And.
Okay.
We don't know when it will bounce back hopefully.
It'll be in Q1.
But we'll have to get closer to Q1 for what we know for sure.
Yeah.
Gary.
I want to add to the point is that I don't think that market is very important.
And their line and.
And our.
Underlying strengths.
Ill.
In future.
Many solid.
This new factory, adding the capacity.
No.
And.
Responsiveness as you can see that indium phosphide will be second new consumer product, we ramped up our production very successfully we didn't lose a stride and I think they are really making good marks.
Two hour.
Most demanding customers.
And so.
We think we're stronger and better than at any time.
But semiconductor unfortunately.
Crystal when.
People are worried about.
Supply they buy a lot.
And where there is a scarce resource.
Sure.
Everybody wants to use their inventory.
The same thing for us you'll see we built some inventory, it's going to take us a quarter or two to achieve bringing it down and then we're not going to buy from our customers. So.
The nature of the business I would say chip.
That's very fair. Thanks for that commentary my second question is on gross margins I'm talking about.
Both about the third quarter, and then kind of the view into the fourth here. So.
You've talked in the past about volume being fairly important indicator of gross margins.
You had a shortfall in your best gross margins ever clearer.
Clearly indium phosphide mixes is helping a lot maybe you could delineate any other drivers here in the third quarter that helps you and are there any things that can help you further.
Recycling or yield things that you've improved onto those have more legs to grow on and then as we look forward here, particularly with the much lower volumes. How do we think about gross margins here can we look back at the quarters. The similar revenue and see it in that range or how do you help Gary can you help us think about where to where to think about gross margins play out in the fourth quarter.
Sure Yes.
Well.
For our business model the way it does.
The company operates.
It's not usually like one single thing that makes the gross margins swing up or down.
I referred to it as <unk>.
Several small dials instead of one big dial, but clearly product mix is.
A key factor.
In.
Net.
Yes.
One of the first thing that comes to mind, when we say why is gross margin improving.
Another is the new indium phosphide recycling program.
As we've described before we developed last year way to reclaim certain scraps.
That's a result of the production process.
<unk>.
That was in I would call beta test in Q4 of last year.
Early production level in Q1 of this year.
Then I would say general production level in Q2.
And.
Again in Q3 and in fact, it was Q3 it was a little bit.
Okay.
<unk> contributed a little bit more than it did in Q2 so.
So that's that's good for our gross margin it's also.
Good for them.
ESG kinds of concepts that we.
We're learning how to recycle some of this stuff so.
A third factor is that.
That would generally have our yields improve.
And.
And in General I think.
We're seeing more manufacturing efficiencies and Maurice talked about our strengths.
We're really the team is really.
A good team so.
I've used the phrase with somebody because before that.
I think we've been going through a settling in process at the new sites.
And I think.
It's we're improving and that it's more stable.
Helping the efficiencies in the yields.
And for <unk>.
To be straight about it for Q3, we had a quarter, where a lot of the numbers seem to be putting north that is in a positive direction that doesn't happen very often.
And sometimes.
It could be putting yourself, but in this case.
Every number on the board.
Was helpful. So.
And that enabled us.
GAAP basis to be at 42% so.
So then Richard secondly.
What do I see going forward.
I think we have some more.
Ground to gain.
Both on mix and on yields in our manufacturing efficiencies all the things I just described.
We have some other recycling ideas that.
We're not ready to share them yet.
Even with you guys or with our competitors.
And we have some some I think some other things that we can do.
To keep the gross margin.
Relatively high.
Yes, it's not going to be in the 40% for Q4, because the volume is going to be lower.
And.
Think somewhere in the 37% to 38% range is achievable.
And.
I Havent really we havent taken a look at it.
Gross margin for next year, but I do I can say and I say this with confidence that.
Okay.
We have some some good ideas that are being implemented now and it will help us next year.
So next question Richard.
For me the reports.
A 10% customer.
New customer or one <unk>, how does the 10% in the past.
Yes.
It's one that we've had before.
And.
We expect that.
There could be 10%.
Going forward there.
Continues to be strong.
They are servicing the consumer application that we've touched up so.
I figured that was the case, okay. That's all from me ill jump on the line. Thanks.
Alright, Thanks, Richard next question.
Thank you as a reminder to ask a question. Please press star one on your telephone.
Please standby for the next question.
Our next question comes from Amit <unk> from PWM financial Please go ahead.
Hi, My first question was how are you adjusting the business given.
Decline in revenue, but your inventory has been increasing quite a bit now.
How are you going to adjust for that.
Generate some free cash flow.
Well.
I can.
First of all let me assure you that.
We're very aware of what's happened to the inventory.
It evolved because we were running really hard to keep up with demand.
We're deliberately building inventory.
And then.
Things shifted pretty dramatically, so, but we're very aware of it.
Let me point out again that.
It is in our inventory right now 50% of it.
As raw materials.
And 46% of Swift.
Only 4% as finished goods.
I'm not worried about having to write down the inventory or anything like that.
And the way, we're going to have to.
Bring it down which which we will.
<unk>.
Yeah.
Several things number one.
I've already been communicating with my teammates in China.
And in the <unk>.
For me sort of.
A swat team if you will to monitor inventory closely.
Of course, we will stop purchasing as much because.
We have too much now.
And I think I think we can we can bring it down over the next couple of quarters.
And it will help on cash yes. So.
So.
Unfortunately, I think we are mirroring what we've seen in our own customers.
They're trying to manage their inventories also so they stopped buying as much.
And.
We're actually in the same in the same position so.
But but.
We are definitely on it.
<unk> been talking about it.
It's not my first rodeo I've been in these situations before.
There is a saying that I use whichever you want to change something measure it.
Im looking at different ways to measure different things in the inventory and communicate that to the team.
And get everybody's attention so.
I feel it's it's.
It is an achievable goal to bring to bring it back down.
Okay.
What I'm trying to get to is also how are you adjusting to this environment because in.
Q2.
You were doing something in the realm of 40 or 50% more in sale revenue per month.
What youre guiding to now.
So that's quite a bit of adjustment you would have to make.
But putting people on.
How are you.
Just doing the manufacturing.
Sure.
We're not putting people on lease.
We're not hiring anybody.
Either but.
Ill.
I think it would be detrimental to our mid term in the future.
If we start.
Jettisoning employees so.
We expect the market is going to come back and when it does we're going to be ready so but in the meantime, we'll trying to trim expenses will try and improve on efficiencies.
And.
We have a lot of dry powder or things that we can do to manage the business. So.
But.
We've considered should we do layoffs, but.
At this point no we're not going to.
Yes.
One of the things, we obviously are doing is.
As you no doubt during a very busy time, we're asking people to take a lot of overtime.
And for their vacations et cetera.
Now.
<unk> is a slower time.
On the slower segments, such as gallium arsenide, and germanium, we either shift them part of them to working indium phosphide, because thats still quite busy we're still building future capacity for the expected demand increase next year.
But also we do encourage.
Yes people to take their annual vacation annual leave time as much as possible. So.
Ready for the next.
Run up to the high demand later.
And my last question is how would you describe the clarity that you have in the business right now.
You mean about the marketplace the picture.
Yes.
We are clear so we can.
<unk>.
Although market is down but as we said.
Think we're losing market share customers all of their insurgent segments. The demand is strong, but we're covering a lot of business for instance.
I think nobody is happy to see that our guided revenue going forward is going down so much but on the other hand part of it could very well be.
The gallium price erosion, I mean gallium price came down.
Almost 20% and is still going down maybe 10%.
And.
All of our joint venture GMA, who sells galleon, they buy and sell gallium.
No.
First of all is the gallium price is low than their revenue comes out so.
That really has nothing to do.
With revenue coming down so much because but we are clear when our revenue was up we are cleared to report to everybody. He part of the increase in revenue is really because the raw material prices going up. So this is coming down on the other side, but it doesn't hurt us because we.
In <unk> business, we're refining it to high purity and.
So.
It doesn't really hurt our business and in terms of.
And also add onto it is when prices go down.
I don't want to buy it because they don't want to stepping too it's going down further so why do I why do I buy it amongst later so maybe this is working.
Yes.
Okay.
Breakdown of inflation so to speak.
But as far as.
The rest of the factory I think we are.
Holding our heads up quite a bit and.
Busy very busy preparing for the IPO process.
Also.
No.
We still have a lot of R&D work. They are working very hard on doing a inch gallium arsenide and six inch indium phosphide development and I think the team spirit is high.
That I can say.
Yeah.
I agree okay.
Thank you.
Yeah.
Thanks, Amit.
Yeah.
Thank you please standby for our next question.
Our next question comes from Richard Shannon with Craig Hallum Capital Group. Please go ahead.
Yeah.
Okay guys. Thanks for getting me back in the queue here I guess two questions first of all Morris you talked about micro led.
Could imagine.
A scenario, where it picks up in calendar 'twenty four can you give us more detail on what youre hearing and what's you're engaged with some customers.
And my understanding is.
If that picks up nicely or green light something there you'd probably have to have some more capacity.
How far in advance do you need to know about this before you get your capacity in place for such a such a build in that year.
Yes, I think we are increasingly more optimistic because he is shaping up nicely alright. Thank the customer is.
Our making that commitment.
And.
So.
One of them is building a very large factory.
Malaysia and.
Yes, Indeed, we are seeing the demand curve.
They start to pick up in 2024.
Making all the preparation for it and.
The ramp in volume demand is gradual.
I think it's been a stop by several hundred wafer per month.
In next year, and we are already delivering some samples to our customers already and they are evaluating the performance of it.
We expect.
During the two of US I mean, our customers us to tweak the specification that they want and need.
Need it would take us some time to build a new factory.
Sure.
Our capacity to deliver that.
Expected increases in demand.
So we are working on that and we expect.
To be able to deliver in the neighborhood.
Let's see some slide five four months.
Towards the middle here.
And we expect to further increase to close to 10 or 12000 away for a month.
In early 2024.
Okay, perfect and just a quick follow up on that topic Morris when do you expect your eight inch wafers to intersect with that opportunity.
What do you mean.
I mean, we were building a caveat for that age yes.
Yes.
The numbers for <unk> wafers got it.
Wafers, Okay perfect. Thank you my second and last question here is on indium phosphide, I think you've talked about tight capacity here and while the revenues seem to be going down a little bit in the fourth quarter. You have got some positive comments about new applications or additional volume in current applications and consumer space, where do you sit in terms of utilization and your capacity.
And do you need to build more in the near term or next year.
Yes.
This is still fairly tight.
And maybe Q4 is going to give us a little bit later, we are still building capacity in anticipation for the.
Volume ramp up next year.
Could be overbuilding.
I mean all of these.
Buildup.
I mean.
In our own initiatives.
We have to.
Great.
What customers really want it and they usually don't give us.
Most of them gave them give us at least three months advanced notice, but some of them.
It is one of the customers tell us they are doing a pilot.
Do you expect the results back in I think last time, we talked to them about in six months.
In the middle of next year, but what do you think that the accounting successfully.
Asking for more product or not.
Obviously, we're going to get very close tab with them and <unk>.
<unk>.
But for us to increase indium phosphide capacity.
It is not as easy as gallium arsenide its more complicated so it takes a little bit higher we need about two months to get all the things together. So we are doing a little bit more.
There's all the products.
Our company and last year as you know these two products are consuming talent I think we did a very nice job expanding capacity to meet all the demand from our most demanding customers. So.
Patting ourselves on the back and say good job Morris.
Hopefully with <unk>.
I'm, saying for the next.
Zero product ramp.
Right now I cannot promise you I mean, they are now coming in with the order yet.
Next question.
I'm not showing any more questions right now actually I would like to turn the call back to Dr. Morris Young for closing remarks.
Okay.
And thank you everybody to.
Participating in our conference call.
And.
Let me see what are the other accomplishes will be attending.
This quarter, we'll be presenting at Craig Hallum.
Select conference in New York in November .
The November 17, and we will be participating at the Needham Conference in New York City on January 11th.
We look forward to see 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. We look forward to speaking with you in the near future.
Thanks, everyone.
Yes.
Thank you for your participation in today's conference. This concludes the program you may now disconnect.
[music].
[music].
Good afternoon, everyone and welcome to Axt's third quarter 2022 financial conference call.
The call today is Dr. Morris Young Chief Executive Officer, and Gary Fischer, Chief Financial Officer. My name is Andrea and I will be your coordinator today at this time all participants are in a listen only mode. After the speaker's presentation. There will be a question answer session.
To ask a question during the session unions Crestar one one on your telephone you will then hear an automated message advising your hands raised please be advised that today's conference is being recorded I would now like to hand, the conference over to Leslie Green Investor Relations for <unk>. Please.
Thank you Andrea 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 admire.
Mental 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 based on management's current expectations and are subject to risks and uncertainties that could cause actual.
Rents or results to differ materially these uncertainties and risks include but are not limited to overall conditions in the market in which the company competes global financial conditions, and uncertainties, COVID-19, or outbreaks of other contagious disease potential tariffs and trade restrictions increased environmental regulations 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 and 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 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 current expectations. This conference call will be available on our website at <unk> Dot Com through October 27, 2023 also before we begin I want to.
Note that Charlotte shortly following the close of market today, we issued a press release reporting financial results for the third 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 third quarter results Gary.
Thank you Leslie and good afternoon to everyone.
Revenue for the third quarter of 2022 was $35 2 million.
That's down from $39 5 million in the second quarter of 2022.
Up from $34 6 million in the third quarter of 2021 from last year.
To break down our Q3 dollars 22 revenue for your by product category Indium phosphide came in at $17 7 million.
Gallium arsenide was $8 1 million down from Q2 by about $4 million and reflects the overall slowdown in the marketplace germanium substrates for $1 1 million.
Our germanium substrate revenue was down by about $2 7 million from Q2 <unk>.
Part of this is the general slowdown we observed in part is due to the payment issue. We described last quarter.
We expect to resolve that situation in the near future.
As of today, we are not shipping to the customers in question. So finally revenues from the two consolidated raw material joint venture companies in Q3 was $8 3 million.
In the third quarter of 2022 revenue from Asia Pacific was 67% Europe , 14% North America, 19%.
Top five customers generated approximately 41% of total revenue and one customer was over the 10% level.
non-GAAP gross margin in the third quarter was 42, 2% compared with 39, 4% in Q2 of 2022.
33, 8% in Q3 of 2021 for.
For those who prefer to track results on a GAAP basis gross margin in the third quarter was 42.0% compared with 39, 1% in Q2.
33, 3% in Q3 of last year.
As you can see we can.
Continue to execute well on gross margin despite lower volumes in Q3, our favorable product mix improved yields and new indium phosphide recycling program all contributed to strong results.
Total non-GAAP operating expense in Q3 was $9 2 million. This compares with $9 1 million in Q2 and was seven 7%.
In Q3 of 2021.
On a GAAP basis total operating expense in Q3 of 2022 was $10 2 million compared with $10 1 million last quarter for comparison total GAAP operating expense was $9 1 million in Q3 of 2021.
non-GAAP operating profit for the third quarter of 2022 was $5 6 million compared with non-GAAP operating profit in Q2 of 2022 of $6 4 million and $4 1 million in Q3 of 2021.
For reference GAAP operating profit for the third quarter of 2022 was $4 6 million compared with an operating profit of $5 3 million in Q2 of 2022, and an operating profit of $2 4 million in Q3 of 2021.
Non operating other income and expense for the third quarter of 2022 was a net gain of $2 7 million.
This includes a gain of 2.0 million from the unconsolidated raw material companies.
The full breakdown.
This release for.
For Q3 of 2022, we had a non-GAAP net income of $6 8 million or <unk> 16 per share compared with $6 7 million or <unk> 16 per share in the second quarter of 2022.
non-GAAP net income in Q3 of 2021 was $5 4 million or <unk> 13 per share.
On a GAAP basis net income in Q3 was $5 8 million or <unk> 13 per share by comparison net income was $5 5 million or <unk> <unk> per share in the second quarter of 2022, and $3 8 million or <unk> <unk> per share in Q3 of 2021.
Weighted average diluted shares outstanding in Q3 was $43 1 million.
Cash cash equivalents and investments were $48 2 million as of September 30th by comparison at June 30 was $57 2 million.
Depreciation and amortization in the third quarter was $2 1 million and capital investments were $4 7 million. Most of this is facilities related.
Stock comp was 1.0.
Net inventory at September 30 was $88 5 million 50.
50% of the inventory is raw materials, 46% as width and finished goods makes up 4%.
This concludes the discussion of our quarterly financial results turning to our plan to list our subsidiary Tom May in China on the Star market in Shanghai, Let me just give you a brief update as previously reported our IPO application was approved by the Shanghai Stock Exchange in July and was then submitted to the China Securities Regulatory Commission, often we referred to that as the CSR.
In August for the next step in the review process, we have had feedback from the <unk> in the form of questions and our advisers believe the questions when normal and customary we hope to get <unk> approval soon and telling them. They still have to accomplish the offering as early as Q4 2022.
This has been a long process, but we remain very enthusiastic and optimistic we have posted a brief summary of the plan and the process on our web site.
Before I turn the call over to Morris I wanted to take a moment to address the topic of export control restrictions with China. So some of you have asked we have extensively studied the new restrictions and guidance, including consultation with our legal experts as such we and our attorneys have concluded that the new restrictions are not applicable to our products.
Equipment, our manufacturing process, we do we do not expect to experience disruption as a result.
Okay, well with that let me turn call over to Dr. Morris Young for a review of our business.
Morris has been in China and is there right now so he got up very early in the morning and it still is early in the morning. There Morris go ahead.
Thank you Gary and.
Well good afternoon everybody.
Yeah.
No.
No softening of the micro environment reset our growth trajectory.
Friends that have driven our revenue customer application expansion remains very much intact.
Despite the fact that our Q3 results demonstrate several key themes.
Indium phosphide is expanding and becoming an increasingly strategic material across the landscape of technology.
Second XD is continue to make meaningful.
Meaningful sustainable progress in driving our gross margin performance and third we are successfully supporting the business.
Go and quality requirements of some of the most discerning tier one companies in the world.
These three factors and the scores.
Cognizant that our business has reached a turning point.
The type of innovation that is driving the expansion of applications, where all materials. We created is lifting our baseline opportunity.
Even in the softer demand environment.
Moving forward.
<unk>.
Solidly positioned as the leader.
Our product quality and technical capability of creating a standard of excellence that is increasingly difficult for our competitors to match.
As is evidenced by our market share gains indium phosphide.
Our Q3 indium phosphide revenue grew 12% over Q1 Q2 to set a new high for quarterly revenue.
This is also a 48% increase over Q3 of 2021.
<unk> growth.
AUM of two consumer applications that contributing meaningfully to our results.
And in line with our expectation coming into the quarter.
As we mentioned previously the first is the <unk>.
Occupancy sensors will audio devices and the second is the endo glass sensor for high end handset.
We're shipping into both application in production quantity.
The strong performance in consumer was offset by weakness in Paul and telecommunications applications, particularly in China.
The data center market was also modestly moderately weaker than we expected.
Into the quarter.
The majority of the revenue shortfall in Q3 came from gallium arsenide.
Industrial lasers.
For automotive and wireless headsets applications were all down in a meaningful.
A meaningful way.
Much of this related.
As to China.
Where customer conservatism towards future demand coupled with COVID-19.
And weather related shut down within the supply chain, resulting in a steep drop in orders.
We're confident this is not a loss in market share.
We are not seeing customers canceling orders.
More commonly.
They are delaying placing orders.
In other cases this is a.
This is to get a better picture into future demand.
And in the other cases it may be the result of shortage within the supply chain.
We see this issue persisting through Q4, but because of the rapid decline in the second half of 2022 improvement in the demand environment or the supply environment could result in a relatively quick recovery.
<unk> 2003.
This is also important to know that.
We continue to see a meaningful amount of development work happening for new obligations in both indium phosphide and gallium arsenide.
Customers are highly focused on new innovation.
We believe that this will contribute to some exciting new.
Use case for our subsidiary in the coming fiscal year.
Including consumer and healthcare monetary.
A bit further out micro OLED applications are growing increasingly more promising.
We would not be surprised to see noticeable revenue in FY 'twenty four.
In terms of our own innovation I'm pleased with the progress we are making in Boes 80 inch gallium arsenide and six inch indium phosphide material.
Our R&D investment, allowing us to ensure that we are ready to meet the market where the applications for these larger diameter move closer to production.
Finally.
Revenue from our two consolidated joint ventures.
About $8 3 million in Q3.
We expect the softer demand environment to gain sales down some in Q4, mostly from <unk>.
That is the result of raw material prices coming down.
Ongoing customer conservatism.
<unk>, who makes PBA crucibles is likely remains steady.
In closing.
Despite the setback of a weaker environment, we haven't made any more progress in our business and we are well positioned to weather the near term softness.
Today.
We are the world leader Indium phosphide and we.
The company that tier one customer come to when they are bringing new innovation to market.
We continue to raise the bar on our technical capability and our quality, creating clear differentiation with our competitors.
Further we have worked hard to improve our efficiency.
And as a result, we are delivering solid profitability.
Over the coming quarters.
The environment will do whether you will.
And though we will diligently manage our business to it.
Our eyes on the horizon.
Because the massive trend.
That will continue to transform the landscape of technology are not going away.
<unk> will be the leading supplier of many of these materials.
I will.
I'll now turn the call back to Gary for our fourth quarter guidance Gary.
Thank you Morris.
That said, we expect Q4 revenue to be between $26 million and $29 million, which reflects our view that the inventory corrections will continue during the quarter.
As such we expect our non-GAAP net profit will be in the range of three to five.
And GAAP net profit will be in the range of $1 <unk>.
Share count will be approximately $43 zero million shares.
Okay. This concludes our prepared comments Morris and I will be glad to answer your questions now Andrea please.
Go to Q&A.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Okay.
Our first question comes from Charles <unk> with Needham <unk> Company. Please go ahead.
Hi.
Good morning, Morris Good afternoon, Gary.
Okay.
Maybe a first question wanted to ask you.
How to reconcile what we heard from your number one customer, but the FTE housing Taiwan.
That particular company recently said that they are quite bullish about <unk> and fiber rollout in China next year. Thanks.
<unk> will be a growth year.
What is your thought.
Your business going into 2000, because I know.
Fourth quarter 22 seems like that the correction will continue but <unk> to 'twenty. Three are you seeing a similar trend as our number one customer and especially on the telecom.
On the Datacom side. Thank you.
Okay.
Let me take this first Gary.
Yes Charles.
Indeed, we think indium phosphide will continue to grow although I think Q4 is.
<unk>.
Taking a slight dip I think but I think the trend of indium phosphide gross is going to continue and I think not only telecom datacom is going to be growing in Q2 thousand 23, but also the consumer product.
Zinc is going to.
Not only.
Continuing to grow hopefully, we're going to pick up one or two more new consumer product applications, which as you know could be.
No.
Accelerating growth because it's a new product.
Okay.
Yes.
That particular company is a long term customer of ours and.
We feel.
Very strong with them.
And we expect to continue to serve their needs.
Yes.
Got it.
So maybe the second question.
To the consumer.
Business.
How what's the total revenue opportunity you are seeing for the current.
One you already have the second consumer application.
What is the end customer.
What's the total size of the revenue opportunity.
Through this this smartphone cycle and.
Do you see any changes to the forecast that they provided to you.
Over the recent weeks or months, but because.
I hear you used that you said that the.
Trend up indium phosphide growth will continue but that kind of makes me Wonder you did guide down.
Q4.
But.
Quite a lot and I wonder whether that second consumer application has a little bit of change in terms of how fast the ramp can be into Q4.
Yes, I don't think there is a slowdown in the.
Demand for these second a consumer product in Q4.
I believe the slide.
Downtick on indium phosphide demand.
<unk> from our other China customers.
Which.
Unfortunately, we don't know exactly what they are doing it could be data count it could be.
<unk> market et cetera.
But.
But definitely this particular customer is not slowing down.
In fact, if I may add I think they are only using on the high end of.
Home market in their first launch this year and hopefully.
Later on they are going to use it in the whole spectrum of product offering so we do expect.
Perhaps.
Demand for this product on the second product is going to go up next year.
Yes, so maybe just to clarify this is going to be my last question to clarify.
You are optimistic about two more consumer applications.
Thus the proliferation of the indium phosphide based sensor into the <unk>.
Well, that's their low end product, but in a market that's probably consider mid to high end.
Is that accounted as a third application or youre talking something completely different and when you talked about the two more consumer application there.
No that's not that's.
That is not considered a new wing with.
I think thats, probably going to increase the demand, but but we haven't talked to the customer yet in terms of how much.
They wanted us to prepare because.
This is still early for next year demand.
I'm talking about possibly we can pick up one or two more new customer product applications. As you know that we have.
At least two product is solar in the queue.
But we are not sure, especially with the economy shaping up like this where are they going to introduce this new product.
Thank you very much.
Thanks, Charles Thanks Charles.
Next question. Thank you our next question.
Richard Shannon with Craig Hallum Capital Group. Please go ahead.
Well, Thanks, Morris and Gary for taking my questions. Let me ask just very specifically on the fourth quarter guidance here, you, obviously talked about indium phosphide down a bit.
The overall number here at the midpoint is down a little bit more than 20%.
<unk>.
The other categories, how they're doing relative to relative to kind of that mid point I'm, assuming gallium arsenide and maybe raw materials are down more than average, but maybe Gary if you could delineate that will more closely there would be great. Please.
Yes.
Well.
We're trying to be conservative first of all.
Secondly.
We are uncertain about.
When the when the market is going to bounce back.
But I.
I don't think anyone.
On this call or in the tech business thinks it's going to bounce back in Q4 so.
<unk>.
So.
Therefore, we forecast all of the products to be down.
A big.
And the big drop in raw materials.
Rob just had been running at about $8 million.
That alone will be down at least 25%.
And it's.
I think it's just reflective of the overall slowdown in.
In the markets so.
Sure.
So.
As I said to our team it's good thing we're grownups because.
It is what it is we can't change the whole marketplace.
And if it shifted on us.
I would say overnight, but it was a very dramatic and rapid shift.
During the summer.
And.
Okay.
We don't know when it will bounce back hopefully.
It'll be in Q1.
But we'll have to get closer to Q1 before we won't know for sure.
Yeah.
Gary.
I want to add to the point is that I don't think we're losing market share that's very important.
And alive and.
And our.
Underlying strengths.
Ill.
In future.
Many solid.
This new factory, adding capacity.
Low <unk>.
And.
Responsiveness as you can see that indium phosphide will be second new consumer product, we ramped up our production very successfully we didn't lose a stride and I think they are really making good marks.
Two hour.
Most demanding customers.
And so.
We think we're stronger and better than at any time.
But semiconductor unfortunately.
Crystal when.
People are worried about.
Supply they buy a lot.
And where there is a scarce resource.
Sure.
Everybody wants to use their inventory.
The same thing for us you'll see we built some inventory, it's going to take us a quarter or two to achieve that and then we're not going to buy from our customers. So.
The nature of the business I would say chip.
That's very fair. Thanks for that commentary my second question is on gross margins I'm talking about.
Both about the third quarter, and then kind of the view into the fourth here. So.
You've talked in the past about volume being fairly important indicator of gross margins.
You had a shortfall in your best gross margins ever clear.
Clearly indium phosphide mixes is helping a lot maybe you could delineate any other drivers here in the third quarter that helps you and are there any things that can help you are there.
Recycling or yield things that you've improved onto those have more legs to grow out and then as we look forward here, particularly with the much lower volumes. How do we think about gross margins here can we look back at the quarters is that similar revenue and see it in that range or how do you help Gary can you help us think about where to where to think about gross margins play out in the fourth quarter.
Sure Yes.
Well.
Yeah.
For our business model the way it does.
The company operates.
It's not usually like one single thing that makes the gross margins swing up or down.
I referred to it as <unk>.
Several small dials instead of one big dial, but clearly product mix is.
Key factor.
In.
That's.
Yes.
The first thing that comes to mind when you say why is gross margin improving.
Another is the new indium phosphide recycling program.
As we described before.
Last year way to reclaim certain scraps.
That's a result of the production process.
Sure.
That was in I would call a beta test in Q4 of last year.
Early production level in Q1 of this year.
Then I would say general production level in Q2.
And again.
Again in Q3 and expect it was Q3 it was a little bit.
Financially it was contributed a little bit more than it did in Q2 so.
So that's.
Thats good for our gross margin it's also.
Good for them.
ESG kinds of concepts.
We're learning how to recycle some of this stuff so.
Third factor is.
That would generally has our yields improve.
And.
And in General I think.
We're seeing more manufacturing efficiencies and Maurice talked about our strengths.
We're really the team is really.
A good team so.
I've used the phrase with some of you before that.
I think we've been going through a settling in process at the new sites.
And I think.
We are improving and that it's more stable.
Helping the efficiencies in the yields.
And for <unk>.
To be straight about it for Q3, we had a quarter, where a lot of the numbers seem to be putting north that is in a positive direction that doesn't happen very often.
And sometimes.
It could be pointing south but in this case.
Every number on the board.
Was helpful. So.
And that enabled us.
GAAP basis to be at 42% so.
So then Richard secondly.
What do I see going forward.
I think we have some more.
Ground to gain.
Both on mix and on yields in our manufacturing efficiencies all the things I just described.
We have some other recycling ideas that.
We're not ready to share them yet.
Even with you guys or with our competitors.
And we have some some I think some other things that we can do.
To keep the gross margin.
Relatively high.
Yes, it's not going to be in the 40% for Q4, because the volume is going to be lower.
And.
Think somewhere in the 37% to 38% range is achievable.
And.
I Havent really we havent taken a look at it.
Gross margin for next year, but I do I can say and I say this with confidence that.
Okay.
We have some good ideas that are being implemented now and it will help us next year.
So next question Richard.
For me a report.
A 10% customer.
New customer or one <unk>, how does the 10% in the past.
Yes.
It's one that we've had before.
And.
We expect that.
They could be 10%.
Going forward there.
Continues to be strong.
They are servicing the consumer application that we've touched up so.
I figured that was the case, okay. That's all from me I'll jump on the line. Thanks.
Alright, Thanks, Richard next question.
Thank you as a reminder to ask a question. Please press star one on your telephone.
Please standby for the next question.
Okay.
Our next question comes from Amit <unk> from PWM financials. Please go ahead.
Hi, My first question was how are you adjusting the business given the decline in revenue, but your inventory has been increasing quite a bit now.
How are you going to adjust for that.
Generate some free cash flow.
Well.
I can.
First of all let me assure you that.
We're very aware of what's happened to the inventory.
It evolves, because we were running really hard to keep up with demand.
We're deliberately building inventory.
And then.
Things shifted pretty dramatically, so, but we're very aware of it.
Let me point out again that.
It is in our inventory right now 50% of it.
As raw materials.
And 46% of Swift.
Only 4% as finished goods.
I'm not worried about having to write down the inventory or anything like that.
And the way, we're going to have to.
Bring it down which which we will.
<unk>.
Yeah.
Several things number one.
I've already been communicating with my teammates in China.
And informing sort of.
A swat team if you will to monitor inventory closely.
Of course, we will stop purchasing as much because.
We have too much now.
And I think I think we can we can bring it down over the next couple of quarters.
And it will help on cash yes. So.
So.
Unfortunately, I think we are mirroring what we've seen in our own customers.
We're trying to manage their inventories also so they stopped buying as much.
And.
We're actually in the same in the same position so.
But we are definitely on it we've been talking about it.
And.
It's not my first rodeo I've been in these situations before.
There is a saying that I use when you if you want to change something measure it so im looking at different ways to measure different things in the inventory and communicate that to the team.
And get everybody's attention so.
I feel it.
This is an achievable goal to bring to bring it back down.
Okay.
What I'm trying to get to is also how are you adjusting to this environment because.
Q2.
You were doing something in the realm of 40 or 50% more in sale revenue per month.
You're guiding to now.
That's quite a bit of adjustment you would have to make.
We're putting people on.
Or how are you just doing the manufacturing.
Sure.
We're not putting people on lease.
We're not hiring anybody.
Either but.
Yes.
I think it would be detrimental to our our midterm in the future.
If we start.
Jettisoning employees. So we expect the market is going to come back and when it does we're going to be ready so but in the meantime, we'll trying to trim expenses will try and improve on efficiencies.
<unk>.
We have a lot of dry powder or things that we can do to manage the business. So.
Right.
We've considered should we do layoffs, but.
At this point no we're not going to.
One of the things, we obviously are doing is.
As you no doubt during the very busy time will asking people to take a lot of overtime.
And forfeit their vacations et cetera, so now.
Now is a slower time.
On the slower segments, such as gallium arsenide, and germanium, we either shift them part of them to working indium phosphide, because that's still quite busy we're still building future capacity for.
It would be expected demand increase next year.
But also we do encourage.
People to take their annual vacation annual leave time as much as possible. So.
Ready for the next.
Run up to the high demand later.
And my last question is how would you describe the clarity that you have in the business right now.
Oh, you mean about the marketplace the picture.
Yes.
We are clear so we can.
<unk>.
Although market is down but as we said.
Think we're losing market share customers all of their insurgent segments. The demand is strong, but we're covering a lot of business for instance.
I think nobody is happy to see that our guided revenue going forward is going down so much but on the other hand part of it could very well be.
The gallium price erosion, I mean gallium price came down.
Almost 20% and is still going down maybe 10%.
And.
Our joint venture GMA, who sells galleon, they buy and sell gallium.
No.
First of all is the gallium price is low than their revenue comes out so.
That really has nothing to do.
With revenue coming down so much because but we are clear while our revenue was up we are cleared to report to everybody. He part of the increase in revenue is really because raw material prices going up. So this is coming down on the other side, but it doesn't hurt us because we.
In <unk> business, we're refining it to high purity and.
So.
It doesn't really hurt our business and in terms of.
And also add onto it is when prices go down.
I don't want to buy because they don't want to step into it going down further so why do I why do I buy it amongst later so maybe this is working.
Yes.
Good.
Bring down inflation so to speak.
But as far as.
The rest of the factory I think we are.
Holding our heads up quite a bit and we're busy very busy preparing for the IPO process.
And also.
Yes.
We still have a lot of R&D work. They are working very hard on doing a inch gallium arsenide and six inch indium phosphide development and I think the team spirit is high.
That I can say.
I agree okay.
Thank you.
Thanks, Amit.
Okay.
Thank you please standby for our next question.
Our next question comes from Richard Shannon with Craig Hallum Capital Group. Please go ahead.
Okay guys. Thanks for getting me back in the queue here I guess two questions first of all Morris you talked about micro led and you could imagine.
A scenario, where it picks up in calendar 'twenty four can you give us more detail on what youre hearing and what's you're engaged with some customers.
And my understanding is.
If that picks up nicely are you green light something there you'd probably have to have some more capacity.
How far in advance do you need to know about this before you get your capacity in place for such a such a build in that year.
Yes, I think we are increasingly more optimistic because he is shaping up nicely alright. Thank the customer is.
Our making that commitment and.
So.
One of them is building a very large factory.
In Malaysia, and yes, indeed, we are seeing the demand curve.
It really starts to pick up in 2024.
Taking all of the preparation for it and.
The ramp in volume demand is gradual.
I think it's been a stop by several hundred wafer per month.
In next year, and we are already delivering some samples to our customers already and they are evaluating the books almost all of it.
We expect.
During the two of US I mean, our customer asked us to tweak the specification that they want.
And indeed, it would take us some time to build a new factory.
Or the capacity to deliver that.
Expected increasing demand.
So we are working on that and we expect.
To be able to deliver in the neighborhood.
Let's see some five.
<unk> 5000 with four months.
NATO.
And we weren't.
To further increase it too close to 10 or 12000 wafer a month.
In early 2024.
Okay, perfect and just a quick follow up on that topic Morris when do you expect your eight inch wafers to intersect with that opportunity.
What do you mean.
I mean, we were building that caveat for that age yes.
The numbers for <unk>.
Alright, it's wafers got it okay. So eight inch wafers. Okay. Perfect. Thank you my second and last question here is on indium phosphide, I think you've talked about tight capacity here and while the revenues seem to be going down a little bit in the fourth quarter. You have got some positive comments about new applications or additional volume in current applications and consumer space, where do you sit in.
In terms of utilization and your capacity and do you need to build more in the near term or next year.
Yes.
This is still fairly tight.
And maybe Q4 is going to give us a little bit later, we are still building capacity in anticipation for the.
Volume ramp up next year.
We could be overbuilding.
I mean, all of these buildup in capacity.
In our own initiatives, because we have to anticipate.
<unk>.
We want it and they usually don't give us.
Most of them gave them give us at least three months advance notice, but some of them.
<unk> is one of the customers they tell us they are doing a pilot.
And we expect results back in I think last time, we talked to them about six months in in the middle of next year, but what are they going to count them successfully.
Asking for more product launch.
Obviously, we're going to get very close tab with them and plans that poster.
<unk>.
But for us to increase indium phosphide capacity.
It is not as easy as gallium arsenide its more complicated so it takes a little longer we need about three months to get all the things together. So we are assuming a little bit more.
Advance all the products.
<unk>.
Last year as you know these two products are consuming pilot I think they did a very nice job expanding our capacity to meet all the demand for our most demanding customers. So.
Patting ourselves on the back and say good job Morris.
Hopefully with <unk>.
I am seeing for the next call.
Similar product ramp.
Right now I cannot promise you I mean, they are not coming in with the order yet.
Next question.
I'm not showing any more questions right now actually I would like to turn the call back to Dr. Morris Young for closing remarks.
Okay.
And thank you everybody to participating.
Participating in our conference call.
And.
Let me see what are the other accomplishes will be attending.
This quarter, we'll be presenting at Craig Hallum Alpha.
Alpha Select conference in New York.
November .
The November 17th and we will be participating at the Needham Conference in New York City on January 11th.
We look forward to see 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.
Look forward to speaking with you in the near future.
Okay.
Thanks, everyone.
Yes.
Thank you for your participation in today's conference. This concludes the program you may now disconnect.